Cuomo v. Clearing House: A Crucial Victory for the Dual Banking System and Consumer Protection

In Cuomo v. Clearing House,[1] the Supreme Court held that the Office of the Comptroller of the Currency (“OCC”) exceeded its authority when it adopted a regulation (12 C.F.R. § 7.4000) that prevented state officials from filing lawsuits to enforce applicable state laws against national banks. However, the Court upheld the OCC’s regulation to the extent that it bars state officers from bringing administrative enforcement proceedings against national banks. The Court thus drew a sharp distinction between “administrative oversight” of national banks by state officials—which the Court viewed as preempted by the National Bank Act (“NBA”)—and “judicial enforcement actions” against national banks by state officials, which the Court found to be consistent with the NBA and the Court’s prior decisions.[2]

Cuomo represents a much-needed triumph for the dual banking system and consumers of financial services. The decision upholds the states’ authority to protect their citizens by enforcing valid, non-preempted state laws against national banks. Cuomo will almost certainly lead to future cases challenging the OCC’s substantive preemption rules, which purport to preempt a broad range of state consumer protection laws. In addition, Cuomo supports current legislative proposals that seek to preserve the states’ historic role in protecting consumers of financial services.

I. Factual and Legal Background of Cuomo v. Clearing House

In 2005, New York Attorney General Eliot Spitzer sent informal letters of inquiry to several large national banks that are members of The Clearing House Association, L.L.C. (“Clearing House”). Spitzer’s letters were based on his office’s preliminary analysis of residential mortgage lending data published by the national banks pursuant to the Home Mortgage Disclosure Act (“HMDA”). The banks’ HMDA data “appeared to indicate that a significantly higher percentage of high-interest home mortgage loans [were] issued to African-American and Hispanic borrowers than to white borrowers.”[3] Spitzer’s letters declared that such disparities “are troubling on their face, and unless legally justified, may violate . . . New York State Executive Law § 296-a.”[4] Spitzer stated that his letters were sent “[i]n lieu of issuing a formal subpoena,” and he requested that the recipients voluntarily provide non-public information concerning their residential mortgage lending policies and practices in New York.[5]

The OCC and the Clearing House acknowledged that N.Y. Executive Law § 296-a was not preempted by federal law and therefore applied to national banks. However, the OCC and the Clearing House sued to enjoin Spitzer from enforcing § 296-a against national banks through either administrative or judicial proceedings. Both parties alleged that any investigative or enforcement efforts by Spitzer would constitute “visitorial” activities and would be preempted by 12 C.F.R. § 7.4000. The district court granted the requested injunctive relief, and its decision was affirmed by a divided panel of the Second Circuit Court of Appeals.[6] The Supreme Court subsequently granted the petition for certiorari filed by Spitzer’s successor, New York Attorney General Andrew Cuomo.

II. The OCC’s Regulation and the Definition of “Visitorial Powers”

The OCC’s regulation at issue in Cuomo prohibited state officials from exercising “visitorial powers” over national banks. The regulation defined “visitorial powers” to include any attempt by state officials to enforce state laws concerning “activities authorized or permitted [to national banks] pursuant to federal banking law.” 12 C.F.R. § 7.4000(a).[7] In 2004, the OCC amended § 7.4000 by extending the regulation’s ban on state enforcement actions to reach judicial as well as administrative proceedings. The OCC thus claimed authority to bar state officials from using any forum—including the courts—to enforce applicable state laws against national banks.

The question presented in Cuomo was whether the OCC’s expansive definition of “visitorial powers” was permissible under the NBA. In answering that question, the Supreme Court applied “the familiar Chevron framework” to determine whether the Court should defer to the OCC’s regulation as a “reasonable interpretation” of the NBA. [8] The Court held, in a 5-4 decision authored by Justice Scalia, that the OCC’s regulation exceeded the agency’s authority to the extent that it barred state officials from filing lawsuits to enforce state laws against national banks.

