Opposition Brief — Northeast Bancorp, Inc. v. Board of Governors, FRS

Office - Supreme Court, US

FILED

OCT @ 1984

No. 84-363 ALEXANDER L. STEVAS.

ET UNE

In the Supreme Court of the United States

OCTOBER TERM, 1984

NORTHEAST BANCORP, INC.,

UNION TRUST COMPANY AND CITICORP

Petitioners

v

THE BOARD OF GOVERNORS OF

THE FEDERAL RESERVE SYSTEM

Respondent

and

BANK OF NEw ENGLAND CORPORATION, CBT CORPORATION,

HARTFORD NATIONAL CORPORATION, THE

COMMONWEALTH OF MASSACHUSETTS, THE STATE OF

CONNECTICUT AND BANK OF BOSTON CORPORATION

Intervenor-Respondents

ON PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF OF RESPONDENTS STATE OF CONNECTICUT

AND BRIAN J. WOOLF,

ITS BANKING COMMISSIONER,

IN OPPOSITION ‘TO PETITION

JOSEPH I. LIEBERMAN

Attorney General

ELLIOT F. GERSON

Deputy Attorney General

JOHN G. HAINES*

Assistant Attorney General

P.O. Box 120

Hartford, Connecticut 06101

*Counsel of Record Tel. (203) 566-4899

——————EEEEEEEEEEEEeeee

i

QUESTIONS PRESENTED

Congress provided in the Bank Holding Company Act (the

“BHCA”) that any acquisition of a bank by a bank holding

company must be approved by the Federal Reserve Board.

Congress further provided in the Douglas Amendment to the

BHCA, 12 U.S.C. §1842(d), that a bank holding company

whose principal operations are in one state may not acquire a

bank in another unless specifically authorized by the laws of

that state. Against this background the following questions are

presented.

1. Whether the provisions of the Connecticut Interstate

Banking Act, which allow Connecticut banks to be acquired by

similar institutions in the other New England states which

grant reciprocal rights to Connecticut banks, are authorized by

the Douglas Amendment and thus do not violate the Com-

merce Clause?

2. Whether the reciprocal provisions of the Connecticut

and Massachusetts Interstate Banking Acts constitute an

interstate agreement increasing the power of the states in a

manner which interferes with federal supremacy in violation

of the Compact Clause?

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED ............2eeeeeeeee i

TABLE OF CONTENTS. ...........20eeeeeeeececee ii

TABLE OF AUTHORITIES .............000ee0e0e iii

STATEMENT OF THE CASE...........0.00e00- 2

SUMMARY OF ARGUMENT.............000000+ 5

REASONS FOR DENYING THE WRIT........... 7

A. There Is No Conflict With Any Decision of This

Court or Any Federal Court of Appeals........ 7

1. There Is No Conflict With Any Decision of

GEE Wate ddeudebccccccceccecccccce 7

a. The Commerce Clause...........+2+0+5 7

b. The Compact Clause ...........0+0005: 12

2. There Is No Conflict With Any Federal

CANE GE BORED cc cccccccccccsccccccccs 14

B. There Is No Important Issue Requiring Settle-

OME Ty TED CURE ccc ccc ccc ccccccccccccccs 15

SEE Soeceeccecccdcccsecescccccccccces 18

PP UUEIEED ceccccccccsccccsccccccccecccccccecs la

ili

TABLE OF AUTHORITIES

Cases Page

Bode v. Barrett, 344 U.S. 583 (1953) ...... cece eens 12

Conference of State Bank Supervisors v. Conover, 715

F.2d 604 (D.C. Cir. 1983), cert. denied, USS.

ene WUD Rs BFE CIDOD ccccccccccccccccece 15

First National Bank of Logan v. Walker Bank & Trust

Co., 385 U.S. 252, reh’g. denied, 385 U.S. 1032 (1966) 9

lowa Independent Bankers v. Board of Governors of the

Federal Reserve System, 511 F.2d 1288, cert. denied,

4 . oo, FE ere 6, 14, 15

Lewis v. BT Investment Managers Inc., 447 U.S. 27

SUPE RERECKGe bec endccedeccccesccecee recesses 7,8

New England Power Company v. New Hampshire, 455

i ediiccannksidedandantanssids'es 8

New State Ice Co. v. Liebmann, 285 U.S. 262 (1932).. 16

New York v. O’Neill, 359 U.S. 1 (1959) ........445. 12

Prudential Insurance Co. v. Benjamin, 328 U.S. 408

DE MGUDGS0bGan doce evedececencesceseceeese 7

South Central Timber Development, Inc. v. Wunnicki,

WB. cectny 106 G.Ce. 22897 (1984) 2... cccces 8

Sporhase v. Nebraska, 458 U.S. 941 (1982).......... 8

United States Steel Corp. v. Multistate Tax Commission,

Ge Ge Se CIPD ccc cccccccccccccencces 5, 12, 13

iv

Page

Virginia v. Tennessee, 148 U.S. 503 (1983) ........ 5, 12

Western & Southern Life Insurance Co. v. State Board

of Equalization, 451 U.S. 648 (1981) .........008- 7,8

Legislative Materials

H. R. Rep. No. 609, 84th Cong., Ist Sess. (1955).... 8, 10

S. Rep. No. 1095, 84th Cong., Ist Sess. (1955) ....... 10

102 Cong. Rec. 6858 (1955) ...... cece eee ceeeee 10, 11

102 Cong. Rec. 6752 (1956) ..... ccc ee cece cece cece 10

Administrative Materials

Bank of Boston Corp., 70 Fed. Res. Bull. 524 (1984).. 4

Bank of New England Corporation, 70 Fed. Res. Bull.

