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

• Author: Hills, Roderick M., Jr.
• Position: II. The Second Demise of McCulloch's Federal Instrumentality Theory C. Replacing McCulloch with Modern Conflict Preemption through Conclusion, with footnotes, p. 1235-1268

3. Replacing McCulloch with Modern Conflict Preemption

   After Luckett, the fundamental principle defining banking preemption had changed, as lower courts recognized. (154) The Supreme Court no longer asserted that states could never regulate national banks. The Court instead emphasized that states could not deny or impair banking powers that Congress had explicitly conferred.

   Barnett Bank of Marion County v. Nelson (155) illustrates this post-New Deal focus on conflict preemption. The Florida law at issue in Barnett--a prohibition on the sale of insurance by any bank affiliated with a holding company (156)--was a banking-specific law that, under the old Dearing-Easton reading of the National Bank Act, should have been automatically preempted as a forbidden regulation of national banks' deposit-taking operations. The Barnett Court, however, ignored the banking-specific character of the Florida law. Instead, it focused on the conflict between the Florida statute and a 1916 federal law authorizing national banks to sell insurance. (157) Relying on what it called "ordinary legal principles of pre-emption," (158) the Barnett Court stated that a federal grant of banking power "ordinarily pre-empt[s] contrary state law" because "normally Congress would not want States to forbid, or to impair significantly, the exercise of a power that Congress explicitly granted." (159) Because the Florida law barred Barnett Bank from an exercise of a federally conferred power, the Court held that it constituted a "significant[]" impairment of that power (160)--hardly a surprising conclusion, given the breadth of the state law's restriction. In so holding, the Barnett Court cited Luckett for the proposition that Barnett's holding would not "deprive States of the power to regulate national banks, where (unlike here) doing so does not prevent or significantly interfere with the national bank's exercise of its powers." (161) The citation was a significant affirmation of Luckett's principle that federal banking law does not automatically preempt a state regulation that is targeted specifically at a banking activity. (162)

   It would be an exaggeration to state that the Court abandoned entirely the earlier nineteenth-century tradition under which states were barred from regulating banks with laws specifically targeting banking activities. The old precedents continued to be cited. In Watters v. Wachovia Bank, for instance, the Court approvingly quoted Dearing's sweeping statement that "the States can exercise no control over [national banks], nor in any wise affect their operation, except in so far as Congress may see proper to permit." (163) The Watters Court acknowledged that "[f]ederally chartered banks are subject to state laws of general application in their daily business to the extent such laws do not conflict with the letter or the general purposes of the [National Banking Act]." (164) However, the use of the phrase "state laws of general application" suggested by negative implication that state laws not of general application would be preempted. This suggestion of some sort of field preemption for all state laws targeting national banks' lending or deposit-taking activities was reinforced by the Watters Court's subsequent observation that "[d]iverse and duplicative superintendence of national banks' engagement in the business of banking, we observed over a century ago, is precisely what the [National Bank Act] was designed to prevent." (165) To support this last assertion, the Court quoted with approval the Easton Court's statement that federal banking law created a banking system that was "independent, so far as powers conferred are concerned, of state legislation which, if permitted to be applicable, might impose limitations and restrictions as various and as numerous as the States." (166)

   The Watters Court, however, never embraced wholesale field preemption of all state laws that specifically targeted banking business. The Court rested its holding on a specific authorization rather than a general ban on states' enforcing banking-specific rules against national banks or their subsidiaries. In analyzing why Michigan could not subject such subsidiaries to the general oversight of Michigan's banking authorities, the Watters Court relied on the National Bank Act's specific provision barring states from exercising visitorial powers over national banks. (167) Moreover, the Court offered an argument specific to the "duplicative" character of the general supervisory power asserted by Michigan: the OCC already exercised precisely the same power in the form of its visitorial power. (168)

