Cuomo v. Clearing House Association: A Misguided Decision That Could Have Been Worse

In Cuomo v. Clearing House,[1] the Supreme Court of the United States considered whether state officials have authority to enforce non-preempted state laws against national banks.  By a vote of 5-4, the Court held that state officials have such authority.  Indeed, the five Justices in the majority dismissed as “bizarre” the very idea that state officials could be barred from enforcing valid state laws against anyone, including national banks.[2]  Despite the majority’s dismissive characterization, the position it rejected—which was supported by the Executive Branch of the federal government, both lower courts, and four Justices of the Supreme Court—is solidly grounded in the statutory text, as well as the historical context of state hostility to national banks.  Although the majority’s decision is misguided, it does not alter the basic analytical framework that the Court applies to preemption questions involving national banks.  Accordingly, the Court’s decision in Cuomo is less damaging than it might have been.

The Court’s Decision.  In Cuomo, the Court interpreted a provision of the National Bank Act that states:  “No national bank shall be subject to any visitorial powers except as authorized by Federal law, vested in the courts of justice or such as shall be, or have been exercised or directed by Congress or by either House thereof or by any committee of Congress or of either House duly authorized.”[3]  The Office of the Comptroller of the Currency (“OCC”), the federal agency responsible for regulating national banks, promulgated a regulation through notice-and-comment rulemaking that interprets the statutory term “visitorial powers” to include (i) examination of a bank, (ii) inspection of its books and records, (iii) regulation and supervision of federally-authorized banking activities, and (iv) enforcing compliance with any applicable federal or state laws concerning those activities.  See 12 C.F.R. § 7.4000.  The Solicitor General, representing the OCC, argued to the Supreme Court that the OCC’s interpretation of Section 484(a) was reasonable, and therefore entitled to judicial deference under Chevron U.S.A. Inc. v. NRDC.[4]

Justice Scalia’s opinion for the five-justice majority acknowledged that there is “some ambiguity” in the term “visitorial powers,” and that under the Chevron framework “[t]he Comptroller can give authoritative meaning to the statute within the bounds of that uncertainty.”[5] The majority concluded, however, that the OCC’s interpretation of the statutory language is unreasonable.  The majority viewed “visitation” as a “right to oversee corporate affairs” that is “quite separate from the power to enforce the law,” and insisted that there is “not a credible argument to the contrary.”[6]  The four dissenting Justices agreed with the majority that the term “visitorial powers” is open to interpretation, but found the OCC’s interpretation of that term to be reasonable.  The dissenters pointed out that, as a historical matter, visitorial power over civil corporations was exercised by the sovereign, which has authority to assure compliance with all applicable laws.[7]  The majority’s rejection of the OCC’s interpretation contradicts the views of “venerable legal scholars” including Blackstone, Kent, and Pound, who “understood visitation of civil corporations to include the power to enforce generally applicable laws through judicial actions.”[8]  In the view of the four dissenters, the OCC adopted a permissible construction of an ambiguous statutory term, and therefore its interpretation was entitled to judicial deference under Chevron.

Notably missing from the majority’s opinion in Cuomo is a recognition of the context out of which Section 484(a) arose.  When Congress enacted the National Bank Act in the midst of the Civil War, it did so against a backdrop of state hostility to the former Banks of the United States.[9]  Consequently, Congress protected national banks from “unfriendly State legislation” by providing for federal chartering and regulation of national banks, and by insulating national banks from attack by hostile state governments.[10]  States “can exercise no control over [national banks], nor in any wise affect their operation, except insofar as Congress may see proper to permit.”[11]  In this context, the OCC’s broader interpretation of Section 484(a) is not “bizarre” at all—it is entirely reasonable.

Consequences of the Court’s Decision.  The majority’s opinion in Cuomo draws a line between a state’s “enforcement of its laws in court” and state demands to “inspect books and records at any time for any or no reason.”[12]  The majority holds that Section 484(a) permits the first action, but prohibits the second.  The majority acknowledges that “in the course of exercising visitation powers the sovereign can compel compliance with the law,” but states that “[t]he critical question is not what is being compelled, but what sovereign power has been invoked to compel it.”[13]  The majority observes that when a state attorney general acts as a litigant, he or she “must file a lawsuit, survive a motion to dismiss, endure the rules of procedure and discovery, and risk sanctions if his claim is frivolous or his discovery tactics abusive.”[14]  The majority adds that “[j]udges are trusted to prevent ‘fishing expeditions.’”[15]  The majority also notes that the forbidden exercise of visitorial powers by a state includes “any form of administrative oversight that allows a sovereign to inspect books and records on demand, even if the process is mediated by a court through prerogative writs or similar means.”[16]

In applying these principles to the parties before it in Cuomo, the majority agreed that if the New York Attorney General’s threatened action against the national banks was prohibited by Section 484(a), then his request for access to bank documents, coupled with a threat to pursue the unlawful action if the documents were not produced, could be enjoined.  Here, the majority concluded, the New York Attorney General’s issuance of a subpoena on his own authority would have been an exercise of supervisory power, and thus is forbidden by Section 484(a).  The majority added, however, that the Attorney General is permitted to bring a judicial enforcement action.[17]

The line the Court drew in Cuomo may not turn out to be as clear or practical as the majority appeared to believe.  For one thing, it may not always be clear whether a state is acting in the role of “sovereign as supervisor” or “sovereign as law enforcer.”[18]  In addition, the majority’s faith in the restraining hand of judges may be overstated.  National banks are subject to suit in state court, and state courts do not always treat the State Attorney General as “just another civil litigant.”

