Cuomo v. The Clearing House Ass’n, L.L.C.

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Authorship: David Schwartz

Contents

[edit] Briefs and Documents

Docket: 08-453

Issue: Whether 12 USC § 484 and 12 CFR § 7.4000 prohibit measures taken by the New York State Attorney General to enforce state fair lending law against national banks by subjecting those entities to “visitorial powers.”

Merit briefs

Amicus briefs

Oral argument: Transcript

Decision: Affirmed in part and reversed in part in an opinion by Justice Scalia

[edit] Pre-Argument Articles

[edit] Grant write-up

[edit] Argument Preview

The National Bank Act (”NBA”), 12 U.S.C. § 484(a), provides that “[n]o national bank shall be subject to any visitorial powers except as authorized by Federal law, vested in the courts of justice or such as shall be, or have been exercised or directed by Congress or by either House thereof.” In 2004, the Office of the Comptroller of the Currency (”OCC”) issued 12 C.F.R. § 7.4000, which interpreted Section 484(a) to preempt state enforcement of state laws against national banks. Today, in No. 08-453, Cuomo v. Clearing House Association, the Court will consider the validity of Section 7.4000.

[edit] Background

Subject to limited exceptions not at issue here, 12 C.F.R. § 7.4000 provides that “[o]nly the OCC or an authorized representative of the OCC may exercise visitorial powers with respect to national banks . . . . State officials may not exercise visitorial powers with respect to national banks” (emphasis added). The regulation further defines “visitorial powers” as the examination of a bank or the inspection of a bank’s books and records or enforcing compliance with any applicable federal or state laws.

This case arises out of an investigation initiated by the Attorney General of New York of the lending practices of New York certain banks. In 2005, the Federal Reserve released home mortgage data which, for the first time, contained data on the race, sex, and income of the loan applicants. When then-Attorney General Elliot Spitzer examined this data, it revealed that banks had apparently issued disproportionately high percentage of high-interest home mortgage loans to minorities. Based on this data, and in lieu of a formal subpoena, Spitzer sent “letters of inquiry” asking state and national banks to provide him with additional information, some of it confidential, regarding their lending practices. Spitzer claimed the authority to conduct such an investigation under federal and state anti-discrimination and consumer protection laws.

The national banks - represented by the Clearing House Association (CHA), a consortium of national banks - brought suit against Spitzer, seeking an injunction to prevent him from issuing a subpoena. Based on its own regulations, OCC brought a similar suit to enjoin the investigation; the two suits were consolidated and gave rise to this case.

The OCC and CHA argued that Section 7.4000 was a reasonable interpretation of the NBA, 12 U.S.C. § 484(a), which provides that “[n]o national bank shall be subject to any visitorial powers except as authorized by Federal law, vested in the courts of justice or such as shall be, or have been exercised or directed by Congress or by either House thereof.”

After a bench trial, the district court issued a permanent injunction against the Attorney General, enjoining him from issuing subpoenas or demanding the inspection of any of the national banks’ records or books. It held that the phrase “visitorial powers” in Section 484 is ambiguous; moreover, the OCC’s interpretation of the phrase as preempting the states from enforcing state laws was reasonable and thus entitled to Chevron deference.

On appeal, the Second Circuit affirmed. The majority began by rejecting the Attorney General’s argument that no Chevron deference was warranted. The presumption against preemption does not apply, the majority explained, to an area - such as this one - that the federal government had “substantially occupied . . . for an extended period of time.” Nor did the OCC’s interpretation implicate the doctrine of constitutional avoidance: because the federal courts were creatures of federal law, the OCC’s interpretation did not significantly diminish “traditional” state powers, which were in any event already reduced.

Turning to a Chevron analysis, the court first agreed that the terms “visitorial powers” and “courts of justice” were ambiguous. Under the second Chevron step, the majority agreed that the OCC’s interpretation was reasonable. While voicing concern that the OCC’s “cursory analysis” “lack[ed] any real intellectual rigor or depth” and that the OCC’s interpretation relied primarily on legal precedent rather than any facts falling within the OCC’s area of expertise, the majority ultimately held that the OCC’s attempt to “harmonize” its regulations with judicial precedent did not invalidate the rule. And because the OCC’s interpretation was consistent with Congress’s policy of creating a national banking system unfettered by state law, the OCC reached a reasonable balance of the various conflicting policies committed to it by Section 484.

