WASHINGTON (Legal Newsline) -- A federal judge has dismissed a lawsuit challenging the constitutionality of certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Judge Ellen Segal Huvelle for the U.S. District Court for the District of Columbia said in a memorandum opinion Thursday that the plaintiffs -- a small Texas bank, two conservative advocacy groups and 11 states -- didn't show that the regulatory overhaul has had an impact on them.
"This is an unusual case, as plaintiffs have not faced any adverse rulings nor has agency action been directed at them. Most significantly, no enforcement action -- 'the paradigm of direct governmental authority' -- has been taken against plaintiffs," Huvelle noted in the 62-page ruling.
The judge said she was "unconvinced" that the states have a present injury because their underlying premise that they have a "property right" in the configuration of the Bankruptcy Code is "flawed."
"Simply put, the States' holding of certain statutory rights does not amount to an inalienable property right under the Bankruptcy Code," she wrote, adding that the injuries asserted are even more speculative, for the states have not claimed any actual damage resulting from increased economic uncertainty.
Nor can the states prevail on an allegation of future injury, Huvelle said.
"There are a series of contingencies that must occur before they would suffer any actual harm," she explained. "It is true that Dodd-Frank empowers the FDIC to treat creditors' claims somewhat differently than they are treated in traditional bankruptcy proceedings, but no one can know if this will ever happen.
"Thus, the States do not face a future harm that is 'certainly impending.'"
In February, the federal government filed a motion to dismiss the lawsuit.
The states -- including West Virginia, Montana, Texas, Georgia, Alabama, Kansas, Nebraska, Ohio, South Carolina, Oklahoma and Michigan -- responded, arguing that Title II of the act violates the U.S. 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 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."
Those states joined the lawsuit February. In October, South Carolina, Oklahoma and Michigan joined the suit, which was originally filed last June by the State National Bank of Big Spring in Texas, the 60 Plus Association and the Competitive Enterprise Institute.
The private plaintiffs in the lawsuit -- State National Bank, 60 Plus and CEI -- argue 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.
Dodd-Frank was signed into law in July 2010 and aimed to regulate the financial industry.
The plaintiffs' suit, which alleged there are no effective checks and balances in the law, also took 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 last June.
Cordray has since been confirmed as the bureau's director.
C. Boyden Gray, lead counsel for the plaintiffs, called the court's opinion "deeply flawed."
"State National Bank of Big Spring is a community bank that has served its community for generations, and it is disturbing that the opinion -- and the government -- ignored the very real harm Dodd-Frank has inflicted on it and the customers who rely on the bank to provide loans for everything from their home to their small business," he said in a statement Friday.
"Specifically, Dodd-Frank's complex new regulatory regime has forced State National Bank, like many other banks, to expend thousands of dollars simply to ensure that they are in compliance with the CFPB's new policies.
"Furthermore, Dodd-Frank caused the bank to substantially change several of the services that it traditionally provided customers. Contrary to the government's assertions, and the courts' opinion, these costs are not self-inflicted."
Gray said the court's decision also misconstrued the "real and immediate" loss of substantive rights that the states have suffered because of Dodd-Frank.
"If this decision stands, taxpayers and pension holders across the country will have no guarantee of being treated fairly or made whole in the event of a future financial crisis," he said.
"Instead, Dodd-Frank creates a 'star chamber' procedure that provides states and other creditors with no notice of impending bank 'liquidations' until after they have begun, after which Dodd-Frank denies the states meaningful judicial review to protect their rights and their financial investments -- including the states' pension funds."
Gray said the plaintiffs plan to file a notice of appeal immediately.
Click here to read the judge's full opinion.
From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.