Argument Preview: Watters v. Wachovia Bank on 11/29

The following argument preview was written by Jennifer Liu of the Stanford Supreme Court Litigation Clinic.

On Wednesday, November 29, the Court will hear argument in Watters v. Wachovia Bank (No. 05-1342). Wachovia Bank presents two questions for the Court’s review, both involving 12 C.F.R. § 7.4006, an interpretive regulation promulgated by the Comptroller of the Currency that extends federal preemption of state law to state-chartered nonbank operating subsidiaries of national banks. The first question, one of administrative law, asks whether the regulation is entitled to Chevron deference. The second question asks whether the regulation, in treating the operating subsidiary as the equivalent of a national bank, intrudes on state sovereignty in violation of the Tenth Amendment.

Michigan Assistant Attorney General E. John Blanchard will argue the case on behalf of petitioner. Robert Long of Covington & Burling will argue on behalf of respondents. He will share his time with Sri Srinivasan, Assistant to the Solicitor General, who will argue on behalf of the United States as an amicus in support of respondents. The briefs are available here.

The National Bank Act governs the creation and supervision of national banks. It bestows the Office of the Comptroller of the Currency (OCC) with primary supervisory and enforcement power over national banks and authorizes the agency to promulgate rules and regulations to carry out its duties. Under 12 U.S.C. § 484(a), unless otherwise authorized by federal law, only the Comptroller, the courts, and Congress may exercise “visitorial powers” – i.e., examination of a bank’s activities and enforcement of compliance with applicable laws and regulations – over a national bank. Another of the Act’s provisions, 12 U.S.C. § 24 (Seventh), vests national banks with “all such incidental powers as shall be necessary to carry on the business of banking.” In 2001, the OCC promulgated 12 C.F.R. § 7.4006, which provides that “[s]tate laws apply to national bank operating subsidiaries to the same extent that those laws apply to the parent national bank.” This regulation, the focus of the questions presented in this case, thus precludes states from exercising visitorial authority not only over national banks, but also over the operating subsidiaries of those banks.

Petitioner Linda Watters, in her capacity as Commissioner of the Michigan Office of Financial and Insurance Services (OFIS), is responsible for administering and enforcing Michigan banking laws. Under Michigan law, mortgage brokers, lenders, and servicers that are subsidiaries of depository financial institutions are required to register with the OFIS if the depository financial institution does not have either a main or branch office located within the state. Wachovia Mortgage Corporation is a state-chartered nonbank operating subsidiary of Wachovia Bank, a national bank. Prior to 2003, Wachovia Mortgage had complied with Michigan’s registration requirement to engage in the business of making first mortgage loans within the state. On January 1, 2003, Wachovia Bank became a wholly owned operating subsidiary of Wachovia Bank. In a letter dated April 3, 2003, Wachovia Mortgage notified OFIS that, in reliance on federal law, it would no longer be registering with OFIS. In response to Wachovia’s letter, OFIS informed Wachovia Mortgage that without a registration, it would no longer be authorized to conduct mortgage lending activities in Michigan.

Respondents Wachovia Bank and Wachovia Mortgage brought an action seeking declaratory and injunctive relief prohibiting Watters from enforcing Michigan’s mortgage laws against Wachovia Mortgage. The district court granted summary judgment in their favor, finding that the OCC’s interpretation of 12 U.S.C. § 484(a) in 12 C.F.R. § 7.4006 was entitled to deference under Chevron and that, as applied to the operating subsidiaries of a national bank, the statute and regulation preempted Michigan law. Under 12 U.S.C. § 24 (Seventh), the OCC’s authority extends to the regulation of a national bank’s operating subsidiaries as regulation of a national bank’s “incidental powers” to carry on the business of banking. The court also rejected petitioner’s Tenth Amendment argument, holding that Congress had authority under the Commerce Clause to regulate national banks and their operating subsidiaries. The Sixth Circuit affirmed.

