Two cases that could change the way bank mergers are contested were argued before the federal appeals court here Monday.
Currently, community groups protest mergers at the Federal Reserve. But one group - Inner City Press/Community on the Move - wants the right to take the central bank to court.
If the group wins, most big bank mergers could end up in long legal battles.
A ruling for the government, however, could severely weaken efforts by activists to derail megabank mergers by making regulators the final arbitrators of community reinvestment and antitrust challenges.
A decision by the U.S. Court of Appeals for the Second Circuit is expected within three months.
The cases, which involve deals by Chase Manhattan Corp. and U.S. Trust Co. of New York, question whether the Community Reinvestment and Bank Holding Company acts give neighborhood groups the right to challenge the Fed's merger approvals.
Lawyers for the Fed argued that community groups may not sue because they are not directly affected by bank mergers. Activists countered that every resident in a neighborhood suffers when a merged bank closes branches.
Fed senior attorney Douglas B. Jordan told the court that Inner City Press must show that it was directly harmed by either Chase's 1995 acquisition of several U.S. Trust units or by Chemical Banking Corp.'s 1996 merger with Chase.
"A special interest in the case is not enough," Mr. Jordan said. "Residence in a particular neighborhood is not enough."
Matthew Lee, Inner City Press' executive director, responded that the holding company law gives consumers the right to challenge mergers on antitrust grounds. Also, he said, Congress expected community residents to challenge the Fed's review of mergers. That is why it prohibited CRA suits unless they are linked to mergers, he said.
"If a competitor has standing to sue, then surely a consumer who buys the services has standing," Mr. Lee said.
The three judges on the appeals court panel injected themselves just twice into the hour-long hearing, giving little hint which way they were leaning.
Judge Dominic J. Squatrito said consumers may have standing to sue on antitrust grounds if a merger causes prices to rise.
The Fed's Mr. Jordan appeared to deflate that argument, saying Inner City Press did not present any evidence of price hikes after either deal. Also, he said the closure of branches in the Bronx would not affect loan rates and fees because banks set prices for the entire New York market, not individual neighborhoods.
Judge Pierre N. Leval questioned why the Fed did not ask for data on the branches Chemical expected to close after merging with Chase.
Mr. Jordan said the Fed, as part of its merger review, looks at the bank's branch-closing policy. Specific branch closings would be scrutinized during subsequent CRA reviews, he said.
Michael E. Deutsch, legal director for the Center for Constitutional Rights and a lawyer for Inner City Press, said the court must let activists protest merger approvals because the Fed is not doing its job.
"We have a situation where the bank regulators are very close to the bankers," Mr. Deutsch said. "Former bankers go to work at the Federal Reserve. It is a two-way street."
Mr. Deutsch also blasted the banks' lending records, accusing them of falsifying Home Mortgage Disclosure Act data and of ignoring low-income communities.
Lawyers for Chase and U.S. Trust defended their banks' lending records, saying the Fed had no reason to reject the deals on CRA grounds.
"It is not unfair to say that the criticisms by the petitioner here are against banks whose records are exemplary," said Mark E. Segall, Chase's assistant general counsel.