Bank Lawyer's Blog

Fourth Corner: Staying Power or Sampling The Product?

When last we checked in January on the trials and tribulations of Fourth Corner Credit Union, a state-chartered Colorado credit union formed to provide financial services to the marijuana industry, the credit union had been denied an injunction by a federal district court in Colorado to force the Federal Reserve Bank of Kansas City to grant the credit union a "master account." It needs that master account to gain access to the banking system. The district court judge ruled that the court was not going to compel the Fed to grant access to a credit union that would facilitate illegal money laundering under federal criminal laws (albeit an activity that is fine and dandy under Colorado law). The court also "hinted" that if it ever got to the merits of the issue of whether Colorado marijuana laws trumped federal marijuana laws, the Supremacy Clause of the US Constitution would lead the court to favor federal law.

On April 29th, the credit union appealed the district court's decision to the 10th US Circuit Court of Appeals in Denver. I have not reviewed the appellant's brief, so all I have to go on regarding the arguments to support the appeal thus far are the public statements of the credit union's spokesperson as reported in The Denver Post. Those statements don't fill me with an excess of hope that the credit union's appeal will be successful. The arguments seem to be:

• The Justice Department and FinCEN are "hypocritical" for issuing guidance that would lead banks to believe that they can successfully avoid prosecution under federal law if they follow the guidance without actually allowing them to do so.
• The government bureaucracy moves slowly, so drug money can't be laundered through the banking system and is, thus, "unsecured," and that "scares" the spokesperson.
• A decision was rendered by a Colorado district court judge that marijuana buds were covered under a general liability insurance policy, a decision that the court made clear involved solely state, not federal, law.
• The US Supreme Court declined to hear a lawsuit filed by the states of Nebraska and Oklahoma against the state of Colorado, a decision that was based solely on jurisdictional grounds, in that the alleged harm is being caused by individuals, not by a state, and, therefore, the SCOTUS does not have jurisdiction to hear the case. The attorneys general of Nebraska and Oklahoma can refile the case in federal district court.

There may be fine legal arguments made by the credit union that support its contention that the Fed must issue it a master account. If so, they are not making it into the main stream media. If all it's got is what I read in the newspaper, I'd recommend that the CU roll 'em if its got 'em, don't Bogart the joints, slap a few Cheech & Chong cd's in the boom box, and "get mellow," because the future is looking somewhat gloomy in the real world.

Then again, come November, we have absolutely no idea what kind of wild card the electorate might draw for the Oval Office. We might actually get a president and Congress that will take the Thai Stick by the lit end and burn down the barriers to a full monty of a Mary Jane-friendly society. Or, those of us who haven't rolled a joint in nearly a half century might be compelled to nestle down in the high country with a M249 SAW, a bale of concertina wire, a half-dozen claymores, plenty of bottled water and Tostitos, and several pounds of Ghost Train Haze and Blue Dream. And yes, unlike our former president and future first man, in such circumstances, we would plan to inhale.

Rent-a-Charter vs. Strategic Alliance

In June 2004, I wrote a post about schemes by non-bank lenders, especially payday lenders, to "partner" with banks and thrifts in ways that would allow the non-banks to use the bank's or thrift's status to "preemept" "inconvenient state laws, such as those pesky usury limits. As I said at the time:

Apparently, the state-chartered banks involved in this practice are counting on the continued lack of objection by the FDIC, and the continued sympathy of state banking regulators who are eager to increase the number of state-chartered institutions that they regulate. In my opinion, this is a risky course.

I also pointed out at the time that national banks and federal savings banks could rest assured that their primary federal regulator would be scrutinizing their business arrangements with non-banks like Elizabeth Warren looking under her bed every night for a bad banker looking to steal all the cash she has hidden in the sock that she keeps under her pillow.