Petitioner Watters argues that Chevron deference is inappropriate when, as here, Congress has directly spoken to the precise question at issue. The clear and unambiguous intent of Congress can be found in the plain text of 12 U.S.C. § 484(a), which expressly refers only to a “national bank”; by contrast, the Act both defines operating subsidiaries as an “affiliate” and refers to affiliates elsewhere in the Act. Under traditional rules of statutory construction, the omission of any reference to affiliates in 12 U.S.C. § 484(a) must be presumed to mean that Congress did not intend to extend the statute’s preemptive scope to reach operating subsidiaries. The Court of Appeals, Watters also contends, erred in framing the regulation of operating subsidiaries not as an overextension of the OCC’s authority to regulate national banks as such, but as an “incidental power” under 12 U.S.C. § 24 (Seventh), as the latter view undermines the careful and express distinctions Congress has drawn between national banks and their affiliates. Watters advances a second argument against Chevron deference: under the Court’s precedent in Smiley v. Citibank, the preemptive effect of a statute is a question to be decided de novo by the courts, rather than an agency. Finally, Watters argues that 12 C.F.R. § 7.4006 violates the Tenth Amendment because it impermissibly encroaches on states’ authority to regulate state corporations. Under New York v. United States and Printz v. United States, a statute which violates the principles of federalism contained in the Tenth Amendment is unconstitutional even if Congress possesses legislative authority over the subject matter. Moreover, other decisions of the Court have struck down similar laws federalizing state associations and state corporations as unconstitutional incursions into a state’s powers reserved under the Tenth Amendment.

Respondents argue that the lower courts correctly understood a national bank’s incidental powers to include the power to conduct mortgage lending activities through an operating subsidiary. To qualify as an “incidental power,” a business activity must be both usual and useful, and the use of operating subsidiaries in the banking business is both a long-standing and a useful practice. Moreover, in 12 U.S.C. § 24a(g)(3)(A), Congress defined operating subsidiaries as those engaged “solely in activities that national banks are permitted to engage in directly and are conducted subject to the same terms and conditions that govern the conduct of such activity by national banks.” Respondents also note that the Court has generally interpreted grants of incidental powers to national banks as preempting contrary state law. The preemptive scope of 12 U.S.C. § 484(a) extends to the OCC’s regulations, including 12 C.F.R. § 7.4006. Section 7.4006, respondents explain, both falls within the scope of the OCC’s rulemaking authority and – because it is a reasonable interpretation of the incidental powers of national banks – is entitled to Chevron deference. Petitioner’s Smiley argument is not on point, because a court may decide the substantive meaning of “incidental powers” without reaching the question of whether a statute is preemptive. Even on the latter question, however, respondents contend that the Court should follow its own precedent in according substantial deference to an agency’s preemption determination. Respondents also assert that treating an operating subsidiary as part of its parent corporation for federal regulatory purposes does not violate the principle of “corporate separateness,” as federal regulation does not reach into matters – such as corporate formation, dissolution, and governance – that are properly the sphere of state law. Finally, respondents rebut petitioner’s Tenth Amendment argument, reiterating the lower courts’ holding that Congress’s authority under the Commerce Clause extends to the regulation of a national bank’s activities conducted through its operating subsidiaries. The “anti-commandeering” principle in New York and Printz is not relevant to this case, respondents point out, nor are petitioner’s concerns that the OCC’s regulation “federalizes” state-chartered corporations, given that Wachovia Mortgage is chartered by North Carolina and not Michigan, and that the regulation at issue does not reach corporate matters governed by state law.

More than a dozen amicus briefs have been filed in the case. As amicus supporting respondents, the United States similarly emphasizes that 12 C.F.R. § 7.4006 regulates the conduct of national banks through operating subsidiaries only to the extent that it could otherwise regulate national banks directly engaging in the same conduct, that preemptive regulations are valid so long as they are within the scope of an agency’s delegated authority, and that the OCC’s regulations do not rest on an interpretation of 12 U.S.C. § 484(a), but rather implement the OCC’s authority to define “incidental powers” under 12 U.S.C. § 24 (Seventh). Other amici supporting respondents include a host of banking and trade associations, administrative law professors, and economists; amici supporting petitioner include the AARP, public interest and consumer protection organizations, and the states, among others.