Wachovia Bank, N.A. And Wachovia Mortgage Corporation v. John P. Burke, in His Official Capacity as Banking Commissioner of the State of Connecticut, Docket No. 04-3770-Cv
Docket: 305
Court: Court of Appeals for the Second Circuit; July 11, 2005; Federal Appellate Court
John P. Burke, as Banking Commissioner of Connecticut, appeals a U.S. District Court ruling favoring Wachovia Bank, N.A., and Wachovia Mortgage Corporation. The plaintiffs sought declaratory and injunctive relief to block the enforcement of Connecticut banking laws against Wachovia Mortgage, arguing these laws are preempted by the National Bank Act (NBA) and related Office of the Comptroller of the Currency (OCC) regulations. The District Court granted summary judgment, concluding that OCC regulations preempt state laws applicable to Wachovia Mortgage, and affirmed that while Wachovia Bank has enforceable rights under the NBA via 42 U.S.C. § 1983, Wachovia Mortgage does not. The appeal addresses the specific preemption of state banking laws concerning the operating subsidiaries of nationally chartered banks, a matter previously unaddressed by appellate courts but supported by several district court rulings. The appellate court agrees with the District Court's preemption finding.
National banks are granted powers under the National Bank Act (NBA), which include "incidental powers" necessary for banking operations (12 U.S.C. § 24 (Seventh)) and are protected from state visitorial powers (12 U.S.C. § 484). The Office of the Comptroller of the Currency (OCC) has established regulations permitting national banks to operate through subsidiaries (12 C.F.R. § 5.34(e)) and clarifies that state laws apply to these subsidiaries as they do to the parent bank (12 C.F.R. § 7.4006). These regulations preempt state visitorial authority over subsidiaries to allow national banks to exercise their incidental powers. The court defers to these regulations as reasonable and within the OCC's authority.
However, the court must reverse the District Court’s ruling regarding Wachovia Bank's claim under 42 U.S.C. § 1983. While 12 U.S.C. § 484 protects national banks from state interference, the NBA does not intend to grant individual rights to national banks as private entities but rather establishes federal regulatory authority over state laws.
The case involves Connecticut banking laws enforced by the Commissioner, including statutes requiring state licenses for mortgage lenders and regulations for maintaining records. A national bank is exempt from these licensing requirements, but its subsidiary is not. Wachovia Bank, a national banking association, acquired Wachovia Mortgage, which had been licensed in Connecticut since 1987. After becoming a subsidiary, Wachovia Mortgage surrendered its licenses but was later issued a Notice of Intent to Issue a Cease and Desist Order for lending without a license. Wachovia Mortgage agreed to apply for re-licensing while retaining the right to legal action. Subsequently, Wachovia Bank and Wachovia Mortgage filed suit in federal court arguing that NBA and OCC regulations preempt state laws and also alleging violations under 42 U.S.C. § 1983.
The District Court ruled that Connecticut banking statutes are preempted by the National Bank Act (NBA) and Office of the Comptroller of the Currency (OCC) regulations, specifically 12 C.F.R. § 7.4006. It applied the Chevron doctrine, determining that Congress has not explicitly addressed whether state law applies to a national bank's subsidiary in the same manner as it does to the national bank itself. The court deemed 12 C.F.R. § 7.4006 a reasonable regulation that protects national banks' operations through subsidiaries, as permitted by 12 U.S.C. § 24 (Seventh).
Regarding § 1983 claims, the court concluded that national banks possess the right to be free from state regulation under the NBA, thus granting summary judgment in favor of Wachovia Bank. However, it ruled that Congress did not extend these rights to operating subsidiaries, leading to the dismissal of Wachovia Mortgage's § 1983 claim in favor of the Commissioner. The court issued a declaratory judgment on the preemption issue and closed the case, which the Commissioner appealed, challenging both the preemption and § 1983 rulings, while Wachovia Mortgage did not contest its claim's dismissal.