FFG (TFB ccc cccccccccveccesesvcecosestacets 4,15

Hartford National Corporation, 70 Fed. Res. Bull. 353

(WIRD occcvevwvencccnvesesesssccccocesscoecs 4

Constitutional Provisions

Commerce Clause (U.S. Const. Art. I, §8, cl. 3) ...... 4, 5,

Compact Clause (U.S. Const. Art. I, §10, cl. 3) 4, 6, 12, 13

Statutes

OI oo icnccinnscinundiiakeet ities 3

Page

Bank Holding Company Act of 1956, 12 U.S.C. §1841 et

SOM, cccccccsecevccesseesessccesesecoees 2, 5, 9, 10

12 U.S.C. §1842(d) (Douglas Amendment)........ 2, 5, 6,

7, 8, 9, 11, 12, 13, 14

McFadden Act, 12 U.S.C. $36 ........ cece ceeenees 9, 10

Abate Seat. GIGEGASS cccccvccccvccocssvescccsecs 15

Conn. Gen. Stat. $36-30, §36-92, §36-93, §36-140 .... 13

Re ee Dn wenn cnndesaoeseeunbesaaer a, 3

Me. Pub. Law 1983, ch. 302, §2 as amended (1984).. 3, 15

Mass. Gen. Laws Ann., ch. 167A., §2........eeeeees 3

R.I. Pub. Law §0061 Sub. A (1983) ......... erevece 3

Other Authorities

Geographic Restrictions on Commercial Banking in the

United States, The Report of the President, Janu-

ary 1981 (“Report of the President”)............. 9

Glidden, Legal Constraints on Bank Expansion: Can

They Be Removed Without Destroying the Dual Bank-

ing System?, 1980 U. IIL. L. F....... cece e eee eee 9

Report to the General Assembly of the State of Connecti-

cut of the Findings and Recommendations of the

Commission to Study Legislation to Limit the Conduct

of Business in Connecticut by Subsidiaries of Bank

Holding Companies and the Impact of the Non-

vi

Page

Depository Institutions on Traditional Banking

Activities, January 5, 1983 (“Hebb Commission

OPENS) cccccsiccncoccescssccesesecvouvers 16, 17

Tribe, Intergovernmental Immunities in Litigation, Tax-

ation and Regulation: Separation of Power Issues in

Controversies About Federalism, 89 Harv. L. Rev.

fi. PPC eTPrTTTrITTirrrrirrerrretre 13

ee ee eee -

l

In the Supreme Court of the United States

OCTOBER TERM, 1984

No. 84-363

NORTHEAST BANCORP, INC.,

UNION TRUST COMPANY AND CITICORP

Petitioners

Vv.

THE BOARD OF GOVERNORS OF

THE FEDERAL RESERVE SYSTEM

Respondent

and

BANK OF NEw ENGLAND CORPORATION, CBT CORPORATION,

HARTFORD NATIONAL CORPORATION, THE

COMMONWEALTH OF MASSACHUSETTS, THE STATE OF

CONNECTICUT AND BANK OF BOSTON CORPORATION

Intervenor-Respondents

ON PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF OF RESPONDENTS STATE OF CONNECTICUT

AND BRIAN J. WOOLF,

ITS BANKING COMMISSIONER,

IN OPPOSITION TO PETITION

The State of Connecticut and Brian J. Woolf, its Banking

Commissioner, submit this brief in opposition to the petition

for a writ of certiorari filed by Northeast Bancorp, Inc., Union

Trust Company, and Citicorp.

2

STATEMENT OF THE CASE

The Petitioners claim that the Connecticut Interstate Bank-

ing Act and a similar law in Massachusetts violate the Com-

merce and Compact Clauses of the Constitution in that they

only allow Connecticut and Massachusetts banks and bank

holding companies to be acquired by banks and bank holding

companies in the other New England states. The State of

Connecticut asserts that its Act is authorized by §3(d) of the

Bank Holding Company Act, 12 U.S.C. §1842(d), and that the

reciprocal provisions of the Connecticut and Massachusetts

Acts do not violate the Compact Clause.

The Bank Holding Company Act (“the BHCA”), 12 U.S.C.

§1841 et seqg., provides for federal regulation of the creation

and operation of bank holding companies. Section 3 of the

BHCA requires that any acquisition of control of a bank by a

corporation or partnership must be approved by the Federal

Reserve Board. Section 3(d) of the BHCA, commonly known

as the “Douglas Amendment,” precludes the Federal Reserve

Board from approving any application by which a bank hold-

ing company proposes to acquire an interest in a bank

located outside the state in which the opera-

tions of such bank holding company’s banking

subsidiaries were principally conducted on July

1, 1966... unless [such acquisition] is specsfi-

cally authorized by the statute laws of the State

in which such bank is located, by language to

that effect and not merely by implication.

12 U.S.C. §1842(d) (emphasis added).

The Douglas Amendment thus establishes a general bar

under federal law to the acquisition of a local bank by an

3

out-of-state bank hoiding company but permits a state to enact

specific legislation lifting this bar.'

By §§2 and 3 of Connecticut Public Act 83-411, the Connec-

ticut Interstate Banking Act (““CIBA”’),? the State of Connecti-

cut accepted Congress’ invitation to lift the bar of the Douglas

Amendment. The State of Connecticut, however, does not

read the authorization of state action in the Douglas Amend-

ment as presenting a choice between no interstate banking (by

leaving the federal bar in place), or unlimited interstate bank-

ing. In order to assess the benefits and detriments of interstate

banking, the Connecticut General Assembly chose to autho-

rize an experiment in interstate banking and to limit the scope

of the experiment to the New England states. (See Res. Conn.

