Last week, the Supreme Court heard the case of Watters v. Wachovia Bank (see Jon’s quick take below, legal background here, the Sixth Circuit opinion here, and the transcript of the oral argument here). The Big Nine will decide whether national banks like Wachovia must play by the rules of the states in which they have set up separate corporations to do business. The federal preemption argument sounds pretty dry, but for consumers there is a point. If Wachovia prevails, then our local legislatures will be powerless to protect us from the biggest, savviest predatory lenders. If we want protection, we will have to go to Congress, where the big banks are ready to play hardball.

Look behind the headlines, and you’ll see that Wachovia wants to have their cake and eat it too. …

Wachovia has set up a separate corporation to do business in Michigan, as a judgment-proofing strategy (defined here) to limit their tort liability under the legal ruse that each corporation is a separate entity, which happens to have very little money on the books. If Wachovia-Michigan were to defraud a Michigan consumer, then even if he wins in court, perhaps with some punitive damages, then the consumer will find that the local Wachovia corporation has no money to pay the judgment. That’s old hat for corporate America, and some scholars think that the ruse is expanding to spell the “death of liability” (see for example Lynn Lopucki in the Stanford Law Review).

When Wachovia gets to the Supreme Court, however, they want to say that all their separate state-based corporations are actually one, big national bank. They say that the federal banking law preempts state laws, not only for national banks’, but also for such state-chartered “operating subsidiaries.” The Bush Administration agrees, sending Sri Srinivasan, an assistant to the solicitor general, to argue on their behalf (see his brief, here).

Wachovia was, of course, pushing this case long before it knew the results of the November Congressional elections. One wonders if they are still so excited about the prospect of being held to federal law now that Congress is at least somewhat more likely to toughen up that law. (See my previous post.) Or, Congress might just clarify the precise preemption issue in favor of the states, as Rep. Luis Gutierrez, D-Ill., ranking member of the House Financial Services Oversight and Investigations Subcommittee, has sponsored legislation to do. (See CongressDaily report, subscription required.)

For plaintiffs lawyers, this case might also present a nugget. As soon as the Wachovia lawyer, Robert Long (of Covington & Burling), opened his mouth, Justice Stevens tried to nail him down: “Wachovia has branch banks all over the country. Are they generally subsidiaries or are they divisions of the bank?” Long tap-dances for a while, but Stevens reminds him, “I'm asking a factual question.” Long then bites the bullet, explaining that Wachovia generally tends to use divisions within the same corporation, but created a subsidiary in Michigan, at least in part to avoid tort liability there. If Long wins on his general theme that these separate corporations should enjoy the same preemptions that the national bank enjoys, I can imagine a state court judge saying that it goes both ways. If preemption power goes down to subsidiaries, then tort liability ought to go up. State court judges have broad authority to pierce corporate veils, but they rarely do so. This might give them just the impetus they need. If so, and Congress tightens federal law, Wachovia may wish it never got its day in the Supreme Court after all!

For those interested in Supreme Court personalities, this case also presents an interesting test for those who espouse both a states-rights ideology but also tend to tilt towards big business. Scalia and Thomas have been criticized for raising the “states rights” banner when useful for striking down consumer or environmental protections, but then alternatively raising the “deference to Congress or the Executive" banner when necessary to preempt state laws that are tougher for big business. (See a People for the American Way report on the 2005 term, for example.) Which will win out this time?