According to a recent client alert from Chapman and Cutler LLP, this bad old idea not only refuses to die, but has engendered state officials to take action to stop it in its tracks. While the alert discusses the State of Pennsylvania going after payday lenders who've aligned themselves with Native American tribes (which has been a problematic marriage for quite some time), it has wider implications for similar arrangements. In this instance, the Commonwealth of Pennsylvania alleged that the "true lender" for regulatory purposes was not a bank in Delaware that would have been exempt from Pennsylvania usury limits and licensing requirements but the non-bank website "originator" that did most of the origination work and derived most of the economic benefits from the loans. The authors note that in other jurisdictions, the court decisions have not been in lockstep on the issue of preemption, arrangements like the one challenged here are likely always to put the lenders in the regulatory crosshairs.

No clear rule has emerged although regulatory challenges almost certainly are more likely to be made when excessive interest rates and/or abusive sales or collection practices are involved. In this case, the loans imposed interest rates of 200% to 300%.

The alert notes that even though the court's decision involved only a motion to dismiss Pennsylvania's action, and that is a long way from a judgment on the merits, the red flags for financial institutions involved in such relationships are clear "because it demonstrates that plaintiffs will continue to raise the “true lender” theory and courts will not necessarily dismiss at an early stage (for failure to state a claim upon relief can be granted) “true lender” claims solely because a bank is the named lender on the loans, at least where there are allegations that the originating bank does not have substantive duties or an economic interest in the program."

In order to mitigate the risk of claims based on the “true lender” doctrine, companies that engage in internet-based lending programs through an arrangement with one or more banks should consider how the programs are structured. For example, consideration should be given to operations where the bank has substantive duties and/or an economic interest in the program or loans. We are aware that some internet-based lending programs are considering structural changes of this nature.

The firm also advises institutions to make certain that they comply with regulatory guidance governing relationships with service providers. They cite FIL-9-2016 and related FDIC guidance. I'd also suggest taking a look at the OCC's Bulletin 2013-29.

Or, for a change of pace, a bank considering one of these schemes might decide to take its entire capital to The Bellagio in Vegas, walk up to nearest roulette wheel, and lay it all on "00." I mean, if you like dancing along the razor's edge with insured deposits, you might as well go all-in. Plus, you get free booze as long as your money lasts. To hedge your bet, you might want to hold back enough to buy a one-way ticket to Havana (regular flights from the States start soon) just in case that method of income-generation doesn't work out as well as a strategic alliance with a non-bank payday lender.

Fourth Corner Painted Into A Corner

This past week, a federal district court judge in Colorado slapped down, hard, Fourth Corner Credit Union. In the process, the judge was equally hard on the federal government that has done a half-baked job in dealing with the problem of state-legal marijuana businesses inability to to obtain access to the nation's financial system because their activities largely remain illegal under federal criminal laws.

As regular readers may recall, Fourth Corner Credit Union is a state-chartered credit union in Colorado that was formed in 2014 by (in the lofty rhetoric of the credit union's attorneys) "ten courageous citizens" to provided banking services to the "compliant, licensed cannabis and hemp businesses and to thousands of persons, businesses and organizations that supported the legalization of marijuana." In order to effectively operate, however, Fourth Corner needed a "master account" from the Federal Reserve Bank of Kansas City. The FRB-KC turned down Fourth Corner's application for such an account on several the grounds, including that federal law preempts state law and that the FRB KC won't grant a master account to a financial institution that is engaged in the facilitation of illegal activities (like the laundering of the proceeds illegal drug sales). Fourth Corner sued for a mandatory injunction by the court that would compel the FRB KC to grant the master account. The district court denied the motion, dismissed (with prejudice) the credit union's complaint, and awarded the FRB KC its reasonable costs.

That had to hurt.

Although the court declared that it did not need to reach the issue of federal preemption, it observed in a footnote that "[i]t is clear, however, that Congress has the power to prohibit cultivation, distribution and use of marijuana notwithstanding compliance with state law." In other words, even though I didn't have to decide the issue, if I had, I would have upheld federal preemption of state law.

