Category Archives: banking

Doe v. United States

487 U. S. 201

June 22, 1988

The government suspected that ‘John Doe’s’ offshore bank accounts contained incriminating documents. Unfortunately for the government, the banks refused to turn over anything without Doe’s signed consent. The government prepared a broadly worded statement, which said that Doe granted consent for any offshore banks to turn over documents in their possession. Doe said that signing this would be testimonial self-incrimination banned by the Fifth Amendment.

The Supreme Court, with Blackmun writing, disagreed in a 8-1 ruling. The statement did not mention any specific banks, accounts, documents, or anything that could be considered testimonial. He was not vouching for the existence, relevance, or authenticity of anything – all of those judgments would be made by the banks and the government. In the end, it was no more compelled testimony than an order for a defendant to turn over a hair or blood sample.

Stevens, in dissent, disagreed. He thought it was more analogous to an order that a defendant “reveal the combination to his wall safe – by word or deed.” Stevens contended that any order requiring the defendant to use his mind to assist the prosecution could count as testimonial self-incrimination. As for me, this one’s a close call, and I’m not sure who I side with.


FDIC v. Mallen

486 U. S. 230

May 31, 1988

The FDIC has the power to suspend bank officials if good evidence shows that the official committed a crime involving dishonesty. There is no pre-suspension hearing, but a post-suspension hearing must be held within 30 days. At the post suspension hearing, there is no unqualified right to oral testimony, though the suspended official may request to proffer it. Mallen, a bank official suspended under these workings, charged that the procedures failed to protect his rights under the Due Process clause.

The Court ruled unanimously that the FDIC procedures were just fine. Justice Stevens said that the need for banks to have trustworthy leadership was compelling enough to allow for a suspension prior to a hearing. The 30 day period afterward to have a hearing, and the 90 day period to reach a final solution were reasonably prompt. Indeed, to shorten these periods would probably work to the bank official’s detriment, argued Stevens, because it would encourage hasty rather than deliberate consideration of the facts. Finally, because oral testimony would often be irrelevant or duplicative, there was no need for an unqualified right to offer it. A legal challenge would still be available, Stevens reminded, in a case where truly relevant oral testimony had been irrationally excluded from consideration.

Another case that’s perfectly reasonable, provided you accept as a premise the Constitutional validity of the expansive administrative state. Maybe it’s a good idea for the government to have the power to suspend rogue bank presidents, but a century ago I doubt the Supreme Court would have found that power consistent with the Constitution.

Norwest Bank Worthington v. Ahlers

485 U. S. 197

March 7, 1988

This is a sad case.

A farm in Minnesota ended up more than a million dollars in debt, most of it owed to a bank. The farm tried to declare bankruptcy, but the bank objected under the ‘absolute priority’ rule, which gives creditors with unsecured debt the power to halt a bankruptcy reorganization. The farm tried to get around the absolute priority rule in several ways.

Unanimously, the Court rejected all of farm’s arguments (Kennedy did not participate). White said the farm could not secure the bank’s debt through promises of future labor and payments. Although a 1939 Court case allowed for some more creative ways to secure debtors, future labor was too speculative to qualify for this exception. Congressional debates bolstered this conclusion. White also shot down, as obviously false, a wacky argument that the farmland had no property value to the bank (and that somehow this meant the absolute priority rule did not apply).

Finally, White addressed the elephant in the room: that not allowing the farmers to reorganize and try to give the farm new life was… well, cruel. Cruel or not, the Court felt constrained to obey the provisions of the bankruptcy code. It’s cases like this that really sour me on the entire concept of legal positivism. A truly Biblically minded nation would not have its highest Court rule in such a way. No, a Christian nation would remember the seventh year debt forgiveness in ancient Israel (Deuteronomy 15:1-11), or the parable of the unforgiving debtor (Matthew 18:21-35). My heart goes out the the Ahlers family, who had the misfortune of living in a country that loved money more than mercy.


Langley v. FDIC

484 U. S. 86

December 1, 1987

The Langleys borrowed a massive amount of cash from a local bank in order to purchase some land. When the loan came due, the Langleys refused to pay, on the grounds that the bank had allegedly lied about the size and quality of the land, though no formal writing contained this information. Eventually, the bank failed, and the FDIC took over. The FDIC tried to collect from the Langleys, arguing that they could not refuse to pay unless the alleged misrepresentations about the land were present in a formal agreement between them and the bank.

