Dodd-Frank Violates Separation of Powers and Constitutional Checks and Balances

In a recent edition of the Washington Post, former White House counsel C. Boyden Gray noted that the sweeping Dodd-Frank financial “reform” law passed last summer is unconstitutional, since it gives the government virtually unchecked power to seize financial firms that supposedly might fail, and to legislate through regulation.  For example, under Dodd-Frank:

“The Treasury can petition federal district courts to seize not only banks that enjoy government support but any non-bank financial institution that the government thinks is in danger of default and could, in turn, pose a risk to U.S. financial stability. If the entity resists seizure, the petition proceedings go secret, with a federal district judge given 24 hours to decide ‘on a strictly confidential basis’ whether to allow receivership. There is no stay pending judicial review. . .The court can eliminate all judicial review simply by doing nothing for 24 hours, after which the petition is granted automatically and liquidation proceeds. Anyone who ‘recklessly discloses’ information about the government’s seizure or the pending court proceedings faces criminal fines and five years’ imprisonment. As for judicial review of the liquidation itself, the statute says that ‘no court shall have jurisdiction over’ many rights with respect to the seized entity’s assets . . .There is little precedent for this kind of unreviewable ‘Star Chamber’ proceeding.”

As Gray noted, this “almost unlimited, unreviewable and sometimes secret bureaucratic discretion, with no constraints on” seizures, is “a breakdown of the separation of powers” mandated by the Constitution, “which were created to guard against the exercise of arbitrary authority.”  (Gray chronicled some of the Dodd-Frank law’s other constitutional violations in a 12-page article last fall available at this link. Others have argued that the lack of judicial review in Dodd-Frank will lead to seizures of property without due process or unconstitutional Takings).

Gray noted that courts are deemed by legal fiction to have approved a company’s seizure if they don’t act in 24 hours to stop it.  And that is exactly what will happen – the courts will not act in time to stop such seizures even if a judge senses that the seizure is probably unwarranted and unnecessary.  As a former federal district court clerk (who drafted opinions and orders for a judge), I can attest from personal experience that courts seldom, if ever, decide on something as momentous as the fate of a company in a mere 24 hours (especially since a company that objects may not even be able to file a detailed legal response to the seizure within 24 hours, much less obtain a court hearing from a busy judge within that short time).  Ruling on court motions that decide the fate of even the smallest and most insignificant lawsuit usually takes weeks of briefing, not a mere 24 hours.  And some judges and their clerks are all too happy to minimize their workload by getting rid of cases on technicalities and using jurisdictional dodges to dismiss challenges that are factually well-founded.

The net result is that some judges will delay ruling on an unjustifiable seizure until it is too late, when it is deemed approved by the mere passage of time, thus making it unnecessary to hold a hearing or read complicated legal briefs about whether or not a seizure is a good idea.  (Court personnel have every incentive to avoid work by getting rid of lawsuits without ruling on their merits.  When I was a young judicial clerk, fresh out of law school, I once rubberstamped a settlement in a complicated patent/antitrust lawsuit, thus ridding myself of the need to draft rulings on motions in that time-consuming case.  I did so even though I did not really understand the details of the settlement, and I have since learned that settlements in such cases occasionally contain buried provisions that are anticompetitive or at odds with public policy.  But approving the settlement made my life easier, and enabled me to go on vacation rather than spending more of my weekends reading painfully-dull patent-law treatises.)

There is yet another way that Dodd-Frank violates the Constitutional separation of powers, that Gray doesn’t mention: Its delegation of power to officials not selected by the President and confirmed by the Senate.  The Financial Stability Oversight Council, which makes threshold determinations about which financial companies are subject to seizure by the government, includes four members who are not appointed by the president, but rather by groups of state officials. That violates the Constitution’s Appointments Clause, and the D.C. Circuit Court of Appeals’ ruling in Federal Election Commission v. NRA Political Victory Fund (1993), which forbids even nonvoting members of federal commissions from being appointed by people outside the executive branch.

The Council also contains an federal employee who is not appointed by the president, even though the Council is powerful enough that its members must, under the Appointments Clause, be nominated by the president and confirmed by the Senate.  (Under the Appointments Clause, only “inferior” officials without a lot of power can be picked by someone other than the President; all others must be picked by the president alone.)

As Gray noted, the Council is not only powerful, but also largely immune from oversight.  In addition to determining which companies are subject to seizure, it also has the power to “control virtually all of the activities of any financial institution for almost any purpose on a two-thirds vote of its members. The courts are not authorized to review whether the council has correctly interpreted the statute, though there isn’t much statutory direction for the courts to interpret in any event.”

Giving it such a blank check violates the separation of powers, which embodies a variety of doctrines (such as the non-delegation doctrine enforced by the Supreme Court in the Schechter Poultry case) designed to prevent agencies from effectively legislating through regulation.