Amicus Curiae Brief — Beneficial Nat. Bank v. Anderson
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Supreme Court of the Gnited States
o
BENEFICIAL NATIONAL BANK AND
BENEFICIAL TAX MASTERS, INC.,
Petitioners
v.
MARIE ANDERSON, et al.
¢
On Writ Of Certiorari To The
United States Court Of Appeals
For The Eleventh Circuit
o
BRIEF FOR THE AMERICAN BANKERS
ASSOCIATION, AMERICA’S COMMUNITY
BANKERS, CONSUMER BANKERS ASSOCIATION,
AND FINANCIAL SERVICES ROUNDTABLE,
AS AMICI CURIAE IN SUPPORT OF PETITIONERS
o
Drew S. Days, III
Counsel of Record
BETH S. BRINKMANN
SETH M. GALANTER
MORRISON & FOERSTER LLP
2000 Pennsylvania Ave., N.W.
Washington, D.C. 20006
(202) 887-1500
Attorneys for Amici Curiae
COCKLE LAW BRIEF PRINTING CO. (800) 225-6964
OR CALL COLLECT (402) 342-2831
TABLE OF CONTENTS
Page
ee ae ED cccpecicncnnnsniecsuniniinienusiiaiitiinans i
ee Oe Be EE etiecsceticictnninniannriaiennginian iv
INTEREST OF AMICI CURIAE ...............ccccccceeeeeeeseeees 1
SUMMARY OF ARGUMENT.....................cccceeeeeeeeeees 2
STE tisicesiesctiinctesniniesiniuiiinitniaiianpeiaiatuntiaiidasiaatai dias 6
A COMPLAINT ALLEGING THAT THE RATE OF
INTEREST PAID TO A NATIONAL BANK IS
UNLAWFUL NECESSARILY “ARISES UNDER”
FEDERAL LAW BECAUSE CONGRESS CREATED
AN EXCLUSIVE FEDERAL CAUSE OF ACTION
FOR SUCH CLAIMS AS PART OF A BROADER
SCHEME TO PROMOTE AND PROTECT THE
FINANCIAL SOUNDNESS OF NATIONAL BANKS ..
A. A Complaint That Challenges The Rate Of
Interest Paid To A National Bank “Arises
Under” The National Bank Act And Is Re-
movable To Federal Court...............cccccceceeeeees
1. Congress provided in the National Bank
Act that the rate of interest charged for
loans by national banks shall be gov-
erned only by federal law ....................0668
2. Congress created a federal cause of ac-
tion in the National Bank Act for indi-
viduals who have paid interest rates that
are in excess of those allowed under fed-
eral law, and intended that it be an ex-
I a iisicticcinicicitbibaindiidbanitsiniceneermnens
ii
TABLE OF CONTENTS - Continued
Page
3. Respondents’ complaint “arises under”
the National Bank Act and was properly
removed to federal court............::ccsseceeeees
B. A Complaint Necessarily “Arises Under”
Federal Law Even If It Expressly Invokes
Only A State Cause Of Action And Fails To
Cite The Exclusive Federal Cause Of Action
That Was Enacted In Its Stead...................065
1. Federal courts are not bound by the face
of the pleadings in determining federal
FUTIORICCION ......0000ccrccccccccerccvcccsecesseesecescoes
2. A complaint alleging a state law claim
and seeking a state law remedy that has
been displaced by a federal cause of ac-
tion necessarily “arises under” federal
TiAl ic india nenapenpuseneuneenveqneuensent
Removal To Federal Court Of Complaints
Challenging The Rate Of Interest Charged
By National Banks Furthers The Compre-
hensive Regulatory Scheme Established By
Congress Over National Banks By Promoting
1. The OCC engages in extensive examina-
tions of each national bank to ensure
compliance with federal law, including
federal limits on interest rates, and re-
quires corrective action whenever viola-
BEND GO TRTIING occecccccccccccsescsccccccccesccecsesees
12
14
16
17
20
ili
TABLE OF CONTENTS - Continued
Page
Litigation in state courts involving the in-
terest rates paid to national banks is
likely to lead to a lack of uniformity con-
cerning the requirements of the National
Bank Act and the propriety of determina-
tions by the OCC, thereby increasing the
costs and uncertainty of litigation .............. 23
CONCLUSION .0000.0.o.ecceccccccccsssessscessceseeeeceseceseceseees 30
iv
TABLE OF AUTHORITIES
Page
CASES:
Ament v. PNC Nat'l Bank, 825 F. Supp. 1243 (W.D.
OO 24
American Well Works Co. v. Layne & Bowler Co.,
Et | of) is eieesinasiannidciinde 13
Atherton v. FDIC, 519 U.S. 213 (1997) ........ccccccceeeeeeeeeenerees i]
Avco Corp. v. Aero Lodge No. 735, 390 U.S. 557
, SS 4,18
Barnet v. National Bank, 98 U.S. 555 (1878).............. 12, 24
Bartholet v. Reishauer A.G., 953 F.2d 1073 (7th Cir.
OT... .ncincunssnenmsanndsiemmemennnneneinmiuiinmsmametnnmannmininents 15
Beeman v. MBank Houston, N.A., 691 F. Supp. 1027
CS ) a 24
Bell v. Hood, 327 U.S. 678 (1946) ..........cccccccceeeeeeeeeeeeneneeees 14
Burnham v. Superior Ct., 495 U.S. 604 (1990)............000 20
Caterpillar Inc. v. Williams, 482 U.S. 386 (1987)............-. 17
Chicago, Rock Island & Pacific Ry. Co. v. Schwy-
hart, 227 U.S. 184 (1913)..... curianabemnmmnieseninadimmeneietiite 16
City of Indianapolis v. Chase Nat'l Bank, 314 U.S.
EE 16
Copeland v. MBNA Am., N.A., 820 F. Supp. 537 (D.
OO Ee 24
Cutler v. Rae, 48 U.S. (7 How.) 729 (1849) ...........cccceeceeees 15
Davis v. Passman, 442 U.S. 228 (1979) ...........ccccseeeeeeeeeeees 15
Evans v. Nat'l Bank of Savannah, 251 U.S. 108
COTE... xcccnssetesisttaimssnsintaciaennammecsuaennnenianntnenentiinnitn 12
v
TABLE OF AUTHORITIES — Continued
Page
Farmers’ & Mechanics’ Nat'l Bank v. Dearing, 91
Se nt anicineintiaeinnatsiniattaiariteaitaieattientattaiamiinnineaal 9, 11, 24
Federated Dep't Stores v. Moitie, 452 U.S. 394
Sere cstteeereetcstansineeaerenenaannaiataitiaiannaistesataattatastatatsitassiatinintaliaaiais 17
Fortenberry v. Southtrust Bank of Ala., N.A., 1996
U.S. Dist. LEXIS 21685 (N.D. Ala. Mar. 21, 1996)........ 24
Franchise Tax Bd. v. Construction Laborers Vaca-
tion Trust, 463 U.S. 1 (1983).............ccccccccceeeeeeee 13, 18, 19
Goehl v. Mellon Bank, 825 F. Supp. 1239 (E.D. Pa.
Sara acieitaitensenaineniipteninitnicenciiciaaatiettniaaiaaatinastatiiasiiital tata! 24
Grand Trunk Western Ry. Co. v. Lindsay, 233 U.S.
ee tncsresenetencensterieleniesieietieatataciaseaceeeaitiiintaaaaai caitlin 15
Heaton v. Monogram Creditcard Bank of Ga., 297
I iia 28, 29
Heaton v. Monogram Creditcard Bank of Ga., No.
98-8275 (La. Civ. Dist. Ct., Orleans Parish July
Se niaiinicseptriiiaiiniiaa a a 28, 29
Hunter v. Rich’s Dep't Stores, 945 F. Supp. 1500
RRR SR eie ato a a Se Re 24
Jones v. BankBoston, N.A., 115 F. Supp. 2d 1350
NI aeincitiiitia e 24
Koster v. Lumbermens Mut. Cas. Co., 330 U.S. 518
Saree ecrccstninitnccemenncecainethinainiataseaatanasemnatisdtcetaenis armenia 16
Lapides v. Board of Regents, 122 S. Ct. 1640 (2002)......14, 20
M. Nahas & Co. v. First Nat'l Bank of Hot Springs,
739 F. Supp. 1338 (W.D. Ark. 1990), aff’d, 930
In, 24
Marquette Nat'l Bank of Minn. v. First of Omaha
Serv. Corp., 439 U.S. 299 (1978) .........ccccccccceeceeseeeeee 10, 11
vi
TABLE OF AUTHORITIES - Continued
Page
Matheis v. May Dep't Stores Co., 1999 U.S. Dist.
