'.

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The Supreme Court Limits Federal Preemption in Cuomo v. Clearing House Association, L.L.C.

John L. Ropiequet is a partner in the Litigation Group of Arnstein & Lehr LLP, Chicago, where he has practiced since 1973, and Co-Chair of its Consumer Finance Group. His I itigation experience includes consumer finance class action, anti-trust, environmental, and commercial cases in numerous state and federal courts. Mr. Ropiequet is a graduate of The Johns Hopkins University and Northwestern University School of Law. He writes and speaks frequently on issues involving consumer credit class actions, evidentiary privilege, legal ethics and other matters. He is a contributing editor to ROHNER & MILLER, TRUTH IN LENDING, on private remedies for TILA violations, and the author of numerous articles on a variety of consumer finance topics in The Business Lawyer, the Consumer Finance Law Quarterly Report and other publications. He is a member of the Governing Committee of the Conference on Consumer Finance Law.

I. Introduction

Less than three years after the United States Supreme Court held in Watters v.

By John L. Ropiequet

Wachovia Bank, N.A. I that state-chartered operating subsidiaries of national banks are subject to the same preemption of state regulatory authority as the banks themselves, pursuant to the National Bank Act (NBA),2 the Court held in Cuomo v. Clearing House Ass'n, L.L.C.3 that a regulation of the Office of the Comptroller of the Currency (OCC) preempting all state law enforcement power over national banks is invalid. In addition to what appeared to be a surprising departure from the direction that the Court took in Watters, the Cuomo case brought to a conclusion a lengthy struggle over what state enforcement powers can be exercised over national bank activities. It also brought much needed clarity to this issue by spelling out what state officials can do and under what circumstances.

Nevertheless, the bright -line test which the 5--4 majority adopted in Cuomo was the product of some shifting philosophical views concerning issues of federalism and preemption under the NBA among the Justices, which would not have been

. expected from a reading of the Watters decision. Therefore, it may continue to be difficult to predict what will happen as other issues involving state oversight of national bank activities are presented." State enforcement officials can be expected to take advantage of powers they may not have thought they had af-

I. 550 U.S. I (2006).

2. Act of June J, 1864. Ch. 1M, 13 Slat. 99 (codified as amended in Title 12, U.S.C}.

3. _ U.S. _, 129 S. Ct. 2110. 174 L.Ed.2d 464 (2009).

4. As previously predicted in this journal. the simplicity promised by federal preemption has proved to be illusory. See, e.g .• Thoma, v, U.S. Bank, N.A. (ND), 575 F.3d 794 (81h Cir. 2(09) (federal preemption does not extend to interest charges beyond the "n-ote rate," as to state-chartered banks and national bank assignees); Miller. Musselman & Harren, infra note 24 (noting the uncertainty in required preemption analyses).

ter Watters,S and additional issues could well come before the Court as a result.

II. Background--the OCC Regulations

The OCC issued several regulations between 1996 and 2004 which were designed to clarify its visitorial power over national banks and, in particular, to preempt any attempts by state officials to exercise such authority." The issue before the Supreme Court in Cuomo concerned section 7.4000 of the OCC regulations (section 7.4000 or the OCC regulation), which was designed to exercise the full extent of the power reserved for the acc under the NBA. This OCC regulation provides in pertinent part:

(a) General Rule

(I) Only the OCC or an authorized representative of the OCC may exercise visitorial powers with respect to national banks, except as provided in paragraph (b) of this section. State officials may not exercise visitorial powers with respect to national banks, such as conducting examinations, inspecting or requiring the production of books or records of national banks, or prosecuting enforcement actions except in limited circumstances authorized by federal law. However, production of a

5. See. e.g .• People v. Wells Fargo & Co .• Case No. 09 Ch 26434 (Cook County. Hl., filed July 31. 2009). discussed infra at Part VI.

6. Cuomo Y. Clearing House Ass'n, L.l.c., 510 F.3d 105. III~ 12 (2d Cir. 2(07). rev 'd. _ U.S. _, 129 S. Ct. 2710.174 L.Ed.2d 464 (2009). See generally Jonathan L. Levin. New Federal Preemption Regulations l..e\'.cl the Playing Field lor National Banks. 58 Consumer Fin. LQ. Rep. 4 (2004).

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147

bank's records (other than non-public OCC information under 12 CFR part 4, subpart C) may be required under normal judicial procedures.'

The acc regulation further defines "visitorial powers" to include not only bank examinations, inspection of bank books and records, and the regulation and supervision of activities authorized or permitted under federal banking law, but also "[e]nforcing compliance with any !pplicable federal or state laws concerning those activities.:" This broad statement asserted the OCC's claim that it was the sole entity empowered to enforce any law, including any state law, affecting any banking practice of national banks, and that action by state law enforcement officers was totally preempted.