Focusing on federalism grounds, Judge Cardamone dissented in relevant part. In his view, Supreme Court precedent required a clear statement by Congress - absent from both Section 484 and the NBA generally - if it intended to alter the federal-state balance of power. Moreover, the particular brand of preemption created by the OCC, which only preempted enforcement of state laws rather than the laws themselves, eroded a key aspect of state sovereignty and muddled political accountability, thereby violating the Tenth Amendment.

[edit] Petition for Certiorari

In his petition for certiorari, Attorney General Andrew Cuomo - who replaced Spitzer - made four primary arguments. First, he argued that the Second Circuit’s decision conflicted with the Court’s decision in First National Bank in St. Louis v. Missouri (1924). In St. Louis, Cuomo argued, the Court upheld the Missouri Attorney General’s authority to enforce a Missouri statute outlawing branch banking against a national bank, thereby necessarily rejecting the argument that the state suit was a preempted “visitorial power.”

Second, he argued that the decision presented an issue on which the courts of appeals were divided two to one - viz., whether a federal regulation purporting to preempt state statutes warrants Chevron deference. In Watters v. Wachovia Bank (2007), three dissenting Justices would have held that such an agency opinion does not deserve Chevron deference. Such an issue is even more important, Cuomo claimed, because federal courts, rather than federal agencies, have the institutional competence to police the federal-state balance of power. This case presents a particularly clear example of this argument, as the OCC only relied on legal precedent in its interpretation in Section 7.4000, rather than any of its particular expertise.

Third, Cuomo argued that the OCC’s interpretation impermissibly alters the balance of power between the federal government and states. In his view, such a change requires a clear statement by Congress. He questioned whether “visitorial powers” were even implicated by his actions: instead of seeking to audit the banks’ records or police their compliance with their federal charters, he was simply trying to enforce state laws.

Fourth, Cuomo argued that the OCC’s interpretation effectively immunized national banks from any state enforcement of its consumer protection and antidiscrimination laws. Because the OCC lacks the ability and expertise to play the roles of state attorneys general, it should not be permitted to preempt the states’ traditional role in protecting consumers’ interests.

In their separate briefs in opposition, respondents argued that St. Louis was not on point: it was decided decades before the OCC promulgated Section 7.4000, interpreted a different version of the NBA, and did not even mention the term “visitorial powers.” Moreover, in that case, the Court was dealing with a state-law challenge to a national bank’s authorization to open a branch in Missouri - an action that the NBA did not authorize - whereas this case deals with real-estate lending, which the NBA specifically does authorize. The Court’s decision in National Cable & Telecommunications Ass’n v. Brand X Internet Services (2005) further demonstrates that the OCC could properly overrule St. Louis because the Court in St. Louis never held that the terms of the NBA unambiguously foreclosed such a reading. To the contrary, OCC’s action is supported by the Court’s precedent - especially Watters, in which the Court noted that Congress enacted NBA to prevent inconsistent state regulation from impairing the national banking system, a policy that the OCC’s interpretation of Section 484 furthers.

Next, respondents challenged Cuomo’s argument that the case even presented a circuit split. One of the cases on which Cuomo relied, they explained, presented a different question altogether: there, the issue was whether a federal law preempted a state statute; here, the issue is about the substantive meaning of a federal law that unquestionably preempts state authority. Moreover, that case refused to give deference to an informal, advisory opinion, rather than the notice-and-comment regulation at issue in this case.

Third, respondents challenged Cuomo’s federalism argument, countering that the OCC’s regulation was simply a continuation of the longstanding congressional policy of allowing national banks to exercise their powers exclusively under federal law. Other federalism cases bear no resemblance to this one, as those cases involved federal laws impinging on core state functions or extending congressional power into areas that Congress has not traditionally regulated. Here, Congress has regulated the federal banking system for 140 years. Moreover, Congress made its preemptive intent quite clear in Section 484. And the alleged paradox of a state being able to pass laws it cannot enforce is actually quite common, respondents maintained.

Fourth, respondents disputed whether the OCC is unable to vindicate state consumer interest and fair-lending laws. New York’s strong interest in enforcing its own laws is immaterial, they contended, when Congress has acted with its own valid law. Instead of investigating national banks, the state attorneys general should better focus their resources on the thousands of state chartered and licensed lenders over which the states have undisputed authority. Finally, the OCC does have the institutional capacity to handle compliance with state laws, they emphasized, except that the OCC has resolves conflicts with state and federal laws via informal recommendations to the national banks rather than public prosecutions.

