The Supreme Court's latest preemption decision clearly hands states the power to hold national banks accountable for compliance with some state laws, but it also left murky how and when such enforcement is allowed.
In its June 29 ruling in Cuomo v Clearing House Association LLC, the high court ruled that a state can enforce a nonpreempted state law against a national bank if it is acting in the role of "sovereign-as-enforcer" rather than "sovereign-as-supervisor." However, the court did not explain the difference between acting as an enforcer and acting as a supervisor.
"I've been scratching my head and asking myself the same question," said Bob Clarke, a senior partner at Bracewell & Giuliani LLP and a former comptroller of the currency.
Observers predicted the ruling will lead to more litigation as states press their new authority and national banks push back.
"The decision has opened up a small window in what was a fairly secure house of preemption," said Tom Vartanian, a lawyer at Fried Frank Harris Shriver & Jacobson. "The next generation of cases [will] focus on the difference between enforcement and quasi-enforcement."
In its decision, the Supreme Court did set a relatively high bar for state attorneys general: they must file a lawsuit, survive a motion to dismiss, endure the rules of discovery and risk sanctions if the claim is frivolous.
"Judges are trusted to prevent 'fishing expeditions' or an undirected rummaging through bank books and records for evidence of some unknown wrongdoing," Judge Antonin Scalia wrote in the majority opinion.
But some say that threshold is not that high, and predict a state may act as a supervisor while maintaining it is acting as an enforcer.
"I don't think there is a big fat bright line as much as we would like," said Greg Taylor, the American Bankers Association's senior litigation counsel. "The ambiguity can exist with respect to discerning any meaningful difference of someone acting in their sovereign capacity and someone acting in their enforcer capacity. … There's very little practical difference between the two."
Hal Scott, a professor and director of the Program on International Financial Systems at Harvard Law School, said it is unclear whether states will be limited to enforcing consumer protection laws — as was the focus of the Cuomo case — or whether safety and soundness laws are fair game as well.
"Can a state enforce any law, and one that is close to safety and soundness?" Scott asked. "I just think this enforcement/supervision line doesn't really work."
Clarke said he believes states will test the boundaries, attempting to enforce a variety of state laws against national banks.
"Fishing expeditions can still happen," he said. "There is no guarantee that a judge will refuse to permit a fishing expedition."
L. Richard Fischer, a partner with law firm Morrison & Foerster, said the Supreme Court's decision to let states bring judicial search warrants may foster fishing.
"With a search warrant," he said, "officials are coming in just to grab things, and then the determination of whether the documents are relevant to the search would be in the mind or interpretation" of a judge.
New York State Banking Superintendent Richard Neiman has a different perspective. He said a state would have to establish a reasonable basis that there is some evidence of violation.
"It provides the proper restraints to avoid using subpoenas … for fishing expeditions," Neiman said.
But just how much evidence would be enough? Lawyers agreed litigants must have a "plausible claim for relief." But it's unclear whether that bar would be cleared by consumer bank records, documents supplied by a whistle-blower or publicly available information such as Home Mortgage Disclosure Act data.
In the Cuomo case, the New York attorney general requested bank loan data after suspicions arose about discrimination based on HMDA data. The court did not address whether HMDA data was enough to request additional data, but did take issue with how the attorney general went about trying to get more information, saying he should have pursued the data in court.
"The court must think he did have [enough] information, because they are basically saying the state is entitled to do this so," Scott said.
But John Cooney, a partner at Venable LLP, said it is still unclear if HMDA data is enough.
"I suspect raw data would probably not be enough," he said. "There would be cases where the HMDA data would be close to putting the state over the line, but there are cases where it would not be enough."
Howard Cayne, a partner at Arnold & Porter, shared that view.
"A suspicion of a violation … would not be enough to survive a motion to dismiss," he said. "There will be much more table-pounding and threats coming from the AGs, but it's unlikely they will be able to go forward at the end of the day."
The OCC's 2004 rule declared broad preemption authority to regulate lending, deposit-taking and most activities of national banks. It asserted the OCC has the sole authority to examine and supervise national banks and enforce the laws that apply to them.
But the court ruled the OCC went too far in its broad reach of which banking activities were preempted and in granting the OCC sole enforcement authority. In the wake of the court's ruling the OCC has decided to rewrite its visitorial powers rule.
"There are portions of our rule that do not fit with the court's decision, and we are already looking at what needs to be done to amend the rule," the OCC said in a statement.
Though the Cuomo decision called the OCC's preemption interpretation "bizarre," it did not clearly define which state laws are protected.
"There's still a lack of clarity of which state laws are preempted and which are not," Neiman said. "I hope as regulatory reform and presidential proposals recognizing the role of states limiting preemption move ahead … that issue might be decided."
The Obama administration's regulatory reform plan would create a new federal consumer protection agency. It also would allow states to enact stronger laws than the federal government and to enforce state and federal laws against national banks.
"If they enacted exactly as the Treasury said, then this whole issue in the Cuomo case would be irrelevant," Scott said. "But I don't think that would be a good thing for the national banking system in the United States."
Fischer said the Obama plan would lead to even more lawsuits.
"What Cuomo means today is significantly more litigation," Fischer said. "If you look at what it means after the administration proposal, it's not a flood, it's a tsunami."