Consistent with the provision of the NBA that "no national bank shall be subject to any visitorial powers except as ... vested in the courts of justice,"? the OCC regulation provided an exception to the acc's exclusive visitorial power for actions brought in court. However, it prohibited state officials from filing any such court actions:

(2) Exception Jor courts oj justice. National banks are subject to such visitorial powers as are vested in the courts of justice. This exception pertains to the powers inherent in the judiciary and does not grant state or other governmental authorities any right to inspect, superintend, direct, regulate or compel compliance by a national bank with respect to any law, regarding the content or conduct oj activities authorized for national banks under F ederal law.i"

7. 12 CFR § 7.4000(a)(I) (emphasis supplied).

8. Id. § 7.4ooo(.)(2)(i)·(iv).

9. 12 U.S.c. § 484(A).

10. 12 CFR § 7.4ooo(h)(2) (emphasis supplied).

III. New York Attorney General Investigations and the District Court

The OCC's assertion through its regulation, that state law enforcement officials' power to enforce their own laws was preempted by authority granted to the federal regulator under the NBA, came under challenge in New York when the office of the Attorney General (Attorney General) took action in 2005 after expanded data first became available under the Home Mortgage Disclosure Act (HMDA).I l Data for some mortgage lenders led to claims that their practices could be racially discriminatory because a disproportionate number of higher cost loans was given to minority buyers. 12 The Attorney General negotiated a consent decree with one lender, Countrywide Home Loans, which was not a national bank, to ensure that its mortgage lending practices did not violate New York's civil rights laws." However, the Attorney General's efforts to investigate several national banks' mortgage lending practices 14 were halted when the banks and the OCC sued to enforce the acc's exclusive visitorial powers as set forth in the OCC regulation.

The controversy heated up when the Attorney General issued letters of

II. 12 U.S.C. §§2801 et seq.

12. Reports by Federal Reserve Board (FRS) researchers on the expanded HMDA data stressed that the HMDA data by itself is insufficient to establish the existence o-f racial discrimination, See, e.g .• Robert B. Avery, Glenn B. Canner & Robert E Cook, New htformatlon Reported Under HMDA ntId tts Appiication in Fair Lending Enforcement, 91 Fed. Res. Bull. 344. 345. 389-90 (2005), available at hup-:llwww fedemlreserve govl pubsfbulleLjn/2QQ51 §ummerOS hmda pdf. However. reports by consumer advocates have not surprisingly concluded 1hal HMDA data showing patterns of disparate impact on minorities was sufficient to support fair lending claims. See. e.g .• Debbie Grunstein Bocian, Keith S. Ernst & \Ve~ Li, Center For Responsible Lending, Unfair Lending: The Effect of Ra-ce and Ethnicity on the Price of Subprime Mortgages 3-5 (May 31, 2006). ami/able at htlp·llwww.responsiblelending.Qrg/pdfs/ uOl I-unfajr lending.5/06.pdf.

13. See Press Release, N.Y. Attorney General, "Countrywide Agrees to New Measures LO Combat Racial and Ethnic Disparities in Mortgage Loan Pricing" (Dec. 5.2006). ami/able athllp-lIwww.o<'lg.slale.ny.us/pressJJQQ6Jdcc/dec{)Sa Q6.html; In re Countrywide Home Loans, Inc., Assurance or Discontinuance Pursuant to Executive Law § 63(J5) {N. Y. Auorney Gen. Nov. 22. 2006). avoilable at hllj;,-lIwww ~ag slate n)' us/pres.s! 2006!dec/cQunlrywjde%2Qassurance%20finaJ%20sjgned%2Qp

ill.u<!f.

14. The national banks targeted by the Attorney General included 'Vel1s Fargo. HSBC, J.P. Morgan Chase and Cieigroup. Cuomo. 5 W F.3d at 109 n. 2 (2d Cir. 2007).

inquiry to the national banks, pursuant to his administrative powers, requesting that the banks produce information concerning their mortgage loan policies and practices and data about their mortgage loans beyond what they disclosed under the HMDA, so that the Attorney General could determine whether there were legal justifications for the disparities shown in the HMDA data. The OCC then filed suit in 'federal district court to enjoin the Attorney General from: conducting this investigation; requesting information from the banks on an informal basis; issuing subpoenas to request information; or seeking any enforcement in court.'> A consortium of national banks which included the ones who received the letters of inquiry from the Attorney General sought similar relief. 16

The Attorney General counterclaimed, seeking a declaration that the OCC regulation was invalid. In his press release concerning this counterclaim, the Attorney General took the position that further investigation by his office was necessary because "[e]vidence already disclosed by the banks appears to show a significant racial disparity that could violate state civil rights laws."!? He cast the litigation in populist terms:

While such a move was expected from the banks, it is shameful that a federal regulator would join in an effort to shield the banks from scrutiny by state regulators.

