WASHINGTON — The decision by three state attorneys general to join a case challenging the Dodd-Frank Act's constitutionality has boosted its chances and expanded the scope well beyond the community bank that originated it.
"The fact that AGs are bringing it gives it more credibility than if it just came from a stand-alone bank in Texas," said Ralph "Chip" MacDonald 3rd, a partner at Jones Day in Atlanta. "They're committing their states' funds and their reputations to it."
The move was reminiscent of the state challenges to the health care overhaul, which eventually went all the way to the Supreme Court (and nearly succeeded).
To be sure, legal observers still question the overall merits of the case and its prospects for success, as well as the specific arguments made by Michigan, Oklahoma and South Carolina officials that center on alleged abuse of powers in Dodd-Frank's method for unwinding giant firms. But the new claimants suggest the battle over financial reform is taking on a whole new look.
"Our challenge in this case is not necessarily just about the effects on the financial system. It's about the fundamental concept of making sure our constitutional framework is upheld," Oklahoma Attorney General Scott Pruitt told reporters Friday, saying that Dodd-Frank "was an opportunity to consolidate and concentrate power in Washington D.C., and to gain a permanent substantial foothold on the entire financial sector.
"They fundamentally and unconstitutionally altered the framework of all Americans' access to money and capital."
The $285 million-asset State National Bank of Big Spring, in Texas, initially filed the suit in federal court in June, challenging the constitutionality of the Consumer Financial Protection Bureau — created under Dodd-Frank — and the recess appointment of Richard Cordray to lead the new agency.
But the three attorneys general, filing the amended complaint Thursday in U.S. District Court for the District of Columbia, focused on a different section of the law, the so-called orderly liquidation authority. Under Title II of Dodd-Frank, the authority lets the Treasury Department — consulting with others — place failing behemoths in a Federal Deposit Insurance Corp. receivership meant to curb the systemic effects of a company going bankrupt.
The states are arguing the authority essentially affords the Treasury secretary too much power to target firms for failure and the FDIC the ability to favor certain creditors in a resolution, all while giving courts just 24 hours to review challenges to the seizures. (State pension potentially hold sizable creditor positions in firms that could be seized in the new regime.)
"Title II of the Dodd-Frank Act empowers the Treasury Secretary to order the liquidation of a financial company with little or no advance warning, under cover of mandatory secrecy, and without either useful statutory guidance or meaningful legislative, executive, or judicial oversight," they said in the new complaint.
In their conference call, two of the three state AGs, and other attorneys involved in the Texas bank's case, indicated they view the fight over Dodd-Frank as similar to the 28-state challenge to the health care overhaul.
"Just like in Obamacare — where the claim was that it was done to save the health care industry — the same thing is being said about Dodd-Frank: that we can't have another 2008 meltdown and that Dodd-Frank is designed to prevent that from happening," said South Carolina Attorney General Alan Wilson. But, he added, "the law … doesn't really focus on some of the main problems. More or less, it just consolidates power in D.C."
But many legal observers say the challenge is fundamentally flawed. They point to provisions of Dodd-Frank that created an appeals process for both companies targeted for resolution and creditors of a failed firm, and note that the process for closing a firm under Title II closely resembles the procedures the FDIC uses — which have survived for decades without being blocked for constitutional reasons — for closing depository institutions.
"The insolvency regime in Title II for the most part already exists today applicable to banks. It's not as if this is an unprecedented regime. It's a regime that exists today, has been in place for a number of years and has been used for depository institutions," said Jeffrey Taft, a partner with the law firm Mayer Brown LP.
"It's a difficult argument to make that the Title II authority is unconstitutional. … There is some due process in Title II that is provided to institutions that are designated as covered financial companies. A court is going to have to look at that and see whether it's adequate due process. But there clearly is contemplated due process within Title II."
Michael Krimminger, an attorney at Cleary Gottlieb Steen & Hamilton LLP and formerly the FDIC's general counsel, said the agency's traditional bank receivership powers have "always been viewed as being constitutional."
"The reason is that regulators have an interest in the orderly resolution of such extensively regulated companies in the public interest," he said.