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Replying to the federal government’s motion to dismiss in an
action alleging the unconstitutionality of the Dodd-Frank Act, State Plaintiffs
said that by delegating immense power to the
Treasury Secretary and FDIC, freeing them from the well-established rules and
rights of bankruptcy law, and insulating them against meaningful
congressional and judicial oversight, Title II of the Dodd-Frank Act violates the Constitution. In a memorandum to the
court, the States argued that Dodd-Frank violates the Constitution’s
separation of powers, the Fifth Amendment right to due process, and the
constitutional requirement that the nation’s bankruptcy laws be uniform.
State National Bank of Big Spring Texas v. Wolin, U.S. District Court for the
District of Columbia, Case No. 1:12-cv-01032 (ESH), Feb. 27, 2013. |
The Orderly Liquidation Authority created by Title II superseded the federal Bankruptcy Code with a new legal regime for the liquidation of financial companies, controlled by the Treasury Secretary and the FDIC. As part of this revision to the bankruptcy laws, argued th States, Title II expressly eliminated the federal guarantee that similarly situated creditors will receive equal treatment, by empowering the FDIC to depart from the ordinary rules of bankruptcy law and to discriminate among similarly situated creditors.
The State Plaintiffs have been and continue to be directly and actually injured by Title II’s modification of the bankruptcy laws. The States, including state workers’ pension funds, invest in the debt of financial companies that could be liquidated under Title II.
In its motion to dismiss, the
Government asserted that the State Plaintiffs’ alleged injury is limited to
financial loss that they could suffer in a future liquidation under Title II’s
Orderly Liquidation Authority. But the State Plaintiffs said that they have
already been injured by Dodd-Frank’s abridgement of their valuable statutory
right to be treated equally among similarly situated creditors, a right
guaranteed to them by pre-Dodd-Frank bankruptcy law.
The Government further argued
that the State Plaintiffs must defer litigation of their constitutional claims
unless and until a long chain of events occurs: namely, when the Government
uses Title II to liquidate a company of which the State Plaintiffs are
creditors, and the FDIC treats the State Plaintiffs differently from
other similarly situated creditors, and the State Plaintiffs receive
less than they would have received in a purely hypothetical Chapter 7
bankruptcy scenario, and the State Plaintiffs exhaust their
administrative remedies at the FDIC. Only then, according to the Government,
can the State Plaintiffs litigate their constitutional claims.
But the State Plaintiffs argue
that the Government is ignoring the injury that the States already suffer by
Title II’s very terms and that much-delayed route to judicial review of the
State Plaintiffs’ constitutional claims. The Government fails to note that
Dodd-Frank expressly prohibits the States from litigating these claims once the
Treasury Secretary initiates a liquidation. Specifically, Title II bars the
State Plaintiffs from litigating those issues in judicial review of the
Treasury Secretary’s decision to begin a liquidation; it bars the State
Plaintiffs from litigating those issues in judicial review of the FDIC’s
execution of the liquidation process; and it purports to bar the State
Plaintiffs from litigating those issues in other courts once a liquidation
occurs. Simply put, the choice is not
between the court hearing these claims before a liquidation occurs and hearing
them after the FDIC completes its work, as the Government suggests. Rather,
Dodd-Frank forces the courts either to hear these claims before a Title II
liquidation occurs, or never at all.
The enactment of Dodd-Frank’s
Title II caused a here and now injury by
modifying the federal bankruptcy laws to abridge the State Plaintiffs’ rights as
creditors. The State Plaintiffs said that they have standing to bring these
claims, which are ripe. They urged the court to deny the Government’s motion to dismiss.