   The Court most clearly rejected McCulloch's theory of preemption in Cuomo v. Clearing House Ass'n (169) There, the Court, in an opinion by Justice Scalia, held that the OCC's exclusive visitorial power did not preempt the New York Attorney General's power to enforce the state's fair-lending laws in state or federal court. (170) In defense of its theory that the lawsuit was preempted because it was an exercise of visitorial powers exclusively vested in the OCC, the OCC argued that the National Bank Act barred, at the very least, public officials' lawsuits to enforce "state banking laws." (171) These specific banking laws, the OCC argued, were preempted even if enforcement of other more general laws was not preempted--for instance, general rules of contract and property--that supply "the legal infrastructure" for banking. (172) In rejecting this "distinction between 'implementation' of 'infrastructure' and judicial enforcement of other laws," Justice Scalia observed that "[o]f course [this distinction] can be found nowhere within the text of the statute" and, therefore, "attempts to do what Congress declined to do: exempt national banks from all state banking laws, or at least state enforcement of those laws." (173) Thus, the Clearing House Court expressly rejected the idea that the National Bank Act contained an implicit general prohibition on state laws specifically tailored for the regulation of lending-precisely the position that the Court had defended since McCulloch. (174) Indeed, even the OCC seemed to concede that the state's fair-lending law might not be preempted "because its substantive requirements are not meaningfully different from those imposed by federal law." (175)

   In sum, since the New Deal, the Court has gradually edged away from the idea, derived from McCulloch, that national banks are immune from state laws specifically targeting the business of banking. The New Deal Court never explained why it retreated from McCulloch's holding that nationally chartered banks were immune from state regulation of their banking activities. One can, however, identify two trends in the policies and jurisprudence of the early twentieth century sufficient to explain the outcomes of these decisions: decreasing trust of private bankers and increasing trust for state governments.

   First, the idea that federally chartered banks were somehow carrying out the policies of the federal government simply seemed absurd in light of the distrust of bankers expressed in the progressive and populist politics leading up to the Wilson Administration. The Second Bank of the United States might plausibly have been regarded as a federal agent akin to, say, a member of the Federal Reserve today. The federal government owned twenty percent of the Bank's stock and appointed several of its directors, and the Bank enjoyed the unique position of holding and disbursing federal deposits in return for a sizable "bonus" paid over to the federal government. (176) One might, therefore, regard the Bank as a sort of quasi-governmental entity like Amtrak--an entity that, while formally private, nevertheless enjoyed a unique status as an agent of federal financial policy. (177) Nationally chartered banks, however, do not have a relationship with the federal government remotely resembling that which the Second Bank had. The federal government does not appoint their directors, own their stock, or even review their federal charters according to any predictable standards. (178) That such banks make various marketing, lending, or deposit-taking decisions hardly means that the federal government has implicitly endorsed those decisions. To the contrary, as Louis Brandeis urged before his appointment to the Supreme Court, those decisions might be made by an "inner group of the Money Trust" (179)--"builders of imperial power" (180) or a "financial oligarchy" (181)--without any imprimatur whatsoever from any democratically accountable federal official.

   Indeed, the legal tradition of private implementation of public policy on which McCulloch rested has been torn down by late nineteenth-century state-building. It was the norm in the early nineteenth century to delegate regulatory matters to essentially private actors operating for their own profit. Navy ship captains were paid through prize money from their captures, U.S. Attorneys were paid with bounties from their victorious lawsuits, and so forth. (182) This regime of privatized government, however, was washed away by the gradual development of a professional, full-time American bureaucracy between the end of the Civil War and the New Deal. Delegations of governmental power to private enterprises further declined with the nondelegation decisions, such as A.L.A. Schechter Poultry Corp. v. United States, in which the Court struck down the National Industrial Recovery Act's authorization for private trade associations of industry to fix prices, wages, and working conditions in codes of fair competition. (183) This doctrinal rejection of private delegations not closely supervised by full-time bureaucrats is a special application of the more general idea that private entities cannot have the last word on their own regulation. This principle is so deeply rooted in American political culture that efforts to immunize federally chartered banks from...