The Supreme Court agreed yesterday to decide whether the rapidly expanding regional banking movement is constitutional.
Federal banking law generally prohibits a bank holding company from one state from taking over a bank located in another state.
But Massachusetts and Connecticut, interpreting a 1956 federal law to say that states have the power to authorize interstate banking, two years ago allowed takeovers of banks in their states. However, the state laws allowed such takeovers only if the holding companies were based in New England.
Opponents of regional banking, particularly large banks in established commercial centers that might be frozen out, argue that the Bank Holding Company Act never intended to authorize such a scheme and that such state laws unconstitutionally infringe on interstate commerce.
The regional limitations were challenged by Northeast Bancorp Inc., based in Connecticut, and New York-based Citicorp, after the Federal Reserve Board approved the regional agreements. The 2nd U.S. Circuit Court of Appeals in New York upheld the board's action.
The banks' appeal argued that Congress could not have intended to allow the "discriminatory Balkanization" of the banking industry by the states.
The Federal Reserve Board acknowledged that the New England agreements, which were followed by similar ones in the Southeast and other parts of the country, "might well lead to a significant restructuring of the banking industry."
The board suggested the justices not take the case, arguing that the appeals court ruling was correct and that there was a possibility that Congress might pass laws making the present controversy moot.
The Senate last September passed a bill that would have authorized states to pass regional banking laws for five years, but the House took no action before adjournment. "There is some indication," Solicitor General Rex E. Lee said on behalf of the board, that Congress will take up the issue again in the current session. The case is Northeast Bancorp Inc. v. Board of Governors of the Federal Reserve System.
In a case affecting several hundred thousand taxpayers each year, the justices also agreed to decide if the IRS can seize money in a joint bank account to collect back taxes owed by one of the depositors.
The case involves a Pine Bluff, Ark., man named Roy Reeves, who, according to the IRS, owed $857 in taxes for 1977. The federal government asked the National Bank of Commerce, where the man had joint checking and savings accounts with his wife and mother, for the money.
In the past, the government said, banks generally pay the IRS. But in this case the bank refused, saying it did not know how much money belonged to Reeves as opposed to his mother or wife.
The 8th U.S. Circuit Court of Appeals supported the bank, saying the government could not order banks to hand over such funds until the IRS, through a separate suit, allows those who don't owe the government to protect their assets.
The IRS appeal said such a procedure would "place an enormous burden" both on the IRS and the courts and would cost the government "tens of millions of dollars to litigate." In addition, the IRS said more money would be lost through the delay in collecting hundreds of millions of dollars in revenue while litigation was pending, and there was a risk that the bank accounts would vanish in the interim. The case is U.S. v. National Bank of Commerce.
The justices also agreed to decide, in Bateman Eichler, Hill Richards Inc. v. Carl F. Berner whether investors who illegally buy stock based on illegal tips but lose money from the deal can sue those who gave them the inside information.
Federal securities laws prohibit passing on or buying stock based on inside information. The investors in this case said the stock of an oil and gas company was manipulated and the inside information they received by a brokerage firm was false.
The justices will review a California federal appeals court ruling that investors acting illegally when they buy stock on illegal tips do not share "equal fault" with those who passed on the tips.
The appeals court said that if brokers and company officials could avoid suits by duped investors -- under the legal theory that each was equally to blame -- there would be no way to punish those brokers and officials for their fraudulent acts.