The court of appeals will review the summary judgment de novo, focusing on whether NBA and OCC regulations preempt state laws as they apply to Wachovia Mortgage and whether the NBA provides enforceable rights under 42 U.S.C. § 1983. No appellate courts have addressed the preemption of operating subsidiaries specifically; however, three district courts have previously found preemption in similar contexts, with differing conclusions on the NBA’s provision of federal rights for national banks. The NBA, enacted in 1864, aims to establish a national banking system and grants national banks certain powers while restricting state visitorial powers to prevent disruptive state regulations.
The Office of the Comptroller of the Currency (OCC) is the federal agency responsible for overseeing the business of banking, with the authority to create rules that define the incidental powers of national banks. According to 12 C.F.R. § 7.4000, the OCC holds exclusive visitorial powers over national banks, enabling it to examine their operations and regulate their activities under federal law. Additionally, 12 C.F.R. § 5.34 allows national banks to conduct activities through operating subsidiaries, which must adhere to the same regulatory conditions as the parent bank. This regulation affirms that the use of operating subsidiaries is a legitimate incidental power under 12 U.S.C. § 24 (Seventh).
In 2001, the OCC introduced 12 C.F.R. § 7.4006, stating that state laws apply to national bank operating subsidiaries to the same extent as they apply to the parent banks, unless specified otherwise by federal law or OCC regulation. This rule was developed in response to supportive comments indicating that operating subsidiaries serve as functional extensions of national banks, allowing them to engage in activities that they could perform directly. The OCC clarified that while this rule does not preempt specific state laws, it implies that state laws affecting the visitorial powers over these subsidiaries—like licensing requirements—would be preempted, similar to their application to national banks.
National banks are empowered to engage in real estate lending under 12 U.S.C. § 371, which allows them to arrange, purchase, or sell loans secured by real estate, subject to regulations set by the Comptroller of the Currency (OCC). The OCC established part 34 of title 12 of the Code of Federal Regulations to outline standards for real estate lending by national banks and their subsidiaries. Specifically, § 34.3 authorizes national banks' real estate lending activities, while § 34.4 preempts state laws that restrict these federally authorized powers, including licensing requirements.
The preemption doctrine, based on the Supremacy Clause of the Constitution, can occur when Congress explicitly preempts state law, occupies a regulatory field entirely, or when federal law conflicts with state law. This case exemplifies "conflict preemption," where state laws hinder the objectives of federal laws. Federal regulations can preempt state laws similarly to federal statutes, and the OCC is recognized as having the authority to issue regulations that can preempt state laws. Preemption is determined by congressional intent, but the Supreme Court indicates that preemptive regulations do not require explicit congressional authorization to displace state law. The focus is on whether the OCC acted within its statutory authority when promulgating regulations, rather than on Congress's intent to preempt state law.
A presumption against federal preemption exists in regulatory areas traditionally handled by states, particularly those of local concern. However, this presumption is diminished in fields where federal authority has been significantly established over time, such as the regulation of federally chartered banks. Although states can regulate certain banking activities within a "dual banking system," their laws are preempted if they significantly interfere with national banks’ powers. The Commissioner mischaracterizes the issue as one of congressional intent to preempt state authority over subsidiaries, when it should focus on the reasonableness of the Office of the Comptroller of the Currency's (OCC) regulatory actions. Under the Chevron framework, the court first assesses if Congress's intent is clear regarding the specific issue; if it is ambiguous, the court evaluates whether the agency's interpretation is a permissible construction of the statute, affording deference to reasonable agency interpretations.
The District Court's inquiry centered on whether Congress addressed the application of state law to national bank operating subsidiaries. It identified 12 U.S.C. § 484, which limits national banks to federal visitorial powers, as the basis for preemption. The Commissioner contended that Congress's omission concerning operating subsidiaries indicated an intention to allow state laws to apply, arguing that such subsidiaries are "affiliates" under 12 U.S.C. § 221a, suggesting non-exclusive federal authority over them.