The federal regulator-Office of the Comptroller of Currency-suggested that a review of these records by my office would somehow interfere with federal

15. See DCC v. Spitzer. 396 F. Supp. 2d 383 (S.D. N.Y. 2005), aff'd scb nom. Clearing House Ass'n, L.L.c. v. Cuomo, 5-W F.3d lOS (2d Cir. 2007). rev'd, _ U.S. _. 129 S. Ct. 2710.174 L. Ed. 2d 464 (2009).

16. See Clearing House Ass'n. L.L.C. v, Spitzer, 394 F. Supp.2d 620 (S.D.N.Y. 2OOS). 'iff'J sub 110m. Clearing House Ass'n, L.L.C. v. Cuomo. 510 F.3d 105 (2d Cir. 2007). rev'd. _ U.S. _. 129 S. Ct. 2710.174 L. Ed. 2d 464 (2009).

17. Pless Release. N.Y. Attorney General. "Srsrement by Attorney General Eliot Spitzer Regarding the lnvestigation of Racial Disparities in Mortgage Lending" (jun. 17. 200S-). avai/able al hup-l/wwW.QilO.51ale.ny.uslpress!2005/jun-ljunl7a 05 html.

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supervision of the banks. But this position defies common sense and a century of joint state and federal oversight of the banking industry.

This position, coming as it does after the acc effort last year to shield nationally-chartered banks from enforcement of state consumer protection laws, is another indication that the Bush Administration sides with corporate interests over consumer interests.

It's unconscionable the acc would help the banks it regulates draft litigation to shield them from reasoned enforcement of consumer protection and civil rights laws and then sit at counsel table right next to those banks, as happened in court his morning. 18

The district court upheld the ace s claims that it had exclusive visitorial power which preempted any state enforcement efforts against the national banks, in two lengthy opinions. In the acc case, the court found that section 7.4000 was a valid exercise of the powers granted to the acc under the NBA, so Chevron deference was due to it. 19 The Attorney General's counterclaim was dismissed because the acc regulation was not arbitrary and capricious." The court permanently enjoined the Attorney General from issuing any administrative subpoenas or other demand for inspection of national banks' books and records, from instituting enforcement actions relating to his demands to inspect documents, and from instituting any actions in state court to enforce state fair lending laws."

In the companion national bank case, the court also found that any attempt by the Attorney General as pa-

18. /d.

19. oce v. Spitzer, 396 F.Supp. 2d at 391-404, (citing Chevron U.S.A, lnc. v, Natural Resources Defense Council, 467 U.S. &31,104 S. Ct. 2718. &1 L. Ed. 2d 694 (1984)).

20. {d. a1407.

21. Id. aI407·08.

rens patriae to enforce the fair lending provisions of the federal Fair Housing Act (FHA)22 against national banks was also prohibited because it constituted the exercise of visitorial powers exclusively reserved to the aCc.23

IV. Watters and the Second Circuit

The Attorney General appealed these decisions to the United States Court of Appeals for the Second Circuit. While the appeals were pending, the Supreme Court decided Watters. The issue before the Court in Watters was whether a state regulator in Michigan could exercise authority over a national bank's operating subsidiary which did business in the state, where the subsidiary was a statechartered corporation which Michigan supervised before it became a whollyowned subsidiary of the national bank." Both the district court and the Sixth Circuit United States Court of Appeals had held in Watters that the state could no longer regulate the mortgage lending activities of the operating subsidiary once the national bank acquired itY

In a 5-3 decision, the Supreme Court affirmed. Speaking for the majority," Justice Ginsburg started from the proposition that it was clear that real estate lending by a national bank "is immune from state visitorial control" under the NBAY The same was true for a national bank's operating subsidiaries because "[f]or supervisory purposes, acc treats national banks and their operating subsidiaries as a single economic enterprise.?"

22. 46 U.S.C. § 3613(a)(1 }(A).

23. Clearing House Ass'n. V_ Spitzer, 394 F. Supp. 2d at 630-31.

24. See gellemlly Fred H. Miller. Meghan S. Musselman & Alvin C. Harren, The warters Case: U.S. Supreme Court Upholds Ability of National BlIu!.;, Operating Subsidiaries to Preempt Slate Law-: What Does It Mean?, 61 Consumer Fin. L.Q. Rep, 610 (2007).

25. 334 P. Supp. 2d 957. 963 (W.D. Mich. 2004), aff·d. 431 F.3d 556 (fith Cir. 2005). aff'd, 550 U.S. 1 (2007).