[edit] Merits Briefing

For the merits stage, both sides’ arguments traced the standard Chevron doctrine analysis. Thus, Cuomo began by arguing that the OCC’s interpretation of the term “visitorial powers” was inconsistent with the traditional understanding of the term, which he described as a term of art referring to the “oversight” and “examination” of banks, processes that specifically consist of comparing a bank’s actions to its own internal laws and charter rather than to general standards. Such a distinction was supported by legal treatises written contemporaneously with the enactment of the NBA in the 1860s, as well as with the Court’s decisions in Guthrie v. Harkness (1905) and St. Louis. Other amendments to the NBA also support such a construction, Cuomo contended. For example, the 1994 Riegle-Neal amendments, 12 U.S.C. § 36, which authorized interstate bank branching, and their legislative history support the distinction between visitorial powers and other types of laws (e.g., fair lending, consumer protection, etc.), the latter of which Riegle-Neal preserves for state enforcement. Additionally, Cuomo questioned the OCC’s decision to issue a rule with “enforcement preemption” in the first place. If the state laws did in fact conflict with federal laws, they would be substantively preempted, but if they are consistent with federal law, then the national banks must follow them. Moreover, the OCC’s regulation contains a large loophole for private suits. How can allowing private individuals to sue, Cuomo queried, be any less burdensome than allowing state attorneys general to sue?

Turning to the second Chevron step, Cuomo focused squarely on federalism arguments. First, the Court made clear in Gregory v. Ashcroft (1991) that such an alteration in the federal-state balance of power requires a clear statement of intent from Congress, which Section 484 lacked.. Second, Chevron deference is not warranted when a regulation declares the preemptive scope of a federal statute. Although an agency has a specific area of expertise in administering complex and technical federal laws, this very expertise robs it of Chevron deference for federalism issues because the agency has such a strong self-interest in operating in that area. Here, Cuomo argued, there was no specific congressional grant of preemptive authority to the OCC, nor can Section 7.4000 carry out the OCC’s responsibilities when it does not enforce any specific statutory provision.

The CHA made a similarly structured argument, albeit in the other direction. It first argued that the NBA precludes state investigations or enforcement actions such as Cuomo’s, and that the OCC’s interpretation of the OCC is entitled to deference. Reviewing the history of the NBA, the CHA attacked Cuomo’s definition of “visitorial powers,” arguing that instead the term had a much broader meaning. The Court’s decision in Guthrie is not to the contrary, as it distinguished between a private, individual right to examine the conduct of a corporation, which was not preempted, and a public right of examination, which was solely given to the OCC and applies fully to Cuomo’s actions here. The Riegle-Neal amendments support this reading; indeed, they reflect Congress’s policy of enforcement preemption, which led to the regulation.

The CHA also argued that a system of concurrent enforcement is incompatible with the current federal regulatory system: for example, allowing each state to choose what measure qualifies as unlawful discrimination will force banks to submit to multiple legal analyses of a single loan decision. Nor do Cuomo’s adversarial, public methods of enforcement coincide with the OCC’s more informal, supervisory model of ongoing examination. The CHA again disputed Cuomo’s characterization of St. Louis, arguing that the case stands only for the uncontroversial proposition that a state law can enforce a prohibition against a national bank as long as federal law does not authorize that bank to take a particular action. Here, by contrast, the actions taken by the national bank, real-estate lending, are expressly authorized.

The CHA then turned to the second Chevron step, arguing that the OCC’s interpretation is reasonable and therefore entitled to deference. Addressing Cuomo’s argument that a clear statement of Congress’s intent is required, the CHA countered that the statement could hardly be any clearer, given that - subject to limited exceptions - Section 484 simply denies any entity the authority to exercise visitorial powers over a national bank. The CHA also challenged Cuomo’s attempt to redefine the case as a consumer protection case, emphasizing that the case deals with banking regulation. Moreover, the regulation did not declare the preemptive scope of a statute, but rather implemented a statute in which, everyone agrees, Congress intended to preempt state law - a distinction embraced by the Court in Smiley v. Citibank (South Dakota), N.A.