The relevant provision of the NBA, 12 U.S.C. § 484(a), states that “[n]o national bank shall be subject to any visitorial powers except as authorized by Federal law, vested in the courts of justice or . . . exercised or directed by Congress or by either House thereof or by [an authorized congressional committee].” The NBA has included a provision similar to § 484(a) since its original enactment in 1864. Neither § 484(a) nor any other section of the NBA defines the term “visitorial powers.” The majority opinion acknowledged that “[t]there is necessarily some ambiguity as to the meaning of the statutory term ‘visitorial powers,’ especially since we are working in an era when the prerogative writs—through which visitorial powers were traditionally enforced—are not in vogue.”[9] However, the majority concluded that “[w]e can discern the outer limits of the term ‘visitorial powers’ even through the clouded lens of history,” based on “[e]vidence from the time of the statute’s enactment, a long line of our own cases, and application of normal principles of construction to the [NBA].”[10]

The majority and dissenting opinions in Cuomo sharply disagreed over the historical understanding of the term “visitorial powers.” In the majority’s view, “[o]ur cases have always understood ‘visitation’ as [the] right to oversee corporate affairs, quite separate from the power to enforce the law.”[11] As support for this historical distinction, the majority cited Justice Story’s concurring opinion in Dartmouth College. In that case, Justice Story observed that chancery courts possessed “a general jurisdiction . . . to redress grievances and fraud” committed by a corporation, but Story explained that the jurisdiction of chancery courts was not a “visitorial power” and was separate from the “controlling authority of [the corporation’s] legal visitor.”[12]

In his dissenting opinion, Justice Thomas attempted to distinguish Dartmouth College on the ground that the college was a charitable rather than a for-profit corporation. Justice Thomas argued that visitors of charitable corporations historically did not have law enforcement powers, while visitors of civil corporations did possess such powers. Therefore, he contended, Justice Story’s opinion did not contradict the OCC’s position that all law enforcement activities directed at for-profit corporations (including national banks) should be viewed as “visitorial.”[13] Justice Scalia’s majority opinion denied the significance of any difference between visitors of charitable and for-profit corporations. Justice Scalia concluded that “whether or not visitors of charitable corporations had law-enforcement powers, the powers that they did possess demonstrate that visitation is different from ordinary law enforcement.”[14]

The majority opinion in Cuomo also relied heavily on two Supreme Court decisions from the first quarter of the twentieth century—Guthrie v. Harkness [15] and First National Bank in St. Louis v. Missouri.[16] Justice Scalia explained that Guthrie—which upheld a shareholder’s right to sue a national bank— “drew a contrast between the nonvisitorial act of ‘su[ing] in the courts of the State’ and the visitorial ‘supervision of the [OCC].’”[17] St. Louis upheld the right of a state attorney general to sue a national bank for violating state law. In Justice Scalia’s view, St. Louis affirmed that “only the United States may perform visitorial administrative oversight” over national banks, but “if a state statute of general applicability is not substantively pre-empted, then ‘the power of enforcement must rest with the [State] and not with’ the National Government.”[18] Justice Scalia concluded that “St. Louis is one of a long and unbroken line of cases distinguishing visitation from law enforcement.”[19]

The majority opinion next turned to the Court’s 2007 decision in Watters v. Wachovia Bank, N.A.[20] Watters held that the NBA preempted the application of state mortgage lender registration and supervision requirements to operating subsidiaries of national banks. Justice Scalia maintained that Watters “is fully in accord with the well established distinction between supervision and law enforcement. . . . All parties to the case agreed that Michigan’s general oversight regime could not be imposed on national banks; the sole question was whether operating subsidiaries of national banks enjoyed the same immunity from state visitation.”[21] Justice Scalia emphasized that Watters “addresses and answers no other question.”[22]

The majority opinion’s declaration as to the narrow scope of Watters echoed statements made by Justice Ginsburg, the author of Watters, during the Cuomo oral argument. Justice Ginsburg told counsel for Clearing House that “[t]he sole question [in Watters] was whether . . . the national bank’s operating subsidiary was to be equated with a division of the national bank. That was the only question provided the Court.”[23] She subsequently advised counsel that “I do not think that excerpts from [the Watters] opinion should be taken out of that context.” [24] The majority opinion in Cuomo and Justice Ginsburg’s comments at oral argument seemed designed to limit the future precedential impact of Watters.