That blasted the "Supremacy Clause" of the US Constitution (Article VI, Paragraph 2)! It's so inconvenient.

In the course of its opinion, the judge blistered the backsides of federal regulators, with special emphasis on FinCEN and the US Justice Department for their "guidance" on this issue. Fourth Corner alleged that such guidance provided federal "authorization" to serve marijuana-related businesses ("MRBs"). The judge didn't buy it (anymore than I did).

The problem is, the FinCEN guidance and Cole memorandum do nothing of the sort. On the contrary, the Cole memorandum emphatically reiterates that the manufacture and distribution of marijuana violates the Controlled Substances Act, and that the Department of Justice is committed to enforcement of that Act. It directs federal prosecutors to apply certain priorities in making enforcement decisions, but it does not change the law. The FinCEN guidance acknowledges that financial transactions involving MRBs generally involve funds derived from illegal activity, and that banks must report such transactions as “suspicious activity.” It then, hypocritically in my view, simplifies the reporting requirements.

In short, these guidance documents simply suggest that prosecutors and bank regulators might “look the other way” if financial institutions don’t mind violating the law. A federal court cannot look the other way. I regard the situation as untenable and hope that it will soon be addressed and resolved by Congress."

Since next year is a presidential election year, "soon" is not likely to be prior to 2017. Until then, to repeat ourselves, any bank that serves marijuana related businesses "is playing with fire and not wearing an asbestos suit."

playing with fire and not wearing an asbestos suit. - See more at: http://www.banklawyersblog.com/3_bank_lawyers/2015/10/over-the-summer-while-i-was-downing-cold-beers-by-the-barrel-the-federal-reserve-bank-of-kansas-city-and-the-ncua-finally-ac.html#sthash.qKIhqoJx.dpuf

playing with fire and not wearing an asbestos suit. - See more at: http://www.banklawyersblog.com/3_bank_lawyers/2015/10/over-the-summer-while-i-was-downing-cold-beers-by-the-barrel-the-federal-reserve-bank-of-kansas-city-and-the-ncua-finally-ac.html#sthash.qKIhqoJx.dpuf

playing with fire and not wearing an asbestos suit. - See more at: http://www.banklawyersblog.com/3_bank_lawyers/2015/10/over-the-summer-while-i-was-downing-cold-beers-by-the-barrel-the-federal-reserve-bank-of-kansas-city-and-the-ncua-finally-ac.html#sthash.qKIhqoJx.dpuf

The Fed On MJ Banking: Nyet

Over the summer, while I was downing cold beers by the barrel rather than blogging, the Federal Reserve Bank of Kansas City and the NCUA finally acted on the applications of Fourth Corner Credit Union for, respectively, a "master account" for access to the Federal Reserve System and for insurance of share accounts. In both cases, the answer was not only "No," but "Hell, No!" Fourth Corner sued both the NCUA and the Fed. last week, the Fed filed a Motion to Dismiss Fourth Corner's complaint that ought to send a chill down the spine of every bank in Colorado, Washington, Oregon and Alaska that thinks it can "work around" the federal banking regulators on the Supremacy Clause when it comes to banking a state-legal, federal-illegal marijuana business.

In broad strokes, the Fed alleges that federal law, in this case the Controlled Substances act, trumps state law on marijuana use by virtue of the Supremacy Clause of the US Constitution. This should be "Hornbook Law" to any bank regulatory attorney. The manufacture, sale, and distribution of marijuana is prohibited by the Controlled Substances Act. Therefore, "any affirmative action that Colorado has taken to facilitate the distribution of marijuana is preempted by federal law."

In the present case, Colorado attempted to grant TFCCU a charter that would, in effect, intentionally allow TFCCU to aid and abet violations of federal law by offering banking services to businesses engaged in the manufacture and/or distribution of marijuana. Such an act is preempted by federal law and is void and without effect...The Court would not aid other such attempts--such as if Colorado enacted a scheme to allow trade in endangered species or trade with north Korea in derogation of federal laws, and then chartered a credit union to handle finances for companies conducting such illegal trade...TFCCU is not an entity that can be recognized under federal law" and the credit union's complaint must be dismissed.

