Watters v. Wachovia Bank


1. Are State-chartered subsidiaries of national banks exempt from State regulation because of their relationship with a national bank?

2. Does equating a State-chartered subsidiary of a national bank to a national bank constitute conversion of a State corporation into a Federal corporation in violation of the Tenth Amendment?

Oral argument: 
November 29, 2006

Michigan has attempted to regulate State-charted nonbank subsidiaries of national banks. National banks are governed by the National Bank Act and the Office of the Comptroller of the Currency (OCC). Through §484(a) of the National Bank Act, national banks are not subject to State regulation. Through 12 C.F.R. 7.4006, the OCC expanded the reach of §484 to cover subsidiaries of national banks as well. Wachovia Mortgage, a State-chartered nonbank subsidiary of Wachovia Bank, a national bank, operates in Michigan. Michigan seeks to exercise regulatory power over the entity. Both courts below held that the OCC’s expansion of §484 was valid and that Michigan could not exercise regulatory power over the subsidiary, Wachovia Mortgage. The decision of the Supreme Court in this case will affect the balance of power between State and Federal regulatory and consumer protection measures.

Questions as Framed for the Court by the Parties 

1. 12 U.S.C. § 484(a) of the National Bank Act limits visitorial powers over "national banks" except as authorized by federal law. National banks are defined and created under the National Bank Act. State-chartered nonbank operating subsidiaries of national banks are created under State corporate law. The Comptroller of the Currency, by Rule 12 CFR 7.4006, made 12 USC § 484(a) equally applicable to State-chartered nonbank "operating subsidiaries" of national banks. Is the interpretation of the Comptroller of the Currency that 12 CFR 7.4006 preempts Michigan's laws regulating mortgage lending as applied to State chartered nonbank operating subsidiaries, entitled to judicial deference under Chevron USA, Inc v. Natural Resources Defense Council, 467 US 837 (1984)?

2. A national bank has been declared to be a national corporation in Guthrie v Harkness, 199 US 148, 159 (1905). 12 CFR 7.4006 treats a State-chartered nonbank operating subsidiary of a national bank as equivalent to a national bank and, thus, as a national corporation. The Tenth Amendment to the United States Constitution is violated to the extent a statute permits the conversion of State corporations into federal ones in contravention of the laws of the place of their creation. Hopkins v Federal Savings & Loan Ass'n v Cleary, 296 US 315, 335 (1935). Does 12 CFR 7.4006, by equating a State-chartered nonbank operating subsidiary with a national bank for purposes of federal preemption of State regulation, violate the Tenth Amendment to the United States Constitution?


Wachovia Bank is a national bank chartered under the National Bank Act, 12 U.S.C. § 21. Wachovia Mortgage is a "State-chartered nonbank, operating subsidiary of Wachovia Bank." Watters v. Wachovia, 431 F.3d 556, 558 (6th. Cir. 2005); Brief for the Petitioner at 7. Under the National Bank Act, Wachovia Bank has "all such Incidental powers necessary to conduct the business of banking." 12 U.S.C. § 24; Brief for the Petitioner at 2. In promulgating regulations pursuant to the National Bank Act, the Office of the Comptroller (OCC), which has supervisory authority over national banks, authorized national banks such as Wachovia Bank to maintain subsidiaries that may conduct "activities authorized under this section pursuant to the same authorization, terms and conditions that apply to the conduct of such activities by its parent national bank." 12 C.F.R. § 5.34(e)(3); Brief for Respondent at 3.