Based upon its review of previous cases dealing with “visitorial powers,” the majority opinion in Cuomo concluded that “the unmistakable and utterly consistent teaching of our jurisprudence, both before and after enactment of the [NBA], is that a sovereign’s ‘visitorial powers’ and its power to enforce the law are two different things. . . . [C]ontrary to what the [OCC’s] regulation says, the [NBA] pre-empts only the former.”[25]

In Justice Scalia’s view, “[t]he consequences of the regulation also cast doubt on its validity.”[26] While all parties agreed that the NBA “leaves in place some substantive state laws affecting banks,” the OCC’s regulation asserted that “the State may not enforce its valid, non-preempted laws against national banks. The bark remains, but the bite does not.”[27] Justice Scalia described this result as “[b]izarre,” particularly in view of the Court’s declaration in St. Louis that it would be a “fallacy” to acknowledge “the binding quality of a statute but deny the power of enforcement,” because “such power is essentially inherent in the very conception of law.” [28] In contrast to the OCC’s regulation, Justice Scalia explained that an “entirely commonplace result” would be produced if § 484(a) were construed as “[c]hanneling state attorneys general into judicial law enforcement proceedings . . . [in order to] preserve a regime of exclusive administrative oversight by the [OCC].”[29 Justice Scalia concluded that such an outcome “echoes many other mixed state/federal regimes in which the Federal Government exercises general oversight while leaving state substantive law in place.”[30] In this regard, the majority opinion cited the Court’s recent decision in Wyeth v. Levine,[31] discussed below, in which the Court held that the federal statutory regime governing labeling of drugs did not preempt failure-to-warn claims under state tort law.

Justice Scalia also observed that allowing state officials to file lawsuits was “suggested” by § 484(a)’s exception for powers “vested in the courts of justice.”[32] In Justice Scalia’s view, that exception’s “only conceivable purpose is to preserve normal civil and criminal lawsuits. . . . [I]t is explicable only as an attempt to make clear that the court’s ordinary powers of enforcing the law are not affected.”[33]

In sum, the majority opinion in Cuomo held that “visitorial powers . . . include any form of administrative oversight that allows a sovereign to inspect books and records on demand.”[34] In contrast, a lawsuit by a state attorney general to enforce state law “is not an exercise of ‘visitorial powers’ and thus the [OCC] erred by extending the definition of ‘visitorial powers’ to include ‘prosecuting enforcement actions’ in state courts.”[35] Accordingly, Cuomo upheld the Second Circuit’s judgment “as applied to the threatened issuance of executive subpoenas” by the New York Attorney General, but Cuomo reversed and vacated the lower court’s judgment “insofar as it prohibits the Attorney General from bringing judicial enforcement actions.”[36]

Justice Scalia emphasized the “pragmatic” significance of the majority opinion’s distinction between visitation and judicial enforcement. The OCC as visitor “may inspect books and records at any time for any or no reason.”[37] In contrast, a state “attorney general acting as a civil litigant must file a lawsuit, survive a motion to dismiss, endure the rules of procedure and discovery, and risk sanctions if his claims are frivolous or his discovery tactics abusive.”38 Courts could also enter protective orders to prevent unreasonable expense or prejudice to national banks. In Justice Scalia’s view, courts could be “trusted to prevent ‘fishing expeditions’ or an undirected rummaging through bank books” by state officials.[39]

III. The Applicability of Chevron Deference in Preemption Cases

Cuomo addresses, but does not fully resolve, two recurring questions dealing with the issue of whether preemptive rulings by federal agencies should receive judicial deference. First, should courts give Chevron deference or a lower degree of deference to an agency regulation or order that includes a declaration of preemption? Second, can an agency’s claim for deference in interpreting federal statutes be overcome by a presumption against preemption of state law in areas of traditional state concern?