She concluded that prior case law supported the acc's position, stating:

We have never held that the preemptive reach of the NBA extends only to a national bank itself. Rather, in analyzing whether state law hampers the federally permitted activities of a national bank, we have focused on the exercise of a national bank's powers, not on its corporate structure. [citation omitted] And we have treated operating subsidiaries as equivalent to national banks with respect to powers exercised under federal law (except where federal law provides otherwise)."

In addition, Justice Ginsburg could not find anything in the NBA which differentiated between acti vities that a national bank chose to conduct itself and activities it chose to conduct through an operating subsidiary." She therefore concluded:

The NBA is thus properly read by acc to protect from state hindrance a national bank's engagement in the "business of banking" whether conducted by the bank itself or by an operating subsidiary, empowered to do only WHat the bank itself could do."

Justice Stevens, dissenting in Watters, read the NBA and the Court's previous case law interpreting the statute quite differently. Emphasizing the rights of states to regulate conduct except to the extent that federal law expressly preempted their powers, he stated:

Congress has enacted no legislation immunizing national' bank su bsidiaries from compliance with nondiscriminatory state laws regulating the business activities of mortgage brokers and lenders,

26. Justice Ginsburg was joined by Justices Kennedy. So-uter,

Breyer and Alhro. Justice Stevens' dissent was joined by 29. Id. at IS (emphasis added in original).

Chief Justice Roberts and Justice Scalia. Justice Thomas did

not participate. 30. ld. at 18· L 9.

27. i-Vallers. 550 U.S. at 13. . 31. ld. at Ll . Bill see Miller, Musselman & Harrell. supra note 24,

suggesting that neither the issues nor she case law was quite so

28. M. at ]7. clear,

~.

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149

Nor has it authorized an executive agency to pre-empt such state laws whenever it concludes that they interfere with national bank activities. Notwithstanding the absence of relevant statutory authority, today the Court endorses an agency's incorrect determination that the laws of a sovereign State must yield to federal power. The significant impact of the Court's decision on the federal-state balance and the dual banking system

> makes it appropriate to set forth in full the reasons for my dissent."

As Justice Stevens read the NBA, there is no provision which preempts state visitorial supervision of national bank subsidiaries which are chartered by a state. Rather, the NBA expresses "congressional silence" on this question." There was, accordingly, no basis for granting Chevron deference to the OCC's regulations on this subject." Echoing comments made by the Attorney General in his amicus brief, Justice Stevens found that the majority had "endorsed administrative action whose sole purpose was to pre-empt state law rather than to implement a statutory command," which was "especially troubling" because it preempted state laws that were" designed to protect consumers. "35

The Second Circuit's decision in Cuomo, affirming the district court decisions against the Attorney General in the OCC and national bank cases, was also split, 2-1. The Second Circuit majority acknowledged that "Watters does not directly address the questions at issue here.'?" but nevertheless found support in that decision for its

32. Wollers, 550 U.S. at 22 (Justice Stevens dissenting).

33. /d. al 35.

34. /d.,,41·43.

35. Id. at 35.44. The Attorney General emphasized the Inability of state law enforcement officials to protect consumers from predatory lending by national banks and their state-chartered operating subsidiaries if the oce regulation were upheld. See Press Release, N. Y. Attorney General. "Stales Hie Brief in O.c.c. Case: federal Bank Regulator woutd Leave Consumers Unprotected" (Sept. 12. 2006). available at hll.t:!; IJw\Vw_Qag S~Rtc ny_uslpressl2QQ6!5eptlsept 123 06.htmL

36. Cuomo. 510 F.3d .tI16.

conclusion that the OCC regulation was an appropriate exercise of the power reserved to it under the NBA.

The Second Circuit majority first addressed whether to afford Chevron deference to the OCC regulation. It found that the usual presumption against preemption of state action did not come into play because the long history of national bank regulation had been "substantially occupied by federal authority for an extended period of time. "37 The Second Circuit majority concluded that the Supreme Court preemption decisions culminating in Watters did not allow it to accept the argument put forward by the Attorney General that "visitation" should be defined to exclude enforcement of state laws of general applicability _Js Watters made it clear to the Second Circuit majority "that investigative and enforcement powers of the type the attomey general has sought to exercise here are at least in some sense 'visitorial. "'39

Curiously, the Second Circuit majority conceded that "the OCC does not appear to have found any facts at all in promulgating its visitorial powers regulation," but excused that absence on the ground that the regulation was not "arbitrary, capricious, or manifestly contrary" to the provisions of the NBA.40 It found that section 7.4000(a) furthered the congressional intent expressed in the NBA "to shield national banks 'from unduly burdensome and duplicative state regulation' in the exercise of their federally authorized powers, such as real estate lending" while allowing state officials to enforce laws "that do not purport to regulate a national bank's exercise of its banking powers," so that the OCC regulation provided "a permissible accommodation of the conflicting policies that were committed" to the OCC by the NBA.41

37. td. at 1 l Lciting wachovia Bank. N.A. Y. Burke,415 F.3d 305, 314 (2d Cir. 2005).