Michigan banking laws require that in order to offer mortgages in that State, a mortgage lender must register with the State, provide annual financial statements to the state, pay an annual operating fee, maintain certain documents, and submit to state investigation to specific consumer complaints if the Comptroller is not pursuing the complaint. Id. See; Mich. Comp. Laws § 445.1651 et seq.; Mich. Comp. Laws §493.51 et seq. Wachovia Mortgage originally registered in Michigan to make first mortgage loans. Wachovia, 431 F.3d at 558. Linda Watters is the Commissioner of the Michigan Office of Financial and Insurance Services ("OFIS"). Brief for Petitioner at 4. In that capacity, she exercises general supervision and control over mortgage brokers, mortgage lenders, and mortgage servicers doing business in Michigan through Michigan’s Mortgage Brokers, Lenders, and Servicers Licensing Act ("MBLSLA") and the Secondary Mortgage Loan Act ("SMLA"). Id. The MBLSLA and the SMLA exempt depository financial institutions from regulation. Id. However, mortgage brokers, mortgage lenders, and mortgage servicers which are subsidiaries of depository financial institutions are required to register with the OFIS if the depository financial institution does not maintain a main office or a branch office in the State of Michigan. Id. The MBLSLA and SMLA give authority to the Commissioner of OFIS to protect consumers from unfair, unsound, and abusive mortgage lending practices. Id. at 5.

From March 27, 1997 to January 1, 2003, Wachovia Mortgage (previously named First Union Mortgage Corporation) had registered in Michigan to engage making first mortgage loans under the MBLSLA. Id. at 7. Under the MBLSLA, Wachovia Mortgage is not required to be licensed. Id. Rather, as a subsidiary of a depository institution (Wachovia Bank), Wachovia Mortgage is exempt from licensure and need only register with the Commissioner of OFIS. Id. On January 2003, when Wachovia Mortgage became a wholly-owned operating subsidiary of Wachovia Bank, Wachovia Mortgage terminated its lending registration in Michigan. Id. Michigan then informed Wachovia Mortgage that it was no longer authorized to conduct mortgage-lending activities within the State. Id. Wachovia filed suit seeking a declaratory order that Wachovia Mortgage may continue its activities in Michigan under the National Banking Act and Comptroller regulations. Id.


The United States is governed by fifty-one separate governments. This includes the governments of each of the fifty States plus the Federal Government. The Constitution of the United States sets out the powers of the Federal Government, and leaves to the States all those powers which were not granted to the Federal Government. U.S. Const. amend. X. Among other powers, Congress was given the power to oversee the nation’s military, foreign relations, and commerce occurring among the States. States were left with, among other things, the power to oversee means of protecting citizens (commonly known as the police power).

In the exercise of its power to regulate interstate commerce, Congress, in 1864, passed the National Bank Act (NBA), creating a system of national banks. 12 U.S.C. §21 et seq. These banks were to be overseen by the Office of the Comptroller of the Currency (OCC). Until that point all banks were chartered and overseen by the individual States. Under the NBA these State banks were still valid and regulated by the States but there was a new breed of bank in town, the Federally-chartered bank regulated by the Federal Government.

Various sections of the NBA clarified the scope of Congress’s intentions in creating these national banks and the power of the OCC in overseeing them. Two of these clarifications are important to this case. First, the national banks were given the power to exercise “all such incidental powers as shall be necessary to carry on the business of banking.” 12 U.S.C §24(Seventh). Second, the national banks were exempted from State regulation. 12 U.S.C. §484(a) (“[no] national bank shall be subject to any visitorial powers [inspection, regulation, examination, supervision, and the like] except as authorized by Federal Law…”).

In applying the power to exercise “all incidental powers”, the OCC found it necessary or beneficial to acquire subsidies that would carry on certain high-risk tasks such as mortgage lending and loans. These subsidies chartered and regulated by the States within which they did business, became wholly owned subsidiaries of their national bank parent. The OCC then extended the exemption of national banks’ from State oversight, found in §484(a), to these subsidiaries by issuing a regulation. 12 C.F.R. §7.4006 (“State laws apply to national bank operating subsidiaries to the same extent that those laws apply to the parent national bank”.)

The Supreme Court will decide whether the OCC has the authority to equate State-chartered national bank subsidiaries with their national bank parent in order to exempt them from State oversight. The Court will also decide whether or not this action violates the Tenth Amendment of the United States Constitution.

