Three states have joined a lawsuit challenging the constitutionality of the Dodd-Frank Act, complaining it gives the government too much power to take over and liquidate nonbank companies when their failure would jeopardize the financial system.
Michigan, Oklahoma and South Carolina joined a broader suit attacking Dodd-Frank that was filed in June in U.S. District Court for the District of Columbia by a Texas community bank, the Competitive Enterprise Institute and the 60 Plus Association.
The original suit focused in large part on the Consumer Financial Protection Bureau, complaining it “aggregates the power of all three branches of government in one unelected, unsupervised and unaccountable bureaucrat,” as former White House counsel C. Boyden Gray, founder of Boyden Gray & Associates in Washington, said when the suit was filed.
The three states, however, specifically declined to go after Dodd-Frank on those grounds. Instead, their participation is limited to a new challenge added to an amended complaint filed last week.
The states are asking the court to review the constitutionality of the Orderly Liquidation Authority established under Title II of Dodd-Frank.
Intended as a so-called third way between bankruptcy and bailout, the new authority allows the Treasury secretary to order the Federal Deposit Insurance Corp. to take over and liquidate a nonbank determined to be “in default or in danger of default” and if a collapse would have a “serious adverse effect on the financial stability of the United States.”
Such a “substantial power is fundamentally inconsistent with our constitutional framework and checks and balances,” Oklahoma Attorney General Scott Pruitt said during a conference call with reporters. “This is a very important case.”
The state AGs complain the process has almost no judicial oversight. A company can challenge the Treasury secretary’s decision in federal court in Washington — but the court only has 24 hours to rule on the petition. If the court doesn’t act, the government’s action will be automatically considered approved.
Also creditors’ rights are few. In a bankruptcy, creditors often appear before a bankruptcy judge to argue the merits of their claims. Under the new resolution process, creditors lack such a forum.
In the complaint, the plaintiffs allege the new authority “abrogates the rights under the U.S. Bankruptcy Code of creditors of institutions that could be liquidated, destroying a valuable property right held by creditors — including the state plaintiffs-under bankruptcy law, contract law and other laws prior to the Dodd-Frank Act.”
The states also complain they “would be barred as a matter of law from being told of the liquidation until after the Treasury secretary’s liquidation order goes into effect.”
The plaintiffs allege the new authority violates the separation of powers clause in the U.S. Constitution. “Title II’s combinations of delegations and eliminations of checks and balances is unprecedented and unconstitutional,” the complaint states.
They also allege it violates due process rights because the Treasury secretary has “effectively unlimited power” to decide if a company will be liquidated.
However, the liquidation power is analogous to that the FDIC has possessed for decades to take over failing federally insured banks. Gray argued the “scope is much broader” under Dodd-Frank because the power extends to nonbank companies.
“All of the powers of the bureau are vested solely in the CFPB director, without the moderating influence of other commissioners, officials or governors on the decisions of the CFPB, as is the case with other administrative agencies that are vested with quasi-legislative and quasi-judicial powers,” Gregory Jacob, an O’Melveny & Myers partner in Washington, wrote in the amended complaint.