In its brief, the OCC - represented at the Court by the Solicitor General - conducted a reverse-Chevron analysis, beginning by addressing whether the OCC’s interpretation was reasonable; and only then inquiring whether the NBA spoke to the definition of “visitorial powers.” Taking the second Chevron step first, the Solicitor General argued that the OCC’s definition of “visitorial powers” was reasonable insofar as it preempted only actions specifically related to state regulatory or enforcement efforts to examine a national bank or its records and thus did not raise the broad “immunization” fears offered by the petitioner.

Turning to Cuomo’s arguments that Chevron deference is not warranted, the Solicitor General dismissed Cuomo’s federalism arguments as unpersuasive, explaining that the federal government’s history in the federal banking area dates back to the Court’s 1819 decision in McCulloch v. Maryland. For similar reasons, the Court should not apply the presumption against preemption. The OCC also attacked Cuomo’s arguments about the agency’s self-interest, arguing that - to the contrary - the agency’s familiarity with the industry gives it special expertise to understand when state regulation will interfere with its authority.

The Solicitor General next turned to the first step of the Chevron inquiry and examined the NBA’s text, structure, and purpose. Like the CHA, he argued that the term “visitorial powers” was extremely broad. The structure of Section 484, which carved out limited exceptions, further demonstrates that no entity, especially the states, could exercise visitorial powers beyond those exceptions. The OCC’s interpretation also furthered the NBA’s purpose of protecting national banks from intrusive state legislation.

In his reply brief, Cuomo argued that history, case law, and other statutes such as Riegle-Neal created a specific definition of the term “visitorial powers” that is distinct from traditional state police powers. He reiterated that the structure of the NBA supports his position; under respondents’ reading of the statute, the OCC would have lacked power to enforce valid state laws until 1966, a century after the NBA’s enactment.

For Chevron step two, Cuomo attacked the distinction between the substantive implementation of a preemptive statute and the promulgation of a regulation purporting to be preemptive; an agency that interprets express preemption both interprets a statute and declares the preemptive scope of the statute, rendering the distinctions raised in Smiley irrelevant. He again returned to the core argument that it is a fallacy to believe that a state can pass substantive laws but not enforce them. Either respondents are defending this fallacy, Cuomo explained, or the state substantive laws have not been preempted and can thus be enforced. Finally, any friction generated by a system of concurrent oversight would result in conflict preemption (a theory that respondents have not advanced), or the conflicts are illusory. Cuomo again argued that Section 7.4000 does not prevent individuals from raising these same issues in state court; indeed, the OCC’s regulation singles out the state attorneys general from a wide array of state and federal enforcement bodies that can investigate claims of discriminatory lending.

[edit] Oral Argument Recap

Like the previous case addressing conflicts between state and federal bank regulators, Watters v. Wachovia Bank (2007), Tuesday’s oral arguments in Cuomo v. Clearing House Association (”CHA”) presented an intriguing and unusual line-up of Justices. Moreover, the arguments were notable for what was not discussed: the Chevron doctrine was only brought up directly once during the entire argument, even though the parties dedicated about half of their merits briefs to the issue. The oral arguments themselves started out somewhat unusually, with Justice Ginsburg beginning her questioning of the petitioner’s counsel, New York Solicitor General Barbara Underwood, on an issue barely discussed in the parties’ briefs: whether the state law at issue extended authority to the New York state bank superintendent, rather than the actual party here, the Attorney General.

But the argument quickly transitioned into one of the main issues of the day - whether allowing state attorneys general to enforce state laws would force a national bank to deal with 51 regulators, and whether Congress, in constructing the current statutory structure, was trying to avoid this conflict. Underwood (supported, at times, by Justice Scalia) had three responses to this argument. First, for any specific loan transaction a national bank would only be subject to two regulators, the Office of the Comptroller of the Currency (”OCC”) and the state attorney general for the specific state in which the loan occurred. Second, if the state’s enforcement method actually conflicted with the OCC’s methods, that would present a case of conflict preemption, an issue not before the Court. And third, the OCC’s allegedly exclusive powers exist among a greater ecosystem of enforcers, including individuals, other federal agencies, and other state agencies as well; thus, the OCC already must deal with potentially conflicting interpretations from other entities besides state attorneys general.

