Dodd-Frank Constitutional Challenge Revived by D.C. Circuit

By Peter Clarke, JD on July 24, 2015 | Last updated on March 21, 2019

The D.C. Circuit has revived a challenge to the constitutionality of the Dodd-Frank Act. A small Texas bank, State National Bank of Big Spring, had challenged the constitutionality of the Wall Street Reform Act. It was joined by 11 states, who also took issue with the Act.

Dodd-Frank, you'll remember, was passed in 2010 in an effort to reform the banking industry and prevent a repeat of the financial collapses that began the "Great Recession" of 2007 to 2009. The district court had tossed the challenge, arguing that the bank and States had no standing, but the D.C. Circuit disagreed, breathing new life into at least half the claims.

Dodd-Frank -- Unconstitutional?

The State National Bank really doesn't like Dodd-Frank. They argued the Act was unconstitutional in pretty much each and every form. The Consumer Financial Protection Bureau? Unconstitutional since it's headed by a single person. Appointment of Director Richard Cordray? Unconstitutional recess appointment. Financial Stability Oversight Council? Unconstitutional delegation of executive power -- so on and so forth.

The States, for their part, object to the Act's grant of liquidation authority to the federal government. Oklahoma, South Carolina, Georgia, Michigan, Nebraska, Alabama, Kansas, Montana, Texas, Ohio, and West Virginia all sued. Under Dodd-Frank, the government can take over the liquidation of failing financial institutions who "pose a significant risk to the financial stability of the United States." That, the states argue, violates the Bankruptcy Clause's guarantee of uniform bankruptcy laws.

How Did the Appellants Have Standing?

The problem, you might imagine, is showing how the bank or States are harmed by any of these things. Without evidence of injury in fact, the appellants have no standing to sue -- and that's just what the district court ruled. The D.C. Circuit did not agree, however. As a regulated entity, it had standing to challenge the agency's constitutionality, the Circuit ruled. Further, it did not have to wait to violate the Bureau's rules and be subjected to an enforcement action -- the banks claims were ripe already. For the same reasons, it can challenge Cordray's recess appointment.

But not every claim was revived. The bank doesn't have standing to challenge the Financial Stability Oversight Counsel, since the Counsel does not regulate the bank. Rather, it has authority only over banks designated "too big to fail." Though State National Bank argued that it had "competitor standing" -- a doctrine allowing one to challenge the "illegal under-regulation" of competitors -- the D.C. Circuit noted that the larger banks were more regulated than State National. Therefore, no competitor standing could be found.

The States' Failed Argument

As for the States, they fared worse than State National Bank. The States argued that any liquidation of banks under Dodd-Frank would deprive them of the benefit of uniform bankruptcy rules. However, that injury is too attenuated, the D.C. Circuit ruled -- first a bank would have to fail, then it would have to be liquidated by the government and then States would have to be treated differently from other creditors. The fact that the government might apply bankruptcy proceedings un-uniformly isn't enough to grant the States standing.

That means that State National Bank can return to court to challenge Dodd-Frank, but it's friends in the States cannot.

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