LEXIS 21917 (E.D. Mo. May 21, 1999), rev’d, 218
F.3d 919 (Sth Cir. 2000)..............csscscccesscrerseereeseeessesesees 24
Mazaika v. Bank One, Columbus, N.A., 653 A.2d
640 (Pa. Super. Ct. 1994), rev’d, 680 A.2d 845
RRR eerrenne eee ener. 25
McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316
TIT sscseernasietnitn dial ateasnpedeaacaienemcabiimemenennemeeneennemnnnntin 7
Mercantile Nat'l Bank v. New York, 121 U.S. 138
TTT on aniceaticin tanita tiaaalaneiinlaebiialibiniinn 7
Merrell Dow Pharm., Inc. v. Thompson, 478 U.S.
ian tata aliedatieaclatatinde 20, 29
Metropolitan Life Ins. Co. v. Taylor, 481 U.S. 58
ana ineceh niet ate tlinrinseeeeamaiaaiaieanmandaiaiids 19
Moss v. SouthTrust Mobile Servs., Inc., 1995 U.S.
Dist. LEXIS 21770 (N.D. Ala. Sept. 22, 1995)............... 24
National State Bank v. Long, 630 F.2d 981 (3d Cir.
sac achalasia aati aaeaed aati ieaiinmmnietninss 8
Nelson v. Citibank (South Dakota), N.A., 794 F.
Supp. 312 (D. Mimn. 1992).............:cccccsesseeeeeeeeneneeeeeennees 24
Partin v. Cableview, Inc., 948 F. Supp. 1046 (S.D.
SS SES en ee ee ne 24
Rivet v. Regions Bank of La., 522 U.S. 470 (1998)...... 15, 17
Sherman v. Citibank, N.A., 679 A.2d 652 (NJ.
elias ) ee 13
Smiley v. Citibank (South Dakota), N.A., 517 U.S.
acne eaeaenlarelie 3, 9, 10, 24, 28
Tarble’s Case, 80 U.S. (13 Wall.) 397 (1871)...........cccceeeees 29
vii
TABLE OF AUTHORITIES - Continued
Pa
The Fair v. Kohler Die & Specialty Co., 228 U.S. 22 _
SSRI cineca ini itt 17
Tiffany v. Nat'l Bank of Mo., 85 U.S. (18 Wall.) 409
ee 7, 8, 29
United States v. Philadelphia Nat'l Bank, 374 U.S.
a area ei icersicictnorsctonrncensiieneiaebaanataitaaeamatataacaiaaaasiatae 21, 23
Watson v. First Union Nat'l Bank of S.C., 837 F.
Supp. 146 (D.S.C. 1998)............cccccccoccccssccossscsssseccececeeces 24
STATUTES, REGULATIONS, AND RULES:
National Bank Act, 12 U.S.C. §§ 1 et seq.
STC Ticishispiioehinneiieiatiaiaiaek aia 8
SSSmreTctaiiiesbebiiiniiaeiiae iii 8
ne vee a en ETS 8
SS iiionilesibaiainieiiitetiente iliac al 8
Ee a Te eT Ea passim
ci Te passim
ee ee, 8
See isirsesiicnctaitecienpcanianianinanisiatetiatiaitaininasiaial tanita 21, 23
Sp ee esteiceceiitanieniecaiieiiitininaatiaaratiaaiiaiiaaiie 8, 21
i) eee cicatricial aisha aad 8
SU isiissiceiitdiliiehiniietieenieiiidiaaiihataiaaa ities itl 8, 21
SSID aiineitisteliiiiinineiiiiaaaaasia ise 8, 22
SU alae al 8
i EN ee ane CR MS SET 21
viii
TABLE OF AUTHORITIES — Continued
Page
I Be iccciecereiceciicniniticnsiniin ideiandilaal 8, 21
es Se I ss cecscnnecnintiieannsiltimnsiiiiiamaratidnninbninniddiniiidediaiitl 28
es Gr Tt icninnictencistcieinennnintanenvendiiinuinntnetiotimmmnsinenion 8
IS 0 STII Ol inrnsrenenninncsianneneasenaiiosmiemunannibeniotmemniadeiies 8
i nny ITT rainicsicinetacinaninninhicheinatenibecennmtennanainaiitinaiiaiisainaiieiia 8
Be te Uy Ei iicenseeninnidecmmniementaunterninnieninmianenaies passim
FE ITU III 0 IIIT cscsiisnsnninnnsiniendinmienntetenianninniianinueiaideinidl 16
SP 0) IED cnecenesemenmmuenennenneninninneinannicmiion 13
28 U.S.C. § 1367(c)(3) ............. WD sccsunhintectdenitesiinnahiaitimneniiitaaioianinii —
ge 3, 6, 12
Sy REG: UID sinsinsiipnicinnengntienenncdenemimmnsincnitniaieianiinanedl 12
een 20
Employee Retirement Income Security Act, 29
re Oe ell inuninnsemmneseneninnnsntanimemmninient 19
Labor Management Relations Act of 1947, § 301, 29
eas UF tl einicrrentntesdsnnneemenennietieniimmaietemmmnets 18
National Bank Act, ch. 106, 13 Stat. 99 (1864).................. 7
12 C.F R.:
WD, Barcevnsecsssssennsersssecssssmnsnseeesesnenanmnnenammnnumenemnaeene 9
STE hasticepenneteaninnneemnnmnenrmuieenieminnnen) 22
I TNT vetcnscecitenarnpesetpianattpeeenetatamanaiiniesenaniiamenpiibiimmaeend 9
TD. Tip viervnsnsicmessenesnsnesseevemenseniermmmnnnennneneesmnenmaanantigin 9
1, Ti ienussessennunennsnienbetenmammmenieinetenieniuidsaiemmenmenaneids 9
ix
TABLE OF AUTHORITIES — Continued
Page
DD, TERS ccsnspessscnnsnesnnesnsensenennenenenntecndianamneansiesanencmnienapinsis 9
WR, GiB cssnsssusssennenenniessenmneenemmeneenennnmietnesinenenneneiininits 9
68 Fed. Reg. 6363, 6366-6370 (Feb. 7, 2003)................. 8, 22
a Sak, Sa Ce incercerssierrssiesenticiinesariccinsiiitiaieiniibbiaginidameaasiaaaiie 1
MISCELLANEOUS:
American Law Inst., Study of the Division of
Jurisdiction Between State and Federal Courts
Kevin M. Clermont & Theodore Eisenberg, Do Case
Outcomes Really Reveal Anything About the Le-
gal System: Win Rates and Removal Jurisdiction,
83 Cornell L. Rev. 581 (1988).............cccccssesessssreeeeeeeeeees 25
Comptroller of Currency, Comptroller’s Handbook:
Assets: Loan Portfolio Management (Apr. 1998)............ 22
Bank Supervision and Examination Process:
ee er Se taccnttctcsicninenntiniiienienintninineniicintl 22
Consumer Compliance Examination: Community
Bank Consumer Compliance (Nov. 2000) ................00006 23
Consumer Compliance Examination: Other
Consumer Protection Laws and Regulations (Oct.
Sarre ei ieccssencciteisaiieisuiaieniasicibeicnnieteheenimniehiiadatabiniibieatacininmineimaien 22, 23
Consumer Compliance Examination: Overview
SETI TE sinsiesiciisehceccihaiieiaesaipaataiinaihgmnaniadinenibiniiinaiaiaaniniannceninll 23
Liquidity and Funds Management: Interest Rate
I TTI saiticisirntaseseeetastesbitlahet entinshdeeharariannaasangrarmenanel 22
Other Areas of Examination Interest: Litigation
and Other Legal Matters (Feb. 2000)..............ccccccceecee0s 26
xX
TABLE OF AUTHORITIES - Continued
Page
Comptroller of Currency, John D. Hawke, Remarks
before the Risk Management Association’s Capi-
tal Management Conference (June 6, 2002) .........::2:00++ 22
Comptroller of Currency, Performance and Ac-
countability Report: Fiscal Year 2002 (2002)........... 21, 22
Cong. Globe, 38th Cong., 1st Sess. 1393 (1864) ............++++ 7
Thre Weeder lial .....0.<ccccccscccesccccssecsessececsseseccccecsosessorssssssessoees 27
Karen A. Jordan, The Complete Preemption Di-
lemma, 31 Wake Forest L. Rev. 927 (1996) .........:2:0+++ 25
Arthur R. Miller, Artful Pleading: A Doctrine in
Search of a Definition, 76 Tex. L. Rev. 1781
(2DBB) .ccrercrnccecscesesccscccssoosesesovecsoososscosessconsssssssocosoooncsssees 27
Charles Warren, The Supreme Court in United
States History (rev. Cd. 1926) ........::ccccceeeseeessereesseeeneenees 7
Charles Alan Wright & Arthur R. Miller, Federal
15, 16
Practice and Procedure (2d ed. 1990) .........::seceeeeeee
1
INTEREST OF AMICI CURIAE’
Amici American Bankers Association, America’s
Community Bankers, Consumer Bankers Association, and
Financial Services Roundtable are national trade associa-
tions whose members include national banks chartered by
the United States Department of the Treasury, Office of
the Comptroller of the Currency (OCC), as well as other
types of financial institutions that are closely regulated by
federal law.
