The long awaited Supreme Court case of Wachovia v. Watters was decided today (2007 U.S. LEXIS 4336, Docket No. 05-1342). The court ruled on the preemption of state law as it applies to wholly-owned operating subsidiaries of national banks. The court sided with the bank (and the OCC) and ruled in favor of preemption of state law in a 5-to-3 decision (one justice abstaining) .

The issue was whether Wachovia Mortgage Corporation, a wholly-owned state-chartered subsidiary (incorporated in North Carolina) of Wachovia Bank, a national bank, was subject to Michigan state banking law. All parties agreed that the parent company (the national bank) was under the exclusive federal regulatory authority of the Office of the Comptroller of the Currency, but the state argued that the operating subsidiary was also subject to state regulation.

The court begun by describing the long history of preemption decisions in the context of national banks. The court noted that the ownership of operating subsidiaries by national banks was reauthorized as recently as 1999 by the Gramm-Leach-Bliley Act (GLBA) and that under the GLBA, operating subsidiaries may only engage in activities that national banks could engage in themselves, subject to the same federal regulation. In concluding that state regulations could not coexist with federal regulations as to such subsidiaries, the court stated that the proper approach was not an analysis of corporate structure but rather one of "powers" (here, to engage in the business of banking). It concluded that since the operating subsidiary engaged in an element of the banking business (mortgage lending) under the authority of federal laws and regulations regarding national banks, preemption would apply to the subsidiary just as it does to the national bank itself. On a side note, since Wachovia Mortgage Corporation is state-chartered, state law will still govern corporate issues such as formation, dissolution and corporate governance (this was not disputed by the parties).

By strongly upholding federal preemption doctrine as to operating subsidiaries, the court indirectly gave a boost to preemption theory as to the banks themselves. Nor is the impact of the Watters case limited to national banks and their operating subsidiaries. Preemption is also conferred on federal savings associations and their operating subsidiaries by parallel regulations of the Office of Thrift Supervision. For more information, contact the law firm.