App. at 6a). Thus, the above-referenced provisions of the

CIBA permit Connecticut banking institutions to acquire or be

acquired by banking institutions located in the other New

England states (Massachusetts, Rhode Island, New Hamp-

shire, Vermont, and Maine) provided they have adopted recip-

rocal legislation which the State Banking Commissioner finds

is nO more restrictive than the Connecticut Act.

The Commonwealth of Massachusetts had adopted similar

legislation in 1982,’ which the Connecticut Banking Commis-

sioner has found is no more restrictive than the CIBA.‘

'The only exception to the state line geographic restrictions on bank

expansion in federal law is provided by 12 U.S.C. §1823(f) dealing with

emergency acquisitions of failing institutions.

*Pet. App. at A97-100.

’Mass. Gen. Laws Ann. ch. 167A §2 (West 1971 & Supp. 1984), Pet.

App. 101-102.

‘Within New England, Rhode Island and Maine have also adopted

interstate banking provisions. The Maine Act, Me. Pub. Law 1983, ch. 302,

§2 as amended (1984), permits unlimited interstate banking. The Rhode

Island Act, R.I. Pub. Law S 0661 Sub. A (1983), limits acquisition of its

banks to bank holding companies located in the other New England states,

but this restriction expires in 1986.

4

Pursuant to the BHCA and the state Acts, the Federal

Reserve Board approved three applications for mergers or

acquisitions by Connecticut and Massachusetts bank holding

companies.°

In the proceedings before the Federal Reserve Board, peti-

tioners, Northeast Bancorp, a Connecticut bank holding com-

pany and its subsidiary Connecticut bank, the Union Trust

Company (collectively Northeast’), and Citicorp, a New

York bank holding company, opposed these transactions

claiming, inter alia, that the Connecticut and Massachusetts

Acts violate the Commerce and Compact Clauses of the Con-

stitution. The Federal Reserve Board rejected these claims

finding that “there is no clear and unequivocal basis for a

determifation that CIBA is inconsistent with the Commerce

Clause, Compact Clause or Equal Protection Clause of the

United States Constitution.” Bank of New England Corpora-

tion, 70 Fed. Res. Bull. 374 (1984) (Pet. App. at A41). The

same finding was made with regard to the Massachusetts Act.

70 Fed. Res. Bull. 353 (1984) (Pet. App. at A75).

Northeast and Citicorp appealed the Federal Reserve

Board's rulings to the Second Circuit, again claiming that the

Board's orders approving these transactions were unlawful

because the Connecticut and Massachusetts Acts violate the

Commerce and Compact Clauses of the Constitutiqn. The

Court of Appeals found both arguments plainly without

substance.

‘Bank of New England Corp. (“BNE”), a Massachusetts bank holding

company application to acquire CBT Corp. (“CBT”), a Connecticut bank

holding company, 70 Fed. Res. Bull. 374 (1984), Pet. App. at 34-71;

Hartford National Corp. (“HNC”), a Connecticut bank holding company

application to acquire Arltru Bancorporation (“Arltru”), a Massachusetts

bank holding company, 70 Fed. Res. Bull. 353 (1984), Pet. App. at 72-78;

and Bank of Boston Corp. (“BBC”), a Massachusetts bank holding com-

pany application to acquire Colonial Bancorp (“Colonial”), a Connecticut

bank holding company, 70 Fed. Res. Bul. 524 (1984), Pet. App. at 79-87.

5

With regard to the Commerce Clause, the Court of Appeals

held that the Connecticut and Massachusetts Acts were autho-

rized by Congress in the Douglas Amendment. (Pet. App. at

A31). As to the Compact Clause, the Court held that, even if

the Connecticut and Massachusetts Acts were treated as a

compact, they would not violate the Compact Clause because

under the test stated by this Court in United States Steel Corp.

v. Multistate Tax Commission, 434 U.S. 452, 471 (1978), there

is no “combination tending to increase the political power in

the states, which may encroach upon or interfere with the just

supremacy of the United States.” (Pet. App. at A32). Accord-

ingly, the Court affirmed the orders of the Federal Reserve

Board.

SUMMARY OF ARGUMENT

1. The provisions of the Connecticut Interstate Banking

Act (Conn. P.A. 83-411, §§2, 3) which permit Connecticut

banks and bank holding companies to be acquired by similar

institutions in the other New England states with reciprocal

laws do not violate the Commerce Clause. The CIBA is autho-

rized by the Douglas Amendment to the Bank Holding Com-

pany Act, 12 U.S.C. §1842(d), which prohibits the Federal

Reserve Board from approving any application by a bank

holding company to acquire a bank in another state unless

specifically authorized by the laws of that state.

2. Under this Court's test, the reciprocal provisions of the

Connecticut and Massachusetts Interstate Banking Acts do not

violate the Compact Clause because there is no interstate

compact or agreement which tends to increase the power of

the compacting states in a manner which interferes with

federal supremacy. United States Steel Corp. v. Multistate Tax

Commission, 434 U.S. 452 (1978); Virginia v. Tennessee, 148

U.S. 503 (1893). There is no overt agreement between Con-

6

necticut and Massachusetts; the state Acts provide no inter-

state apparatus for the regulation of bank holding companies;

and there can be no interference with federal supremacy

because the Douglas Amendment defers to state law on the

issue of interstate banking.

