The Connecticut Banking Department has won its legal challenge to the Office of the Comptroller of the Currency's "30-mile rule."

U.S. District Court Judge Alfred Covello ruled last Friday that the OCC overstepped its authority in allowing Fleet Financial Group to consolidate five of its banks in Connecticut, Massachusetts, and Rhode Island.

Fleet sought to take advantage of a rule that allows a national bank to relocate its headquarters by 30 miles or less across a state line.

Connecticut's victory comes three months after one by Texas in a similar 30-mile case. Another challenge is pending in Michigan.

Connecticut Banking Commissioner John P. Burke sued the OCC in April. He claimed the federal agency was ignoring a state law requiring his approval for branching by out-of-state banks.

"This decision tells the OCC and to some extent national banks that if you are going to do something in Connecticut, you must ask the state banking regulator first," Mr. Burke said in an interview. "To borrow a phrase from New Hampshire, 'Don't tread on me.'"

The lawsuit was filed in U.S. District Court for the District of Connecticut after the OCC's March 27 approval of Fleet's application to consolidate its New England operations.

Fleet relocated the main offices of its Connecticut and Rhode Island banks to Massachusetts. Under a separate OCC approval, the company then converted its 238 offices in Connecticut and Rhode Island into branches of the Massachusetts-based bank.

In an interview Monday, OCC Chief Counsel Julie L. Williams said the court made a "profound error," misapplying the 1994 federal interstate branching law.

It based the decision on a provision of the Riegle-Neal Interstate Banking and Branching Efficiency Act that requires banks in interstate mergers to file applications with state regulators.

But the law also says interstate mergers by definition can occur only between institutions with headquarters in different states. Because Fleet technically moved its Rhode Island and Connecticut headquarters to Massachusetts before consolidating the operations into one bank, Ms. Williams contended these two separate transactions cannot be lumped together and defined as an interstate merger.

However, the court regards Ms. Williams' argument as a splitting of hairs, said David Roderer, a partner at the Washington law firm Winston & Strawn.

"The court simply looks at this as if it is a single transaction, and it says calling it anything else is just a circumvention of the statutory scheme," Mr. Roderer said. "The underlying broader issue is that this decision questions the authority of the comptroller to reasonably interpret and apply the National Bank Act."

Although the OCC is expected to appeal Friday's decision, Ms. Williams said she is still "reviewing the options."

Fleet said it will appeal the ruling, and added that the court's decision will have no effect on its operations.

Mr. Burke said he didn't sue to disrupt Fleet's operations, but merely wanted the company to file an application with his department.

"This is simply a states' rights issue," Mr. Burke said. "I would hope that Fleet would now file with us, and we'd say, 'That's wonderful.'"

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.