Beyond the "master account" and insurance of accounts applications at issue here, the Motion to Dismiss contains a broad condemnation for any existing financial institution--credit union or bank--that thinks that it is somehow safely avoiding federal criminal law prosecution and/or bank regulatory agency enforcement action because it follows the "FinCEN Guidance" issued in early 2014 that, in turn, followed the "Cole Memorandum" guidance provided to US Attorneys on prosecutorial discretion in the area state-legal marijuana businesses. The Fed contends that such "guidance" is not a protection from criminal prosecution (which the guidance itself states, if read carefully). Even if it affords such protection, the Fed makes clear that the Fed would not be bound by it.

The Fed also makes clear that it considers any financial institution that engages in providing financial services to a state-legal marijuana business to be engaging in aiding and abetting a criminal activity under federal law, and that federal law controls. Under that analysis, the Fed should, if it is consistent, take enforcement action against any Fed-member bank that is so engaged. I fail to see why the OCC, FDIC, or NCUA would take a contrary position.

An anonymous (naturally) critic from Dogpatch, U.S.A., attempted to leave a comment on the blog a few months ago that criticized my support of (the critic's phrase) "federal infallibility" regarding state marijuana laws. The poor soul apparently conflated "Papal Infallibility," a theological doctrine of the Roman Catholic Church, with the constitutional principle of "Federal Supremacy. The issue at stake is not who is "right" or "wrong" regarding whether the manufacture and distribution of marijuana for recreational use should or should not be illegal, it is whose law prevails when state and federal law conflict on this matter. My view is that federal law prevails and that any financial institution (and its directors, officers, and employees) that "banks"  a state-legal marijuana business is running a serious risk of being hammered by different federal agencies for violating federal criminal laws.

If your credit union's or bank's business plan is "I feel lucky today," more power to you. I think that you're playing with fire and not wearing an asbestos suit.

Lawmen Sue To Stop The (Reefer) Madness

You would think that when all a state wants to do is let weed-lovers light up, their neighbors would just chill and let them have serious conversations, along the lines of the following:

The Dude: It's like what Lenin said... you look for the person who will benefit, and, uh, uh...

Donny: I am the walrus.

The Dude: You know what I'm trying to say...

Donny: I am the walrus.

But, no. The neighbors can't get their redneck noses out of Colorful Colorado's smokin' hot ganja biz.

A few months ago, Oklahoma and Nebraska sued Colorado in the US Supreme Court, asking Clarence Thomas to speak up loudly enough, and Stephen Breyer to venture back from his exploration of Martian law long enough, to stamp out Colorado's raging forest fire of legalized recreational pot sales. The wind blows east and south out of the Rockies, and those states apparently are worried about the deleterious effects on their citizens of second-hand smoke. Banks in Colorado didn't need another reason to avoid banking the recreational MJ business, but that lawsuit certainly didn't lessen the risk.

Recently, Sheriffs in Nebraska and Kansas, joined by six traitorous Colorado sheriffs, filed yet another lawsuit against Colorado's governor (appropriately named "Hickenlooper") over the same issue (legalization of recreational pot sales).

“This suit is about one thing — the rule of law,” Larimer County Sheriff Justin Smith said in a news release. “The Colorado Constitution mandates that all elected officials, including sheriffs, swear an oath of office to uphold both the United States as well as the Colorado Constitutions.”

The last time we saw federal supremacy thrown around so much it involved the OCC's march-to-the-sea over the blazing husk of the 10th Amendment in defense of the right of national banks to thumb their noses at guys like Eliot Mess, the"Sheriff of Wall Street." At that time state bank regulators and law enforcement officials weren't so keen on the federal supremacy clause (or the National Bank Act). Now that Franken-Dodd and the Cuomo v. Clearing House Corporation decision have put chinks in the preemption armor of national banks, that particular reason for hating federal preemption doesn't have as much steam. People who hate federal preemption in this situation are not people who want to save the state from those who would use federal preemption to break state laws, but people who want to break federal law in order to engage in a state-sanctioned activity.

