WASHINGTON -- Today, the start of the Supreme Court's new term, the justices are to hear a test of the Federal Reserve Board's hotly debated "source of strength" policy.
The case, MCorp v. Federal Reserve, is the second on the new court's agenda.
Today's hearing would be the first of several opportunities for the justices to deal with banking matters. Other cases likely to be argued address such issues as bancruptcy and the right to sell insurance.
Effect on Investors
In the MCorp case, the parent of the failed MBanks in Texas challenged the central bank's requirement that weak banks be propped up by stronger subsidiaries of the holding company.
If the Supreme Court upholds MCorp's victories in lowercourt decisions, bankers might see the return of many investors who have been waiting for the outcome, according to Wendy Samuel, general counsel for the National Council of Community Bankers.
"I'm less likely to invest money in a bank if I have to worry about the health of all the banks that might be connected through a holding company," she said.
Fed's Use of Policy at MCorp
The Fed enforced its "source of strengt" policy against Dallas-based MCorp in the late 1980s when regulators place 20 of its 25 subsidiary banks in receivership. The federal appeals court in Dallas held, however, that the Fed had exceeded its statutory power under the Bank Holding company Act.
If the Fed prevails before the Supreme Court, Mrs. Samuel said, the decision could frighten away shareholders.
David Danovitch, a lawyer at Jones, Day, Reavis & Pogue, said the case has lost some of the importance it had for bankers when filed in 1988.
Bankruptcy Case Scheduled
"The Fed will get by legislation what it has been unable to accomplish through the court system," he said. "It will be a Pyrrhic victory for the banking industry."
A bankruptcy case, Union Bank v. Holas, will be argued Nov. 5. It involves an extention of a revolving line of credit to Los Angeles-basd ZZZZ Best, a cleaning frachiser that declared bankruptcy.
The San Francisco-based bank subsidiary of Bank of Tokyo argued that interest payments on the credit line were made in the ordinary course of business and, therefore, did not have to be returned to the bankruptcy trustee.
Appeals Court Ruling
But the U.S. Court of appeals for the Ninth Circuit in San Francisco held that interest payments were "preferential" and could be recovered.
The appeals court decision discriminates against banks, said Michael F. Crotty, deputy general counsel for litigation at the American Bankers Association. "If you make us give back payments made less than 90 days before a bankruptcy, to be fair, you ought to make the plumber and the gas company give back theirs, too."
Given the volume of bankruptcies, many banks could find themselves in a similar situation, Mr. Crotty said.
3 Potential Issues
Other issues that are not scheduled but may come before the court in its 1991-92 session include:
* The right of banks to sell insurance through state-chartered subsidiaries in Citicorp v. Federal Reserve.
* Residential cramdowns, in which a bankruptcy court turns the difference between a house's mortgage amount and its market value into an unsecured loan.