38. Id. at 115·16.

39. /d. at 117.

40. kl. at 119 (citing Chevron, 467 U.S. at 844).

41. /d. at 120 (citing WOrler.<, 127 S.O. at 1567 (emphasis sup· plied)).

The Second Circuit majority therefore affirmed the injunctive relief granted against any investigative or enforcement action by the Attorney General."

Judge Cardamone, dissenting, took a much different view of the relationship between the oec and state enforcement officials. He began his dissent with a strong statement on the implications that upholding the OCC regulation would haveon the federal-state relationship:

By proscribing the enforcement of non pre-emptive state law against national banks, the Office of the Comptroller of the Currency, a bureau within the U.S. Treasu.ry Department, has altered the compact between the state and national governments, That compact crafted by the framers of our Constitution envisioning two independent coexisting sovereigns will be dangerously weakened should this action by the Executive Branch stand. A co-equal relationship between the two sovereigns was built into the frame of our republican form of government. Changing that status to one more akin to parent-child or employer-employee tips the federalism scales and strips the states of a portion of the residual sovereignty granted them under the Tenth Amendment by casting the states into a permanent junior or inferior position vis-a-vis the national government, Thus, if the power to alter the relationship between the state and federal government is established, it portends the power to destroy the constitutional concept of federalism, an indispensible component of our free society."

Proceeding from this perspective, Judge Cardamone went on to find that - Chevron deference was not due to section 7.4000 if it prevented the Attorney General from enforcing the state's civil rights

42. Id. at 121.

43. Id. at 126 (Curdemone.J .• dissenting).

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laws where "we have a federal executive official-the Comptroller of the Currency-usurping 'residual power reserved to the states' ... the police power to investigate certain national banks and their operating subsidiaries doing business in New York allegedly guilty of discriminatory lending practices in the state. "44

Judge Cardamone stated that while "visitorial powers" had not been fully defined by the Supreme Court in previous cases, "it was clear that virtually from the iAception of the National Bank Act the term was not understood to preclude state enforcement of non preempted state Iaws.?" The Attorney General's actions thus should not be considered an exercise of any visitorial powers reserved to the acc by the NBA, and the acC's regulation, which attempted to define visitorial powers in that fashion "erodes a key aspect of state sovereignty, confuses the paths of political accountability, and allows a federal regulatory agency to have a substantial role in shaping state public policy. The likely result of which is a plain transgression on our republican form of government and a violation of the Tenth Amendment.'?"

Contrary to the acC's interpretation of visitorial power, Judge Cardamone found that prior Supreme Court precedent showed that the Court had allowed states to enforce their laws against national banks so long as there was no "impermissible state action to 'enforce a Iaw of the United States' or 'call the bank to account for an act in excess of its charter powers. "'41 He found that Watters did not require any different result because the Michigan statute in that case "attempted to empower the state banking commissioner with general supervision and control over the operating subsidiaries and subjected them to various licensing, registration, and inspection

44. [d. at 127.

requirements," so that "[t]here was no question that the state statute at issue in the case constituted an exercise of visitorial power over such subsidiaries. "48

V. Decision of the Supreme Court

The Supreme Court took quick action in reversing the Second Circuit not long after it granted the Attorney General's certiorari petition."? In the process, the majority opinion by Justice Scalia drew on extensive precedent to fashion a definition of the term "visitorial powers" and drew a line which clarifies what powers the NBA left to the courts. Since the acc regulation did not conform to the limits set forth by the Court, it was invalidated.

Justice Scalia stated that the question presented in Cuomo was "whether the Comptroller's regulation purporting to pre-empt state law enforcement can be upheld as a reasonable interpretation of the National Bank ACt."50 His Chevron inquiry led him to explore what the term "visitorial power" was intended to mean under the common law preceding enactment of the NBA in 1864, as well as to explore prior case law precedent both before and after the NBA was enacted." In particular, he noted that the Court had allowed the Missouri Attorney General to enforce a state anti-bank branching law against a national bank in First Nat'I Bank in St. Louis v. Missouri'? because the NBA did not substantively preempt that state law, so that '" the power of enforcement must rest with the [State] and not with' the National Government. "53 He also found nothing in Watters contrary to the distinction

48. [d. at 133.

he drew between bank supervision and law enforcement because Watters dealt with a much more limited question:

"[G]eneral supervision and control" and "oversight" are worlds apart from law enforcement. All parties to the case agreed that Michigan's general oversight regime could not be imposed on national banks; the sole question was whether operating subsidiaries of national banks enjoyed the same immunity from state visitation. The opinion addresses and answers no other question. 54