Some legal experts think that the latest lawsuit has a chance of success of somewhere between "slim" and "none."

Sam Kamin, a law professor at the University of Denver, was skeptical of the sheriffs’ argument. He said no law requires local officers to act as de facto federal drug agents.

“Of the four (lawsuits), this is the one with the least merit,” Kamin said. “They have targeted not just the (marijuana store) regulation piece but they’re also essentially saying Colorado can’t legalize marijuana. No one has ever gone that far.”

Even if true, that leaves three more lawsuits that continue to add to the risk of banking marijuana businesses, whether or not they are "legal" under state law.

The Mistress of Spin

A reader recently emailed that she was surprised by how brazenly Elizabeth Warren speaks out of both sides of her mouth. The specific event that caused her incredulity was Warren's initial public support of regulatory relief for community banks and her subsequent assertion that community banks didn't need regulatory relief because they were doing just fine financially.  After telling her that speaking out of two sides of a mouth is a gift commonly demonstrated by those born with a forked tongue, I pointed out that Ms. Warren's been stretching the boundaries between lies and damned lies for, literally, years.

Back in 2008, she went on the warpath (this was in the days before anyone called her questionable claim of Native American ancestry) over what she claimed on her blog (yes, Liz was a blogger) was a proposal by national banks to claim preemption from all state foreclosure laws. The fact that those banks were claiming preemption only over extended foreclosure moratorium and similar laws, not the general binding nature of each state's foreclosure process law requirements, didn't enter her discussion. Instead, she made this spurious allegation as to the position of the banks:

State laws are pre-empted whenever a national bank holds the mortgage, so the states can't make them follow the local rules. Pre-emption has been used successfully by the credit card companies to fight off state regulation, so now the banks want to escape local restrictions on foreclosure as well.

That was not the position of the banks regarding foreclosure laws at the time. It was also not the position on national bank preemption of either the OCC (which issued preemption regulations and opinions) or of the federal courts. In fact, the then-applicable OCC regulation specifically stated that state debt-collection and foreclosure laws were not preempted. Warren's characterization that the banks were arguing that they were preempted from all state foreclosure laws and, therefore, could, apparently, seize homes at will, was false. Of course, as a practical matter, some national banks did, in fact, seize homes without due process (even those on which they did not hold a mortgage), and even the owner's pet parrots, but that was through incompetence, not intent.

While intellectual dishonesty has served her, and will continue to serve her, well as a US Senator, Ms. Warren's ability to let no fact stand in the way of a populist narrative should come as no surprise to anyone who's been paying attention to her public pronouncements for any length of time. I mean last year, she blamed the 2008 financial meltdown on Ronald Regan. Next up: ISIS was created by Billy Graham.

More Depth On Legal Issues Surrounding Marijuana Banking

University of Alabama Law Professor Julie Anderson Hill has posted a draft of a work-in-progress, an article for an upcoming Case Western Law Review Symposium Issue, entitled "Banks, Marijuana, and Federalism." In it, she explores the legal issues surrounding banks providing banking services to state-legal marijuana-related businesses in more depth than you'll see on the pages of this rag. While it requires some polishing (including the addition of a specific discussion of Fourth Corner, the Colorado cannabis co-op, in a section in the later portion of the article that she discusses in passing earlier in the article), I found it to be a valuable addition to the analysis of the risks to banks that want to provide services to such businesses.

