Wachovia Bank, NA v. Burke (United States Court of Appeals for the Second Circuit)

In this case, Connecticut’s Banking Commissioner (“Commissioner”) contended that the Connecticut based Wachovia Mortgage Corp. (“Wachovia Mortgage”) is subject to state regulation even though it is a wholly-owned subsidiary of Wachovia Bank (“Wachovia”), which is nationally chartered. Connecticut’s position is directly contrary to 12 C.F.R. § 7.4006, a federal regulation which provides that “[u]nless otherwise provided by Federal law or OCC regulation, State laws apply to national bank operating subsidiaries to the same extent that those laws apply to the parent national bank.” Since state laws do not apply to national banks, under this regulation they also do not apply to a national bank’s wholly-owned subsidiary. Initially a partially-owned Wachovia Bank subsidiary, Wachovia Mortgage complied with Connecticut’s state licensing, inspection and reporting procedures. When it became a wholly-owned Wachovia subsidiary on January 1, 2003, Wachovia Mortgage notified the Commissioner and claimed exemption from state regulation. In response, the Commissioner threatened to issue a cease and desist order prohibiting Wachovia Mortgage from doing business in Connecticut unless it renewed its state license. Wachovia and Wachovia Mortgage then obtained a declaratory judgment from the federal District Court in Connecticut that Wachovia Mortgage is exempt from state regulatory oversight. The Commissioner appealed. NELF’s amicus curiae brief in the Court of Appeals concentrated its argument on the reasonableness prong of the federal preemption analysis of Chevron, USA, Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984) in order to counteract the Commissioner’s public policy argument that state regulation of national banks’ mortgage subsidiaries is required to prevent abuses like “predatory lending.” NELF argued that (1) duplicative state and federal regulation is economically inefficient and (2) constitutional history demonstrates the importance of the Supremacy Clause and federal preemption as part of the system of checks and balances in the United States federal system. The Court of Appeals agreed with NELF that Federal regulations superseded state regulations as a matter of federal supremacy 414 F.3d 305 (2d Cir. 2005). The Commissioner has petitioned the United States Supreme Court for certiorari..