My law partner, Christy D. Jones, is a trustee of the United States Supreme Court Historical Society, founded by Chief Justice Warren E. Burger. In recognition of her commitment to the preservation of the rich history of the court, I wrote my check and joined the Society. Each quarter, the Society sends its members the Journal of Supreme Court History, a well-written, thoroughly researched compilation of some of the most interesting stories of how the court has impacted jurisprudence in America.

Landmark Case: McCulloch v. Maryland

Reading the journal brought to mind some of the important cases that have influenced banking in this country, one of which cemented my interest in banks very, very early in my career — I was a junior in high school when my history teacher assigned the case of McCulloch v. Maryland (1819) as required reading in our studies of the Constitution. In 1816, Congress chartered the Second Bank of the United States, and in 1818, the state of Maryland passed legislation to impose taxes on the bank. James W. McCulloch, the cashier of the Baltimore branch of the bank, refused to pay the tax. Maryland raised two issues: did the state have the right to impose taxes on banks established by the federal government, and did the federal government have the authority, under the Constitution, to establish banks since that power is not specified in the Constitution?

The court unanimously held that the Maryland state tax unconstitutionally interfered with federal supremacy and ruled that the Constitution gives the federal government certain implied powers. The court found that Congress had the power to incorporate the bank and that states could not tax instrumentalities of the federal government employed in the execution of constitutional powers. Chief Justice John Marshall wrote that Congress possessed un-enumerated powers not explicitly outlined in the Constitution.[1] Today, the Comptroller of the Currency, which establishes and regulates national banks, uses McCulloch as one of the key tools in its assertion that states have little or no authority to regulate the activities of a national bank.

With this one decision, the Marshall Court expanded Congress’s powers to include those implied in the Constitution, affirmed the constitutional sovereignty of the new federal government, and asserted that the states come in second where the rights of the federal government are concerned. All because a frugal banker wouldn’t pay a tax.

Preemption of National Bank Act

In 2009, however, the Roberts Court (with Chief Justice Roberts dissenting), in a 5-4 opinion, authorized states to investigate national banks for lending discrimination, rejecting the Comptroller’s position that its regulatory authority preempted states’ enforcement powers. Justice Antonin Scalia, writing for the majority, held that federal banking regulations did not preempt states from enforcing their own fair lending laws.[2] The ruling decided a dispute between the Comptroller of the Currency and New York’s attorney general’s office, under then Attorney General Eliot Spitzer, which had initiated investigations into national banks’ residential real-estate lending practices. The American Bankers Association and the Consumer Bankers Association, which had filed a brief as amici curiae in support of the comptroller,[3] issued a statement that argued that the court’s ruling overturned 140 years of settled law. Each of the various states’ banking associations joined in the brief. The fear expressed was that national banks would face duplicative and conflicting federal and state regulation and enforcement actions. New York’s attorney general at the time of the litigation, Andrew M. Cuomo, argued that the ruling simply reaffirmed a state’s role in enforcing consumer protection laws. The court’s majority, however, differentiated between a state’s “visitorial powers” and its enforcement powers. The court stated that the National Bank Act[4] only prevented a state from exercising its powers to supervise national banks, but the long-standing act did not preclude a state from exercising its ordinary powers to enforce state laws.

Antitrust and Bank Mergers

A case much closer to home involved the former Third National Bank in Nashville and Nashville Bank and Trust Company, the second and fourth largest banks in Davidson County, Tennessee, at the time. These two banks merged on Aug. 18, 1964. Following the merger, the three largest banks had 97.6 percent of the total bank assets in the county, and the two largest banks, 76.7 percent. The Bank Merger Act of 1966[5] took effect on Feb. 21, 1966, before the federal government’s lawsuit was filed, challenging the validity of the merger on an antitrust claim.[6] Section 5 of the Bank Merger Act prohibits approval of a merger whose effect “may be substantially to lessen competition” unless the anticompetitive effects “are clearly outweighed in the public interest by the probably effect of the transaction in meeting the convenience and needs of the community to be served.”[7]

The district court found that the act altered the standards used in determining whether a merger violated Section 7 of the Clayton Act,[8] citing United States v. Columbia Steel Company.[9] The district court found that Nashville Bank and Trust Company was a “stagnant and floundering bank” that suffered from a lack of young and aggressive officers. It held that the merger would not tend to lessen competition. On appeal to the Supreme Court,[10] that court held that The Bank Merger Act requires de novo inquiry by the district courts into the validity of bank mergers to determine whether the merger offends antitrust laws, and if it does, whether the banks have established that the merger is justified by the convenience and needs test.[11] The court further found that the act, which adopted the language of Section 7 of the Clayton Act (“substantially to lessen competition”)[12] did not provide a different antitrust standard for bank cases, and that the district court applied an erroneous Clayton Act standard to the merger.[13] On the facts of this case, the merger substantially did tend to lessen competition in the Nashville commercial banking market.[14] The Supreme Court remanded the case to the lower court so it could reconsider the act’s application to the facts of this merger, and, since the district court heard this case before Houston Bank, supra, was decided, the justices noted that the lower court might wish to consider reopening the record to permit the presentation of new evidence in light of the intervening interpretations of the act.[15]

Court Watcher Predictions

I do not litigate, and while I am authorized to practice before the United States Supreme Court because of the wonderful opportunity afforded me by the Tennessee Bar Association to trek to Washington to be sworn in, you won’t find me in the hallowed halls of the Supreme Court except when I take my triplet grandchildren (each a future justice on the court) on the obligatory Washington visit. Watching the court is not something that takes up much of my time, but I do believe that all of us who represent regulated financial services companies will see a proliferation of cases that defend the rights of consumers and homeowners and that challenge the largest banks to do a better job of conforming their activities to the ever increasing body of consumer financial protections. These cases may not have the same panache as upholding the Affordable Care Act or overturning states’ bans on same-sex marriage or even McCulloch v. Maryland, but they will be important tools in a growing effort to assure the rights of our citizens. But lest we forget that banks are citizens, as well, we can only hope for balance in jurisprudence.

Notes

1. 17 U.S. 316 (1819).
2. Andrew M. Cuomo, Attorney General of New York v. Clearing House Association LLC, 129 S. Ct. 1695 (2009).
3. Brief for American Bankers Association and Consumer Bankers Association as Amici Curiae in Support of Respondents, filed April 1, 2009.
4. 12 U.S.C. 38 (adopted June 3, 1864).
5. 12 U.S.C. Section 1828(c).
6. 260 F. Supp. 869 (M.D. Tenn. 1966). Findings of fact and conclusions of law are unreported.
7. 15 U.S.C Section 7.
8. 15 U.S.C. Section 1.
9. 334 U.S. 495 (1948).
10. 390 U.S. 171 (1968) [88 S. Ct. 882, 19 L.Ed2d 1015].
11. United States v. First City National Bank of Houston, 386 U.S. 361 (1967); 390 U.S. 178.
12. 390 U.S. 172.
13. 390 U.S. 181-182 .
14. 390 U.S. 183.
15. 390 U.S. 192.

KATHRYN REED EDGE is a member member in the Nashville office of Butler Snow LLP with offices in with offices in Tennessee, Mississippi, Alabama, Colorado, Pennsylvania, Georgia, Louisiana, New York, New Mexico and London, England. She is a member of the firm’s Government and Regulatory Practice group and concentrates her practice in representing regulated financial services companies. She is a past president of the Tennessee Bar Association and a former member of the editorial board for the Tennessee Bar Journal.