The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”) was passed by Congress and signed into law by President Obama in 2010 as a response to the financial crisis in the preceding years. The purpose of the Act is “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.” In essence, the Act is one of the most comprehensive changes in financial regulation seen during our lifetimes and, as a result, has far-reaching public and private implications.
One of the most controversial enactments of Dodd-Frank is the Orderly Liquidation Authority delegated in Title II. This provision allows the Treasury Secretary, in conjunction with the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board, to unilaterally place a financial company under the complete control of the FDIC for liquidation purposes if, by their judgment, the specific company’s potential failure threatens financial stability in U.S. markets. The primary objective of this portion of the Act was to prevent future bailouts of financial companies, which cost U.S. taxpayers billions of dollars, by closing the firms and liquidating their assets instead of supporting those who were deemed “too big to fail” during their attempts to revitalize. The Orderly Liquidation Authority provision has now been challenged in federal district court, raising questions about the future of the entire Act.
The State National Bank of Big Spring, TX, The 60 Plus Association, and the Competitive Enterprise Institute originally filed suit on July 21, 2012, alleging the unconstitutionality of multiple portions the Act. On September 20, 2012, the Attorney Generals of Michigan, Oklahoma, and South Carolina joined the suit with respect to Title II, giving the case a new level of credibility. Of primary concern to the states is the fact that they have all invested in, and act as creditors for, financial companies that are subject to liquidation under Title II. The pertinent section of the complaint claims that the Orderly Liquidation Authority provision is unconstitutional on three separate grounds, discussed below.
First, the plaintiffs say that the provision defies the separation of powers standard that is inherent in the U.S. Constitution by empowering the Treasury Secretary to order a liquidation with minimal oversight. They also allege that the FDIC is allowed to preempt creditor rights tied to the financial company, as well as show subjective favorability among those creditors when settling debts, with no meaningful judicial review or congressional oversight. Judicial review of the process is indeed limited; if a company contests the Treasury Secretary’s decision, he is allowed to file a petition with the U.S. District Court for the District of Columbia under Sec. 202(a)(1)(A). Also in that section, the District Court is given only 24 hours in which to conduct a hearing and issue a final decision on the merits; if such a decision is not made within that timeframe, the Treasury Secretary’s decision is upheld by operation of law. When reviewing the Secretary’s decision, under Sec. 202(a)(1)(A)(iii), the District Court may only look at his finding that the company is a financial company for purposes of the Act and that it is in default, or danger of default; those determinations can only be overturned if the court decides the Secretary’s decision was “arbitrary and capricious.” The plaintiffs also contend that creditors have no right to judicial review of the Treasury Secretary’s decision under Title II. Congressional oversight is said to be limited because Sec. 212(b) provides that the funds used in liquidating a company should be recovered from the disbursement of that company’s assets upon final liquidation, and not from any congressional appropriations. This limits Congress’ power over the process because it is unable to withdraw funding from the FDIC to unequivocally stop a liquidation process.
Second, the provision is said to violate the Fifth Amendment’s due process clause by forcing the liquidation of a financial company, as well as creditor losses, which denies both entities constitutionally required notice and a meaningful opportunity to be heard before their property is taken. The FDIC is allowed to merge companies or sell their assets without obtaining any approval, assignment, or consent under Sec. 210(a)(1)(G). Such a lack of notice leaves companies virtually no time to contest within the allotted 24 hours given by the Act. Sections 210(b)(4) and (c)(1) also allow the FDIC to make a final decision to reduce or completely cancel debts owed by the financial company if it believes a contract is burdensome or that such action is necessary to maximize the value of the company’s assets or minimize the loss that may be realized upon liquidation of those assets. This conceivably leaves creditors with no compensation for their investment and no avenue for redress. In addition, the lack of judicial review discussed above is also an element of this argument, especially the allegation that creditors are not entitled to any judicial examination.
Third, the plaintiffs contend that Article I, Section 8, Clause 4 of the U.S. Constitution, requiring that any bankruptcy laws be uniform throughout the U.S., is infringed by the provision. By allowing the Treasury Secretary and FDIC to create a regime for liquidating companies and choosing how creditors are compensated, it is argued that bankruptcy laws, normally under the total purview of Congress, are made non-uniform, thus violating the Constitution.
As of this time, a date has not been scheduled for preliminary hearings in the District Court under the Hon. Ellen S. Huvelle.
* Stephen C. Pritchard is a second year law student at Wake Forest University School of Law. He holds a Bachelor of Science in Information Systems and Operations Management, with minors in Economics and Political Science, from the University of North Carolina at Greensboro. Upon graduation, he intends to practice corporate and entertainment law.