The American Bankers Association is the largest
national trade association of the banking industry in the
United States, representing approximately 90 percent of
the domestic assets of all American banks. America’s
Community Bankers is an independent national trade
association that represents the nation’s nearly 1,200
community banks of all charter types. The Consumer
Bankers Association represents more than 750 federally
insured banks and other financial institutions that collec-
tively hold nearly 80 percent of all consumer deposits and
about 70 percent of all consumer credit held by federally-
insured depository institutions. The Financial Services
Roundtable represents 100 of the largest integrated finan-
cial services companies providing banking, insurance, and
investment products and services to American consumers.
National banks, including those that are members of
the amici associations, participate in a highly regulated
industry. The OCC provides extensive oversight of
‘ Letters from the parties consenting to the filing of this brief are
being filed with the Clerk of this Court along with this brief, pursuant
to Supreme Court Rule 37.3(a). No counsel for a party authored this
brief in whole or in part, and no person or entity, other than the amici
curiae, their members, or their counsel, made a monetary contmbution
to the preparation or submission of this brief.
2
national banks, including decisions about how many loans
to grant, to whom, and at what interest rates. It is not
uncommon for amici’s members to be the targets of state
law litigation involving interest rates on loans, despite
this Court’s consistent holdings, stretching back 125 years,
that the rate of interest that national banks charge can be
challenged only through the express federal cause of
action found in the National Bank Act, 12 U.S.C. § 86.
Such litigation, although baseless, often costs national
banks substantial sums of money, money that must be
diverted from the funds available to ensure the financial
soundness of the bank. Given the burden of such litigation
on the safe and sound operation of national banks, amici
have a strong interest in the proper resolution of the
question presented in this case.
SUMMARY OF ARGUMENT
Usury claims against national banks arise under the -
National Bank Act because that statute establishes a
federal interest rate that preempts state interest rates as
applied to national banks and creates an exclusive federal
cause of action to redress violations of that rate. Respon-
dents’ apparent attempt to avoid that federal cause of
action by purportedly pressing only a plainly preempted
state law claim must be rejected. Interest-bearing loans
typically constitute the predominant assets on a national
bank’s balance sheet and are a primary component of
virtually every national bank’s income. Consequently,
lawsuits under state law usury causes of action in state
court that challenge the interest rate paid to a national
bank can be a significant impediment to the proper func-
tioning of the national bank.
A. In 1864, Congress created an exclusive and
comprehensive federal regulatory regime in the National
Bank Act to govern the financial practices of national
banks, including the rate of interest charged for loans, and
3
vested regulatory enforcement authority in the United
States Department of Treasury, Office of the Comptroller
of the Currency (OCC). The federal government’s exclusive
regulation of national banks was, in part, a response to
certain States’ hostility to them. That regulation extends
to the rate of interest a national bank may charge. As a
matter of federal law, see 12 U.S.C. § 85, national banks
are authorized to charge interest at the highest of three
possible rates. Depending on the location of the national
bank, it may be that none of those rates is a rate
authorized by the law of the State where the borrower is
located. Thus, as this Court has recognized, there is “no
doubt” that Section 85 preempts state law usury
limitations as applied to national banks. Smiley v.
Citibank (South Dakota), N.A., 517 U.S. 735, 744 (1996).
But Congress did more than just create a federal night
for a national bank to charge interest up to a federally-
prescribed ceiling. Congress also created an express
private cause of action against national banks in 12 USC.
$ 86 for violations of Section 85. This Court has recognized
repeatedly that Congress intended the Section 86 cause of
action to be the exclusive means of private redress. Re-
spondents’ state court challenge to the rate of interest paid
to a national bank necessarily arises under that federal
cause of action created by the National Bank Act, which
preempted and replaced state law usury claims against
national banks. The claim thus is one “arising under” the
federal cause of action established in Section 86 and,
therefore, the action is within the original “arising under”
jurisdiction of federal district courts, 28 U.S.C. § 1331, and
is removable to federal court under 28 U.S.C. § 1441.
B. That respondents cite only state law in their
complaint does not deprive the allegations of the com-
plaint of their federal character. In determining its juris-
diction, a federal court is not bound by the complaint’s
legal averments but, instead, must look behind the face of
the pleadings. That is the settled rule in diversity cases,
+
where federal courts must exercise jurisdiction over cases
in disregard of the face of the complaint when an assess-
ment of the true nature of the case shows that complete
diversity exists. The power and obligation of the federal
courts to look beyond the pleadings is no different when
determining whether a federal court has jurisdiction over
a case on the basis that a claim alleged “arises under”
federal law.
Plaintiffs are free to choose between a state and a
federal cause of action when both exist. But when a
plaintiff’s state law cause of action and remedy are
preempted by federal law and Congress has created an
exclusive federal cause of action in their stead, a plaintiff
has no choice but to invoke the federal cause of action if he
wishes to challenge the underlying conduct. In such
circumstances, a complaint nominally alleging violations
of the displaced state cause of action can be viewed only as
a claim arising under the remaining federal cause of
action. See Avco Corp. v. Aero Lodge No. 735, 390 U.S. 557
(1968). Although sometimes described as a doctrine of
“complete preemption,” the circumstances under which a
district court may treat a purportedly state law claim as
arising under federal law are not predicated upon the
substantive breadth of the statute’s preemption. The
critical question is whether Congress created a federal
cause of action to replace any state cause of action, thereby
transforming a state cause of action into one “arising
under” federal law. Because Section 86 of the National
Bank Act does precisely that by creating an exclusive
federal cause of action for persons who allegedly paid a
national bank an interest rate greater than that allowed
by Section 85, claims challenging the rate of interest paid
to a national bank necessarily arise under federal law.
C. The nature of the federal interests at stake in
adjudicating usury claims against national banks also
weighs heavily in favor of federal jurisdiction. The OCC
engages in frequent and extensive examinations of every
— a
5
national bank to ensure compliance with federal law,
including the federal limit on interest rates, and requires
corrective actions whenever violations are found. These
OCC examinations, performed as a component of the
OCC’s exclusive regulatory and supervisory authority and
backed by the threat of significant civil penalties, substan-
tially reduce the risk of national banks engaging in any
systemic violations of Section 85 and promote a uniform
interpretation of federal law.
Despite the fact that it has been settled for 125 years
that state law causes of action challenging the interest
paid to a national bank are preempted, such suits in state
court are not uncommon. The failure of a court promptly to
dismiss such a suit as preempted increases the risk of
uncertainty and the cost of the suit, which are both harms
that are particularly injurious to national banks intent on
limiting financial and reputational risks. It is the experi-
ence of amici and their member institutions that such a
prompt dismissal is less likely to occur in state trial
courts. The efforts of the plaintiffs’ bar to keep such cases
in state court through a variety of not-so-subtle pleading
stratagems suggests that they share the understanding
that federal courts are more likely to analyze preemption
questions correctly more often, and thus dismiss plaintiffs’
claims before the costs and burdens of litigation enable a
plaintiff to extract a settlement from a national bank.
Although erroneous state trial court decisions on preemp-
tion can be appealed, such appeals are generally available
only after the costs of discovery and litigation have been
expended.
Litigation in state courts involving the interest rates
paid to national banks is more likely than federal court
litigation to lead to a lack of uniformity concerning the
requirements of the National Bank Act and the propriety
of determinations by the OCC, to the detriment of the
national banking system. Although this Court ultimately
6
remains available to resolve any conflicts between the
state and federal courts, the uncertainty of such a discre-
tionary avenue of relief at the end of the litigation defeats
Congress's intent to preempt entirely state causes of action
challenging interest rates of national banks in favor of a
singular federal remedy.