To address the first question presented, the Supreme Court will use the Chevron test to determine if a government agency has correctly interpreted the power granted to it by Congress given Congress’ intent. Chevron U.S.A. v. National Resources Defense Council, 467 U.S. 837 (1984). The test contains two parts. First the Court will need to decide whether or not Congress has spoken clearly and unambiguously on the issue, that is, whether or not Congress has given national bank subsidiaries the same protection from State law that it has given the national banks themselves. Id. The court will consider 12 U.S.C. §24 (seventh) and §484(a) in answering this inquiry. If the Court determines that Congress has spoken on the issue, Congress’s intent will determine the outcome. Id. If the court finds that Congress’s intent is unclear, the Chevron test requires the Court to respect the OCC’s interpretation of its power so long as that interpretation is based on a reasonable interpretation of the statutes. Id.

Both the district court and the appellate court found that Congress’s intent was unclear as to whether or not national bank subsidiaries should be protected from State law as national banks are. Wachovia Bank, N.A. v. Watters, 431 F.3d 556, 563 (6th Cir.2005); Wachovia Bank, N.A. v. Watters, 334 F.Supp. 2d 957 (W.D. Mich., 2004). Moving to the second part of the Chevron test, the courts below gave deference to the OCC’s interpretation of the statutes. Id. Therefore, they approved the OCC’s decision that the OCC alone could exercise visitorial power over the subsidiaries of national banks. Michigan argued that the Tenth Amendment, which leaves to the States all powers not granted to Congress, bans Congress from controlling the subsidiaries. However, both courts determined that the Commerce Clause of the United States Constitution gives Congress the right to create and regulate national banks. Id. Therefore, those rights are granted to Congress and are not reserved to the States. The Sixth Circuit joined the Second and Ninth Circuits in upholding the OCC’s power. Wachovia Bank, N.A. v. Burke, 414 F.3d 305 (2d Cir. 2005); Wells Fargo Bank, N.A. v. Bourtris, 419 F.3d 949 (9th Cir. 2005).

Petitioner, Michigan’s financial regulator, will argue that there is a general presumption against voiding state laws and that this urges against the OCC’s determination. Petitioner will further argue that, since the statute mentions only national banks and not their subsidiaries, Congress clearly meant to exclude subsidiaries from the reach of the law, thereby subjecting the subsidiaries to State law.

Respondent first argues that every court that has decided the issue of whether the OCC may preempt state legislation in governing National Banks and their subsidiaries has found in favor of the OCC, and that Petitioner manufactures contradictions between the courts. Next, Respondent argues that the Sixth Circuit’s opinion in this case was correct. Finally, Respondent argues that there are no Tenth Amendment issues because Congress’s authority to govern national banks falls under the Commerce Clause.

The importance of this case centers on the division of power between federal and state governments and the balance of consumer interests versus those of large financial institutions. On one side stands the federal power to regulate national banks as federally insured depository institutions, while on the other hand stands states’ interests in protecting their own citizens and local economies. This protection includes preventing lending abuses against consumers. States are arguably in a better position to monitor such abuses, as they have traditionally played a role in regulating these institutions. See Brief of Amici Curiae AARP et al. Supporting Petitioner at 6. Petitioner has attracted much support from consumer protection groups because some lenders have a history of unfair practices that have largely been kept in check by state law. These groups believe that the States are best suited and are more likely to respond to any unfair practices of subsidiaries by rapidly crafting laws, and initiating investigations into potential abuses. Id. States are also more familiar, accessible and accountable to their constituencies. Id. Further, removing state regulation of subsidiaries of national banks has the potential to undermine state sovereignty.