Prior to Cuomo, both issues were raised in Watters and Wyeth. In Watters, three dissenting Justices – including Justices Stevens and Scalia, who joined the majority opinion in Cuomo – argued that “when an agency purports to decide the scope of federal preemption, a healthy respect for state sovereignty calls for something less than Chevron deference.”[40] The dissenters argued that an agency’s views on preemption should be entitled to “some weight” but only to the extent that the agency provided an “expert” opinion about the ways in which state law conflicted with the federal statutory scheme.[41] In addition, the dissenters contended that the Court should have applied a presumption against preemption in Watters, because the state mortgage lending laws in question were “designed to protect consumers” and “[c]onsumer protection is quintessentially ‘a field which the States have traditionally occupied.’”[42] Based on that presumption, the OCC’s preemptive regulation should have been struck down in the absence of any “clear and manifest purpose of Congress” to preempt the states’ authority to regulate nonbank operating subsidiaries of national banks. [43] 

The majority opinion in Watters carefully avoided the issue of Chevron deference. The majority opinion determined that the statutory provisions of the NBA preempted any exercise by state officials of “visitorial powers” over operating subsidiaries of national banks. The majority opinion therefore concluded that “the level of deference owed to the [OCC’s] regulation is an academic question,” because “the NBA itself—independent of the OCC’s regulation—preempts the application of the pertinent Michigan laws to national bank operating subsidiaries.” [44] 

In Wyeth, the majority opinion was written by Justice Stevens, who authored both Chevron and the dissenting opinion in Watters. Justice Stevens declared that a presumption against preemption applies “[i]n all preemption cases, and particularly those in which Congress has ‘legislated in a field which the States have traditionally occupied.’” [45] In addition, Justice Stevens maintained that Chevron deference does not provide the appropriate framework for reviewing agency claims of preemption, except in cases where agencies possess “special authority to pronounce on preemption [through an express] delegation by Congress.” [46] Justice Stevens explained that, in past cases involving claims of preemption by federal agencies, “the Court has performed its own conflict determination, relying on the substance of state and federal law and not on agency proclamations of pre-emption.” [47] Justice Stevens emphasized that “in such cases . . . we have not deferred to the agency’s conclusion that state law is pre-empted.” [48]  Instead, the Court has “given ‘some weight’ to an agency’s views . . . . about how state requirements may pose an ‘obstacle to the accomplishment of the full purposes and objectives of Congress.’” [49]  Justice Stevens explained that “[t]he weight we accord to the agency’s explanation of state law’s impact on the federal scheme depends on its thoroughness, consistency, and persuasiveness.” [50] 

The majority opinion in Wyeth did not define the precise degree of “weight” that courts should give to agency claims of preemption. However, the opinion’s citation to Skidmore and its recitation of the Skidmore factors of “thoroughness, consistency, and persuasiveness” suggest that agency preemptive determinations should receive Skidmore’s relatively low level of deference. [51] For two reasons, the majority opinion in Wyeth refused to give any deference to the preemption claim made by the Food and Drug Administration (“FDA”). First, the FDA did not incorporate its claim in a regulation that was adopted after notice and opportunity for comment. Instead, the FDA inserted its claim, without prior notice, into a preamble when it published a final rule. [52] Second, the FDA’s preemption claim “is at odds with what evidence we have of Congress’ purposes, and it reverses the FDA’s own longstanding position without providing a reasoned explanation, including any discussion of how state [tort] law has interfered with the FDA’s regulation of drug labeling during decades of coexistence.” [53] 

Taken together, the dissenting opinion in Watters and the majority opinion in Wyeth set forth a promising four-part framework for evaluating agency preemption claims. First, agency preemption determinations are not entitled to Chevron deference unless Congress has expressly authorized the agency to issue preemptive regulations. Agencies without explicit preemptive rulemaking power should not receive Chevron deference because they should not be allowed to issue preemptive rules based on mere congressional ambiguity. Second, courts should not defer to an agency’s legal conclusions about preemption based on the agency’s reading of Supreme Court precedents and other legal authorities. Third, courts may properly give “some weight” to an agency’s analysis of alleged conflicts between state law and the governing federal statute, to the extent that such analysis is supported by the agency’s expertise and otherwise has “power to persuade” under Skidmore. Fourth, an agency’s claim to Skidmore deference regarding its analysis of conflict preemption can be overcome by the presumption that Congress does not intend to preempt state law in areas of traditional state concern.

Unfortunately, the majority opinion in Cuomo did not adopt the Wyeth framework for preemption analysis. Instead, as noted above, Justice Scalia said that he was applying “the familiar Chevron framework.”[54] As a practical matter, however, Justice Scalia’s application of Chevron gave little deference to the OCC and was closer to the heightened scrutiny applied by Justice Stevens in Wyeth.

