United States: Will Dodd-Frank Act End Up In Supreme Court?

Last Updated: October 11 2012
Article by Tamar N. Dolcourt

Law360, New York (October 04, 2012, 3:11 PM ET) -- In 2010, Congress passed and President Obama signed a significant piece of financial reform legislation, known as the Dodd-Frank Act. One component of the act was the creation of an orderly liquidation authority, which combines aspects of Federal Deposit Insurance Corporation receiverships with certain provisions of the Bankruptcy Code, to quickly address situations where the failure or potential failure of a financial institution poses a serious risk to the broader American economy.

On June 21, 2012, a Texas bank along with the Competitive Enterprise Institute and the 60 Plus Association Inc. filed a lawsuit in the United States District Court for the District of Columbia challenging numerous provisions of the act on various constitutional grounds. On Sept. 20, 2012, the attorneys general of Michigan, Oklahoma and South Carolina joined the lawsuit with an amended complaint specifically addressing the constitutionality of the orderly liquidation authority.1

The attorneys general argue that they have standing as creditors of institutions which may be subject to the orderly liquidation authority through the investments of each state's pension funds. This lawsuit is still in the early stages, and the United States has not yet filed a response, and will not do so until at least Oct. 26, but it is possible that this lawsuit may follow a similar path to that taken by lawsuits filed against the Patient Protection and Affordable Care Act, which reached the U.S. Supreme Court in 2012.

Title II of the act is the orderly liquidation authority, which allows the U.S. Treasury Department secretary to order the liquidation of a nonbank financial institution once he receives a recommendation from a twothirds vote of the Federal Reserve Board and the FDIC, and determines that, among other things, the failure of the institution would have "serious adverse effects on financial stability" in the United States.2

Once the treasury secretary invokes his or her powers under the orderly liquidation authority, the FDIC will take over the financial institution in question and either liquidate it, or take other actions it deems appropriate, including selling the institution in order to protect the broader United States economy. The attorneys general argue in the amended complaint that certain provisions of the orderly liquidation authority violate the Constitution's separation of powers, due process, and bankruptcy uniformity provisions.

The decision to invoke the orderly liquidation authority may not be undone by either Congress or the president.3 Furthermore, judicial review of that decision is also strictly limited.4 If the troubled institution does not agree to the liquidation, the secretary must file a petition to allow it in the United States District Court for the District of Columbia, and that court must review the petition and rule on it within 24 hours. If it does not rule within 24 hours, the petition is granted by operation of law.

Second, the hearing must be confidential, with no public disclosure beforehand. Third, the court is only entitled to review the secretary's determinations that the institution is a "financial company" within the meaning of the act, and whether it is default or in danger of defaulting.

Fourth, the court may only use an arbitrary and capricious standard to review the limited determinations it is entitled to make. Fifth, appellate review is similarly limited to the same grounds and standard as the district court's review. There is also no provision for a stay pending appeal, meaning that the liquidation could occur while the appeal is pending, rendering it moot. These limitations on separate and co-equal branches of the government give rise to the AGs' separation of powers argument.

Creditors and other parties in interest who could be affected by the determination to liquidate an institution are not permitted to play any role in the process. In fact, because of the Act's prohibition on disclosure of a hearing related to an orderly liquidation proceeding, they will not even know of such an event until after it occurs. This limitation on the participation of creditors forms the basis of the AGs' due process argument.

The complaint also alleges that the act allows the FDIC to use its own discretion in determining the priority of claims that it will pay, further bolstering the plaintiffs' argument that the act violates due process with respect to the creditors of the institutions which may be subject to the orderly liquidation authority. Finally, the attorneys general allege that the orderly liquidation authority constitutes an exercise of Congress' bankruptcy powers, but it creates a nonuniform system of bankruptcy where the FDIC may use discretion when dealing with creditors, which may result in similarly situated creditors being treated differently.

The constitutional questions highlighted by the amended complaint have been recognized since the act was signed into law two years ago, however, some did not believe that they were significant enough to pose a serious challenge to the act.5 For example, despite the concerns about the limits on the judicial review of a decision to invoke the orderly liquidation authority as discussed above, Baird and Morrison ultimately concluded that this sort of limited review is within the power of Congress and is not unprecedented.6

This is similar to the initial consensus of many academics regarding the potential constitutional challenges to the Affordable Care Act, that is, that there was no serious constitutional challenge to be had.7 Ultimately, of course, there were serious constitutional questions with respect to the Affordable Care Act, which split courts of appeal and were resolved in the Supreme Court.

However, while it is possible that the amended complaint filed by the attorneys general will reach the Supreme Court, it is far from clear that that will be the outcome, or that its path will follow the path of the Affordable Care Act.

First, and most notably, there are unlikely to be multiple challenges to the act. Unlike the Affordable Care Act, which was the subject of numerous challenges throughout the country, the act limits the judicial review of decisions made under it to the United States District Court for the District of Columbia, with appeals limited to the Court of Appeals for the District of Columbia. This most likely eliminates the chance of the circuit split that pushed the Affordable Care Act to the Supreme Court.

Furthermore, the issues implicated in the orderly liquidation authority are not issues that affect the everyday American and are not likely to get the same attention both by politicians and the media as the issues presented by the Affordable Care Act did.

It is too early to predict what the United States' response to this lawsuit will be and whether the challenge to the act's orderly liquidation authority will move beyond this initial district court lawsuit. However, recent history has shown that constitutional challenges that seem to many to be of dubious merit at the outset may ultimately make their way to the Supreme Court.

Footnotes

1 State Nat’l Bank of Big Spring, et. al., v. Geithner, et. al., First Amended Complaint, Case No. 12-cv-01032-ESH (D.D.C. Dkt. No. 6)

2 12 U.S.C. § 5383(b).

3 First Amended Complaint, ¶ 236.

4 12 U.S.C. § 5382.

5 See, e.g., Douglas G. Baird and Edward R. Morrison, Dodd-Frank for Bankruptcy Lawyers, 19 Am. Bankr. Inst. L. Rev. 287, 294-299 (2011) (reviewing but ultimately finding unpersuasive potential constitutional challenges related to judicial review and due process issues in Title II).

6 Id. at 296.

7 Sarah Kliff, How Obamacare Got to the Supreme Court, WonkBlog (March 31, 2012), available at http://www.washingtonpost.com/blogs/ezra-klein/post/how-obamacare-got-the-supremecourt/2012/03/30/gIQAN3kzlS_blog.html (interview with Professor Brad Joondeph regarding the Affordable Care Act litigation).

Reprinted with permission from Portfolio Media, Inc.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Tamar N. Dolcourt
 
In association with
Related Video
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.