Exorcising McCulloch: the conflict-ridden history of American banking nationalism and Dodd-Frank preemption.

• Author: Hills, Roderick M., Jr.
• Position: Introduction through II. The Second Demise of McCulloch's Federal Instrumentality Theory B. Judicial Retreat from McCulloch's Field Preemption 1924-1948, p. 1235-1268

Conventional wisdom holds that federal laws conferring banking powers on national banks presumptively preempt state laws seeking to control the exercise of those powers. This conventional wisdom originates with McCulloch v. Maryland, which established that nationally chartered banks are federal instrumentalities entitled to regulate themselves free from state law--even when national law fails to address the risks that state law seeks to regulate. Incorporated into the National Bank Act of 1864 by nineteenth-century precedents but then abandoned by the New Deal Court, McCulloch's theory of preemption is being revived today by the Office of the Comptroller of the Currency (OCC) to preempt broad swaths of state law.

This Article maintains that it is time to exorcise McCulloch's theory from our preemption jurisprudence. Far from historically sanctioned, McCulloch's theory that national banks are federal instrumentalities offends a deeply rooted tradition in American political culture and law that I call the "anti-banker nondelegation doctrine." This principle has been manifest in campaigns against national banks' immunities from political oversight, ranging from Andrew Jackson's 1832 veto of the charter of the Second Bank of the United States to Louis Brandeis's 1912 campaign against the "House of Morgan" as a 'financial oligarchy." In contrast to

McCulloch's view of banks as impartial instruments of the federal government, the American political system and the post-New Deal federal courts have adopted the view that federal law should not delegate unsupervised power to private banks to regulate their own operations. Accordingly, if federal regulators displace state laws regulating banking practices, then those federal regulators must explain how federal law addresses the risks that those state laws were attempting to control.

The most recent effort to eliminate McCulloch's theory of preemption is section 1044(a) of the Dodd-Frank Act. Section 1044(a) provides detailed standards governing the OCC's power to preempt state law. This Article argues that the OCC'S 2011 rules mistakenly revive McCulloch's theory of preemption. This revival contradicts not only section 1044(a); it also contravenes the general tradition of distrusting grants to national banks of immunity from state law. Like McCulloch, the OCC's rules draw irrational distinctions between states' general common law doctrines and states' rules specifically directed toward banking practices, and subject the latter to a sort of field preemption. This Article contends that such preemption is unprincipled and mistaken. Instead, it urges courts to follow the ordinary principles of conflict preemption--that is, to find state law preempted only where the OCC has specifically approved the banking practice forbidden by state law.

INTRODUCTION I. THE ANTI-BANKER NONDELEGATION DOCTRINE VERSUS THE FEDERAL INSTRUMENTALITY DOCTRINE IN ANTEBELLUM AMERICAN BANKING LAW A. Jackson's Veto Message and the Anti-Banker Nondelegation Doctrine B. McCulloch's Federal Instrumentality Theory and Banking as a Suspect Classification 1. McCulloch's Distinction Between Banking-Specific Activities and Nonbanking Activities 2. The National Bank Act of 1864 and the Judicial Exhumation of McCulloch II. THE SECOND DEMISE OF MCCULLOCH'S FEDERAL INSTRUMENTALITY THEORY A. The Panic of 1907 and Brandeis's Revival of the Anti-Banker Nondelegation Principle B. Judicial Retreat from McCulloch's Field Preemption, 1924-1948 C. Replacing McCulloch with Modern Conflict Preemption III. MCCULLOCH'S THIRD RESURRECTION? THE CASE AGAINST THE OCC'S 2004 AND 2011 RULES ON PREEMPTION A. Are the OCC's Preemption Rules Rationally Related to the Goal of Market Harmonization? B. Are the OCC's Preemption Rules Consistent with the Dodd-Frank Act's Standards for Preemption? IV. OLD HICKORY'S REVENGE: THE CASE FOR CONDITIONING PREEMPTION ON THE OCC's EXAMININATION OF THE RISKS ADDRESSED BY STATE LAW A. Prodding the OCC into Exercising Its Expertise B. Presuming Preemption on Functional Grounds: A Presumption Against States' Protectionism and Expropriation of National Banks' Investments CONCLUSION INTRODUCTION