3. There is no conflict with any decision of this Court or

any other court of appeals. Indeed, the Second Circuit's deci-

sion is in accord with the decision of the one other circuit that

has addressed the question. lowa Independent Bankers v.

Board of Governors of the Federal Reserve System, 511 F.2d

1288 (D.C. Cir.), cert. denied, 423 U.S. 875 (1975), held that

the intent of the Douglas Amendment was to

assure that the states had sufficient power to

control the expansion of bank holding compa-

nies across state lines so that such expansion

would not contravene state policy.

Id. at 1297. ie

4. While interstate banking is not an unimportant issue of

public policy, there is no /ega/ issue requiring settlement by

this Court. The basic legal issues related to the Commerce and

Compact Clauses are familiar learning, while the petitioners’

major argument—that the geographic limitations in the Con-

necticut and Massachusetts Acts are bad national policy—

should more appropriately be addressed to Congress.

7

REASONS FOR DENYING THE WRIT

A. THERE IS NO CONFLICT WITH ANY DECISION OF

THIS COURT OR ANY FEDERAL COURT OF

APPEALS

1. There Is No Conflict with Any Decision of this Court.

a. The Commerce Clause

In its decision that the Connecticut and Massachusetts Inter-

state Banking Acts are authorized by the provisions of the

Douglas Amendment, the Court of Appeals applied well-

recognized Commerce Clause principles.

It is axiomatic that the Commerce Clause ,is a grant of

plenary power to Congress to regulate commerce among the

states and that this grant in no way restricts the authority of

Congress to regulate interstate commerce. Western & South-

ern Life Insurance Co. v. State Board of Equalization, 451 US.

648, 652 (1981); Lewis v. BT Investment Managers Inc., 447

U.S. 27, 35 (1975); Prudential Insurance Co. v. Benjamin, 328

U.S. 408, 434 (1946). Indeed, as this Court stated in Prudential

Insurance Co. v. Benjamin, supra, at 434:

The power of Congress over commerce . .. is

not restricted, except as the Constitution

expressly provides, by any limitation which

forbids it to discriminate against interstate

commerce and in favor of local trade.

The Douglas Amendment's total ban on bank acquisitions

across state lines is a clear example of this power to discrimi-

nate in favor of local trade. Indeed, the main impetus for the

8

BHCA was to protect local banks and maintain the diversity of

the American banking system.°

It is also axiomatic that, in the exercise of its plenary

authority over interstate commerce, “Congress may ‘confe[r]

upon the States an ability to restrict the flow of interstate

commerce that they would not otherwise enjoy.” Western &

Southern Life Insurance Co. v. State Board of Equalization, 451

USS. at 652 (citing Lewis v. BT Investment Managers, 447 U.S.

at 44). This Court has held, however, that any such authoriza-

tion must be expressly stated in federal law. South Central

Timber Development, Inc. v. Wunnicki, US. :

104 S.Ct. 2237, 2242 (1984); New England Power Company v.

New Hampshire, 455 US. 331, 340-41 (1982); Sporhase v.

Nebraska, 458 U.S. 941 (1982).

The State of Connecticut asserts that the Douglas Amend-

ment is a clear expression of Congressional authority for the

State to determine whether and on what conditions out-of-

state bank holding companies shall be allowed to acquire

banks in Connecticut, and that this determination may be

made on the basis of local needs and local concerns. This

assertion is made on the basis of the plain language of the

Douglas Amendment and the long history of federal deference

to state law on the issue of banking structure.

The most striking feature of American banking is its frag-

mented structure. Any discussion of that structure must begin

with the “dual banking system” which permits institutions to

be chartered by either the states or the federal government.

The state and federal systems are not totally separate, how-

ever. Over the years, the two have been tied together by a

complex network of federal regulation on the state system and

various deferrals to state law in the federal system. The most

6See H.R. Rep. No. 609, 84th Cong., Ist Sess., 2, 5 (1955).

ee ee ee eS

9

unusual point of fragmentation, however, is geographic.

Unique among American industries, banks have been pre-

vented from expanding across state lines, and in many states

bank operations are limited to a single community.’

The unusual statutory circumstances which led to this bal-

kanization of American banking into 50 separate banking

zones are the result of choices made by Congress to defer to the

states on the issue of geographic expansion by banks.

The first expression of this federal policy is contained in the

McFadden Act, adopted in 1927 and amended in 1933 (12

U.S.C. §36), which limits national banks to the same branch-

ing powers as are expressly permitted to state banks under

state law. The result of the McFadden Act is that banks

chartered by the federal government are not allowed to oper-

ate nationally. They are locked in the same geographic com-

partments as their state chartered counterparts and only

allowed to expand through branching in accordance with state

policy. First National Bank of Logan v. Walker Bank & Trust

Co., 385 U.S. 252, reh’g. denied, 385 U.S. 1032 (1966).

The second major piece of federal legislation which con-

fined bank expansion to the borders of the states is the

Douglas Amendment to the BHCA, 12 U.S.C. §1842(d).

Th. bank holding company movement was primarily a

device to avoid restrictive state branching laws (as grafted

onto the federal system by the McFadden Act) which limited

bank expansion. By the time Congress addressed the bank

holding company movement, several bank holding companies

’Glidden, Legal Constraints on Bank Expansion: Can They Be Removed

Without Destroying the Dual Banking System? 1980 U. Ill. L. F. 369;

Geographic Restrictions on Commercial Banking in the United States, The

Report of the President, Department of the Treasury, January 1981.

10

were already operating large interstate networks.* Congres-

sional response to this situation produced distinctly different

bills in the House and Senate.