Turning to the question of whether the aec could prohibit state law enforcement officials from enforcing a state's "valid, non-pre-empted laws against national banks," so that "[t]he bark remains, but the bite does not,"55 by issuance of its regulation, Justice Scalia concluded that "if the state statute is valid as to national banks, 'the corollary that it is obligatory and enforceable necessarily results. '''56 This also explained why NBA section 484(A) reserved state power "vested in the courts of justice.?" While the exception could not exempt an exercise of the visitorial power, it could "preserve normal civil and criminal lawsuits.?" And, as a practical matter, "[i]f a State chooses to pursue enforcement of its laws in court, then it is not exercising its power of visitation and will be treated like a litigant" by filing a lawsuit, surviving motion practice and complying with the rules of court, while "[a] visitor, by contrast, may inspect books and records at any time for any or no reason.">?

Justice Scalia summarized the difference between the visitorial power reserved to the oce by the NBA and the powers reserved to state officials as follows:

{Continued 011 page 70>

49. TIle Supreme Court granted the writ on January 16.2009, _ U.S. _. 129 S. Ct. 981. 173 L. Ed.2d 179 (2009). heard oral arguments on April 29 and issued its opinion on June 29. _

U.S. _. 129 S. Ct. 2710. 114 L. Ed. 2d 464 (2009). 54. /d.

50. 129 S. Ct. a12715. 55. [d. at 2118.

51. Id.at2716--L1.citingiuteralia J 'V Bu..CKSToNE,COMMENTARIES 56. ld. (emphasis in original) (citing Sf. Louis, 263 U.S. at 659-

45. Id. at 129. ON TIlE L-<\W5 OF ENGLAND 469 (1765); Trustees of Dartmouth -60).

College v. Woodward. 17 U.S. 518.4 Wheat 518. 616. 681

46. [d. at 130·31. (1819); Guthrie v. Harkness. 199 U.S. 148. 157. 159 (I905). 51. [d.

41. fd. ar 132. (citing First Nne) Bank in $1. Louis v, Missouri. 263 52. 263 U.S. 640 (L924)-. 58. Id.

U.S. 640.660 (1914); Guthrie v, Harkness, 199 U.S. 148, ISS

(1905)). 53. Cuomo. 129 S. Ct. at 2717 (citing Sf. Louis, 263 U.S. at 660). 59. [d .• ,2118·19.

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same time paying meaningful amounts . to all creditors--including unsecured creditors. That is a win-win outcome."

courts are moving ahead and grappling with itY With the active involvement of counsel, the result of a Chapter 13 case of a higher-income borrower can

21. In addition to the previously cited cases, see, e-g-, III re Ortiz, Case No. 06·50216 (Banke. S.D. Tex .• Nov. 20. 2006) (automalic slay in successive cases); I1J re Hubbard. 333 B.R. 377 {Bankr. S.D. Tex. 2005), reconsiderauon denied; III re Salazar. 339 B.R. 622 (Bankr, S.D. Tex. 2006). appeal denied as moot when parties seuled, 2006 WL 1871284 (51h Cir. 2006); and [T1 re Jones. Case No.II6·3J190 (Bankr. S.D. Tex .• Oct. 20. 2006) (aU re eligibility for relief when debtor's prepetiticn counsel-

)-, ing is stale by even a few days); Itt re Singleterry, Case No. 06·30339 (Bankr. S.D. Tex .• OCL 19.2006) (means resu: fl. '" Chapter 13 Fee Applications. Misc. Case No. 06·00305 (Bankr, S.D. T ex.. OCI. 3.2006); [ro re Bufford. 2006 WL 1617160 (Bankr. N.D. Tex .. June 13,2006) and tn re Taylor. Case No. 06·30952 (Bankr. N.D. Tex .• July 19.2006) (interest rate on § 910 debts); III re Gentry. Case No. 05·60128 {Bankr. N.D. Tex., June 9. 2006) (interest on lax claim); In re Desanti, Case No. 05·95075 [Bankr, S.D. Tex .. April 21, 2006) (adequate protection).

be that the debtor is able to confirm a plan that puts himself or herself on a firm financial footing while at the

28. Unreported cases cited ill the footnotes are available on www IQjslaw.com

"Visitorial powers" in the National Bank Act refers to a sovereign's supervisory powers over corporations. They include any form of administrative oversight that allows a sovereign to inspect books and records on demand, even if the process is mediated by a court through prerogative writs or similar means.

* * *

When, however, a state attorney general brings suit to enforce state law against a national bank, he is not acting in the role of sovereignas-supervisor, but rather in the role of sovereign-as-law-enforcer. Such a lawsuit is not an exercise of "visitorial powers" and thus the Comptroller erred by extending the definition of "visitorial powers" to include "prosecuting enforcement actions" in state courts, § 7.4000.60

The original injunctive relief against the Attorney General prohibited him

60. [d. at 2721.

