Bank of New York Co. is again going to court over its ownership position in a New England bank.
The company sued Massachusetts banking authorities this month in federal court, asserting that they had wrongly rejected its plan to buy a larger stake in State Street Corp.
Bank of New York is seeking to increase its stake in State Street common stock to 9.9%, from 4.9% currently. The New York company has insisted it wants the shares only as an investment, not as the prelude to a takeover attempt.
State Street's management emphatically does not believe this, and has mounted an extensive effort to derail the move. Massachusetts regulators rejected the proposal March 14, offering the rationale that it would not promote "public convenience and advantage."
There is a distinct feeling of familiarity about it all. Bank of New York has been involved in challenging out-of-state banking laws before and ended up the catalyst for sweeping changes in the banking industry.
In 1983, it took a position Northeast Bancorp. of Connecticut, aiming eventually to expand its presence farther into the affluent suburbs of New York City. But Connecticut and the other New England states joined forces to thwart acquisitions from outside the region.
A subsequent legal battle culminated in the landmark 1985 decision by the Supreme Court that states do not violate the Constitution by forming exclusive regional compacts to prevent entry by banks from large states like New York.
That high court ruling ushered in the modern era of interstate banking and consolidation, permanently altering the landscape of the industry by laying the groundwork for the growth of superregional banks within these compacts. NationsBank Corp., the country's second-largest banking company in market capitalization, is the most prominent result, along with giants like First Union Corp. and Fleet Financial Group Inc.
The current lawsuit, filed in U.S. District Court in Boston, will likely not spur such sweeping results. But H. Rodgin Cohen, a lawyer representing Bank of New York, acknowledged that the situation "is not without a whiff of the Northeast Bancorp. case."
The relationship of state and federal banking laws is at issue, as well as the status of reciprocity between states in banking matters. These are key elements in bank mergers and acquisitions.
Mr. Cohen, a veteran banking lawyer who is a partner in the New York firm of Sullivan & Cromwell, said he did not know of a similar set of circumstances in the 41-year history of the Bank Holding Company Act.
Indeed, Bank of New York is essentially complaining it is caught in a classic Catch-22 situation.
Doing anything as a State Street shareholder to "promote public convenience and advantage," thus accommodating the Massachusetts regulators, would violate "passivity commitments" required by the Federal Reserve for its approval of the investment under the Bank Holding Company Act.
Bank of New York has petitioned the Fed for approval of the investment while State Street has urged that permission be denied. The matter is still pending. Massachusetts Commissioner of Banks Thomas J. Curry filed no comment with the Fed during the period for such submissions.
In banking, advancement of public benefit typically takes the form of more branch offices in disadvantaged areas and more lending to help such neighborhoods.
"That isn't possible with a noncontrolling investment," Mr. Cohen insisted. "If Bank of New York told State Street they ought to put another branch in Roxbury, they could go screaming to the Fed that passivity commitments had been violated, and they would be right."
On the other hand, a Massachusetts bank with a similar stake in State Street could satisfy the public-benefit requirements of both state and federal law on its own. Thus, Bank of New York claims, it is being discriminated against as an out-of-state institution.
The bank claims that Massachusetts' action violates the "supremacy" and "commerce" clauses of the U.S. Constitution. In short, if the state wanted to block the out-of-state investment, it should have asked the Fed to deny permission instead of acting on its own.
Bank of New York chairman and chief executive officer J. Carter Bacot has long insisted that his company regards bank stocks as lucrative investments. That has been undeniably true for the past five years.
At the same time, Bank of New York under Mr. Bacot has been aggressive and opportunistic about expansion, both in its New York-area home market and in the various business lines it has long cultivated. It pursued rival Irving Bank Corp. for more than a year before Irving succumbed in 1989.
State Street, which strongly competes with Bank of New York in asset custody, has told the Fed it believes the New York company means to take it over. Meanwhile, at home in Massachusetts, it has run a public relations campaign warning that jobs and community investments are at risk.