The House version of the BHCA would have barred bank

holding company acquisitions of banks across state lines

entirely. ° The Senate bill would have permitted bank holding

companies to acquire banks in other states subject to state

power to block them under §7 of the BHCA, 12 U.S.C. §1846."°

Senator Douglas then offered a compromise amendment

which imposed a federal bar on interstate acquisitions but

permitted the states to lift it.

In urging the adoption of his amendment, Senator Douglas

stated:

[O]ur amendment will permit out of state

holding companies to acquire banks in other

states only to the degree that state law

expressly permits them... .

102 Cong. Rec. 6858 (1956).

In remarking on his amendment, Senator Douglas also

stated:

[I]t is a logical continuation of the principles of

the McFadden Act, which tried to prevent the

Federal power from being used to permit

national banks to expand across State lines ina

way contrary to State policy and, of course,

*See H.R. Rep. No. 609, 84th Cong., Ist Sess. 3-4 (£955).

°ld. at 3, 15.

10S. Rep. No. 1095, 84th Cong., I st Sess. 10-11 (1955). See also 102 Cong.

Rec. 6752-55 (1956).

11

under the McFadden Act, even to expand

within a State.

Id. at 6860.

Finally, in responding to criticism that his amendment

would make interstate expansion more difficult, Senator Doug-

las stated that “if State law permits, and if approved by the

[Federal Reserve] Board, interstate acquisitions are possible.”

Id.

In light of the plain language of the Douglas Amendment

and the long history of federal deference to state law on the

issue of bank expansion, the Court of Appeals correctly ap-

plied this Court's decisions requiring a clear statement of

Congressional policy to authorize state regulation free of the

negative implications of the Commerce Clause.

Finally, any attempt to read the negative implications of the

Commerce Clause (and its implied hostility to state economic

protectionism) into the Douglas Amendment is illogical. The

Douglas Amendment—a federal Act—totally blocks the inter-

state acquisition of banks by bank holding companies. If there

is One proposition on which no one can disagree, it is that the

Douglas Amendment was not passed to facilitate the free flow

of commerce. There is also no indication in the Douglas

Amendment (or the McFadden Act) that uniformity of regula-

tion among the states is required in the national interest.

Indeed, the intent of Congress appears to have been quite the

opposite. The result is our balkanized banking system.

In short, Congress restricted the flow of interstate com-

merce, but it gave the states the power to remove the

obstruction—for the benefit of a state or states—and not

because of any national interest in the free flow of commerce.

In light of the severe geographic restrictions on bank holding

12

company expansion imposed by Congress, it is difficult to see

how it can be claimed at all that the Connecticut Act “burdens”

interstate commerce. Absent action by a state, there is no such

commerce. Indeed, in lifting the bar of the Douglas Amend-

ment, no matter how slightly, the state facilitates and expands

the flow of commerce.

b. The Compact Clause

The Court of Appeals also applied clear precedent of this

Court in determining that the Connecticut and Massachusetts

Acts do not violate the Compact Clause. The Compact Clause

is only violated where (a) there is an interstate compact or

agreement, (b) which tends to increase the power of the

compacting states in a manner which interferes with federal

supremacy. United States Steel Corp. v. Multistate Tax Com-

mission, 434 U.S. 452 (1978); Virginia v. Tennessee, 148 US.

503 (1893).

In addressing this issue, we note first that the passage of

reciprocal legislation in Connecticut and Massachusetts did

not occur pursuant to any explicit or tacit legislative or execu-

tive agreement. Rather, it constituted the independent act of

each state. The enactment of such reciprocal legislation does

not automatically create a “compact.” See New York v.

O’Neill, 359 U.S. 1, 19 (1959); Bode v. Barrett, 344 U.S. 583,

586 (1953).

Second, even if a compact could be said to exist, it fails the

second prong of the test in United States Steel v. Multistate

Tax Commission, supra. There is no increase in the power of

the compacting states in any manner which interferes with

federal supremacy.

No independent commission or other administrative body

is authorized by the Connecticut Act. The Act does not create

13

any interstate apparatus for the administration of bank hold-

ing companies nor does it commit any state to approve any

particular acquisition. In this regard, it should be noted that

the Connecticut and Massachusetts Acts merely lift the bar of

the Douglas Amendment. Other state laws set forth the crite-

ria under which individual mergers or acquisitions will be

considered.'!

Finally, the Court of Appeals correctly found that the Con-

necticut and Massachusetts Acts do not interfere with federal

supremacy. As a matter of federal policy, Congress has

unequivocally deferred to the states—in the Douglas Amend-

ment and in other federal acts—regarding bank expansion.

Further, although Congress allowed the states to lift the lim-

itation on interstate acquisitions of banks by bank holding

companies, the Federal Reserve Board maintains full power

and authority to pass upon all such acquisitions permitted by

state law. State laws cannot operate so as to permit holding

companies to make acquisitions in a manner that would be

inconsistent with federal standards. Thus, federal supremacy

relating to the expansion of bank holding companies remains

fully protected and the exercise by the states of the power

given to them cannot constitute an unwarranted intrusion on

that supremacy.

In sum, the Connecticut and Massachusetts Acts do not

require Congressional approval under the Compact Clause

because “they neither project a new presence onto the federal

system not alter a state’s basic sphere of authority.” L. Tribe,

Intergovernmental Immunities in Litigation, Taxation and

Regulation: Separation of Power Issues in Controversies

About Federalism, 89 Harv. L. Rev. 682, 712 (1976).!?

See e.g., Conn. Gen. Stat. §§36-30, 36-92, 36-93, 36-140.