That said, the consequences of the Supreme Court’s decision are not as harmful as they might have been.  This is so for three related reasons.

            1.  The Court did not invoke the “presumption against preemption.”  In recent years, the Court has often invoked a “presumption against preemption” as a way of expressing a judicial bias against preempting state laws.  Indeed, just last Term the Court held that this presumption applies in cases of implied preemption as well as express preemption.[19]  The Court has not applied this presumption in the national banking context.  To the contrary, it has applied something like the opposite presumption:  it has presumed that Congress intended to preempt any state law that prevents or significantly interferes with the exercise of national banking powers.  As a result, “grants of both enumerated and incidental ‘powers’ to national banks” are “not normally limited by, but rather ordinarily preempt, contrary state law.”[20]  The court’s decision in Cuomo does not alter this basic approach.  Instead, the majority expressly stated that it was not relying on a presumption against preemption to support its ruling against the OCC and the national banks.[21]

            2.  The Court did not alter the Chevron framework.  In its prior decisions, the Court has held that the Comptroller’s reasonable interpretation of provisions of the National Bank Act receive Chevron deference.  In Smiley v. Citibank (South Dakota), N.A.,[22] for example, the Court’s opinion (also written by Justice Scalia) distinguished between “the question of the substantive . . . meaning of a statute” and “the question of whether a statute is pre-emptive.”[23]  The Court answered the first question by deferring under Chevron to the OCC’s interpretation of the statutory term “interest.”  Because there was a clear conflict between the federal statute, as reasonably interpreted by the OCC, and the state law at issue, the Court had no need to consider whether deference was due to the OCC on the preemption question.

In Cuomo, the Court did not alter the Chevron framework.  To the contrary, the Court stated that it was applying “the familiar Chevron framework,” that “[t]here is necessarily some ambiguity as to the meaning of the statutory term ‘visitorial powers,’” and that “[t]he Comptroller can give authoritative meaning to the statute within the bounds of that uncertainty.”[24]  The four dissenting Justices also applied the Chevron framework, and would have ruled for the OCC on the basis of that framework.  The majority held, however, that the Comptroller’s interpretation of visitorial authority was unreasonable, and therefore not entitled to deference under Chevron.

It is possible that the Justices in the majority believed that a restriction on enforcement of non-preempted state laws by state officials is so unusual (or “bizarre”) that it requires a clear statement of congressional intent to impose such a restriction.  Rather than imposing such a clear-statement rule, however, the Court held that the OCC’s interpretation of the term “visitorial powers” is unreasonable under Step 2 of the Chevron analysis.  While the majority’s arguments in support of this conclusion are unpersuasive (at least to us), the majority’s approach leaves the Chevron framework of analysis intact.

            3.  The Court’s Opinion Does Not Alter the Substantive Preemption Analysis Applied to National Banks.  Perhaps most important of all, the Court’s opinion in Cuomo does not alter the legal analysis that courts apply to determine whether state laws are substantively preempted as applied to national banks.  In most of the Supreme Court’s cases applying preemption principles to national banks, the issue is whether a particular state law restricting interest rates, insurance sales, or other bank activities is substantively preempted as applied to national banks.  Cuomo differs from these decisions in that the state law at issue in Cuomo was not preempted.  The issue was not whether the state fair-lending laws at issue in Cuomo applied to national banks—they did.  Instead, the issue was whether state officials and the OCC share authority to enforce a concededly applicable state law against national banks, or whether enforcement authority rests solely with the OCC.  While state authority to enforce non-preempted state laws against national banks is important and consequential, it is distinct from the authority to impose substantive requirements that prevent or significantly interfere with the exercise of federal banking powers.  Because Cuomo is limited to state laws that, as a substantive matter, do not prevent or significantly interfere with the exercise of federal banking powers, the adverse consequences of the Court’s decision are likely to be limited.

+ Partners, Covington & Burling LLP.  In Cuomo v. Clearing House Assn. L.L.C., the authors represented the Financial Services Roundtable, which filed a brief as amicus curiae supporting the Clearing House Association and the Office of the Comptroller of the Currency.

[1] Cuomo v. Clearing House Assn., L.L.C., 557 U.S. ___ (2009)

[2] Slip op. 7.

[3] 12 U.S.C. § 484(a).

[4] 467 U.S. 837 (1984).

[5] Slip op. 3. 

[6] Slip op. 4, 7.

[7] Slip op. 6.

[8] Slip op. 10.  These arguments are set out in the amicus brief that the authors filed in Cuomo.

[9] See Watters v. Wachovia Bank, N.A., 550 U.S. 1, 10 (2007) (“Nearly 200 years ago, in McCulloch v. Maryland, this Court held federal law supreme over state law with respect to national banking”).

[10] Tiffany v. National Bank of Mo., 85 U.S. (18 Wall.) 409, 412 (1874).

[11] Farmers’ and Mechanics Nat’l Bank v. Dearing, 91 U.S. 29, 34 (1875).

[12] Slip op. 9.

[13] Slip op. 11-12.

[14] Id.

[15] Id.

[16] Slip op. 14.

[17] Slip op. 14-15.

[18] Slip op. 14.

[19] See Wyeth v. Levine, 129 S. Ct. 1187 (2009); Altria v. Good, 129 S. Ct. 538 (2008).

[20] Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25, 32 (1996).

[21] See Slip Op. 12 (“We have not invoked the presumption against preemption”).

[22] 517 U.S. 735 (1996).

[23] 517 U.S. at 744.

[24] Slip op. 3.