Here's a portion of the "abstract" of the article provided by Professor Hill, which summarizes her approach and conclusions:

This article explores the root of the marijuana banking problem as well as possible solutions. It explains that although the United States has a dual banking system comprised of both federal- and state-chartered institutions, when it comes to marijuana banking, federal regulation is pervasive and controlling. Marijuana banking access cannot be solved by the states acting alone for two reasons. First, marijuana is illegal under federal law. Second, federal law enforcement and federal financial regulators have significant power to punish institutions that do not com-ply with federal law. Unless Congress acts to remove one or both of these barriers, most financial institutions will not provide services to the marijuana industry. But marijuana banking requires more than just Congressional action. It requires that federal financial regulators set clear and achievable due diligence requirements for institutions with marijuana business customers. As long as financial institutions risk federal punishment for any marijuana business customer’s misstep, institutions will not provide marijuana banking.

Among the many fascinating (to a nerd like me, at any rate) observations made by Professor Hill was the following potential problem with the Federal Reserve approving Fourth Corner's access to the federal reserve payments system:

If the Federal Reserve provided payment services to a cannabis credit co-op, the Federal Reserve and its employees would be engaging in money laundering. They might also be conspiring to manufacture and distribute marijuana, aiding and abetting the manufacture and distribution of marijuana, and acting as accessories after the fact for the manufacture and distribution of marijuana. 

As long as they don't process payments for payday lenders, online dating services, or Smith & Wesson, they should be safe from prosecution under the "prosecutorial discretion" mantra chanted by the present executive branch monks until the current administration vacates the White House. The problem with that approach is that the statutes of limitation will not have expired by the time new Attorney General Ted Cruz decides to wage a little MJ jihad on every Justice Department and federal bank regulatory agency official who looked the other way when some bankers in Colorado or Washington lit up a fat boy and followed the money.

I also agree with her conclusion that, while action by the U.S. Congress is necessary, it's not enough. A change in attitude by federal bank regulators will also be required, whether of not we get a federal legislative fix. If due diligence requirements make it too risky and expensive to bank these businesses, then marijuana businesses are going to find themselves continuing to face problems that only a third-party payment processor or payday lender could truly appreciate.

State Nullification: Inhale Deeply

When we asked a couple of months ago whether the Cannabis Co-operative Credit Unions that have been authorized by Colorado law were "dead on arrival," we thought that the answer was "yes." Yet, there appears to be a beating heart and hopeful heart in this body, inasmuch as the State of Colorado recently granted the first such charter.

There  are a couple of catches, however. First, the NCUA still has to grant deposit insurance, which may be a couple of years away (although Colorado law allows the co-op to open its doors as long as it has "applied" for NCUA insurance). The second is that state law requires that the credit union have access to the Federal Reserve system via a master account. One of the attorneys for the credit union asserts that the credit union has a "right" to a master account. I'm not so sure, but I guess we'll see, won't we? 

This development comes on top of anecdotal evidence that a few banks are providing financial services for marijuana-related businesses and that the federal banking regulators know about it and are "tacitly" approving the same (in other words, not writing up the bank in an examination for engaging in this activity, as long as they have the right "risk-management policy" in place). If those instances denote a trend, then apparently "prosecutorial discretion" is waxing in areas other than illegal immigration. Apparently, you have to be involved in a much more heinous business like legal payday lending, check-cashing, legal gun-selling, deposit advance lending, overdraft protection, and legal online match-making before you offend the ethical sensibilities of the US Justice Department and the federal banking regulators. Engaging in organized drug financing in violation of federal criminal statutes is not worth the while of the current occupants of the executive branch of the federal government.

On the issue of whether or not recreational marijuana use ought to be decriminalized at the federal level, I'm an evangelical agnostic. I believe deeply, based solely on divine revelation and natural law informed by reason, that there are valid arguments on both sides of the issue, and I'm willing to listen to rational argument both for and against the proposition. However, the fact remains that what Fourth Corner Credit Union and those who assist it in servicing marijuana-related businesses is illegal under federal criminal laws. They are violating federal drug laws, and, arguably, engaged in a conspiracy to do so. There are a number of convicted felons whiling away their days in federal penitentiaries for having engaged in organized activity to promote the cultivation, harvesting, processing, distribution, and sale of marijuana, and the "processing" of funds derived from such activities.