ARGUMENT
A COMPLAINT ALLEGING THAT THE RATE OF
INTEREST PAID TO A NATIONAL BANK IS
UNLAWFUL NECESSARILY “ARISES UNDER”
FEDERAL LAW BECAUSE CONGRESS CREATED
AN EXCLUSIVE FEDERAL CAUSE OF ACTION
FOR SUCH CLAIMS AS PART OF A BROADER
SCHEME TO PROMOTE AND PROTECT THE
FINANCIAL SOUNDNESS OF NATIONAL BANKS
Although sometimes described as a doctrine of
“complete preemption,” the circumstances under which a
district court must treat a purportedly state law claim as a
claim “arising under” federal law, and therefore within the
district court’s original jurisdiction, 28 U.S.C. § 1331, 1s
not predicated upon the breadth of a federal statute's
preemption. Instead, the critical question is whether
Congress has created a federal cause of action to take the
place of the purportedly state law cause of action. When
Congress has done so, a complaint that invokes the
displaced state cause of action necessarily arises under the
exclusive federal cause of action and can be removed to
federal court by a defendant sued in state court, 28 U.S.C.
§ 1441. Congress has done just that in Section 30 of the
Nationa! Bank Act, 12 U.S.C. $§ 85, 86.
Congress intended for usury claims against national
banks to arise under the National Bank Act because of the
potential adverse effect on the national banking system that
could result if suits challenging a critical component of a
national bank’s operations — its granting of interest-bearing
—<--
7
loans — were left in the hands of state courts at the sole
discretion of plaintiffs. National banks such as amici’s
members are subject to comprehensive federal regulatory
supervision of their interest rates and loan practices. The
federal interest in the safety and soundness of such
institutions that led to such supervision confirms that
Congress intended that challenges to such rates arise
under federal law.
A. A Complaint That Challenges The Rate Of
Interest Paid To A National Bank “Arises Un-
der” The National Bank Act And Is Removable
To Federal Court
In 1864, in the midst of the Civil War, Congress
enacted the National Bank Act, ch. 106, 13 Stat. 99 (1864).
The Act authorized the creation of national banks “for the
purpose, in part, of providing a currency for the whole
country, and in part to create a market for the loans of the
General government.” Tiffany v. Nat'l Bank of Mo., 85 U.S.
(18 Wall.) 409, 413 (1874); see also Mercantile Nat'l Bank
v. New York, 121 U.S. 138, 154 (1887) (“The object of the
[Act] was to establish a system of national banking insti-
tutions, in order to provide a uniform and secure currency
for the people, and to facilitate the operations of the
Treasury of the United States.”).
Congress expected States and their regulators to be
hostile to national banks. See, eg., Cong. Globe, 38th
Cong., lst Sess. 1393 (1864) (Rep. Washburn) (“it will not
do to place (the national banking system] in the power of
the States, otherwise you place it in the power of any State
which may be opposed to the system to cripple and destroy
it”). That expectation was rooted in the attempts by some
States to disrupt the operations of previously established
national banks. See, e.g, McCulloch v. Maryland, 17 US
(4 Wheat.) 316 (1819) (discriminatory stamp tax targeted
at national bank); 1 Charles Warren, The Supreme Court
8
in United States History 505 (rev. ed. 1926) (giving exam-
ples of state laws outlawing national bank). Congress
therefore created a comprehensive federal regulatory
regime to promote the national banking system and
excluded state laws and regulators.
1. Congress provided in the National Bank
Act that the rate of interest charged for
loans by national banks shall be governed
only by federal law
From the outset, Congress vested complete regulatory
authority over national banks in the United States De-
partment of the Treasury, Office of the Comptroller of the
Currency (OCC). Congress has granted the OCC the
exclusive power to authorize the creation of new national
banks, see 12 U.S.C. §§ 26-27, to establish substantive
standards to ensure financial safety and soundness, see 12
U.S.C. §§84,183lo, 183lp-1, 3907, to require regular
reports from the national banks, see 12 U.S.C. § 161, and
to redress and punish any violations of the law, or the
OCC’s regulations or orders, see 12 U.S.C. §§ 93, 164,
1818. Congress also required federal regulators and
supervisors tc engage in regular examinations of national
banks for compliance with all banking laws, see 12 U.S.C.
$§ 481, 1820(d), and provided them substantially exclusive
visitorial authority, see 12 U.S.C. § 484; 68 Fed. Reg. 6363,
6366-6370 (Feb. 7, 2003). That scheme of exclusively
federal regulation was designed to protect national banks
from “the hazard of unfriendly legislation by the States.”
Tiffany, 85 U.S. (18 Wall.) at 413. Indeed, even when the
substance of a state law is not preempted, the OCC is the
only regulatory agency that may enforce the state law
against national banks. See, e.g., 12 U.S.C. § 36(f 1 B)
(“The provisions of any State law to which a branch of a
national bank is subject under this paragraph shall be
enforced, with respect to such branch, by the Comptroller
of the Currency.”); National State Bank v. Long, 630 F.2d
9
981, 989 (3d Cir. 1980) (“[E)nforcement of the state statute
is the responsibility of the Comptroller of the Currency
rather than the State Commissioner.”). Of course, not
every state law that incidentally applies to national banks
is preempted by federal law, see Atherton v. FDIC, 519
U.S. 213, 222-223 (1997), but Congress clearly delegated
the authority to govern the financial workings of national
banks solely to federal regulators.
Interest-bearing loans typically constitute the
predominant assets on a national bank’s balance sheet and
are a primary component of virtually every national bank’s
income. The OCC extensively regulates most aspects of a
national bank’s program to loan money, including the
amount of money the national bank may lend and the
appropriate combination of loans it can make at different
rates of interest to account for risk. See, e.g., 12 C.F.R. pts.
3, 25, 30, 32.1, 34. Since the inception of the national
banking system, federal law has governed the rate of
interest a national bank may charge as part of the federal
regulatory scheme. See Farmers’ & Mechanics’ Nat'l Bank
v. Dearing, 91 U.S. 29, 34 (1875). In doing so, Congress
intended that interest include the full range of payments
“compensating a creditor or prospective creditor for an
extension of credit, making available a line of credit, or
any default or breach by a borrower of a condition upon
which credit was extended,” such as “late fees, not suffi-
cient funds (NSF) fees, over-limit fees, annual fees, cash
advance fees, and membership fees.” Smiley v. Citibank
(South Dakota), N.A., 517 U.S. 735, 740, 747 (1996) (up-
holding OCC’s regulation, 12 C.FR. §7.400l(a), as a
reasonable interpretation of the statute). Under 12 U.S.C.
§ 85, national banks are authorized to charge interest at
the greatest of three rates: (1) the rate that state banks
are allowed to charge in the State where the national bank
is located; (2) under the “most favored lender” doctrine, the
rate that any other lender is allowed to charge in the State
where the national bank is located; or (3) “a rate of 1 per
10
centum in excess of the discount rate on ninety-day com-
mercial paper in effect at the Federal reserve bank” in the
district where the national bank is located. See Marquette
Nat'l Bank of Minn. v. First of Omaha Serv. Corp., 439
U.S. 299, 308 n.19, 309-311, 318 n.31 (1978).”
There is “no doubt” that Section 85 preempts state law
usury limits as applied to national banks. Smiley, 517 U.S.
at 744; see also Marquette, 439 U.S. at 308 (“The interest
rate that [a national bank] may charge *** is ***
governed by federal law.”). In all instances, state usury
limits are preempted; the rates set by a State’s law are
only relevant to the extent they are incorporated by the
National Bank Act. Indeed, in certain circumstances,
national banks may legally charge interest rates higher
than those allowed to other lenders under state law. For
* Section 85 provides in relevant part:
Any association may take, receive, reserve, and charge on
any loan or discount made, or upon any notes, bills of ex-
change, or other evidences of debt, interest at the rate al-
lowed by the laws of the State, Territory, or District where
the bank is located, or at a rate of 1 per centum in excess of
the discount rate on ninety-day commercial paper in effect
at the Federal reserve bank in the Federal reserve district
where the bank is located, whichever may be the greater,
and no more, except that where by the laws of any State a
different rate is limited for banks organized under State
laws, the rate so limited shall be allowed for associations
organized or existing in any such State under this title.
When no rate is fixed by the laws of the State, or Territory,
or District, the bank may take, receive, reserve, or charge a
rate not exceeding 7 per centum, or 1 per centum in excess
of the discount rate on ninety day commercial paper in ef-
fect at the Federal reserve bank in the Federal reserve dis-
trict where the bank is located, whichever may be the
greater, and such interest may be taken in advance, reckon-
ing the days for which the note, bill, or other evidence of
debt has to run.
wa
11
example, if the rate based on the Federal Reserve’s
discount rate is higher than the state rate, national banks
may charge the higher rate. Also, because national banks
serve customers across state lines, a national bank located
in one State is authorized to charge residents of another
State the interest rate allowed in the State where the
bank is located, even if that rate is higher than the rate
permitted under the laws of the customer’s State. See
Marquette, 439 U.S. at 317-318.