The federal courts seem to assume a long, unbroken historical consensus that nationally chartered banks ought to be governed by the federal government to the exclusion of state regulation. Since the Supreme Court handed down McCulloch v. Maryland, (1) judges and scholars have commonly declared that "history" has called for centralized law governing nationally chartered banks. As Justice Breyer described preemption of state law under federal laws conferring powers on banks in Barnett Bank of Marion County v. Nelson:

In using the word "powers," the [National Bank Act] chooses a legal concept that, in the context of national bank legislation, has a history. That history is one of interpreting grants of both enumerated and incidental "powers" to national banks as grants of authority not normally limited by, but rather ordinarily pre-empting, contrary state law. (2) This "history," according to Justice Breyer, requires the presumption that "normally Congress would not want States to forbid, or to impair significantly, the exercise of a power that Congress explicitly granted." (3) Thus, there should be no need for judicial straining to figure out a way for state and federal law to coexist. If a bank is authorized by federal law to do something, then that bank's authorization preempts any state law that interferes with a banking power "that Congress explicitly granted"--even if the state law in question is neutral and does not discriminate against national banks. As Jamelle Sharpe describes the doctrine, courts review state regulation of national banks under a "Centralization Default," (4) derived from an alleged jurisprudential tradition of regarding state control of nationally chartered banks with suspicion.

The idea that American history implies this sort of "Centralization Default" has been defended administratively, as well. Consider, as an example of administrative reliance on alleged historical consensus, the justification for the preemption rules issued by the Office of the Comptroller of the Currency (OCC) in the summer of 2011. (5) The OCC's rules construed the Dodd-Frank Act's preemption clauses--which provide that a state consumer financial law is preempted, even if such a law does not single out nationally chartered banks for discriminatory treatment, if the state law "prevents or significantly interferes with the exercise by the national bank of its powers" (6)--as expressly codifying Barnett Bank's preemption standard. (7) Despite the reference to Barnett Bank, one might reasonably infer that this clause was intended to cut back on preemption of state law. After all, it contains unusual requirements that the OCC support preemption by making a "specific finding," (8) on a "case-by-case basis," (9) supported by "substantial evidence, made on the record of the proceeding." (10) Furthermore, the clause provides only Skidmore--not Chevron--deference for agency preemption findings, and it expressly bars field preemption. (11) How could such unusually specific statutory admonitions not be an effort to trim back on the preemption status quo?

Yet the OCC reissued its 2004, pre-Dodd-Frank rules in almost identical terms in the summer of 2011. (12) Despite disavowing field preemption, (13) the OCC declared once more that nationally chartered banks may make non-real estate loans "without regard to state-law limitations concerning" a broad array of topics. (14) George W. Madison, the Department of Treasury's General Counsel, bluntly criticized the 2011 rule for "seem[ing] to take the position that the Dodd-Frank standard has no effect." (15) In response, the OCC predictably trotted out the argument from history: broad preemption had been a "pillar[]" of banking law for "nearly 150 years." (16) Broad preemption, the OCC argued, provided the uniformity of regulation necessary to promote a national market in financial services that would guarantee "prosperity and growth." (17)

The OCC also argued that nationally uniform rules were suggested not only by historical practice but also by the national scale of the financial services market. Technological change (e.g., Internet banking), legal change (e.g., the authorization of interstate bank branching), and increased mobility of consumers caused "[m]arkets for credit (both consumer and commercial), deposits, and many other financial products and services" to become "national, if not international, in scope." (18) Such national markets required "consistent, national standards, regardless of the location of a customer when he or she first becomes a bank customer or the location to which the customer may move after becoming a bank customer." (19) "[D]iverse and potentially conflicting state and local laws" raise compliance costs, and "national banks must either absorb the costs, pass the costs on to consumers, or eliminate various products from jurisdictions where the costs are prohibitive." (20)

In sum, the OCC has justified its preemption rule with a combination of historical precedent and alleged economies of scale achieved by having one set of uniform rules for a national industry. In this Article, I argue that the breadth of the OCC's rule defies both its historical and its policy-based justifications. The OCC's rule preempts state banking laws without making any specific findings about whether federal law adequately addresses the specific risks of bad banking behavior that the particular state banking laws attempt to remedy. Far from being justified by "nearly 150 years" of precedent, this de facto field preemption of state banking law runs afoul of a deeply rooted American legal and political tradition that I term the "anti-banker nondelegation doctrine."

Under this doctrine, national law would supplant state law only if the national lawmakers (whether...