Although a technical victory for national banks, the U.S. Supreme Court's decision in Cuomo v. The Clearing House Ass'n, 557 U.S. _____ (2009), substantially curtails the pre-emptive effect of federal bank regulations and enforcement powers. In Cuomo, the State of New York sought production of records through a threatened executive subpoena as part of an investigation into violations of New York's fair-lending laws. (Op. p. 1). The majority held that such an executive subpoena would be a pre-empted exercise of visitorial powers, but went on to explain that the use of judicial process would be a nonpre-empted power. (Op. at p. 15).
At issue was a regulation issued by the Office of the Comptroller of the Currency (OCC), 12 CFR §7.4000, concerning the pre-emptive effect of its visitorial powers. (Op. at p. 2-3). As written by the OCC, the regulation pre-empted States from prosecuting enforcement actions by placing such actions under its own exclusive visitorial powers. The Supreme Court rejected the OCC's interpretation of the National Bank Act and drew a distinction between "visitorial" and "enforcement" powers. (Op. at 3-6).
Writing for the Court, Justice Scalia defined visitorial powers as involving oversight, supervision, and the exercise of control. (Op. at pp. 4, 14). Justice Scalia, joined by Justices Stevens, Souter, Ginsburg, and Breyer, then distinguished such superintendent functions from "ordinary enforcement" of state laws through the judicial system, citing, Guthrie v. Harkness, 199 U.S. 148, 157 (1905) and First Nat'l of St. Louis v. Missouri, 263 U.S. 640, 660 (1924). "If 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." (Op. at p. 9). Thus, if the State is abusing its powers by engaging in a fishing expedition, the State will be subject to normal discovery sanctions. (Op. at p. 9). "A visitor, by contrast, may inspect books and records at any time for any or no reason." (Op. at p. 9).
To Justice Scalia, prohibiting States from enforcing non-pre-empted laws against national banks would leave those laws with only bark and no bite. (Op. at p. 7). Thus, if a state statute is valid and not pre-empted, it must be enforceable, even against national banks. (Op. at p. 8). Congress did not intend to pre-empt all state laws as to national banks and 12 U.S.C. §484(a) of the National Bank Act's "only conceivable purpose is to preserve normal civil and criminal lawsuits." (Op. at p. 8).
Justice Scalia concluded, "the unmistakable and utterly consistent teaching of our jurisprudence, both before and after enactment of the National Bank Act, is that a sovereign's 'visitorial powers' and its power to enforce the law are two different things. There is not a credible argument to the contrary. And contrary to what the Comptroller's regulation says, the National Bank Act pre-empts only the former." (Op. at p. 7). Thus, when a state attorney general files suit against a national bank, "he is not acting in the role of sovereign-as-supervisor, but rather in the role of sovereign-as-law-enforcer." (Op. at p. 14).
National banks were no doubt surprised that the Cuomo opinion was not beneficial to them (other than in the narrow specific holding as to the preemption of an executive subpoena). In 2007, the Court, in Watters v. Wachovia Bank, N.A., 550 U.S. 1 (2007), had that the National Bank Act, as interpreted by the OCC, pre-empted the State of Michigan from applying its laws to the mortgage-lending activities of an operating subsidiary of a national bank. Indeed, the dissent cited Watters as supporting the OCC's construction of the statute. (Dissent at p. 16). By contrast, the majority wrote that Watters dealt with general supervision, control, and oversight which "are worlds apart from law enforcement." (Op. at p. 6).
The dissent, although concurring in the specific outcome, would have deferred to the OCC's interpretation of its powers under the National Bank Act, pursuant to Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). (Dissent at p. 2). Justice Thomas, writing for the dissent and joined by Chief Justice Roberts and Justices Kennedy and Alito, agreed with the majority that the term "visitorial powers" was ambiguous, but found the OCC's interpretation, as expressed in 12 CFR 7.4000, to be reasonable. (Dissent at p. 3). The dissent found that New York's attempt "to obtain nonpublic information to comply with state fair lending laws under threat of judicial action" was sufficiently supervisory to amount to a visitorial power. (Dissent at p. 4).
Dismissing the majority's attempt to distinguish "visitorial" from "enforcement" powers, the dissent noted that, "even if the sovereign's law enforcement and visitorial powers were at one time distinct, by common law, they had merged at least with respect to the enforcement of generally applicable public laws against civil corporations." (Dissent at p. 10). The dissent also found that the structure of the National Bank Act supported the conclusion that enforcement powers were generally subsumed under visitorial powers because certain enforcement actions were specifically excepted from the Act. (Dissent at p. 12).
However, Justice Scalia was not persuaded by the fact that the preservation of state powers "vested in the courts of justice" is stated as an exception to the prohibition of visitorial, rather than enforcement, powers, holding that "it is explicable only as an attempt to make clear that the court's ordinary powers of enforcing the law are not affected." (Op. at p. 8). The majority also dismissed the dissent's concern that results which could seemingly only be compelled by "visitorial" power can now be compelled by using mere "enforcement" powers. Unlike the dissent, the majority held that the focus should be on the power being exercised rather than the result or impact being obtained. (Op. at p. 12).
In the current economic climate, banks are struggling to cope with the fallout from bad lending decisions made in the past and a new regulatory structure to come in the future. The Obama Administration has already enacted a credit card bill of rights and an overhaul of federal financial regulators is in the works. The Supreme Court has now added to the growing list of concerns of national banks by making them more answerable to state attorneys general.
If you have any questions regarding this e-Alert, please contact David Curcio at 713.752.4441 or dcurcio@jw.com.
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