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Tuesday, July 17, 2012

A Blow Dealt to Federalism by a State Court: Justice Goodwin Liu's Disappointingly Pro-Preemption (and Pro-Bank) Decision on Convenience Checks

In all of the kerfuffle over the constitutionality of ACA's mandate/tax/whatever, I did not have time to post any item on recent preemption decisions. Among the most important -- and, for federalism fans, disappointing -- was Justice Goodwin Liu's decision in Park v MBNA, handed down this June, holding that the National Bank Act preempts California's law requiring that certain disclosures accompany preprinted checks -- so-called "convenience checks" -- that a credit card issuer provides to its cardholders for use as credit. .

The decision was a disastrous rout for federalism, ironically delivered at the hands of a state court and -- et tu Brute! -- a former law prof. It is also worth noting that the opinion has not generated a lot of comment from the professoriate, suggesting that the Academic Left is not very appreciative of the importance of federalism to their regulatory goals. (As I have noted earlier, the curious bias of liberal law profs in favor of federal power leads them to overlook the fact that, especially when it comes to banks, the feds are and always have been their enemy and the states, their pals).

Predictably, the credit card issuers and banks are crowing over what amounts to a colossal defeat for state power. Naturally, I am bitterly disappointed by this gratuitously centralizing decision, but I have to agree with the banks and their lawyers: They've won a really, really big one. Park defends an exceptionally sweeping theory of preemption of state banking regulations at a sensitive time, when the preemptive effect of the Dodd-Frank Act is still up for grabs and actively being litigated in state and federal courts.

As I'll explain after the jump, however, I will try to provide some aid and comfort to you friends of federalism out there. All is not lost, because Park leaves untouched common-law fraud claims against nationally chartered banks. That logically inexplicable concession to subnational power might be the loose thread that can cause this egregious structure of preemption to unravel.

1. First, why is Park's preemption of state disclosure requirements by the National Bank Act ("NBA") so potentially devastating to state power? The problem with Park is that, beyond an unexplained distinction between states' "background legal principle[s]" (not preempted) and every other state law (preempted), Park contains no intelligible limit on preemption. But Park provides no intelligible reasoning to justify this distinction, thereby making it extremely hard to fix the limit and contain preemption.

Park reasoned that any state law imposing disclosure or other requirements on national ban's extending unsecured credit impermissibly interferes with nationally chartered banks' incidental powers bestowed by the NBA. The NBA, after all, does not contain any such disclosure requirements: Therefore, the state law bars a transaction that the NBA allows -- QED.

This syllogism is a bit weird, given that, since 1870, the SCOTUS has repeatedly stated that nationally chartered banks are "governed in their daily course of business far more by the laws of the State than of the nation” and that “[i]t is only when the State law incapacitates the banks from discharging their duties to the government that it becomes unconstitutional.” National Bank v. Commonwealth, 76 U.S. 353 (1869). Is Park suggesting that a nationally chartered bank's loan contract can be enforced even if it is declared to be a forgery, a fraud, unconscionable, etc., under state contract law? After all, there is no general federal common-law of fraud applicable to national banks.. So why is not a defense of forgery or fraud or duress (for instance) all preempted as the state's imposing conditions on a national bank's exercise of its powers to make loans?

Park distinguishes all such state common-law rules on the ground that such state laws "were laws of general applicability." But wait -- the disclosure requirements of California law did not single out nationally chartered banks! They, too, were "generally applicable" to that extent. Park concedes as much but contends that "state laws that restrict federally authorized banking powers may be preempted even if they are nondiscriminatory."

Okay: then, if general applicability is not the limiting principle, what does distinguish a common-law fraud defense from a statutory disclosure requirement? Park offers this cryptic distinction:

[California's disclosure requirement] does not state a background legal principle against fraudulent, deceptive, or unconscionable practices. It prescribes specific and affirmative conduct that credit card issuers must undertake if they wish to lend money through convenience checks. Unlike the state law considered in Perdue, the disclosure requirements of [California's disclosure requirement] cannot be understood as part of the general legal backdrop to Congress‟s enactment of federal banking legislation.

