Key Test of State Power for Supreme Court ; in a Case of State vs. Federal Bank Laws, to Be Argued Wednesday, the Roberts Court May Offer Clues to Its Stance on Federalism

Article excerpt

For 11 years, the conservative wing of the US Supreme Court did something decidedly unconservative. It sought to tip the balance of power between the national government and the states.

This so-called federalism revolution was aimed at bolstering the status of the states as dual sovereigns in the face of an ever- expanding sphere of federal power. The justices wrote of state sovereignty and the dignity of the states in terms reminiscent of Colonial distrust of the kind of draconian central authority wielded by the British crown.

But by the time Chief Justice William Rehnquist died in 2005, the "revolution" resembled little more than a constitutional skirmish.

Now with two new members of the Supreme Court, it is unclear whether the justices might again take up the mantle of states' rights. Will a majority seek to boldly build on the string of federalism precedents handed down by the Rehnquist court, or will the judicial minimalism of Chief Justice John Roberts leave it to federal regulatory agencies and Congress to police the constitutional contours of federal-state power?

The high court's first significant opportunity to address those questions arrives in a case set for oral argument Wednesday.

At issue in Watters v. Wachovia Bank is whether a federal agency has the power to preempt state regulations governing national mortgage companies doing business within a state's borders. Put another way, the issue is who regulates mortgage companies affiliated with national banks, state regulators or federal regulators.

Traditionally, mortgage companies had to comply with state registration and other requirements. But in 2001, the federal Office of the Comptroller of the Currency (OCC), which regulates national banks, issued a new rule that subsidiary companies of national banks are governed by federal, not state, regulations.

That action preempted state laws and rules governing mortgage companies and other national bank subsidiaries operating in a particular state.

The current case arose in Michigan. Wachovia Mortgage Corp., a subsidiary of Wachovia Bank, had long done business there. The mortgage company was set up as a Michigan corporation. But because it is a subsidiary of a national bank, company officials said after the OCC rule change that they did not have to comply with Michigan regulations, only federal ones enforced by the OCC.

Linda Watters, who heads Michigan's Office of Insurance and Financial Services, insisted that the company would have to comply with state laws if it wanted to continue to conduct business there.

The dispute went to court. A federal judge and a federal appeals court panel ruled for the company. Two other federal appeals courts have also ruled against state governments in similar litigation.

Michigan is now asking the Supreme Court to reverse the lower court decision, in part, according to state lawyers, because the OCC's preemptive actions encroach on an area of traditional state power enforced by principles of federalism guaranteed in the 10th Amendment.

"In the absence of Congressional authorization, the OCC has no independent power to preempt the validly enacted legislation of a sovereign state," writes Michigan Solicitor General Thomas Casey in his brief to the court. …