The District Court rejected these arguments. It clarified that the Office of the Comptroller of the Currency (OCC) does not classify "national bank" in § 484 to include operating subsidiaries, but interprets the national bank's incidental powers under 12 U.S.C. § 24 (Seventh) to allow conducting banking through these subsidiaries. The OCC established 12 C.F.R. § 7.4006 to prevent states from imposing regulations on subsidiaries that could hinder the parent bank's federal powers. It recognized that the OCC has the discretion to authorize activities beyond those explicitly enumerated in § 24 (Seventh), and both the Commissioner and Attorneys General Amici acknowledged the OCC's authority to permit national banks to utilize operating subsidiaries.
Furthermore, the Commissioner’s argument regarding "affiliates," based on the Glass-Steagall Act, was considered but found lacking. The Act's definition of "affiliate" includes entities controlled by member banks, and while it grants the OCC regulatory authority, it does not imply a lack of exclusive visitorial authority over operating subsidiaries. The Court maintained that state regulations could significantly interfere with the national bank's exercise of its federally granted powers, thus warranting preemption under 12 U.S.C. § 484.
The definition of "affiliates" encompasses a broader range of entities than just operating subsidiaries, which do not fit neatly within the Glass-Steagall Act's provisions. This Act was established due to Congressional concerns about the risks posed by commercial banks engaging in underwriting and securities speculation, which were believed to have contributed to the bank failures during the Great Depression. A key amendment to 12 U.S.C. § 24 (Seventh) restricted national banks from purchasing, selling, or underwriting securities. The Act specifically targeted national banks' use of affiliates for non-commercial banking activities, while not addressing the use of operating subsidiaries for banking functions.
The Office of the Comptroller of the Currency (OCC) first acknowledged national banks' use of "subsidiary operations corporations" in the 1960s, reflecting the need for flexibility in banking structures as the industry evolved. The Gramm-Leach-Bliley Act (GLBA) of 1999 further recognized the role of operating subsidiaries by allowing national banks to control "financial subsidiaries," while specifically excluding those engaging solely in activities permitted for national banks. The legislative history of the GLBA reinforces that national banks have historically been allowed to invest in operating subsidiaries for activities they could conduct directly, such as mortgage lending, and that the legislation does not alter their authority to do so.
Additionally, 12 U.S.C. §§ 371c and 371c-1 treat operating subsidiaries distinctly by limiting bank transactions with affiliates but excluding subsidiaries from the affiliate definition for these regulations. Despite some overlaps, there is no clear congressional intent to restrict the OCC's regulations regarding operating subsidiaries in this context.
The Commissioner cites 12 U.S.C. §§ 161(c) and 481 to assert that the OCC has non-exclusive regulatory authority over affiliates and cannot preempt state visitorial power over these affiliates. However, these statutes only specify that national bank affiliates must report to the OCC and that the OCC will examine these affiliates to understand their relationships with national banks. They do not address the broader allocation of visitorial power between federal and state authorities, nor do they consider the emerging role of operating subsidiaries in banking.
The historical context of banking laws indicates that Congress and the OCC have treated operating subsidiaries distinctly, and there is no specific statute that delineates federal versus state authority over them. With the enactment of the GLBA, it appears Congress intentionally left a regulatory gap regarding national bank operating subsidiaries. The OCC can define a national bank's incidental powers to include conducting banking activities through operating subsidiaries, as permitted by 12 C.F.R. § 5.34. This authority extends to preempting state laws concerning operating subsidiaries in the same manner as those laws would apply to the parent national bank.
The reasonableness of OCC regulations must be upheld if they reflect a reasonable interpretation of the statutory framework. The Commissioner challenges the rationale behind 12 C.F.R. § 7.4006 and argues against deferring to it, claiming it merely reflects the OCC's opinion on potential court rulings. However, these arguments lack merit; the OCC's regulations represent reasonable policy decisions. The Commissioner specifically criticizes the OCC's rationale that treats operating subsidiaries as effectively part of the parent bank, arguing this undermines corporate separateness and allows national banks to evade state regulation. The OCC counters that this rationale acknowledges the long-standing practice of using operating subsidiaries for activities that the parent bank could perform directly and asserts that the structural separation of these subsidiaries should not be impeded by state regulations.
