Dodd-Frank Stands as Judge Rejects Suit by States, Bank

A lawsuit by 11 states and a Texas bank challenging the Dodd-Frank law’s financial regulation overhaul was dismissed by a federal judge.

U.S. District Judge Ellen Segal Huvelle in Washington ruled in yesterday’s decision that the states and the State National Bank of Big Spring, Texas, didn’t have legal standing to bring their claims. She also said they “did not come close” to showing they would suffer financial injury as a result of the overhaul.

The plaintiffs claimed the law establishing the Consumer Financial Protection Bureau violates the U.S. Constitution because Congress doesn’t appropriate its budget, the president has limited powers to remove its director and the courts face restrictions in reviewing its actions.

The suit, filed in June 2012 was brought by the bank and the Competitive Enterprise Institute, a group that advocates for limited government. In September, states including South Carolina and Michigan joined the litigation.

The states, in an amended complaint, challenged only the portion of Dodd-Frank that empowers the Treasury secretary to order a liquidation of a financial company whose collapse may threaten the stability of the banking system.

Financial Crisis

Dodd-Frank was enacted to curb the kinds of transactions that led to the 2008 financial crisis. It imposed new rules on derivatives, limits the ability of banks to trade on their own account and crafted new regulations for mortgages.

C. Boyden Gray, lead attorney for the plaintiffs called the ruling “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,” Gray said.

He said the ruling also misconstrues “the real and immediate” loss of substantive rights by the states, which under Dodd-Frank would be denied “meaningful” judicial review to protect their investments in a bank liquidation.

The banks and the states told Huvelle today they intend to appeal her ruling.

The case is State National Bank of Big Spring v. Geithner, 12-cv-01032, U.S. District Court, District of Columbia (Washington).

To contact the reporter on this story: Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net; Tom Schoenberg in Washington at tschoenberg@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net