With regard to the first step of Chevron—determining whether “the intent of Congress is clear”[55] —Justice Scalia stated that the existence of “some ambiguity” in § 484(a) “does not expand Chevron deference to cover virtually any interpretation of the [NBA].”[56] Justice Scalia’s skeptical approach to “Chevron step one” was similar to Gonzales v. Oregon,[57] where the Court held that “Chevron deference . . . is not accorded merely because the statute is ambiguous and an administrative official is involved. [Rather,] the rule must be promulgated pursuant to authority Congress has delegated to the official.”[58]

In applying the second step of Chevron—whether the agency made a “permissible” and “reasonable interpretation” of the statute[59]—Justice Scalia determined (as discussed above) that historical evidence and judicial precedents enabled the Court (i) to “discern the outer limits” of § 484(a) and (ii) to conclude that the OCC exceeded its authority in defining “visitorial powers” to include “ordinary enforcement of the law.”[60] In contrast, Justice Thomas argued that the OCC had “selected a permissible construction of a statutory term that was susceptible to multiple interpretations.”[61] Justice Thomas urged the Court to use the same highly deferential approach to Chevron that the Second Circuit had followed. In Justice Thomas’ view, under Chevron “[t]he Court must decide only whether the construction adopted by the agency is unambiguously foreclosed by the statute’s text.”[62]

Justice Scalia found it “unnecessary” to invoke the presumption against preemption in order to strike down the OCC’s regulation.[63] However, he emphasized that “the incursion that the [OCC’s] regulation makes upon traditional state powers [should not] be minimized.”[64] He pointed out that “the [OCC] was not given authority to enforce nonpre-empted state laws [against national banks] until 1966,” and he therefore rejected Justice Thomas’ claim that the “historic police powers of the States” were unaffected by the OCC’s regulation.[65] By implication, Justice Scalia also rejected the dissenters’ claim, based on United States v. Locke,[66] that the presumption against preemption should never be applied in construing the preemptive scope of the NBA.[67]

Justices Thomas and Scalia strongly disagreed about whether the OCC’s regulation in Cuomo should be viewed as preemptive in the first place. In Smiley v. Citibank (South Dakota), N.A.,[68] the Supreme Court (in an opinion written by Justice Scalia) held that an OCC regulation defining the term “interest” for purposes of 12 U.S.C. § 85 did not preempt state law and therefore was not subject to any presumption against preemption. Smiley held that § 85 preempted state law as a statutory matter, and the OCC’s regulation only defined “the substantive (as opposed to pre-emptive) meaning of [§ 85].”[69] Relying on Smiley, Justice Thomas argued that the OCC’s regulation was not preemptive because the OCC merely interpreted “an ambiguous statutory term” in order to “clarify the preemptive scope of enacted federal law.”[70]

Justice Scalia rejected the claim that the OCC’s regulation was not preemptive. As he pointed out, “[a]ny interpretation of ‘visitorial powers’ necessarily ‘declares the pre-emptive scope of the NBA,’ . . . If that is not pre-emption, nothing is.” [71] Thus, Justice Scalia essentially repudiated his prior reasoning of Smiley.[72] Based on Cuomo, states can now claim that an agency rule which defines the “meaning” of a preemptive statute in a way that expands the statute’s reach should itself be viewed as preemptive. Accordingly, such a rule should receive a lower level of judicial deference and should be subject to the presumption against preemption.

Justice Scalia and Justice Thomas also sharply differed as to the binding effect of prior Supreme Court decisions on federal agencies. Relying on National Cable & Telecommunications Ass’n v. Brand X Internet Services,[73] Justice Thomas contended that the OCC was free under Chevron (i) to adopt its own interpretation of “visitorial powers” and (ii) to disregard St. Louis and several other Supreme Court decisions upholding the authority of state officials to file lawsuits against national banks. In Justice Thomas’ view, Brand X made those decisions irrelevant because they did not provide an unambiguous construction of the term “visitorial powers.” Justice Thomas maintained that none of the cited decisions “addressed the meaning of “visitorial powers” for purposes of § 484(a), let alone provided a definitive construction of the statute.”[74]