The Federal Register entries regarding 12 C.F.R. § 5.34 elaborate on the rationale supporting the use of operating subsidiaries by national banks. The Office of the Comptroller of the Currency (OCC) has emphasized that a separate subsidiary structure enhances safety and soundness by differentiating its activities from those of the parent bank, facilitating better management and monitoring. This rationale is rooted in historical contexts, dating back to 1966, when the OCC recognized that controlled subsidiary corporations offered national banks additional structural options for operational efficiency and cost control. The OCC maintains that these subsidiaries, while legally distinct, are integral to the parent bank's ability to operate safely.
Regarding 12 C.F.R. § 7.4006, the OCC clarified that national bank operating subsidiaries must adhere to state law to the same extent as their parent banks, without preempting state law. This regulation reflects the OCC's interpretation of the law as aligned with judicial precedent, emphasizing that courts are not bound to defer to agency interpretations of case law. However, the OCC's regulation is grounded in its policy judgment on operating subsidiaries and clarifies existing preemption based on federal statutes and regulations. Consequently, the regulation serves to affirm the OCC's stance on the applicability of state laws to these subsidiaries.
The OCC asserts that national banks should utilize operating subsidiaries with minimal state restrictions, emphasizing that this position is rooted in "safety and soundness" considerations rather than strict legal interpretation. The OCC's revisions to 12 C.F.R. part 34 clarify which state laws are preempted regarding real estate lending, citing 12 U.S.C. 24 (Seventh) as providing national banks with a flexible authority to adapt to changes in the financial marketplace. The OCC identifies that increasing state regulations have hindered national banks' operations, exemplified by the preemption of the Georgia Fair Lending Act, which adversely affected mortgage lending in Georgia. The OCC concludes that inconsistent state laws create operational challenges for national banks, negatively impacting their business, safety, and soundness. Consequently, the OCC is issuing a final rule to ensure national banks can operate fully under federal law without interference from state regulations, promoting the national banking system's integrity and operational soundness.
12 C.F.R. 34.1(b) and 34.4 support preemption of state regulations concerning national banks' operating subsidiaries, aligning with the OCC's rationale to prevent state interference with national banks' powers under 12 U.S.C. 24 (Seventh). While concerns are raised regarding consumer protection and OCC's regulatory capability, the OCC has addressed these in its rulemaking, indicating that states should seek recourse through Congress.
Regarding Wachovia Bank's claims under 42 U.S.C. 1983, a distinction is made between violations of the Supremacy Clause and claims for federal rights enforcement. A preemption claim does not automatically confer enforceable rights under 1983. The Supreme Court, in Blessing v. Freestone, outlines three factors for determining if a statute creates federal rights: Congressional intent to benefit the plaintiff, clarity of the right to ensure judicial enforceability, and the statute must impose binding obligations on states. The Court emphasizes that only violations of rights, not laws, give rise to 1983 actions, and that without clear Congressional intent to create individual rights, private suits under 1983 are not viable. The concurrence in Gonzaga University highlights the complexity and diversity of statutes, suggesting that a singular formula for determining rights is insufficient.
Courts should avoid determining federal rights based on a superficial application of the Blessing factors, particularly when evidence suggests Congress did not intend for such rights to be enforceable under § 1983. The District Court concluded that the National Bank Act (NBA) intended to create federal rights for national banks, finding that 12 U.S.C. § 484(a) emphasizes the benefitted class and is sufficiently concrete for judicial enforcement. However, this analysis overlooks the distinct role of national banks within the statutory framework of the NBA. A comprehensive view of the NBA and its historical context reveals that it addresses the division of federal and state regulatory authority without granting national banks individually enforceable rights. National banks are recognized as federal instrumentalities designed to serve public purposes, as established in past Supreme Court rulings, and are subject to federal authority rather than operating solely for private gain. Consequently, references to national banks do not support the existence of a federal right under the first Blessing factor.