\2Petitioners appear to confuse potentiab impact on “federal interests”

with threats to “federal supremacy.” That there is a federal interest no one

denies. However, “[a]bsent a threat of encroachment or interference

through enhanced state power the existence of a federal interest is irrele-

vant.” United States Steel, 434 U.S. at 479, n.33.

14

2. There Ils No Conflict with Any Federal Court of Appeals.

There is no conflict with any other court of appeals and, in

fact, the Second Circuit decision is fully in accord with the

decision of the District of Columbia Circuit in lowa Indepen-

dent Bankers v. Board of Governors of the Federal Reserve

System, 511 F.2d 1288, cert. denied, 423 U.S. 875 (1975). In

that case the plaintiff, an association of lowa bankers,

appealed from a decision of the Federal Reserve Board

approving the acquisition of two lowa banks by a Minnesota

bank holding company under a state law which permitted the

acquisition of Iowa banks by any out-of-state bank holding

company that already owned at least two banks in the state.

The Iowa Act was plainly designed to serve Northwest Ban-

corporation, the only out-of-state bank holding company that

would qualify.

The Association's appeal was based, inter alia, on the claim

that the lowa statute was invalid because it conflicted with the

intent of Congress expressed in the Douglas Amendment. The

Association claimed that

implicit in the Douglas Amendment is a prohi-

bition against discrimination between out-of-

state bank holding companies. In other words,

... the states can only decide whether to extend

the right to acquire in-state banks to all out-of-

state bank holding companies or to prohibit

such acquisitions entirely.

511 F.2d at 1296.

After reviewing the Douglas Amendment and its history,

the D.C. Circuit rejected the claim that the Douglas Amend-

ment was intended to impose limitations on the power of the

states. On the contrary, the court held that

15

the intent of the Douglas Amendment was to

assure that the states had sufficient power to

control the expansion of bank holding compa-

nies across state lines so that such expansion

would not contravene state policy. Petitioner's

suggested interpretation of [the Douglas

Amendment] would rob the states of this

power.

Id. at 1297. The D.C. Circuit recently reaffirmed this yiew

in Conference of State Bank Supervisors v. Conover, 715 F.2d

604 (D.C. Cir. 1983), cert. denied, USS. , 104 S.Ct.

1708 (1984).

The clear import of the lowa Bankers case is that a state may

partially lift the bar of the Douglas Amendment and impose

conditions and limitations on the entry of out-of-state bank

holding companies to serve local needs.

B. THERE IS NOIMPORTANT ISSUE REQUIRING SET-

TLEMENT BY THIS COURT

While regional interstate banking is not an unimportant

issue, it is not an issue requiring settlement by this Court.

Congress deliberately created the balkanized, fragmented

banking system which exists in the United States, and it clearly

deferred to state law on the issue of interstate banking. In line

with the diversified nature of American banking and this

deference to state law, the states have taken various

approaches to interstate banking, applying economic"’ or geo-

graphic restrictions on the entry of out-of-state bank holding

companies. Only two states, Alaska and Maine, presently

allow unlimited interstate banking.'*.

\3$ee order approving BNE/CBT merger, 70 Fed. Res. Bull. 374 (Pet.

App. at A70-A71).

\4Alaska Stat. §06.05.235; Me. Pub. Law 1983, ch. 302, §2, as amended

(1984). >

16

Before considering interstate banking in Connecticut, the

Connecticut General Assembly appointed a special commis-

sion (“the Hebb Commission,” Res. Conn. App. at la) to

study the issue. In its report the Hebb Commission first noted

the background against which its recommendations were

made, including federal deregulation and the emergence in the

financial services industry of such organizations as Sears,

Merrill Lynch, Shearson/ American Express and others. The

Commission then stated that it believed “that the interest of

both consumers and businesses in Connecticut would be well

served by increasing the number of competitors and the vigor

of banking competition in the state.” (Res. Conn. App. at

3a-4a). But, the Commission observed:

To allow the control of credit that is essential

for the health of our state economy to pass to

hands that are not immediately responsive to

the interests of Connecticut citizens and busi-

ness would not, we believe, serve our state well.

Similarly, to expose our small banks to the

rigors of unlimited competition from large out-

of-state banking organizations . .. would not be

wise.

Res. Conn. App. at Sa.

In bafancing these conflicting considerations, the Commis-

sion recommended an “experiment” in interstate banking.

The Commission stated that by an experiment,!°

See New State Ice Co. v. Liebman, 285 U.S. 262, 311 (1932) (Brandeis,

J., dissenting): “To stay experimentation in things social and economic is a

grave responsibility. Denial of the right to experiment may be fraught with

serious consequences to the Nation. It is one of the happy incidents of the

federal system that a single courageous State may, if its citizens choose

serve as a laboratory; and try novel social and economic experiments

without risk to the rest of the covntry.”

17

we mean a first step toward interstate banking

that would allow limited entry by out-of-state

banking organizations and would afford the

legislature an opportunity to make its own cal-

culus of the benefits and detriments that might

result from a broader program of interstate

banking.

Res. Conn. App. at Ga.

The Commission then staked out the geographic bound-

aries of the experiment by recommending that it be limited to

the New England states. In making this recommendation, the

Commission stated:

We believe that there is a natural economic and

cultural community of interest among the New

England states that would make such an experi-

ment in regional banking a reasonable first

step toward interstate banking. We further

believe that the legislature would be justified in

excluding New York from this first phase on

the ground that New York is the home state of

a number of the nation’s very largest banking

institutions and that ii is necessary to assess the

impact of out-of-state entry upon Connecticut

banks in a more limited experiment in inter-

state banking before exposing our banking sys-

tem to the full rigor of competition from these

giant institutions.

