Arguing that due process rights “are vaporized” under the Dodd-Frank Act, witnesses told a House subcommittee on Tuesday that aspects of the massive 2010 law overhauling the financial services industry might be unconstitutional.

During a hearing that at times felt more like a law school seminar, members of the Committee on Financial Services Subcommittee on Oversight and Investigations focused on the law’s all new—and as yet untested—orderly liquidation authority.

Intended as a third way between bankruptcy and bailout, the provision gives the Federal Deposit Insurance Corp. (in conjunction with other regulators) the ability to take over an institution whose failure might pose a risk to the financial stability of the United States.

Columbia Law School professor Thomas Merrill testified that it raises serious constitutional issues—ones almost sure to be litigated the first time the provision is invoked, with potentially disastrous consequences.

“It’s very likely to cause the whole process to go off the rails and become chaotic,” he said. “My concern is that the constitutional issues will work against the purpose [of the provision]…at a time when it’s least appropriate to bring them to the fore.”

But Pepper Hamilton partner Timothy McTaggart argued that the law likely would pass constitutional muster, pointing out that fewer than 170 laws enacted by Congress between 1789 and 2002 were held unconstitutional. “A difference in policy choice as reflected in enacted legislation does not make the legislation unconstitutional,” he said.

To date, no court has held Dodd-Frank to be unconstitutional, but a case pending before the U.S. District Court for the District of Columbia, State National Bank of Big Spring v. Lew, may provide the first test. Former White House Counsel C. Boyden Gray is co-counsel in the case, brought by a Texas community bank, the Competitive Enterprise Institute, the 60 Plus Association and several states. He testified before the subcommittee that Dodd-Frank “violates the Constitution’s system of checks and balances” and gives “regulators effectively unlimited power.”

Merrill zeroed in on the provisions for judicial review of the orderly liquidation authority, which he called a “rubber stamp.”

“Only the financial firm is informed about the petition to appoint a receiver; other interested parties like employees, creditors and counterparties are kept in the dark,” he said. “Indeed, anyone disclosing the pendency of the court proceedings is subject to criminal prosecution.

“The court has only 24 hours to rule on the petition,” he continued. “It may consider only two out of seven determinations that must be made to commence a receivership. It can review these determinations only under a highly deferential ‘arbitrary and capricious’ standard. And if the court fails to rule within 24 hours, the petition is deemed automatically granted. There can be no stay of the receivership pending appeal.”

While Merrill recognized that the speed and secrecy were designed to address a crisis situation and avoid triggering market panic, he also saw the potential for due-process and First Amendment violations.

He urged Congress to amend the law, going back to the version originally proposed by the House whereby judicial review would come after the receiver is appointed. That way, all interested parties could be notified and could challenge the government receivership if they desired.

McTaggart was skeptical that would be a better solution. “It’s like trying to unscramble the eggs,” he said. “From an advocacy standpoint, I’d rather have the opportunity to make the case” before the government takeover.

He also questioned whether there is any constitutional problem with the orderly liquidation provision. “Congress has the inherent authority to limit the time period available for judicial review and to set other requirements concerns the standard of review to be applied by the courts in reviewing administrative actions,” he said. “I would conclude that Congress sought to ensure that due process was afforded to the affected financial institutions.”

Contact Jenna Greene at jgreene@alm.com.