Petitioner’s Argument

Petitioner first argues that based on the plain language of the NBA, a national bank subsidiary is not the same thing as a national bank. Brief for Petitioner at 12. The NBA defines a national bank as an institution which (1) has a charter from the OCC and which is eligible to (2) become a Federal Reserve Bank and (3) receive insurance from the FDIC. Id. at 13. Subsidiaries do not fit this definition. They do not need a charter from the OCC, they are not eligible to become a Federal Reserve Bank or to receive insurance from the FDIC. Id. Rather, Petitioner argues, subsidiaries fall under the NBA’s definition of an affiliate set out in 12 U.S.C §221a(b) as “any corporation controlled by a national bank.” Id. Since only national banks, and not affiliates, are mentioned in §484, Petitioner argues that it is clear and unambiguous that only national banks, and not affiliates, are to be exempt from State oversight. Id. This argument is strengthened by the fact that other sections of the NBA explicitly mention both national banks and their affiliates when both are to be reached. See 12 U.S.C. § 161(c); §481. Petitioner argues that when Congress wants a law to apply to affiliates, Congress will explicitly say so.

Next Petitioner turns to the law of corporations in support of its argument that the OCC’s regulation is invalid. Brief for Petitioner at 17. Corporations are legal entities created by law and charted by either the State or Federal Government. Wachovia Bank is a Federally-chartered corporation created by Federal law. Wachovia Mortgage is a State-chartered corporation created by State law. It is well settled that when a corporation becomes a subsidiary to a parent, each party maintains their status as an entity distinct from the other. Id at 18. For example, a parent is not liable for the acts of its subsidiary because they are separate entities. Id. Petitioner argues that by equating a State-chartered corporation with their Federally-chartered parent the OCC’s regulation ignores the distinct nature of these two entities. Id. at 19.

Petitioner next attacks Respondent’s attempt to claim that equating a national bank subsidiary to a national bank is an exercise of the “incidental powers necessary to carry on the business of banking.” Id. at 21. It is argued that in doing so the OCC is really expanding of the scope of §484(a) and that “incidental powers cannot be reasonably understood to include the power to obliterate the distinction between national banks and their affiliates.” Id. Furthermore, Petitioner urges that there is a longstanding presumption that State law is not preempted unless there is a clear and manifest intention of Congress to do so. Because there is not such clear intent here, and because of the States’ strong interest in regulating and power to regulate it’s entities, the Court should not assume that Congress intended to preempt State oversight of its chartered corporations such as national bank subsidiaries. Id.

Applying these observations to the first part of the Chevron analysis (which asks whether §484(a) shows the clear intent of Congress to either prohibit or permit States’ regulation of State-chartered subsidiaries of national banks) shows that Congress only intended §484(a) to apply to national banks. Brief for Petitioner at 28. Therefore it is clear that the intent of Congress was to permit States regulation of State-chartered subsidiaries of national banks. This conclusion is strengthened by the special and constitutionally serious nature of regulations that preempt State law. Id. at 33. Petitioner argues that “agency regulations are generally not entitled to deference when they preempt State laws.” Id. Seeing that Congress has spoken clearly and unambiguously, through §484(a), that only national banks and not their subsidiaries shall be exempt from State oversight, the OCC’s determination to the contrary is not entitled to deference from the Court.

Furthermore, even if Congress’s intent was to allow the OCC to exercise exclusive visitorial powers over State corporations, such a grant of power is an unlawful destruction of State power under the Tenth Amendment. The Supreme Court held, in Hopkins Federal Savings & Loan Ass’n v. Cleary, that “the conversion of State associations into Federal ones in contravention of the laws of the place of their creation” was a violation of the Tenth Amendment. 296 U.S. at 335 (1935). Therefore this regulation, which has the effect of transforming State corporations into Federal ones, is a violation of the Tenth Amendment to the Constitution of the United States.

Respondent’s Argument

The Respondent first argues that all courts—including the Second and Ninth Circuits—that have decided the issue of whether The National Bank Act (NBA) and OCC regulations preempt state banking laws have agreed with the Sixth Circuit’s holding in this case. Brief for Respondent at 5–6. In both the Second and Ninth Circuits, the courts found that since there was no dispositive language in the NBA, the OCC is entitled to deference under Chevron USA, Inc. v. Natural Resources Defense, 467 U.S. 328 (1984); Brief for Respondent at 6. Further, Respondent distinguishes this case from those Petitioner claims create a controversy among the circuits. Id. at 7. In Colorado Public Utilities Commission v. Harmon, 951 F.2d 1571, 1578-79 (10th Cir. 1991), the court held that agency’s opinion on the preemptive scope of regulations is not accorded Chevron deference. Id. at 8. However, Harmon is not applicable to this case because the district court did not rely on the deference principles in deciding that the OCC regulation preempted the State legislation. Id. Finally, Respondent distinguishes this case from Gonzales v. Oregon, 126 S. Ct. 904 (2006). Id. In that case, the court said that the Chevron defense did not apply because Congress had not given the Attorney General rule-making power in a particular case whereas in this case, Congress has vested the OCC with rule-making power to define the scope of incidental powers necessary for the business of banking. Id.

