Northeast Bancorp, Inc. v. Board of Governors of the Federal Reserve System (1985)

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Northeast Bancorp, Inc. v. Governors, FRS
Seal of the Supreme Court of the United States.png
Supreme Court of the United States
Argued April 15, 1985
Northeast Bancorp Inc. v. Board of Governors of Federal Reserve System
The interstate compact was deemed not illegal, and the merger was allowed to go forward
Northeast Bancorp, Inc. v. Board of Governors of the Federal Reserve System, 472 U.S. 159 (1985), was a case decided by the Supreme Court of the United States that sought to test reciprocal legislation implemented by both Connecticut and Massachusetts, which permitted the establishment of bank holding companies without approval by the Federal Reserve Board of Governors, so long as they were agreed upon by the individual states. The Court relied in part on an earlier case, Commonwealth of Virginia v. Tennessee (1893), in addition to the Instate Compact Clause (Article I, § 10, Clause 3) of the United States Constitution, in reaching its verdict.


The Bank Holding Company Act of 1956, (12 U.S.C. § 1841, et seq.), was an official Act of the United States Congress implemented to regulate the actions of bank holding companies, which, according to the definition outlined by the measure, encompassed "any company which has control over any bank or over any company that is or becomes a bank holding company by virtue of this Act."[1] The law was enacted by Congress largely to regulate and control banks that formed holding companies in an effort to simultaneously own both banking and non-banking businesses. In order to establish a bank holding company, the legislation required that approval be sought from the Federal Reserve Board of Governors. Furthermore, existing bank holding companies were prohibited from engaging in most non-banking activities and, if headquartered in a specific state, were barred from acquiring a bank in another state.

Ten years later, an addition to the legislation, known as the Douglas Amendment, was implemented. It exempted interstate bank holding companies from the rule barring them from acquiring a bank in another state. Release was granted so long as the bank holding company was "specifically authorized by the statute laws of the State in which such bank is located, by language to that effect and not merely by implication."[2] Soon thereafter, Connecticut and Massachusetts implemented reciprocal legislation through their state statutes that allowed an out-of-state bank holding company with its headquarters located in one of the New England regional states to acquire an in-state bank, provided that the other state accorded reciprocal privileges equal to those of the enacting state's banking organizations. In the years following the enactment of these statutes, other New England states including Maine, New Hampshire, Rhode Island and Vermont would also enter into the interstate agreement.

Four years after the Douglas Amendment was approved for inclusion in the Bank Holding Act, the Connecticut Bank & Trust Company (CBT Corp.) and the New England Merchants National Bank approved the formation of holding companies to acquire their assets - CBT Corporation and New England Merchants Company, Inc. These two large bank holding companies eventually agreed to a merger in 1984. However, before the proposed merger could be approved, Citicorp, one of the nation's largest banking conglomerates based in New York, objected to the proposal. They argued that since the agreement between the New England states discriminated against non-New England out-of-state bank holding companies, it not only represented an "illegal compact between the states" but was also a direct violation of the Compact Clause of the United States Constitution.

The decision

The Supreme Court heard oral arguments from both parties on April 15th, 1985. After nearly two months of deliberation, the Court reached a unanimous 8-0 verdict on June 10, 1985, in favor of Connecticut and Massachusetts; Justice Lewis F. Powell did not participate in the case. The opinion of the Court, delivered by Associate Justice William H. Rehnquist, reached the following conclusion:

"The Connecticut and Massachusetts statutes do not violate the Commerce Clause. Congress' commerce power is not dormant here, but has been exercised by enactment of the BHCA and the Douglas Amendment, authorizing the challenged state statutes."[2]

Majority opinion

The majority opinion of the Court argued that the state statutes enacted by both Connecticut and Massachusetts lifting the ban on interstate acquisitions was precisely what was envisioned when the Douglas Amendment was approved; and while the amendment does not specifically state that a state may lift a small portion of the ban, "neither does it specifically indicate that a State is allowed only the alternatives of leaving the federal ban in place or lifting it completely."[2]

In addition to concluding that the statutes were not a violation of the Constitution under the Commerce Clause, Rehnquist stated neither did the Justices of the Court find them to be unconstitutional under the Interstate Compact Clause. The ruling in this case reiterated the Court's guiding principle that interstate compacts were strictly limited to arrangements "directed to the formation of any combination tending to the increase of political power in the States, which may encroach upon or interfere with the just supremacy of the United States."[3][4] In light of the Douglas Amendment, the state statutes do not infringe on federal supremacy, nor do they "enhance the political power of the New England States at the expense of other States or have an impact on the federal structure.[2]

Concurring opinion

Associate Justice Sandra Day O'Connor wrote a concurring opinion.

While O'Connor agreed with the Court's ruling that Connecticut and Massachusetts were not a violation of the Constitution, she wrote a concurring opinion to highlight that she saw no distinction between the statutes upheld in this case and those struck down in Metropolitan Life Insurance Co. v. Ward (1984) under the Equal Protection Clause.[5] She argued that she failed to see how less discriminate it is for Connecticut and Massachusetts to favor neighboring out-of-state banks over all other out-of-state banks "than Alabama's scheme of taxing the insurance companies from 49 States at a slightly higher rate."[2]

See also

External links

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