The Court backed the FDIC, and it was unanimous. Scalia wrote the opinion. Federal law said that any agreements used as a defense against loan collection had to be in writing. The Langleys claimed that the misrepresentations were not part of any ‘agreement,’ but Scalia thought otherwise. Statements about a land’s quality could be considered express warranties, and thus a component of an agreement. He stressed that the FDIC needs to be able to have certainty about their right and ability to collect when they take over a bank. He also said that agreements involving fraud could not be exempted from the general rule of requiring writing. I feel a little bit sorry for the Langleys, but must admit that the Court ruled correctly.


Shearson/American Express Inc. v. McMahon

482 U. S. 220

June 8, 1987

The McMahons were customers of Shearson/American Express, and signed an agreement that all disputes would be subject to arbitration rather than litigation. All too typically, the McMahons changed their mind, and whined that they deserved the right to sue. As a general rule, contracts which submit disputes to arbitration are always enforceable, but they filed suit anyway under the Exchange Act, and under RICO, arguing that these particular claims were not arbitrable.

Unanimously, the Court rejected the RICO argument, and it also rejected the Exchange Act argument 5-4. O’Connor wrote the majority opinion, which found nothing in RICO’s text to suggest that its provisions were not arbitrable, and was unmoved by the contention that its purposes worked best with litigation. The Exchange Act was harder because it said that compliance with its provisions could not be waived, and it also said that District Courts would have jurisdiction over its subject matter. O’Connor said that this jurisdiction was not a duty requiring “compliance.”

In one of the very first Warren Court decisions ever, Wilko v. Swan, the Court had ruled that arbitration was forbidden for a very similar act, the Securities Act. O’Connor rather politely argued that the Wilko ruling was stupid, undermined by subsequent cases, and unduly hostile to arbitration. She also said that arbitration had come a long way since 1953, and that it was now subjected to some government oversight. While declining to overrule Wilko, she limited its reach to the case’s fact.

Blackmun, joined by Brennan and Marshall, dissented. He thought the majority exaggerated the extent to which Wilko had been undermined in subsequent cases, and the force of its logic in interpreting the Securities Act. He also disagreed that the government oversight of the arbitration was any good, and that arbitration was fair. Blackmun said that the companies still exercised a lot of control over the arbiters, and that there was insufficient review of arbitration decisions. In a brief dissent of his own, Stevens said that lower courts had thought Wilko applied to the Exchange Act, and that the Court ought to leave this consensus unchanged.

Arbitration is a wonderful thing, and I’m sorry judicial liberals loath it so much. The Bible discourages lawsuits, and wants believers to settle disputes amicably. The liberal distaste for arbitration is yet another example of valuing ‘rights’ and ‘entitlements’ over humility, forgiveness, and peacemaking.


Clarke v. Securities Industry Ass’n.

479 U. S. 388

January 14, 1987

I am humble enough to admit that I do not understand all areas of law equally well. Banking, securities, and the like is one area that kind of mystifies me, so you’ll have to forgive me if some of my summaries are not quite up to par.

Two national banks attempted to begin operating discount brokerage services on a nationwide basis. According to the McFadden Act, banks could operate branches that did the “general business” of banking only in the main bank’s home state. The Comptroller of the Currency approved of the proposed brokerage services though, finding that they would not carry on the “general business” of banking, and would thus not be branches for the purposes of the McFadden Act. Competing brokers sued, arguing just the opposite

Unanimously, the Court rejected this challenge to the Comptroller’s decision (with Scalia not participating). First, Justice White held that the petitioners did have standing. Even though the McFadden Act did not directly provide for legal challenge, judicial precedent had long allowed agency decisions to be contested if injury would exist, and if the party was within a nebulous “zone of interest.” The zone of interest standard was not demanding, and the Court concluded confidently that competing brokers would fall within it. Stevens, writing for himself, Rehnquist, and O’Connor, did not join this section. He argued that the resort to the zone of interest test was unnecessary. The McFadden’s Act’s very purpose was to prevent a bank from acquiring too much dominance in the financial realm, and this by itself was enough to confer the plaintiffs with standing.

Moving on to the merits, White did a good deal of historical and textual analysis to show that the restriction on out-of-state branches doing the “general business” of banking meant only that such subsidiaries could not engage in core banking functions. Based on history and practice during the 20th century, brokerage services did not qualify as core banking functions. Thus, the Court deferred to the ruling of the Comptroller.

I have no real quarrel with the ruling, to the extent that I understand it. I must admit, it was illuminating to read in the Stevens concurrence about how much paranoia exists over the possibility of dominant national banks. It seemed to be cartoonish ‘Big Banks = TEH EVILZZZ’ logic. Maybe it’s justified, but to me, the McFadden Act comes across in large part as an exercise of blind hostility toward any reasonably large amassing of capital.