Respondent then counters Petitioner’s claim that the OCC overreached its authority in redefining the term “national bank” under Chevron. Brief for Respondent at 9. Respondent cites the Solicitor General’s brief, arguing that rather than redefining the term national bank, the OCC construes the term “incidental powers,” something that clearly is within the OCC’s discretion. Id. at 9–10. Respondent also counters Petitioner’s argument that the NBA speaks to the operation of subsidiaries when it excludes affiliates from the OCC’s visitorial powers through omission in § 484. Id. at 10. Respondent argues that § 484 is not the only source of the OCC’s authority over national banks and their subsidiaries and that the NBA grants the OCC responsibility to define and administer the incidental powers of national banks, the operation of subsidiaries being one of those powers. Id. at 11.

Respondent then turns to Petitioner’s argument that the Sixth circuit’s preemption analysis was incorrect because Congress did not expressly state that it intended to preempt state law. Id. at 13. Respondent argues that the Sixth Circuit’s preemption analysis was correct by quoting from Fed. Sav. & Loan Assn v. de la Cuesta, “[a] pre-emptive regulation’s force does not depend on express congressional authorization to displace state law,” and “[w]here Congress has directed an administrator to exercise his discretion, his judgments are subject to judicial review only to determine whether he has exceeded his statutory authority or acted arbitrarily.” 458 U.S. 141, 153–154; Brief for Respondent at 13–14. The issue thus is not whether Congress authorized the agency to preempt State law, but whether the agency was authorized to issue the regulation and then whether the regulation preempts state law. Brief for Respondent at 15.

Next, Respondent counter’s Petitioner’s argument that Michigan has a strong interest in “protect[ing] consumers from unfair, unsound, and abusive lending practices.” Id. at 17. Respondent argues that in Franklin National Bank v. New York, 347 U.S. 373 (1954), the Supreme Court held that courts “do not weigh the relative merits of State laws that conflict with Federal authority. Furthermore, the strong interest of the State does not outweigh the Supremacy Clause. Id. at 19.

Finally, Respondent argues that preemption does not violate the Tenth Amendment. Petitioner claims that the OCC’s regulation violates Michigan’s sovereignty under the Tenth Amendment, which states “[t]he powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.” Brief for Respondent at 21. Respondent counters this by arguing that the Federal government has the authority to preempt states in the interest of interstate commerce, and establishing national banks is clearly within that authority under McCulloch v. Maryland, 17 U.S. 316, 424-25 (1819). Id.


Ultimately, the Supreme Court will decide whether to strengthen both the distinct nature of the corporate entity and States’ rights, or side on behalf of convenience. The Court could strengthen States’ rights and the corporate entity by holding that a State still retains the ultimate responsibility for governing the activities of corporations that do not have a national charter. Convenience speaks to the fact that if Wachovia wants to lend mortgages without the interference of the State of Michigan, it will do so, regardless of the holding in this case. They will do so simply by conducting these operations through an actual national bank. If the Court is swayed by the first conclusion, it will likely say that the analysis hinges on the definition of national bank. Since Congress has already defined "National Bank" in the National Bank Act, the OCC is not free to create new definitions. If the Court prefers the second conclusion, it will likely base its decision on the extent of the OCC's ability to determine the nature of the incidental powers of banking-something the OCC clearly has the power to determine.

Written by: John Schultz & Elizabeth Cusack

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