A Texas court stunned the Office of the Comptroller of the Currency last week, ruling that the agency exceeded its authority when it allowed an Arkansas bank to move its headquarters less than 30 miles into Texas and retain the Arkansas offices as branches.

The 43-page opinion by Judge Barefoot Sanders reverses the agency's August 1995 decision permitting Commercial National Bank to move its headquarters to Texarkana, Tex., from Texarkana, Ark.

Federal law allows banks to move their headquarters 30 miles even if it takes the bank across a state line. But the U.S. District Court for the Northern District of Texas said the agency went too far when it permitted Commercial National to retain the Arkansas operation as branches of the Texas bank.

Since the so-called 30-mile loophole caught on in 1994, nearly 60 banks have used it to move their headquarters and retain the original offices as branches.

In the edited excerpts from his opinion that follow, Judge Sanders explains his decision.


The court is of the opinion that the enactment of the Riegle-Neal Act is not as significant to the outcome of this case as the parties appear to believe.

The provisions of Riegle-Neal that would apply to this case do not take effect until June 1997. Further, the law was not in effect at the time of the Comptroller's decision, and as such, that statute cannot form the basis for invalidating the decision. For similar reasons, the court declines to adopt the Comptroller's expansive notion that the enactment of Riegle-Neal is evidence that Congress intended an implied recognition of retention of existing branches until May 31, 1997. The Comptroller cannot justify his action on the basis of a statute that is not yet in effect.

Having concluded that section 30 does not create an "implied adjunct" allowing for retention of existing branches in contravention of applicable state branching laws, the court also concludes that the establishment of the "new" branch at the location of the former main office is not authorized by section 36(c) of the National Bank Act.

The Comptroller based his authorization of the establishment of the bank's former main office as a branch on section 36(c). This section of the act allows national bank branching only to the extent that a state permits branch banking for its own banking institutions.

Federal law determines what constitutes a branch bank, but state law determines when, where, and how a national bank may branch, if indeed, it may branch at all. In determining whether to approve national bank branch applications, the Comptroller must consider all relevant state laws and comply with any requirements established by state statutes.

If the Comptroller were allowed to relax state branching standards for national banks, the doctrine of competitive equality would be violated.

The court finds that the state banking statutes of both Texas and Arkansas are relevant in determining whether the branch authorization was valid under section 36(c).

The court first examines Texas branching law. Although the bank was "situated in Texas" by virtue of the main office relocation, as required by section 36(c), the court finds that the establishment of a branch at the site of the former main office is not authorized under that section because Texas state branching law did not allow interstate branching.

Upon relocation of the bank's main office to Texas, the bank is only authorized to establish an interstate branch to the extent allowed under Texas law. The court is not persuaded by the Comptroller's insubstantial argument that the absence of the in-state limitation (in Texas law) means that interstate branching is not prohibited under Texas law.

Similarly, the court also finds that the establishment of a branch was not permitted under Arkansas branching law. Under Arkansas law, the bank may establish a branch anywhere within the county "in which its principal banking office is located."

Arkansas' branching statute must be construed in light of section 36(c). Specifically, the court must examine whether the bank is "situated" in Arkansas, pursuant to section 36(c).

The Comptroller relies on the Seattle Trust case, which held that a bank is situated in each state in which it has a main office or a branch. According to the Comptroller, in light of Seattle Trust, the bank is "situated" in Miller County, Arkansas, by virtue of the bank's retention of its existing branches in that county. Under this tortuous reasoning, the establishment of the new branch at the site of the former main office is allowed under the McFadden Act, and the state branching law of Arkansas which the McFadden Act incorporates.

The Comptroller's reasoning is faulty. For the reasons already stated, the bank was not authorized to retain its existing branches under the "implied" authority of section 30. Thus, when the main office relocation application was granted, the bank was (and is) no longer "situated" in Arkansas because it no longer had any lawful branches in Arkansas. Because the bank is no longer situated in Arkansas, there is no authority to establish a new branch under section 36(c).

The court further concludes that the Comptroller's preemption argument is specious. The Comptroller argues that even if state law acted as a prohibition on the establishment of the branch at issue in this case, that law would be preempted because it would be in conflict with the authority granted to national banks under the National Bank Act, sections 30 and 36.

The court has already determined that there is no "implied" authority for branch retention under section 30. The court determined this on the basis of federal law, and thus the preemption argument is irrelevant as applied to section 30. Similarly, as to section 36, the statute explicitly requires reference and adherence to state law. Therefore, there can be no conflict between state and federal law as to that section.

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