Dodd-Frank challengers respond to feds' motion to dismiss

By Jessica M. Karmasek | Mar 4, 2013

WASHINGTON — The attorneys general of 11 states are asking a federal court to deny the government’s motion to dismiss and allow a lawsuit challenging the constitutionality of certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act to proceed.

The government filed its motion to dismiss in the U.S. District Court for the District of Columbia Feb. 22.

In a 34-page memorandum in opposition, the states — including West Virginia, Montana, Texas, Georgia, Alabama, Kansas, Nebraska, Ohio, South Carolina, Oklahoma and Michigan — contend Title II of the act violates the Constitution’s separation of powers, the Fifth Amendment right to due process and the constitutional requirement that the nation’s bankruptcy laws be “uniform.”

“The Government Defendants stress the benefits that Title II was intended to promote. But they fail to acknowledge the corresponding costs that Title II imposed upon creditors, including the State Plaintiffs, who have been deprived of the Bankruptcy Code’s long-guaranteed protections,” the states wrote in the memorandum, filed in district court late Wednesday.

“Title II abrogated their statutory right to equal treatment among similarly situated creditors. The State Plaintiffs’ purely legal claims are ripe, and they can be litigated only in the current pre-liquidation posture.”

In a brief Feb. 15 filing, the government claimed eight of the states — West Virginia, Montana, Texas, Georgia, Alabama, Kansas, Nebraska and Ohio — “lack standing to assert their challenges” and that their claims were “unripe.”

In an earlier press release, West Virginia Attorney General Patrick Morrisey singled out Title II of the act, which creates the Orderly Liquidation Authority, as unconstitutional. It provides a process to liquidate a complex financial company that is close to failing as an alternative to bankruptcy.

The Federal Deposit Insurance Corporation is appointed as a receiver to carry out the liquidation and given several years to finish the process.

“Title II of the Dodd-Frank Act and the Orderly Liquidation Authority negatively impacts West Virginia and its taxpayers,” Morrisey said.

“The Orderly Liquidation Authority allows un-elected Washington bureaucrats to pick winners and losers among affected creditors, entirely abandoning the rule of law.”

He added that it “deprives West Virginia of its rights under federal bankruptcy laws to be treated fairly and equally. The executive branch, in its discretion, could choose to place the rights of other similarly situated creditors ahead of West Virginia.

“In addition to directly impacting West Virginia’s legal rights, this potentially jeopardizes millions of dollars in state pension funds and other state investments.”

Eight states joined the lawsuit Feb. 13. In October, South Carolina, Oklahoma and Michigan joined the suit, which was originally filed in June by the State
National Bank of Big Spring in Texas, the 60 Plus Association and the Competitive Enterprise Institute.

Those three filed their own response to the motion to dismiss. They argue in their 41-page filing that they have “pled concrete and present injuries” caused by the act.

In particular, State National Bank contends the formation and operation of the Consumer Financial Protection Bureau has “substantially increased” its compliance costs, imposed new costs on the management of its outstanding mortgages, and forced it to exit from two profitable lines of business.

As consumers of services offered by financial institutions that are subject to the act, the CEI and 60 Plus members argue they have experienced increased service costs and decreased services as a direct result of the regulatory burdens imposed by the act.

“Contrary to the Government’s claims, this suit does not turn on speculation, but rather focuses on the concrete injuries that have already been inflicted on Plaintiffs by the unchecked and unprecedented powers conferred on defendants by the Dodd-Frank Act,” they wrote in their memorandum.

Sam Kazman, general counsel for CEI, pointed to a ruling by the U.S. Court of Appeals for the District of Columbia Circuit in January that invalidated appointments made by President Barack Obama to the National Labor Relations Board.

“This effectively resolves one of the major issues in our constitutional challenge to Dodd-Frank. But there are other basic issues as well: Dodd-Frank’s institutionalization of the ‘too big to fail’ syndrome through its illegally-constituted Financial Stability Oversight Council; its provisions for split-second liquidations with practically no protection for creditors and practically no judicial review; and the unaccountable nature of its Consumer Financial Protection Bureau,” he said in a statement Wednesday, adding that the act continues to have a “devastating impact” on the economy.

“Rather than address the constitutional validity of this law, the federal government has, through its motion to dismiss, chosen to attack the standing of 11 states, two nonprofit groups and one small but courageous community bank in Texas, as well as the ripeness of their claims. That is the government’s prerogative. Today we filed our responses to the government motion. We look forward to the court’s resolution of these preliminary issues, and we are hopeful that we’ll be able to proceed to litigate the merits of our case.”

Dodd-Frank was signed into law in July 2010 and aimed to regulate the financial industry.

The plaintiffs’ suit, which alleges there are no effective checks and balances in the law, takes particular issue with the CFPB, which was created by the law and is headed by former Ohio Attorney General Richard Cordray.

CEI attorney Hans Bader has said Cordray’s role “is like a czar.”

“He is not accountable to anyone and can’t be fired even if voters elect a president with different ideas about how to protect consumers,” Bader said in June.

However, Cordray’s employment could soon become a question following the D.C. Circuit’s ruling last month.

Although Obama has said he plans to renominate him to the position, a group of 43 Republican senators have said they will continue to oppose the confirmation of any nominee, regardless of party affiliation, to be the bureau’s director.

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