National Banks Subject to State Laws
July 8, 2009
Gerald Baldwin
The Supreme Court has issued its decision in Cuomo v. Clearing House Association1 and in doing so has upheld the right of states to apply certain of their laws to national banks.
The National Bank Act was enacted in 1864 and it exempted national banks from “visitorial powers” of the states. In 2004, the Comptroller of the Currency adopted regulations attempting to make it clear that the National Bank Act prohibited attempts by states to inspect the books and records of national banks, reserving those powers to the OCC.
In 2005, the Attorney General of New York requested records of several national banks seeking to determine whether the banks had violated state laws prohibiting discrimination in lending. The OCC and a trade group sued to prevent further efforts to obtain the desired records. The trial court and the Court of Appeals held that the state could not require production of the records. The Supreme Court reversed and held that, while the states cannot exercise “visitorial powers” over national banks, the states do have the power to enforce state laws applicable to those banks. The Court described “visitational powers” as oversight over corporate affairs.
The Court contrasted enforcement and visitorial powers as follows:
On a pragmatic level, the difference between visitation and law enforcement is clear. If a State chooses to pursue enforcement of its laws in court, then it is not exercising its power of visitation and will be treated like a litigant. An 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 claim is frivolous or his discovery tactics abusive. . . . A visitor, by contrast, may inspect books and records at any time for any or no reason.
Interestingly, the Supreme Court upheld the injunction issued by the trial court in that the litigants seemed to agree that the action sought to be enjoined was the issuance of “executive subpoenas” to gather information about the banks’ lending practices and therefore the Court reasoned was an exercise of visitorial powers. However, the Court did vacate the injunction “insofar as it prohibits the Attorney General from bringing judicial enforcement actions.”
So, it now appears as if a state may sue a national bank to enforce its laws (like discrimination in lending) but it may not first subpoena the records of the bank to determine whether such a suit would be warranted by those records. That is an interesting result. Will states now sue first and seek information later? Is that a desirable result for the banks? With the high cost of modern litigation, banks might chose to preserve their precious resources by sharing appropriate information when requested by a state government if the alternative is unnecessary litigation in which the state will receive that same information.
1557 U.S. _________ (2009).