Res. Conn. App. at 6a-7a.

Petitioners’ basic argument in this case is that these paro-

chial interests which are embodied in the Connecticut Act are

bad economic policy for the nation. But, because the Con necti-

cut Act is plainly authorized by Congress, petitioners’ energies

should be addressed to that body and not to this Court.

18

CONCLUSION

For the foregoing reasons, the Petition for Writ of Certio-

rari should be denied.

Respectfuly submitted,

State of Connecticut and

Brian J. Woolf, Its

Banking Commissioner

JoszPH I. LIEBERMAN

Attorney General

ELLIOT F. GERSON

Deputy Attorney General

JOHN G. HAINEs*

Assistant Attorney General

P.O. Box 120

Hartford, Connecticut 06101

Tel: (203) 566-4899

*Counsel of record

In the Supreme Court of the United States

OCTOBER TERM, 1984

No. 84-363

NORTHEAST BANCORP, INC.,

UNION TRUST COMPANY AND CITICORP

Petitioners

Vv.

THE BOARD OF GOVERNORS OF

THE FEDERAL RESERVE SYSTEM

Respondent

and

BANK OF NEw ENGLAND CORPORATION, CBT CORPORATION,

HARTFORD NATIONAL CORPORATION, THE

COMMONWEALTH OF MASSACHUSETTS, THE STATE OF

CONNECTICUT AND BANK OF BOSTON CORPORATION

Intervenor-Respondents

ON PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

APPENDIX TO THE BRIEF OF

RESPONDENTS STATE OF CONNECTICUT

AND BRIAN J. WOOLF,

ITS BANKING COMMISSIONER,

IN OPPOSITION TO PETITION

2a

REPORT TO THE GENERAL ASSEMBLY OF THE

STATE OF CONNECTICUT

OF

THE FINDINGS AND RECOMMENDATIONS

OF

THE COMMISSION TO STUDY LEGISLATION

TO LIMIT THE CONDUCT OF BUSINESS

IN CONNECTICUT BY SUBSIDIARIES OF

BANK HOLDING COMPANIES AND THE

IMPACT OF NON-DEPOSITORY

INSTITUTIONS ON TRADITIONAL

BANKING ACTIVITIES

Edwin Gordon Hebb, Jr.

Chairman

January 5, 1983

Submitted Pursuant to Connecticut General Statutes

Section 36-S5b

(The “Hebb Commission Report”) (Excerpt)

RECOMMENDATIONS

The Commission has given careful thought to the question

whether Connecticut should be opened up to interstate bank-

ing. Under present federal law, the choice is entirely within

the authority of the Connecticut legislature. Interstate branch-

ing is not presently permissible for member banks of the

Federal Reserve System and nonmember banks are generally

restricted to in-state branching by their own state laws.

Through the so called Douglas Amendment to the Bank Hold-

ing Company Act of 1956, Congress has effectively prevented

bank holding companies from acquiring additional bank subsid-

iaries Outside their home state unless the law of the addi-

3a

tional state explicitly permits an out-of-state bank holding

company to acquire banks in that state. Thus, by taking no

action at all, Connecticut can allow the prohibition of the

Douglas Amendment to remain in effect and to preclude

acquisitions of Connecticut banks by out-of-state banking

Organizations.

At the same time, it is within the authority of the Connecti-

cut legislature to take action under the Douglas Amendment

to permit out-of-state entry. Furthermore, the legislature has,

in view of the Commission, a wide range of choice in fashion-

ing a law that would permit such entry. That is, the legislature

is not simply limited to a choice between retaining the Doug-

las Amendment barrier, on one hand, or doing away with it

entirely, on the other. It may, if it so elects, condition entry into

Connecticut in a way that would promote the best interests of

the state of Connecticut and its citizens.

The Commission is keenly aware that issues of interstate

banking are of concern to a wide range of interests in Connec-

ticut. We have tried to take these interests into account in

fashioning our recommendations. While we believe, as we set

forth in more detail below, that the legislature should give

favorable consideration to some form of interstate banking,

we also believe that a balanced and evenhanded approach

should be taken to the issue.

In the view of the Commission, the primary advantage for

citizens of Connecticut in opening the state to interstate bank-

ing would be to increase competition in banking in Connecti-

cut. While banking has historically been viewed as an industry

that needs protection from excessive competition, in view of

the overwhelming public interest in maintaining a sound

banking system, the Commission believes that the interest of

both consumers and businesses in Connecticut would be well

4a

served by increasing the number of competitors and the vigor

of banking competition in the state. The business of banking

has experienced enormous innovation in recent years, and

with increasing deregulation of banking at the federal level,

the Commission believes that the future will also be a time of

great innovation in banking. While Connecticut banking insti-

tutions have served our state extremely well, we believe that

an infusion of additional competitive vigor into Connecticut

would not only enhance the competitive performance of our

own banks but would bring to bank customers in Connecticut

the benefits of increased innovation in banking. Furthermore,

the Commission believes that as our citizens become increas-

ingly mobile, banking can no longer be viewed as an industry

that is neatly segregable by state boundaries. Banking is very

much an interstate business, and we must not close our eyes to

the fact that banking in Connecticut is simply part of our

nation’s overall banking structure.