The Supreme Court Limits ...

(Continued fro", page 150)

from issuing subpoenas on his executive authority under New York law, in addition to prohibiting him from filing any action in court to enforce his subpoenas or to enforce federal or state anti-discrimination laws. The majority opinion affirmed the district court to the extent that it dealt with the threatened issuance of executive subpoenas, but vacated the injunction to the extent that it prohibited the Attorney General from bringing any judicial enforcement actions."

Justice Thomas' dissent also reviewed the history of the visitorial power, but found that "the common-law tradition does not compel the conclusion that petitioner's definition of visitation is the only permissible interpretation of the terrn.?" His review of the authorities cited by Justice Scalia led him to conclude that "[l]ike acc, each of these venerable legal scholars understood visitation of civil corporations to include the power to enforce generally applicable laws

6 Lid. at 2722.

through judicial actions.?" Accordingly, he found that the acc regulation was based on "a more modest construction than could have been supported by the common-law and dictionary definition," and that it therefore was reasonable. 64

Justice Thomas distinguished the St.

Louis decision because it did not refer to or address visitorial powers.s? He also concluded that Watters supported the acc's construction of the l'{BA because the state statutes there "granted state banking commissioners the very enforcement authority that' petitioner seeks to exert over the national banks in this case."66 The acc regulation was due Chevron deference because "it interpreted the term 'visitorial powers' to encompass state enforcement of state fair lending laws. The pre-emption of state enforcement authority to which

[Continued O1J page 83)

63. /d. at 2727.

64. £d.

65. ta.

66. Id. at 2730.

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83

The bankruptcy was filed in order to preclude enforcement of these liens."

When the secured creditor sought to dismiss or convert the 3 Ram Chapter 11 case, the debtor objected on grounds that the secured claim in the Chapter 11 case would be paid via the Chapter 13 plan in the shareholders personal

24. The sharehorder filed under Chapter J 3~3 Ram, Inc. filed under Chaple"ll.

bankruptcy case. This was said by the debtor to excuse the debtor's seven month failure to file a Chapter 11 plan of reorganization. The court disagreed and granted the creditor's motion, on grounds that the debtor's expectation of payment through a Chapter 13 plan was too speculative, and was not a substitute

for the required Chapter 11 plan of reorganization. The court's opinion discusses the 2005 amendments to section 1112, concluding that a lack of feasibility remains a basis for dismissing a Chapter 11 case or converting it to Chapter 7.25

25. 343 B.R .• , 117·119.

petitioner objects thus follows from the statute itself-not agency action.?"

VI. Conclusion

To date, the Attorney General has not taken public action in response to Cuomo, beyond issuing a press release applauding the decision as "a huge win for consumers across the nation.?" The first state enforcement action following the Cuomo decision appears to have been taken by Illinois Attorney General Lisa Madigan. One month after the Cuomo opinion was announced, she filed an enforcement action against Wells Fargo in state court/" She alleges that Wells Fargo's prime and subprime lending subsidiaries discriminated against minorities, based on HMDA data, studies of HMDA data by consumer advocacy groups, and detailed statistical demographic information." Although the complaint mentioned that Wells Fargo declined to comply with her

67. /d." 2732.

6&. Press Release. Office of the N.Y. Suee AnurneyGeneral, "Statement from Attorney General Andrew Cuomo on Supreme Court Decision in Cuomo v. Clearinghouse Ass'n'' (June 29. 2(09), available ar hllp:flwww.Qag.state.ny.uslmedja centerl2009! juneJiune29a 09.h,mL But see discussion below.

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{Continued from page 70)

administrative subpoena," it did not cross the line between "sovereign-as-supervisor" and "sovereign-as-law-enforcer" by attempting to enforce the subpoena.

Under Cuomo, it appears that the definition of "visitorial power" has now, for the first time, been clearly delineated in terms of what state officials can and cannot do. In particular, as more HMDA data becomes publicly available each year, if state law enforcement officers conclude that the data shows a pattern of racial discrimination, they are free to bring action in court to enforce their own state anti-discrimination laws or federal laws like the FHA and the ECOA. While, as Justice Scalia noted, the NBA requires state officials to go to court in the first instance rather than proceed by administrative subpoena, so that the courts can "prevent 'fishing expeditions' or an undirected rummaging through bank books and records for evidence of some unknown wrongdoing.'?' it is not at all clear what will be considered sufficient cause for them to file such court actions.

FRB researchers who have issued reports on HMDA data have stressed that the data by itself is not enough to establish that mortgage lending practices violate

70. ld .• ComplainlaI15.34·41.

