TARP Challenged in Federal Court

Three businesses and five individuals recently brought suit against the Troubled Asset Relief Program (TARP) in the Eastern District of New York.  The case, Henry Builders et al. v. US, alleges that the TARP violated their Fifth and Fourteenth Amendment equal protection rights.  The plaintiffs sought to have their mortgages paid by the government as well and possibly the actual use of the TARP funds.

While the case was ultimately dismissed with prejudice, meaning that the same parties cannot be brought before the court again, the merits of the case were not reached.  The main argument, violation of equal protection, did not receive an opinion.  The plaintiffs challenge the TARP’s exclusive arrangement with financial institutions.  Perhaps the most important holding of the case held that financial institutions were not suspect classifications – a branch of equal protection law that requires more stringent review in addition to making it easier to overturn a law.  Instead, District Judge Vitaliano ruled that the plaintiffs did not have standing.

Article III of the Constitution requires standing in every case brought to the court under its case or controversy provision.  Plaintiffs must prove 1) an injury that is concrete and unique.  This injury can be either actual or imminent.  2) The injury must be causally connected to the complaint and 3) a victory in court would correct the injury.

The court ruled that the plaintiffs did not meet the first standing requirement.  The court explained that the claims, similar to suits brought by taxpayers in general, are “shared with millions of others” and, therefore, not unique. It remains unclear whether the case was dismissed on being brought as a taxpayer suit.  The court notes that the plaintiffs never attempted to apply for TARP funds.

While the plaintiffs would have almost certainly been denied an application, the statute is so ambiguous and if Paulson was in a good mood – no one knows.  Filing worthless pieces of paper sometimes comes in handy.  For instance in District of Columbia v. Heller (the case overturning the DC gun ban), Heller filed for a handgun permit from the District.  Although he was denied the permit that did not exist, this action gave Heller standing to pursue his case in court ultimately serving as the best for the most important Second Amendment decision ever decided.

If anyone has standing, it will most likely be from a competitor who did not receive bailout funding.  A company in this position may not even have to file for TARP money if the company is clearly ineligible on its face.

This is the first of many cases to challenge the TARP.  It does not signal a defeat to every challenge to the TARP.  When a court grants standing to a plaintiff, the merits of the case must be heard.  The TARP clearly violates the Founding Fathers’ vision of the Constitution – now lets hope the courts agree.