2. Congress created a federal cause of action in
the National Bank Act for individuals who
have paid interest rates that are in excess of
those allowed under federal law, and in-
tended that it be an exclusive remedy
Congress did more than just create a federal right for
a national bank to charge interest up to a federally-
prescribed ceiling. Congress also created an express
private cause of action for violations of Section 85 by
national banks. Congress provided that a person who has
paid an interest rate greater than that allowed by Section
85 “may recover back, in an action in the nature of an
action of debt, twice the amount of the interest thus paid
from the association.” 12 U.S.C. § 86. In doing so, Congress
also established a federal limit on the scope of relief
available against a national bank for violation of Section
85. Moreover, Congress specified that that federal cause of
= is governed by a two-year statute of limitations.
id.
This Court has recognized repeatedly that Congress
intended that the Section 86 cause of action be the exclu-
sive means of private redress against a national bank that
violates the interest rate limits set forth in Section 85. See
Farmers’ & Mechanics’ Nat'l Bank, 91 U.S. at 35 (“the
12
power to supplement [Sections 85 and 86] by State legisla-
tion is conferred neither expressly nor by implication” and
“would be unreason[able], and contrary to the manifest
intent of Congress”); Barnet v. National Bank, 98 U.S. 555,
559 (1878) (“The statute which gives the right prescribes
the redress, and both provisions are alike obligatory upon
the parties.”); Evans v. Nat'l Bank of Savannah, 251 U.S.
108, 109 (1919) (“whether transactions by [a national
bank] are usurious, and the consequent penalties therefor,
must be ascertained upon a consideration of the National
Bank Act”). Thus, by creating the exclusive cause of action
in Section 86, Congress displaced state law usury claims
against national banks with a uniform federal remedy.
3. Respondents’ complaint “arises under” the
National Bank Act and was properly re-
moved to federal court
A defendant seeking to remove a case from state to
federal court need not establish specific congressional
intent that a particular federal cause of action be remov-
able, contrary to respondents’ suggestion. Br. in Opp. 9.
Instead, Congress granted defendants a general right to
remove an action to federal court under Section 1441 of
Title 28, which specifies that “any civil action brought in a
State court of which the district courts of the United
States have original jurisdiction, may be removed by the
defendant or the defendants, to the district court of the
United States for the district and division embracing the
place where such action is pending.” 28 U.S.C. § 1441(a).
Because Congress has granted the district courts “original
jurisdiction” over all civil actions “arising under the
Constitution, laws, or treaties of the United States,” 28
U.S.C. § 1331, Congress has evidenced all the intent that
is necessary that a state court civil action may be removed
to federal court if the action arises under federal law.
13
As a general rule, a “suit arises under the law that
creates the cause of action.” Franchise Tax Bd. v. Con-
struction Laborers Vacation Trust, 463 U.S. 1, 8-9 (1983)
(quoting American Well Works Co. v. Layne & Bowler Co.,
241 U.S. 257, 260 (1916)). In the instant case, the National
Bank Act creates the cause of action for the underlying
conduct alleged in respondents’ complaint. That complaint
alleges that petitioner Beneficial National Bank, a na-
tional bank, and its corporate affiliate charged “excessive
interest” on loans made to respondents in violation of
Alabama statutory and common law limits on interest,
and that respondents “have been injured and damaged” by
petitioners’ actions. Comp. 7{ 59-60. Respondents’ allega-
tion that petitioners violated Alabama’s authorized inter-
est rate necessarily alleges a violation of federal law -
Section 85 — which makes interest charges in excess of
state law illegal, at least to the extent that the State in
question is the location of the national bank (a fact con-
tested by petitioners, which maintain that they are located
in Delaware) and the state law rate is not less than any of
the alternative rates authorized in Section 85.’ That
challenge to the rate of interest paid to a national bank
necessarily arises under the federal cause of action created
by the National Bank Act — Section 86 — that preempts
* Respondents’ complaint includes other counts that are based on
related allegations concerning the rate of interest charged by petition-
ers. Comp. 99 38-57, 63-68. Those claims would also fall within the
preemptive scope of the National Bank Act, cf Sherman v. Citibank,
N.A., 679 A.2d 652 (N.J. 1996), reinstating 640 A.2d 325 (N.J. Super. Ct.
App. Div. 1994) (holding that state cause of action for failing to disclose
that state law prohibited late fee charges was preempted by Section 85),
but the Court need not address those other counts. If the district court
had original jurisdiction over the usury count, then the court could
exercise supplemental jurisdiction over all other claims and parties
arising from the same case or controversy. See 28 U.S.C. § 1367(a).
l4
and replaces state law usury claims against national
banks.
Indeed, it is clear that such a claim “arises under”
federal law within the federal district court’s original
jurisdiction because, if respondents’ complaint had origi-
nally been filed in federal court, it could not have been
dismissed for lack of “arising under” jurisdiction.‘ There-
fore, removal of the civil action to federal court at petition-
ers’ request was proper.’
B. A Complaint Necessarily “Arises Under” Fed-
eral Law Even If It Expressly Invokes Only A
State Cause Of Action And Fails To Cite The
Exclusive Federal Cause Of Action That Was
Enacted In Its Stead
Respondents did not cite the National Bank Act as the
basis for their usury claim against the national bank, but
that omission on respondents’ part does not negate federal
* An action can “arise under” Section 1331 even if the allegations of
the complaint do not state a claim upon which relief can be granted
under federal law, so long as the claim is not wholly insubstantial and
frivolous. See Bell v. Hood, 327 U.S. 678, 681-682 (1946). If respondents’
claims under Section 86 are subsequently dismissed, either because
they did not allege a violation of Section 85 or later proceedings show
that petitioners in fact did not violate Section 85, the district court
would then have discretion to retain or remand whatever state law
claims remained, if any. See 28 U.S.C. § 1367(c\3); Lapides v. Board of
Regents, 122 S. Ct. 1640, 1643 (2002) (“the law commits the remand
question, ordinarily a matter of discretion, to the Federal District Court
for decision in the first instance”).
* If a defendant does not exercise its right to remove the civil action
to federal court, the case can proceed in state court. For although it is
clear that Congress intended challenges to the interest rates paid to
national banks to be brought exclusively under federal law, Congress
did not evidence an intent to create exclusive federal court jurisdiction.
oe «.
15
jurisdiction. See Grand Trunk Western Ry. Co. v. Lindsay,
233 U.S. 42, 48 (1914) (rejecting the argument that a
federal statute “may not be applied to a situation which is
within its provisions unless, in express terms, the provi-
sions of the act be formally invoked” in the complaint as
“manifest{ly] unsound[ ]”). By adopting the Federal Rules
of Civil Procedure, the Court expressly declined to adopt
common law or “code” pleading rules that require a com-
plaint to allege a “cause of action” or a “theory of the
pleadings.” See Davis v. Passman, 442 U.S. 228, 237
(1979); 5 Charles Alan Wright & Arthur R. Miller, Federal
Practice and Procedure § 1219, at 188-194 (2d ed. 1990):
see also Bartholet v. Reishauer A.G., 953 F.2d 1073, 1078
(7th Cir. 1992) (Easterbrook, J.) (“Instead of asking whether
the complaint points to the appropriate statute, a court
should ask whether relief is possible under any set of facts
that could be established consistent with the allegations.”).
Moreover, the fact that respondents cited only Ala-
bama state law (Comp. 4936, 60) and expressly dis-
claimed any federal cause of action (Comp. 9 31), cannot
deprive the allegations of the complaint of their federal
character. A federal court is not bound by the complaint’s
legal averments in determining its jurisdiction. Just as a
federal court cannot exercise subject-matter jurisdiction by
consent or stipulation, see Cutler v. Rae, 48 U.S. (7 How.)
729, 731 (1849), neither can a federal court be deprived of
jurisdiction based on “artful” pleadings, i.e., pleadings that
are drafted in a manner to avoid an exclusive federal
cause of action. See Rivet v. Regions Bank of La., 522 U.S.
470, 475-476 (1998) (collecting cases). Federal courts have
the obligation to look behind the face of the pleadings
when determining jurisdiction.
