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From Banking and Finance Law Daily, August 2, 2013

Challengers to constitutionality of Dodd-Frank lacked standing

By John M. Pachkowski, J.D.

A federal district court has dismissed a case that claimed certain provisions of the Dodd-Frank Act were unconstitutional because the plaintiffs lacked standing. (State National Bank of Big Spring v. Lew, Aug. 1, 2013, Huvelle, United States District Judge).

The challenge was brought by State National Bank of Big Spring (SNB); the 60 Plus Association, a “non-partisan seniors advocacy group with a free enterprise, less government, less taxes approach to seniors issues”; the Competitive Enterprise Institute (CEI), a non-profit public policy organization dedicated to advancing the principles of limited government, free enterprise, and individual liberty; and the states of Alabama, Georgia, Kansas, Michigan, Montana, Nebraska, Ohio, Oklahoma, South Carolina, Texas, and West Virginia (State Plaintiffs).

SNB, 60 Plus Association, and CEI challenged the constitutionality of Title I of the Dodd-Frank Act on separation of powers grounds, alleging that the Financial Stability Oversight Council had “sweeping and unprecedented discretion to choose which nonbank financial companies to designate as ‘systematically important’” and that such “powers and discretion are not limited by any meaningful statutory directives.” These plaintiffs also challenged Title X on the grounds that it violated the separation of powers clause because the Consumer Financial Protection Bureau was delegated “effectively unbounded power” and the CFPB was “insulated” against meaningful checks by the legislative, executive, and judicial branches. Finally, these plaintiffs claimed that the January 2012 recess appointment of Richard Cordray as CFPB Director violated the appointments clause of the U.S. Constitution.

It should be noted that U.S. Supreme Court will examine the issue of presidential recess appointment in NLRB v. Noel Canning (Dkt No 12-1281).

All the plaintiffs challenged the order liquidity authority (OLA) found in Title II of Dodd-Frank on a number of grounds. First, the liquidation of a financial company by the Secretary of Treasury violated the Constitution’s separation of powers clause because there was no “useful statutory guidance or meaningful legislative, executive, or judicial oversight.” Their second ground was that the OLA violated the due process clause of the Fifth Amendment in that the Federal Deposit Insurance Corporation had “virtually unlimited power to choose favorites among similarly situated creditors in implementing the liquidation, denies the subject company and its creditors constitutionally required notice and a meaningful opportunity to be heard before their property is taken—and likely becomes unrecoverable.” Finally, they claimed that the OLA violated the constitutional requirement of uniformity in bankruptcy.

Grounds for standing. To establish standing under Article III of the Constitution, the plaintiffs were required to show an injury that: (1) was “concrete and particularized” and “actual or imminent, not conjectural or hypothetical;” (2) was “fairly traceable to the challenged action of the defendant;” and (3) will be “redressed by a favorable decision.” At the outset the court noted that this was an unusual case, as the plaintiffs had not faced any adverse rulings nor had agency action been directed at them.

Title I challenge. SNB challenged Title I, arguing that it would suffer an “injury-in-fact” due to the designation of nonbank financial companies as “systematically important financial institutions” or SIFIs. The bank alleged a SIFI would have a competitive advantage due to the ability to raise capital, and would be perceived safer to investors, thereby making the SIFI a direct and current competitor. The court found SNB’s injury-in-fact theory to require “guesswork,” since it is difficult to prophesize that the SIFI designation confers a clear benefit on a SIFI, much less a corresponding disadvantage on non-SIFI institutions like SNB.

OLA challenge. The court rejected claims by the State Plaintiffs that they had standing based on the existence of a present injury. They claimed that “as investors in the unsecured debt of financial companies, they were protected by the federal bankruptcy laws’ guarantee of equal treatment of similarly situated creditors and that by abridging that guarantee, [the OLA] invades the State Plaintiffs’ legally protected interests, injuring them and giving them standing to challenge [OLA’s] constitutionality. The court was unconvinced that the State Plaintiffs have a present injury because their underlying premise that they have a “property right” in the configuration of the Bankruptcy Code was flawed. The court noted, “Simply put, the States’ holding of certain statutory rights does not amount to an inalienable property right under the Bankruptcy Code.”

The court was also not persuaded by the State Plaintiffs’ argument that the loss of a right in the abstract is sufficient to confer standing. Finally, the court ruled that the State Plaintiffs could not establish standing on an allegation of future injury because there are a series of contingencies that must occur before they would suffer any actual harm.

Title X challenge. SNB challenged the constitutionality of Title X on the basis that various actions taken by the CFPB caused it to cease certain mortgage and remittance activities causing it injury. The bank also claimed that it sustained harm due to substantial compliance cost.

The court found that SNB would not have standing due to its substantial compliance costs. The court found that SNB’s “compliance costs” consisted of the costs of learning about the CFPB’s regulatory and enforcement activities. The court acknowledged that some courts in this jurisdiction have found standing based on expenditures that have been categorized as “compliance costs,” but in each case, those costs were incurred to come into compliance with the law, rather than merely to keep abreast of developments in the law. The court also rejected SNB’s reliance on two cases from U.S. Court of Appeals for the Fourth Circuit that provided an expansive definition of “compliance costs, ” noting those case were not binding on the court and were distinguishable. The court added, “[to accept the Bank’s definition of compliance costs would amount to an evisceration of the requirement of injury-in-fact, and would grant standing to a party that is merely a subject of a regulation or statute.”

SNB also did not establish standing based on a claim that the CFPB’s Remittance Rule “constrained its remittance business, thereby causing it Article III injury.” The court found that SNB had no imminent injury based on the Remittance Rule as presently promulgated.

The court also rejected a number of grounds for standing based on several of the CFPB’s mortgage rules that were promulgated in early 2013. SNB specifically claimed that the CFPB’s RESPA Servicing Rule and the Ability to Repay-Qualified Mortgage Rule, both issued by the CFPB under Cordray’s direction, were evidence of injury. The court noted that since neither rule had been issued at the time of the filing of the suit, they cannot form the basis of the SNB’s standing. The court added “even if they could, the Bank’s alleged injuries based on the two rules are far too speculative.”

Reaction. Oklahoma Attorney General Scott Pruitt commented on the decision noting “We disagree with the judge’s conclusion that the State of Oklahoma, or any state, has not been harmed by this law that gives federal agencies the power to decide the fate of our state’s investments.” He added, “We will be appealing this decision.”

The case is No. 12-1032 (ESH).

Companies: 60 Plus Association; Competitive Enterprise Institute; State National Bank of Big Spring

LitigationEnforcement: CFPB; DoddFrankAct; FinancialStability; Receiverships; UDAAP

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