Justice Scalia rejected Justice Thomas’ argument based on Brand X. In Justice Scalia’s view, “St. Louis is relevant to the proper interpretation of 12 U.S.C. § 484(a) . . . because it is one in a long and unbroken line of cases distinguishing visitation from law enforcement.” [75] This aspect of the debate in Cuomo between Justices Scalia and Thomas was effectively a replay of their dueling opinions in Brand X. Justice Thomas wrote the majority opinion in Brand X while Justice Scalia entered a vigorous dissent. In his dissent, Justice Scalia declared that Brand X’s concept of “judicial decisions subject to reversal by executive officers” was “bizarre” and “probably unconstitutional” as a violation of separation of powers.[76] In Justice Scalia’s view, “Article III courts do not sit to render decisions that can be reversed or ignored by executive officers.”[77] Justice Scalia’s dissent in Brand X undoubtedly informed his refusal in Cuomo to allow the OCC to disregard St. Louis and other Supreme Court decisions.

IV. Cuomo’s Implications for the Dual Banking System and Consumer Protection

For at least three reasons, Cuomo is likely to have a significant impact on future court cases and legislative proposals dealing with the dual banking system and consumer protection. First, the decision affirms the right of state officials to seek judicial enforcement of applicable state laws against national banks. Cuomo provides a very substantial boost to the dual banking system and consumer protection by ensuring that national banks, like other lenders, will be subject to judicial enforcement of non-preempted state laws by state officials. In contrast, a victory by the OCC in Cuomo (i) would have encouraged the remaining state banks with interstate operations to convert to national charters and (ii) would have made it much more difficult for states to enact and enforce fair lending statutes and other consumer protection laws.

Second, Cuomo will shift the focus of future preemption cases involving national banks to the question of which state laws apply to national banks, and it will also encourage legal challenges to the validity of the OCC’s substantive preemption rules. In 2004, the OCC adopted sweeping regulations that purport to preempt state laws in four broadly-defined areas: real estate lending, other lending, deposit-taking, and other federally-authorized “activities.” In all four areas, the OCC’s rules (i) preempt state laws if they “obstruct, impair, or condition a national bank’s ability to fully exercise its powers to conduct activities authorized under Federal law,” and (ii) allow state laws to apply to national banks only if such laws “establish the legal infrastructure that makes [it] practicable” for national banks to conduct their federally-authorized activities. [78] 

Cuomo strikes a significant blow at the OCC’s claim of exclusive preemptive authority over the banking activities of national banks. Cuomo affirmed that “States . . . have always enforced their general laws against national banks—and have enforced their banking-related laws against national banks for at least 85 years, as evidenced in St. Louis.”[79] Moreover, Cuomo addressed and rejected the OCC’s assertion that the NBA generally preempts state laws that “affect the content or extent of the Federally-authorized business of banking,” and that the NBA permits the application of state law only if it “establishes the legal infrastructure that surrounds and supports the ability of national banks . . . to do business.”[80] The Court declared that the OCC’s asserted “distinction between ‘implementation’ of ‘infrastructure’ and judicial enforcement of other [state] laws can be found nowhere within the text of the [NBA]. This passage . . . attempts to do what Congress declined to do: exempt national banks from all state banking laws, or at least enforcement of those laws.” [81] Cuomo creates serious doubts about the validity of the OCC’s substantive preemption rules, because those rules rely on the same purported distinction between state “banking” laws and state “infrastructure” laws.

Third, Cuomo dramatically changes the legal status quo for debates about the adoption of new federal legislation to provide greater protection for consumers of financial services. For example, Title I of H.R. 3126 would establish a new “Consumer Financial Protection Agency” (“CFPA”) and would give the CFPA broad authority to issue and enforce regulations applicable to all providers of financial services, including national banks. Subtitle D of Title I would preserve the states’ authority to enact laws that provide additional protections to consumers beyond those established by the CFPA’s rules In addition, Subtitle D would empower state attorneys general to bring judicial proceedings to enforce applicable federal or state laws against national banks. Before Cuomo, the OCC and national banks could arguably have claimed that Subtitle D would constitute a significant departure from the legal status quo. After Cuomo, state officials and consumer groups can maintain that Subtitle D would represent a proper congressional endorsement of the outcome in Cuomo.