Monday, March 11, 2013

States Reply to Government Motion to Dismiss in Action Alleging Dodd-Frank Unconstitutional

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The Orderly Liquidation Authority created by Title II superseded the federal Bankruptcy Code with a new legal regime for the liquidation of financial companies, controlled by the Treasury Secretary and the FDIC.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.