16
1. Federal courts are not bound by the face of
the pleadings in determining federal juris-
diction
Federal courts often are presented with jurisdictional
questions that require them to look beyond the manner in
which a complaint characterizes an issue or a party. For
example, in order to exercise diversity jurisdiction under
28 U.S.C. § 1332, a federal court must determine that
there is “complete diversity” between each plaintiff and all
the defendants. In making that determination, a federal
court may disregard the plaintiff's designation in the
caption and text of the complaint of which parties are
defendants or plaintiffs and, as a matter of federal law,
“realign the parties for jurisdictional purposes according to
their real interests.” Koster v. Lumbermens Mut. Cas. Co.,
330 U.S. 518, 523 (1947). “Diversity jurisdiction cannot be
conferred upon the federal courts by the parties’ own
determination of who are plaintiffs and who defendants.”
City of Indianapolis v. Chase Natl Bank, 314 U.S. 63, 69
(1941). It is the duty of the federal courts “to ‘look beyond
the pleadings and arrange the parties according to their
sides in the dispute.’” Jbid. Similarly, a federal court can
exercise diversity jurisdiction over a civil action even if one
of the defendants named in the complaint shares the same
citizenship as the plaintiff, so long as the federal court
finds that no colorable claim for relief is available against
that particular defendant under state law and all the
remaining defendants are diverse from the plaintiff. See
Chicago, Rock Island & Pacific Ry. Co. v. Schwyhart, 227
U.S. 184, 193-194 (1913); 14 Wright & Miller, supra,
§ 3641, at 173-175. Thus, a non-colorable state law claim
alleged in a complaint must be disregarded in determining
whether the federal court has jurisdiction over the
complaint.
The power of the federal courts to look beyond the
pleadings is no different when determining whether a
federal court has jurisdiction over a case on the basis that
17
the claim alleged arises under federal law. This Court
explained in Federated Department Stores v. Moitie. 452
US. 394 (1981), that it was a “settled principle” that a
district court assessing whether a complaint can be re-
moved from state to federal court must “‘seek to determine
whether the real nature of the claim is federal. regardless
of plaintiff's characterization.’” Jd. at 397 n.2: see id. at
408 (Brennan, J., dissenting) (“The federal court must
therefore scrutinize the complaint in the removed case to
determine whether the action, though ostensibly grounded
solely on state law, is actually grounded on a claim in
which federal law is the exclusive authority.”). Although
the Court later confined the result reached in Moitie to its
particular facts, see Rivet, 522 U.S. at 472, the Court at
the same time reaffirmed the principle relevant to this
case — “[i]f a court concludes that a plaintiff has ‘artfully
pleaded’ claims * * *, it may uphold removal even though
no federal question appears on the face of the plaintiff's
complaint.” Jd. at 475.
2. A complaint alleging a state law claim and
seeking a state law remedy that has been
displaced by a federal cause of action nec-
essarily “arises under” federal law
Once Congress creates an exclusive federal cause of
action to replace an existing state law cause of action, “any
claim purportedly based on that pre-empted state-law
claim is considered, from its inception, a federal claim. and
therefore arises under federal law.” Rivet, 522 U.S. at 476
(quoting Caterpillar Inc. ». Williams, 482 U.S. 386, 393
(1987)). Although plaintiffs are free to choose between a
state and a federal cause of action when both exist and
may be “masters” of their complaints by bringing their suit
under only the state cause of action, see The Fair v. Kohler
Die & Specialty Co., 228 U.S. 22, 25 (1913), that is not so
when a plaintiff’s state law claim is preempted by federal
18
law and Congress has created an exclusive federal cause of
action in its stead. In such circumstances, a complaint
alleging violations of the displaced state cause of action
can be viewed only as a claim arising under the remaining
federal cause of action.
For example, in Avco Corp. v. Aero Lodge No. 735, 390
U.S. 557 (1968), an employer filed suit in state court
seeking an injunction based on the allegation that a union
had breached a collective bargaining agreement. Although
the employer could have brought its suit under § 301 of
the Labor Management Relations Act of 1947 (LMRA), 29
U.S.C. § 185, which creates a federal cause of action for
“violation{s] of contracts between an employer and a labor
organization representing employees in an industry
affecting commerce,” the employer did not invoke that
cause of action but alleged only a state breach of contract
claim. See Franchise Tax Bd. v. Construction Laborers
Vacation Trust, 463 U.S. 1, 23 (1983) (describing complaint
in Avco). This Court, nonetheless, sustained the removal of
the claim to federal court because an action enforcing a
collective bargaining agreement “is controlled by federal
substantive law even though it is brought in a state court.”
Aveo, 390 U.S. at 559. Because a claim to enforce a
collective bargaining agreement could be brought only
under the LMRA’s cause of action, it was “clear” that the
claim under the collective bargaining agreement was “one
arising under the ‘laws of the United States’ within the
meaning of the removal statute.” Jbid.
That is not to suggest, as do respondents (Br. in Opp.
18), that the “artful pleading” doctrine applies only when a
federal statute has a broad preemptive scope. Although
sometimes described as a doctrine of “complete preemption,”
the circumstances under which a district court may treat a
purportedly state law claim as arising under federal law
are not predicated upon the substantive breadth of the
statute’s preemption. Indeed, as this Court’s cases under
19
the Employee Retirement Income Security Act (ERISA), 29
U.S.C. § 1001 et seg., make clear, the critical question is
whether Congress provided the plaintiff with a federal
cause of action against the defendant to replace the state
cause of action. Thus, in Franchise Tax Board, the Court
held that certain state law claims did not “arise under”
federal law even though it “may well be” that ERISA
preempted the challenged state conduct. The Court
explained that the complaint did not “arise under” federal
law because ERISA did “not provide anyone * * * with an
express cause of action for a declaratory judgment on the
issues in this case.” 463 U.S. at 26. By contrast, in
Metropolitan Life Insurance Co. v. Taylor, 481 U.S. 58
(1987), the Court held that when a plaintiff's common law
contract and tort claims against his employer relating to
an employee benefit plan were preempted by ERISA and
ERISA also “provides an exclusive federal cause of action
for resolution of such disputes,” id. at 62, then the “suit,
although it purports to raise only state law claims, is
necessarily federal in character” and is “removable to
federal court by the defendants,” id. at 67.
Thus, this Court’s cases establish that, where federal
law provides the exclusive cause of action by preempting
state causes of action and by creating a federal private
right of action, a federal court must treat as federal a
complaint purportedly raising only the displaced state
cause of action. As discussed above, see pages 8-12, supra,
the National Bank Act does precisely that by preempting
all state causes of action for persons who allege they paid
a national bank an interest rate greater than that allowed
by Section 85, and by creating in Section 86 a federal
cause of action for the claim.
20
C. Removal To Federal Court Of Complaints
Challenging The Rate Of Interest Charged By
National Banks Furthers The Comprehensive
Regulatory Scheme Established By Congress
Over National Banks By Promoting Uniformity
And Reducing The Costs Of Litigation
As demonstrated above, the straightforward test
established by this Court to determine “arising under”
jurisdiction when a plaintiff attempts to rely on a state
law claim rather than a federal cause of action 1s whether
that federal law preempts the state cause of action and
creates a private federal cause of action in its place. That
test, met here, comports with the Court’s insistence that
“jurisdictional rules * * * be clear,” so that judicial and
litigation resources are not unnecessarily expended on
procedural matters. Lapides v. Board of Regents, 122
S. Ct. 1640, 1645 (2002); see also Burnham v. Superior Ct.,
495 U.S. 604, 626 (1990) (plurality opinion of Scalia, J.).
The need for such clarity is particularly important in the
removal setting, where a district court's determination
that removal is not proper is rarely subject to appellate
review. See 28 U.S.C. § 1447\d).
The Court also has suggested that the question
whether an action “arises under” federal law may include
a consideration of “the nature of the federal interest at
stake” in light of “the demands of reason and coherence,
and the dictates of sound judicial policy,” and “with an eye
to practicality and necessity.” Merrell Dow Pharm., Inc. v.
Thompson, 478 U.S. 804, 814 n.12, 810 (1986). Although
amici believe that such a factor is not pertinent here
because the statutory language of the National Bank Act
is so clear, to the extent such considerations are relevant,
the nature of the federal interest at stake in adjudicating
usury claims against national banks in federal court
weighs heavily in favor of federal jurisdiction.
—"
1. The OCC engages in extensive examinations of
each national bank to ensure compliance with
federal law, including federal limits on inter-
est rates, and requires corrective action
whenever violations are found
There are more than 2,100 national banks throughout
the country. Those institutions are responsible for more
than 58 percent ($3.8 trillion) of the total assets of all
banks in the United States. See Comptroller of Currency,
Performance and Accountability Report: Fiscal Year 2002,
at 1 (2002). Although each national bank is a private
association with shareholders that is operated for profit,
each national bank also is a federal instrumentality
closely supervised and regulated by the OCC to ensure
that the bank engages in safe and sound financial prac-
tices. See 12 U.S.C. $$ 93(b), 1818(b). That degree of
regulation is, of course, of paramount importance to the
Nation’s economy, which relies on the financial safety and
soundness of those institutions.