This nation once almost went to war with certain states (South Carolina being the most prominent) over the theory of "nullification," whose advocates asserted that states could "nullify" within their borders the application of federal laws with which the state disagreed. President Jackson was prepared to use federal troops to invade any state that tried to put that theory into practice. Although the specific issue at that time involved tariffs, and today it involves the use of drugs, one hundred and eighty years later we seem to be on the verge of the same war, in which certain states think that they can, by changing their state laws on drugs, somehow nullify the effect of federal drug laws within their borders. A critical difference today is that the federal authorities are not only not prepared to combat the nullification effort, they appear to be accommodating it.

With several states, and the District of Columbia, enacting recreational marijuana use legislation earlier this month, and with more states expected to consider similar legislation in 2016, the issue is not going away and it's not just a problem for Colorado and Washington state. Personally, I think it would be better for the respect for the rule of law to have a debate in Congress over the merits of changing federal drug laws, or, at the very least, to have the Justice Department go through the process of considering the removal of marijuana as a Schedule 1 controlled substance. Moreover, for those financial institutions and those that aid and abet them in financing marijuana-related businesses, January 2017 could bring the second coming of a John Ashcroft wanna-be as Attorney General, and the worm could turn. If that happens, the discretion of prosecutors may be to nail your hide to the side of a barn. After all, I remember when "open bank assistance" and "forbearance" were not dirty words for bank regulators. Times change. Stuff happens.

Actually, I don't expect such cautionary advice to concern those most at risk. They're too busy inhaling and munching.

Big Bank Bizarro Land

Both big banks and big-bank-hating judges have been acting with increasing wackiness lately, as The New York Times' Gretchen Morgenson recently explored. In one case, a Massachusetts judge claimed that he bought the argument of Wells Fargo that a borrower's predatory law claims against the bank were barred by federal preemption principles, but then made the bizarre demand that the bank provide the court with a resolution of the bank's board, signed by a majority of the bank's directors, that stated that the board is not waiving its right to claim federal preemption. The judge believed that the bank's public advertising that it is consumer-friendly raises the issue as to whether or not it has waived its right to claim federal preemption. Naturally, knowledgeable observers, including the counsel for the borrower, had never heard of such a judicial demand. The bank is appealing the requirement, which appeal, unless the judge backs down, the bank will win.

While the judge labels the bank's alleged conduct to be "outrageous," a commenter in an ABA Journal article on the decision made a telling observation.

This judge has gotten too big for his britches and is stepping beyond his constitutional role as a neutral jurist. It makes no difference whether he personally finds Wells Fargo’s conduct to be “outrageous” or out of sync with the company’s public image, conclusions that are legally irrelevant and do not entitle the judge to dictate what the company must do to raise a legitimate defense. Justice is supposed to be blind to personal sympathies such as this; he is displaying prejudicial and unprofessional bias toward a party, and he should be recused or sanctioned.

It's Massachusetts, pal. He'll be neither recused nor sanctioned. He'll be hailed as a lion of the bench.

On the flip side, Gretchen also recounts a case where Bank of America and its assignee hounded a homeowner repeatedly for payment of a debt that had been discharged in bankruptcy. Apparently, repeated contact by collectors continued even after the bank was sued. Determining whether or not a debt has been validly discharged in bankruptcy is not the equivalent of discovering the cure for cancer. The bank that can't shoot straight on the foreclosure trail apparently has no better aim when it comes to general debt collection.

The phone calls and letters continued even after Mr. Schwartz went back to court to ask that Bank of America be sanctioned for illegal attempts to collect the debt. During this time, Bank of America sold the servicing rights on the first mortgage to another company, which soon began sending its own demand letters to the Ramoses.