Another major issue in Underwood’s portion of the argument was the distinction between “visitorial” and “police” powers. Justice Ginsburg and Chief Justice Roberts both asked several questions on this point, trying to distinguish between the two. Underwood agreed that an entity could look at books and records under both powers, and that such powers could be exercised concurrently. One would thus have to look at the entire regimes at issue to determine whether the bank-regulator relationship was supervisory, as in Watters, or whether it was instead prosecutorial, which involves “discrete acts of law enforcement.”

Underwood also received several questions on the historical background of the National Bank Act (”NBA”), enacted during the Civil War, and its conception of visitorial powers. She offered two responses. First, state hostility could not have been as worrisome as respondents made it out to be given that the Court in National Bank v. Commonwealth (1869) disagreed, only six years after the NBA’s passage, that there were the state hostility problems of the kind that appeared in McCulloch v. Maryland (1819). Second, historical descriptions of “visitorial powers,” such as those found in Blackstone, dated back to an era in which there was only one sovereign, i.e., the British Crown.

Finally, Underwood also discussed the Riegle-Neal amendments, 12 U.S.C. § 36(f), which provides that “[t]he provisions of any State law to which a branch of a national bank is subject under this paragraph shall be enforced . . . by the [OCC].” She argued that this section was not exclusive, but rather hortatory to the OCC to begin enforcing state law via authority that Riegle-Neal preserved. This was especially true given that Riegle-Neal also says that non-visitorial state law shall apply, but at the end of Underwood’s argument this only got the Court, in the words of the Chief Justice, “back to where we started.”

Deputy Solicitor General Malcolm Stewart attempted to make more headway, and launched into his most difficult issue, which was the “passing strange” situation in which state laws themselves were not preempted, but state officials were nonetheless precluded from enforcing the laws. Several Justices inquired whether this type of preemption appeared elsewhere in U.S. law, and whether it was exclusive. On the latter point, Stewart argued that the NBA’s passive voice implied exclusivity, though Justice Scalia remained unconvinced. Moreover, on the former point several Justices disagreed with Stewart’s characterization of other parts of the statute, such as 12 U.S.C. § 85 or the Similar Crimes Act, as containing enforcement preemption. Indeed, Justice Scalia argued repeatedly with the respondents over their definition of “enforcement preemption.” When Stewart turned to Justice Breyer’s questions about enforcement conflicts between the state attorneys general and the OCC, Justice Scalia questioned whether Stewart was simply talking about conflict preemption, which was not at issue in this case.

After briefly discussing Riegle-Neal’s legislative history, the argument next turned to the possible implications of a decision in the respondents’ favor. Justices Stevens and Ginsburg both wanted to know whether holding for respondents would prevent a state from applying its anti-discrimination laws to cases such as a bank engaging in employment discrimination, or giving different interest rates to customers based on their race. Stewart, however, had trouble drawing a line between this case and the latter example, and once again ran into Justice Scalia’s argument that distinctions based on conflicting enforcement methods are simply cases of conflict preemption.

Representing the CHA, Seth Waxman began with the NBA’s text, arguing that in Watters the Court had said that the NBA preempts “the State’s investigative and enforcement machinery.” However, Justice Ginsburg immediately and strongly distinguished this case from Watters, which - unlike this case - undisputedly dealt with a visitorial regime. This again led to a colloquy over the distinction between visitorial and police powers, which Waxman distinguished between public and private rights, and between public enforcement via police or visitorial powers. While no one disputed the former distinction, being based on Guthrie v. Harkness (1905), the latter raised an extended discussion between the Justices that again focused on ways to draw a workable line between police and visitorial powers, since - as this case demonstrates - the two clearly can overlap. Waxman maintained that state enforcement of any law “directed at a national bank’s authorized banking powers is a visitorial power,” but Justice Souter still thought that there was a distinction in the type of relief requested and judicial power exercised.

On rebuttal, the Justices again focused on the issue of whether allowing state attorneys general to enforce their own laws would create enforcement conflicts, and whether this is what motivated Congress to construct the NBA and Riegle-Neal the way it did. Underwood again reinforced the point that wide variety of federal and state agencies can enforce various laws against national banks, demonstrating that Congress simply did not intend to give the OCC exclusive control over banks in this area. Finally, Justice Scalia concluded the arguments with a foreshadowing statement about whether the Court “ought to revise our jurisprudence” to potentially make room for the concept of enforcement preemption, to which Underwood responded that denying the state enforcement authority is actually more intrusive than preempting the law altogether.

[edit] Opinion Analysis

[edit] Links and further information

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