Perhaps the “most effective” tool for federal regulation
of banking is “the broad visitorial power of federal bank
examiners.” United States v. Philadelphia Natl Bank, 374
U.S. 321, 329 (1963). Whenever the OCC deems it neces-
sary, but in most cases at least once each year, see 12
U.S.C. § 1820/d), it may order “a thorough examination of
all the affairs” of a national bank. 12 U.S.C. § 481. During
Fiscal Year 2002, the OCC conducted more than 3,100
examinations of national banks. See Performance and
Accountability Report, supra, at 9. In addition, national
banks are required to furnish detailed periodic reports of
their operations. See 12 U.S.C. $161. “In this way the
(federal regulatory] agencies maintain virtually a day-to-
day surveillance of the American banking system.” Phila-
delphia Natl Bank, 374 U.S. at 329. Indeed, for the largest
national banks, the concept of day-to-day oversight is
literally true, as the OCC has placed “full-time teams of
resident examiners on site at the largest banks — as many
22
as 40 or 50 examiners at the very largest.” Comptroller
John D. Hawke, Remarks before the Risk Management
Association's Capital Management Conference (June 6, 2002)
‘available at www.occ.treas.gov/ftp/release/2002-49 txt); see
also Performance and Accountability Report, supra, at 10
(describing distribution of examiners based on bank size
and assets). This system of federal supervision is exclu-
sive. Except under very narrowly defined circumstances,
state regulators may not examine the records of a national
bank, see 12 U.S.C. § 484; 68 Fed. Reg. 6363, 6366-6370
(Feb. 7, 2003), and cannot review the OCC’s examination
reports except at the Comptroller's “sole discretion,” 12
C.F.R. § 4.37(c).
Significantly for purposes of this case, the OCC’s bank
examiners monitor loans granted by national banks,
including the interest charged on those loans, as part of
their general safety and soundness examinations. See
generally Comptroller of Currency, Comptroller's Hand-
book: Assets: Loan Portfolio Management ‘Apr. 1998);
Comptroller of Currency, Comptroller's Handbook: Liquid-
ity and Funds Management: Interest Rate Risk (June
1997). In addition, as part of each national bank’s con-
sumer compliance review, the records of the national bank
are examined “[t]o determine the bank’s compliance with
Interest on Loans” requirement by “reviewling] loan
reports or a sample of loans (originated since the preced-
ing examination) to determine that the rates charged
comply with 12 USC 85.” Comptroller of Currency, Comp-
troller’s Handbook: Consumer Compliance Examination:
* The Comptroller's Handbook is a series of publications issued by
the OCC that “was developed primarily for national bank examiners to
use in supervising banks, but has grown to serve other users as well. It
educates readers about bank activities and provides a guide to how the
OCC expects banks to conduct different activities.” Comptroller of
Currency, Comptroller's Handbook: Bank Supervision and Examination
Process. Introduction 5 (July 1994).
23
Other Consumer Protection Laws and Regulations 3, 6
(Oct. 1996); see also Comptroller of Currency, Comptrol-
ler’s Handbook: Consumer Compliance Examination:
Community Bank Consumer Compliance 11, 44 (Nov. 2000)
(similar).
When “violations of law or regulations are identified,”
national banks must take “corrective action.” Other Con-
sumer Protection Laws, supra, at 3, 7; see also Comptroller
of Currency, Comptroller's Handbook: Consumer Complt-
ance Examination: Overview 4, 15-16 (Aug. 1996). In
addition, the OCC has the authority to impose civil penal-
ties for each day during which a violation of Section 85
continues, ranging from $5,000 a day for an unintentional
violation to $1,000,000 a day for knowingly committing
such a violation for substantial pecuniary gain. See 12
U.S.C. § 93\b). The “frequent and intensive” examinations,
Philadelphia Nat'l Bank, 374 U.S. at 330, performed by
the OCC significantly reduce the risk of national banks
engaging in any systemic violations of Section 85, while
ensuring a uniform interpretation of federal law through a
unified enforcement scheme.
2. Litigation in state courts involving the in-
terest rates paid to national banks is likely
to lead to a lack of uniformity concerning
the requirements of the National Bank Act
and the propriety of determinations by the
OCC, thereby increasing the costs and un-
certainty of litigation
a. Unfortunately, civil actions in state courts against
national banks concerning the rates of interest paid, such
as the one brought by respondents, are not uncommon
occurrences. Such cases rarely generate reported opinions
in state courts, however, because most state trial court
opinions are unpublished and, for the reasons discussed
below, most such cases are settled if they are not disposed
24
of early at the trial level.’ Such suits are often brought
purportedly under state causes of action to recover dam-
ages in excess of those available under the federal cause of
action or to challenge conduct authorized by federal law,
even though it has been clear for more than 125 years that
such state causes of action are preempted as applied to
national banks. See Farmers’ & Mechanics’ Nat'l Bank v.
Dearing, 91 U.S. 29, 35 (1875); Barnet v. National Bank,
98 U.S. 555, 558 (1878); Smiley v. Citibank (South Da-
kota), N.A., 517 U.S. 735, 744 (1996). Despite the baseless
nature of the suits as a matter of federal law, the failure of
a state court to dismiss immediately a case as preempted
may compel a national bank, ever-conscious of the need to
limit risk, to enter into settlements.
It is the experience of amici and their member institu-
tions that a prompt dismissal on preemption grounds is
unlikely to occur in state trial courts. Amici do not suggest
that all state trial courts will incorrectly refuse to dismiss
preempted claims and remedies, or that all federal district
’ For examples of complaints filed in state courts against national
banks concerning the rate of interest charged that were removed (even
if only briefly) to federal court, see, e.g., Jones v. BankBoston, NA., 115
F. Supp. 2d 1350 (S.D. Ala. 2000); Matheis v. May Dep't Stores Co., 1999
US. Dist. LEXIS 21917 (E.D. Mo. May 21, 1999), rev'd, 218 F.3d 919
‘Sth Cir 2000); Partin v. Cableview, Inc., 948 F. Supp. 1046 (S.D. Ala.
1996); Fortenberry v. Southtrust Bank of Ala., N.A., 1996 U.S. Dist.
LEXIS 21685 (N.D. Ala. Mar. 21, 1996); Hunter v. Rich's Dep't Stores,
945 F. Supp. 1500 (N.D. Ala. 1995); Moss v. SouthTrust Mobile Servs.,
Inc., 1995 U.S. Dist. LEXIS 21770 (N.D. Ala. Sept. 22, 1995); Watson v.
First Union Nat'l Bank of S.C., 837 F. Supp. 146 (D.S.C. 1993); Goehl v.
Mellon Bank, 825 F. Supp. 1239 (E.D. Pa. 1993); Copeland v. MBNA
Am., N.A., 820 F. Supp. 537 (D. Colo. 1993); Ament v. PNC Nat! Bank,
825 F. Supp. 1243 (W_D. Pa. 1992); Nelson v. Citibank (South Dakota),
N.A., 794 F. Supp. 312 (D. Minn. 1992); M. Nahas & Co. v. First Natl
Bank of Hot Springs, 739 F. Supp. 1338 (W.D. Ark. 1990), aff'd, 930
F 2d 608 (8th Cir. 1991); Beeman v. MBank Houston, NA., 691 F. Supp.
1027 (S.D. Tex. 1988).
25
courts will always resolve preemption questions correctly.
Amici’s experience, however, has been that federal courts
are more likely to analyze preemption questions correctly
more often, an experience that may be explained by the
differing structural incentives faced by state courts. See
Karen A. Jordan, The Complete Preemption Dilemma, 31
Wake Forest L. Rev. 927, 990 (1996) (“state courts may be
less inclined to give full effect to a federal preemption
provision” because “a federal preemption provision may
harm state citizens by eradicating a state right to a
remedy”); cf. Mazaika v. Bank One, Columbus, N.A., 653
A.2d 640, 642 n.3 (Pa. Super. Ct. 1994) (finding no pre-
emption of usury claim against national bank and likening
the interest rate charged by a national bank in compliance
with the National Bank Act to the conduct of Don Cor-
leone, a fictional organized-crime figure and loan shark),
rev'd, 680 A.2d 845 (Pa. 1996).