While we believe that the enhancement of competition in

banking in Connecticut is the major goal to be served by any

change in Connecticut law that would permit entry by out-of-

state banking institutions, it must also be recognized, we

believe, that the ability of Connecticut banks to compete in

markets outside Connecticut may well depend upon Connecti-

cut’s attitudes toward interstate banking. Several states that

have recently enacted laws to permit entry by out-of-state

banking organizations have done so on the basis of reciprocity.

That is, they have permitted out-of-state entry only from

those states into which their own banks would be permitted

reciprocal entry. If such laws become the prevading pattern for

state laws relating to interstate banking, as we think they may,

Connecticut may have an additional interest in modifying its

laws in this regard so as to advance the interests of its own

banks. It is plainly in the interests of Connecticut that

Connecticut-based banks have the opportunity to grow and

become stronger through geographic expansion.

Sa

At the same time, we believe that there are countervailing

concerns that weigh against wholesale elimination of the

Douglas Amendment prohibition. There are presently 63

savings banks, 40 commercial banks and 19 savings and loan

associations in Connecticut, many of which are quite small.

These banks have been devoted over the years to serving

Connecticut markets and Connecticut customers, and we

believe that they have been doing a good job. The shareholders

of these banks are themselves, for the most part, citizens of

Connecticut, whose interests, just as those of consumers of

banking services in Connecticut, are entitled to consideration

by our legislature.

Both at the national and state levels the philosophy underly-

ing our structure of bank regulation has been to promote a

pluralistic banking system—a system comprised of many

units, rather than a highly concentrated system made up of a

few large banks. The promotion of local ownership and con-

trol of banks has as one of its objectives the preservation of a

close relationship between those in our communities who

need credit and those who provide credit. To allow the control

of credit that is essential for the health of our state economy to

pass to hands that are not immediately responsive to the

interests of Connecticut citizens and businesses would not, we

believe, serve our state well. Similarly, to expose our smaller

banks to the rigors of unlimited competition from large out-

of-state banking organizations—particularly at a time when

deregulation of banking products at the federal level is already

putting strains on the resources of smaller banks—would not

be wise.

In an effort to balance the various conflicting considerations

that bear on the issues of interstate banking, the Commission

has concluded and recommends that a legislative program

embodying the following principles should be given favorable

consideration:

6a

1. An experiment in interstate banking would be desirable.

By “experiment” we mean a first step toward interstate

banking that would allow limited entry by out-of-state

banking organizations and would afford the legislature

an Opportunity to make its own calculus of the benefits

and detriments that might result from a broader pro-

gram of interstate banking.

2. De novo entry into Connecticut by out-of-state banking

organizations should not now be permitted. While we

recognize that de novo expansion is generally thought to

be pro-competitive, we believe it would present a poten-

tially serious threat to the owners of Connecticut banks

to permit de novo entry at this time. We recognize that if

Connecticut were opened to out-of-state entry, the value

of existing banks may well be enhanced. On the other

hand, the ability of a large potential entrant to come in de

novo may well have the effect of tipping the bargaining

power in favor of the out-of-state interest. Were de novo

entry to be permitted, the value of an existing franchise

would be limited by some factor relating to the potential

entrant's cost of de novo entry. While we do not believe

that it is the purpose of our banking laws to create or

preserve value for bank stockholders, we believe that the

owners of existing banks have a legitimate claim, at least

during a transitional period, not to have their equity

devalued by a sudden change in the structural rules.

3. The range of potential entrants should be limited, at

least initially, by area of origin. The Commission

believes that out-of-state entry into Connecticut during

the “experiment” should be restricted only to banking

organizations having their principal place of banking

business in another New England state. We believe that

there is a natural economic and cultural community of

interest among the New England states that would make

7a

such an experiment in regional banking a reasonable

first step toward interstate banking. We further believe

that the legislature would be justified in excluding New

York from this first phase on the ground that New York

is the home state of a number of the nation’s very largest

banking institutions and that it is necessary to assess the

impact of out-of-state entry upon Connecticut banks ina

more limited experiment in interstate banking before

exposing our banking system to the full rigor of competi-

tion from these giant institutions.

4. Out-of-state entry should be conditioned upon reciproc-

ity. That is, we should permit entry only from those

states into which Connecticut banking organizations

would be permitted reciprocal entry.

5. To enhance the competition position of Connecticut's

banking institutions, we suggest the relaxation of re-

straints on intrastate multi-office banking.

6. The approval of the Connecticut Banking Commissioner

should be required for the acquisition of any bank in

Connecticut by an out-of-state bank holding company,

and in considering applications for such acquisitions the

Commissioner should be required to consider the effect

of the acquisition on the financial and managerial

resources of the acquired bank, the effect of the acquisi-

tion on competition, and the likelihood that the acquisi-

tion will serve the public interest.

In summary, we recommend that the legislature adopt a

measure permitting banking institutions from the New Eng-

land states to acquire existing banks in Connecticut, subject to

the approval of the Banking Commissioner, and subject

8a

further to the requirement that Connecticut banking organiza-

tions are permitted to enter the acquirer's state under condi-

tions no more onerous than those imposed by Connecticut and

that appropriate review of the restrictions on intrastate geo-

graphical expansion be considered.

Respectfully Submitted,

Edwin Gordon Hebb, Jr.,

Chairman

The Commission to Study

Legislation to Limit the Conduct

of Business in Connecticut by

Subsidiaries of Bank Holding

Companies

Commissioners Robert G. Gilligan, Clarence Gustafson and

John Sponheimer are in agreement with the Report.

Commissioner Frank Coyle agrees with the Report, but takes

exception to Recommendation No. 5.

Commissioner William J. Sullivan was ill and unable to partic-

ipate in the findings and recommendations within the Report.