69. People v, Wells Fargo & Co .• No. 09 CH 26434 (Cook Oy.

Cir. 0. Ju131. 2009). 71. t«, Complaint at 5.

72. 129 S. CI. at 2719.

civil rights laws, but consumer advocates who study the data have concluded otherwise." So far, no courts have reached the question of whether HMDA data by itself or as interpreted by experts, without other evidence, is sufficient to establish a prima facie case of discrimination. Likewise, no courts have reached the question of what statistical threshold must be crossed to prove a violation, assuming that HMDA data is sufficient by itself to establish a prima facie case, or what evidence can be used to explain or justify an apparent racial disparity in the data,

While federal regulators are given the primary responsibility to police national banks and their operating subsidiaries over questions raised by racial disparities in HMDA data, state officials who are concerned about such matters have been given a clear signal by the Supreme Court that they have an independent ability to act, so long as they proceed through the court system. Although private litigants have never been barred by the ace regulation from challenging racial discrimination suggested by HMDA data, and have recently shown interest in pursuing racial discrimination

[Continued em page 87)

73. See snpru note 12.

QUARTERLY REPORT

87

contracts is simply not worth the very real costs. On the other hand, a different movement is clearly afoot in Germany and the Netherlands, to empower the debtor to "cram down" a proposed outof-court payment plan on recalcitrant creditors where a majority of creditors have accepted reality and taken what they can reasonably expect. Even as European states express their discomfort with legally-mandated debt forgiveness, they are quite willing to allow majority creditor rule t6'undermine the rights of a few in deciding the fate of consumer contracts.

Oddly, as European states scale back their bankruptcy systems to reduce administrative formality and offer relief over shorter periods, the U.S. has vastly increased the administrative expense of the consumer bankruptcy system (by implementing the credit counseling requirement, the "means test," and a variety of requirements for the U.S. Trustee's office, panel trustees, clerk's offices, and courts). Comparative analysis shows the

folly of this approach and offers a basis for predicting that the U.S. may reverse course when the reality becomes apparent. Already, after only a few years of the new system, the credit counseling stage came under attack (including by credit counselors themselves) as a useless formality, and very few debtors have sufficient income to fall into the "means test" net so as to be forced into a payment plan. Judging by experience in Europe, these results were inevitable. Further study of the development of consumer bankruptcy law in Europe may well foreshadow more changes to come in the U.S.

IV. Conclusion

Leaving consumer bankruptcy out of the consumer law picture misses a fundamental aspect of the debtor-creditor bargain. Without at least a brief consideration of consumer bankruptcy, an examination of contracts and consumer law cannot include the whole picture

of state ambivalence toward the costs and benefits of enforcing consumer contracts and the trade-offs that states are increasingly making when "push comes to shove." The motto of contract law of the past (pacta sunt servanda) is rapidly losing traction as states worldwide confront the challenges of a broadly expanded consumer credit market with unique psychological and economic realities: The compromises inherent in consumer bankruptcy law have begun to erode the fundamentals of consumer contract theory in the present. The future of this area of consumer law likely holds even more compromises, and recent experience suggests that the U.S. has given up its seat as first mover and trend setter. The U.S. seems to be moving backward in consumer bankruptcy law, covering territory that European practice has already shown to be unproductive. Meanwhile, Europe forges ahead in new, more creative, and more productive directions.

claims against mortgage lenders," they may also be given heart by the Cuomo decision. Thus, it is more important than ever before for lenders to carefully

74. See generaIly John L Rcpiequet & L. Jean Noonan, Recent Developmems in Fair Lending: The Daw1I of.(Z New Litigtuion ETa?, 64 Bus. Law. 563 (2009). Civil rights claims against auto finance companies appear to have wound down at this point. See generally John L. Ropiequet & Nathan O. Lundby, APR Split Clnss Actions Under the Equal Credit Opporl:lJliry Act:

Tile End of History?, 61 Consumer Fin. L.Q. Rep. 49 (2007).

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iConthsued from page 83J

examine their own HMDA data as soon as it is released for their mortgage loans for the previous year, and to take whatever preventive and remedial action with

respect to the activities of their own loan officers and independent mortgage brokers that the data may show is necessary.

NOTICE TO READERS

The Quarterly Report is a research tool designed to help readers find and understand applicable laws, cases, and regulations. It also provides a forum for advocates of change. While the content of the Quarterly Report is believed to be accurate, the Conference cannot be responsible for errors. Readers are cautioned to consult primary authority before formulating or relying on a legal position. The views expressed in the Quarterly Report are solely those of the authors and do not necessarily represent the views of the Editor, the Conference on Consumer Finance Law, or the members of the Governing Committee. Opposing views are welcome and will be considered for publication.