Whatever the reasons, amici’s perception that state
courts are more amenable to plaintiffs’ claims against
national banks also appears to be shared by the plaintiffs’
bar. Many suits against national banks are initially
brought in state court and are carefully drafted, as was
the complaint in this case, with the apparent goal of
preventing removal to federal court based on diversity
jurisdiction by limiting the amount in controversy just
below $75,000. Comp. ¥ 62 (demanding damages “not to
exceed $74,900 per named Plaintiff”); Br. in Opp. App. lla
(same demand in different lawsuit against national bank).
In addition, cases removed from state to federal court
on the basis of federal question jurisdiction (excluding
prisoner suits) are dismissed before trial 72% of the time,
compared with a 31% dismissal rate for federal question
suits originally filed in federal court. See Kevin M. Cler-
mont & Theodore Eisenberg, Do Case Outcomes Really
Reveal Anything About the Legal System: Win Rates and
Removal Jurisdiction, 83 Cornell L. Rev. 581, 594 tbl.
26
1 (1988) (describing data and suggesting various explana-
tions). That substantial disparity suggests that cases with
weaker federal claims are originally brought in state
court, perhaps in the belief that state courts are less likely
to dismiss a plaintiff’s claims, which in turn increases the
possibility of extracting a settlement from the defendant.
b. The mere existence of a state court decision refus-
ing to find preempted state substantive laws and remedies
concerning the rate of interest paid to national banks can
create uncertainty and thus add to various forms of risk
that are the subject of federal regulation and frequent
federal examination. The OCC has concluded that, even if
a national bank ultimately prevails in litigation of a claim,
the mere act of litigating the claim “can disrupt the
operations of a bank, possibly reducing the institution's
earnings and capital,” by causing “foregone business
opportunities, loss of corporate focus, or diminished
reputation in the community.” Comptroller of Currency,
Comptroller’s Handbook: Other Areas of Examination
Interest: Litigation and Other Legal Matters 1 (Feb. 2000).
Additionally, according to the OCC, “depositor confidence
in an institution may be shaken by litigation against the
bank, and may lead to unanticipated loss of both deposits
and capital.” Jd. at 3. Because “[rjeal or threatened litiga-
tion can pose significant costs to banking organizations,”
the OCC requires its examiners “to identify any pending or
threatened litigation involving the bank, assess the
liabilities and any impact from those legal matters, and
determine whether the bank is effectively identifying,
measuring, monitoring, and controlling those risks.” Jd. at
1. Considering the “likelihood of an unfavorable outcome,”
the “estimated cost of defending the claim,” and “an
estimate of the amount or range of potential loss,” the
examiner must “(djetermine whether threatened or pend-
ing litigation [or] claims * * * against the bank exist and
quantify their potential effect on capital, earnings, and
financial soundness.” Jd. at 11, 12, 13.
27
Permitting a national bank to remove to federal court
a case concerning the rate of interest it charged reduces
the likelihood of error, confusion, and delay and thus
reduces the potential effect of such a case on the financial
soundness of an institution in an exclusively federally-
regulated industry. See American Law Inst., Study of the
Division of Jurisdiction Between State and Federal Courts
4 (1969) (“Federal question jurisdiction is necessary to
preserve uniformity in federal law and to protect litigants
relying on federal law from the danger that state courts
will not properly apply that law, either through misunder-
standing or lack of sympathy.”); The Federalist No. 80, at
476 (Alexander Hamilton) (Clinton Rossiter ed., 1961)
(“The mere necessity of uniformity in the interpretation of
the national laws, decides the question. Thirteen inde-
pendent courts of final jurisdiction over the same causes,
arising upon the same laws, is a hydra in government,
from which nothing but contradiction and confusion can
proceed.”).
Although erroneous state trial court decisions on
preemption can be appealed, such appeals are generally
available only after the costs of discovery and litigation
have been expended and a final judgment has been en-
tered. National banks are thereby denied one of the
primary benefits of preemption - a quick dismissal of
preempted state law claims as a matter of law. And al-
though this Court ultimately remains available to resolve
any conflicts between the state and federal courts, the
uncertainty of such a discretionary avenue of relief at the
end of the litigation defeats Congress’s intent to preempt
state causes of action challenging interest rates of national
banks in favor of a singular federal remedy. See Arthur R.
Miller, Artful Pleading: A Doctrine in Search of a Defini-
tion, 76 Tex. L. Rev. 1781, 1821-1822 (1998) (“One of the
purposes of complete preemption is to vindicate Congress's
purported desire not to allow any causes of action in a
particular substantive area other than federal causes of
28
action. Assuming that this intent can be found, it is not
enough to respond *** that the Supreme Court can
vindicate the underlying statutory purpose through
appellate jurisdiction because this will not satisfy the
congressional desire to abrogate state causes of action.”).
Nor does it create the level of certainty necessary for the
optimal functioning of a national banking system.
c. In addition, national banks, subject to the pervasive
federal oversight of the OCC, have a particular interest in
not having state courts second-guess federal agency
determinations regarding issues that may affect the
national banks’ financial safety and soundness. Because
the OCC is charged with exclusive governmental enforce-
ment of Section 85, its determination about the scope and
meaning of the statute is accorded great deference. See
Smiley v. Citibank (South Dakota), N.A., 517 U.S. 735,
739-741 (1996). Allowing suits in state court to proceed
against a national bank on necessarily federal claims over
the objection of the national bank could interfere with the
OCC’s exclusive regulatory jurisdiction by permitting, in
essence, collateral attacks on the OCC’s determinations.
A case currently pending in Louisiana state court
reveals the problems that can result when a state court
sits to review bank conduct that is sanctioned by a federal
regulatory body. In Heaton v. Monogram Creditcard Bank
of Georgia, No. 98-8275 (La. Civ. Dist. Ct., Orleans Par-
ish), the plaintiffs brought a class action suit against a
defendant alleging violations of state usury laws. See
Heaton v. Monogram Creditcard Bank of Ga., 297 F.3d
416, 419 (5th Cir. 2002) (describing litigation). The Federal
Deposit Insurance Corporation (FDIC) had previously
certified that the defendant was a “bank” for purposes of
the Federal Deposit Insurance Act, which determination,
inter alia, entitled it to deposit insurance, subjected it to
federal regulation, and preempted certain state usury
laws, 12 U.S.C. § 1831d(a). See 297 F.3d at 424. The state
court refused to accept the FDIC's certification and held
29
that whether the defendant was a “bank” entitled to the
federal preemption defense was a factual question to be
determined by a jury. Heaton v. Monogram Creditcard
Bank of Ga., No. 98-8275, Judgment at 3-4 (La. Civ. Dist.
Ct., Orleans Parish July 9, 2001). The state court also
refused to allow the FDIC to intervene in the litigation tw
defend its actions. See Heaton, 297 F.3d at 423 n.10. On
removal by the defendant, the federal district court re-
manded for lack of jurisdiction, but on appeal, the order
was reversed after the intervention of the FDIC in the
litigation. See id. at 420. (The case is still pending in state
court because the federal court of appeals’ mandate has
not issued due to a pending petition for rehearing). That
litigation has been pending for five years, incurring
substantial and unnecessary fees and costs, because of the
failure of the state court promptly and properly to resolve
the question of federal preemption.
While certainly an unusual case procedurally, similar
difficulties would arise were a state court to conclude that
a practice that was approved by the OCC during the
course of its examination of a national bank nonetheless
violated the National Bank Act as interpreted by a state
court. To maintain the proper roles of federal and state
courts, national banks should be permitted to invoke
federal court jurisdiction so that inquiry into the sound-
ness of the OCC’s judgment can be made, if at all, by
federal trial and appellate courts. Cf Tarble’s Case, 80
U.S. (13 Wall.) 397 (1871).
From their inception, “National banks have been
National favorites.” Tiffany v. Nat'l Bank of Mo., 85 US.
(18 Wall.) 409, 411 (1874). In furtherance of its policies of
competitive and financially sound national banking
system, Congress preempted state law usury causes of
action against national banks and replaced them with a
single federal cause of action. The “practicality and neces-
sity,” Merrell Dow Pharm., 478 U.S. at 810, of a federal
forum to vindicate those national policies complements the
30
legal analysis that demonstrates that civil actions chal-
lenging the rate of interest paid to a national bank neces-
sarily “arise under” federal law.
CONCLUSION
For the reasons set forth above, the judgment of the
United States Court of Appeals for the Eleventh Circuit
should be reversed.
Respectfully submitted.
Drew S. Days, III
Counsel of Record
BETH S. BRINKMANN
SETH M. GALANTER
MORRISON & FOERSTER LLP
2000 Pennsylvania Ave., N.W.
Washington, DC 20006
(202) 887-1500
Attorneys for Amict Curiae
MARCH 2003
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.