Congress established national banks to facilitate a national banking system, as supported by Supreme Court precedent. When congressional preemption benefits specific parties incidentally within a federal regulatory scheme, a private damages remedy under 42 U.S.C. § 1983 may not be available. The case of Golden State distinguished between two types of preemption rules and found that the National Labor Relations Act (NLRA) both preempted state laws and created federal rights. The Court emphasized that Congress intended to protect parties' rights to engage in economic pressure without government interference. However, the current case involves a Garmon-related preemption rule, which addresses the applicability of state or federal regulations rather than establishing a "free zone" from all regulations. The Office of the Comptroller of the Currency (OCC) has expanded preemption of state laws for operating subsidiaries only after implementing comprehensive federal regulations. This indicates a preemptive scheme aimed at uniform federal regulatory administration, not one that creates federal rights. Notably, despite the long-standing nature of the National Bank Act (NBA), no courts have recognized that it creates federal rights for banks, with at least one appellate court ruling that the NBA does not permit actions under § 1983 related to interest rates.
The Court of Appeals for the Eighth Circuit concluded that the powers of national banks do not encompass significant personal rights akin to those protected by the Fourteenth Amendment, which typically allow claims under 42 U.S.C. § 1983. The mere similarity between the wording of 12 U.S.C. § 484 and certain anti-discrimination provisions does not imply that Congress intended for national banks to have enforceable federal rights under § 1983. Recognizing such rights for Wachovia Bank could enable national banks to pursue § 1983 claims whenever preemption applies due to the National Bank Act (NBA) and Office of the Comptroller of the Currency (OCC) regulations. This is viewed as inappropriate given the intricate regulatory landscape and the evolving nature of national banks' powers. The OCC has specified a case-by-case approach to preemption, further complicating the matter. Allowing § 1983 claims could lead to extensive implications for the balance of federal and state regulatory authority, given the federal oversight of national banks. Ultimately, the NBA establishes a preemption framework that does not clearly indicate an intention to grant enforceable federal rights under § 1983 for national banks.
The District Court's declaratory judgment favoring the plaintiffs on preemption is affirmed, while the summary judgment in favor of Wachovia Bank regarding its § 1983 claim is reversed. The denial of the Commissioner's summary judgment motion is vacated, and the case is remanded for the District Court to enter partial summary judgment for the Commissioner. Each party is to bear its own costs. Additionally, several amicus curiae briefs were submitted, with various states' Attorneys General supporting the Commissioner’s arguments about state regulatory interests. In contrast, the OCC, American Bankers Association, and trade groups supported Wachovia, emphasizing the OCC's preemption policy's reasonableness.
Commenters suggested including a statement in 12 C.F.R. 7.4006 affirming the applicability of 12 CFR 34 (Real Estate Lending and Appraisals) to operating subsidiaries. However, this addition is deemed unnecessary as 12 CFR 34.1(b) already clarifies that the regulation applies to national banks and their operating subsidiaries. Various courts have approached preemption issues under the National Bank Act (NBA) without strictly applying the Chevron framework, instead granting deference to reasonable regulations from the Office of the Comptroller of the Currency (OCC) within its authority. Precedents, such as de la Cuesta, establish that OCC regulations will be enforced unless they exceed statutory authority or are arbitrary. Wachovia Bank is acknowledged as a "member bank" under 12 U.S.C. 221. The OCC's promulgation of 12 C.F.R. 5.34 and 34.1(b) in 1996, prior to the Gramm-Leach-Bliley Act (GLBA), enabled national banks to operate through subsidiaries under the same conditions as their parent banks. The OCC interpreted the GLBA as reaffirming its regulatory authority over operating subsidiaries and subsequently updated 12 C.F.R. 5.34. In 2001, the OCC established 12 C.F.R. 7.4006, citing the GLBA's acknowledgment of operating subsidiaries as a foundational basis for the rule. Since 1996, 12 C.F.R. 34.1(b) has confirmed that part 34 applies to national banks and their operating subsidiaries, while 12 C.F.R. 34.4 addresses state law's applicability to national banks' real estate lending powers.