Nowhere does Park offer any account for why a generally applicable disclosure requirement is less a part of the state's legal "background" than, say, a fraud claim. Yet states' regulation of national banks' dealings hangs on this distinction. One might ask for a bit more in the way of reason-giving, especially from a justice who was once a professor specializing in giving explanations.

2. Why is this sort of vague and potentially sweeping preemption doctrine so dangerous to sound federalism? The problem is that Park does not rest preemption of state law on some federal agency's specific regulation of some particular banking activity. Regulation Z, in fact, does federally mandate some disclosures for so-called "supplemental credit access" (which include convenience checks). In 2010, the Federal Reserve Board has issued a new rule clarifying and supplementing these disclosures. Had Park simply said that such federal rules were intended to be a ceiling as well as a floor on further state regulation, then such a decision would have been nothing worse than conventional "frustration-of-purpose" conflict preemption, the damage of which would be limited to the particular purposes associated with the particular provision of Regulation Z invoked to push aside the state law.

By rooting preemption in the statute itself, Park implies that the NBA authorizes nationally chartered banks to do what they want until a federal agency gets around to passing a federal rule forbidding such a banking activity. But this makes nationally chartered banks into a law unto themselves while the federal rule-making process grinds on at a glacial pace.

Federalism is best understood as a device to prevent federal law from placing the burden of regulatory inertia on banking consumers rather than national banks. From its inception, advocates of federalism focused on the danger of using national law to insulate national banks from state law, because financial elites would have an advantage in controlling the federal regulatory process. This was the warning of Anti-Federalists like Matthew Findley of Pennsylvania (who led the opposition to Pennsylvania's chartering of the Bank of North America in 1786). It was the basis for the Democratic Republicans' opposition to the federal chartering of the First Bank of the United States and the Jacksonian's opposition to the federal chartering of the second BUS.

What possible sense does it make to force banking consumers to go to Washington, D.C. to seek out a specific federal rule on convenience checks? Why not place the burden on the banks to seek out a specific rule preempting state law? Surely, the latter has an advantage over the former, given that the leaders of the relevant federal agencies -- the OCC, the Federal Reserve, the FDIC, etc -- work regularly with the banks and are frequently drawn from the banking industry.

If Park decided to take the side of the banks against federalism, the least it could have done was supply an intelligible explanation for how and why California's statutory disclosure requirement was not part of the "legal background." Alas, there were no such reasons -- just assertions using vague terms ("legal background") that were hardly self-explanatory, let alone self-justified.

3. Is there any good news emerging from this preemption train wreck? Just this: Park's implication is that common-law claims are part of the "legal background." If so, then state juries and judges still can apply the prod of common-law claims -- fraud and unconscionability, for instance -- to induce the banks to plead with federal agencies for specific federal rules on banking activities that give rise to such state claims. The state common-law prod, in other words, reduces substantially the benefits to banks of their sitting on their hands, secure in the libertarian shield provided by an 1864 federal statute: They will have to put specific rules on the federal agencies' agendas -- and that creates an opportunity for groups like the National Consumer Law Center to make a case for federal safeguards to replace states' common law.

The irony of Park is that it leaves unpreempted the crudest and vaguest state blunderbuss -- common-law claims for damages enforced by juries and generalist state judges -- while barring more precise state regulations issued in advance by the states' regulatory experts in state agencies. If the point of preemption is to make the national economy run according to predictable rules implemented by experts familiar with industry, Park's stripping state banking regulators of power and turning such power over to state juries, judges, and private attorneys seeking contingency fees is a pretty odd place to end up.

Posted by Rick Hills on July 17, 2012 at 06:55 PM | Permalink


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I have a fear of having to claim bankruptcy. This kind of stuff just freaks me out and makes me nervous.

Posted by: Tina Dole | Sep 5, 2012 6:18:44 PM

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