This month, the matter came before Robert D. Drain, a federal bankruptcy judge in New York. Judge Drain found Bank of America in contempt of the debt discharge order protecting the Ramoses and required the bank to pay Mr. Schwartz’s legal bills in the case. The judge also ordered the bank to pay $10,000 a month in sanctions to the Ramoses until it stopped making the repayment demands.

Judge Drain acknowledged that it wasn’t a lot of money to Bank of America. But, he said, he hoped that its lawyers would get the message. “This is not just a stupid mistake” by the bank, the judge said. “This is a policy.”

A Bank of America spokeswoman said the bank was working to resolve the court’s issues and “researching and investigating what transpired.”

"Researching and investigating" what? Did they call and/or write or didn't they? You need a drug-sniffing dog and an electron microscope for that task, America's Bank?

We all know why the people with pitch forks and torches want to burn down the banks. Now, it appears, the cumulative effect of years of this type of moonbattery by big banks is driving even respected jurists batty.

The borrower's lawyer in the Bank of America case thinks that the bank has a deliberate policy of ignoring the law and is willing to fork over the occasional sanction as the price it pays to squeeze blood out of turnips. Personally, I think that gives them too much credit. I subscribe to the "Too Big To Think" theory. If it's a choice between Professor Moriarty and Alfred E. Neuman, I vote for the "What, Me Worry?" explanation.

Tribes vs. New York: Round 2

If New York state banking superintendent Bernard Lawsky thought that the Indian tribes that he is pursuing in an attempt to choke off their Internet payday lending activities in his state were going to meekly come to heel, they quickly disabused him of that notion.

Two Indian tribes on Wednesday sued a New York regulator in an effort to preserve their ability to make online loans to the state’s residents.

The tribes sought an injunction against Benjamin M. Lawsky, superintendent of New York’s Department of Financial Services, in U.S. District Court for the Southern District of New York.

Earlier this month, Mr. Lawsky ordered 35 online and tribal lenders to stop offering “illegal payday loans” in New York, saying they violated a state-imposed cap on interest rates  charged to consumers.

Mr. Lawsky also pressed banks and the group that oversees an electronic payments system to cut off access to those lenders.

The tribes, however, say they don’t need to don’t need to comply with the law of New York or other states because they enjoy sovereign status under federal law.

“The states have no authority to regulate these tribes in a way that limits their sovereign rights,” said David Bernick, a lawyer with Boies Schiller & Flexner LLP, who represents the tribes. “That is a bedrock principle of law.”

The lawsuit was filed by the Otoe-Missouria Tribe, located west of Tulsa, Okla., and the Lac Vieux Desert Band of Lake Superior Chippewa Indians, located near the Wisconsin-Michigan border. The Otoe-Missouria tribe operates American Web Loan Inc and Great Plains Lending LLC and the Lac Vieux tribe operates CastlePayday.com.

“Through a campaign of misrepresentations, threats, and coercion, the State of New York has launched an attack on the plaintiff Tribal Nations’ inherent sovereignty,” the lawsuit reads.

Lawsky should have been prepared for the fact that the tribes are not wimps. They've been waging jihad on the CFPB for some time.

Consumer advocacy spokespersons, predictably, were outraged by the tribes' insistence that tribal law preempts state law. The tribes responded to such outrage with an analogy that I am convinced was not intended to be ironic, but certainly was.

Tribal lenders compare their online lending operations are similar to Indian-run casinos.  They argue that their operations are legal because borrowers who take out loans agree that a tribe’s law, rather than their state’s law, applies to them.

Yes, that's a winning public relations argument: our payday operations are just like gambling. The odds overwhelmingly favor the house and we make money off the losses of thousands of the addicted. That's not exactly their preemption argument, but it might as well be if they insist on continuing to compare taking out a payday loan to letting it all ride on the pass line. Just sayin...

It's interesting that some of the tribes' competitors are backing New York.

Other lenders disagree with this argument. The largest ‘payday’ lenders, which also offer loans online, say they are careful to only offer their loans in states that allow them, and are careful to comply with state regulations.

“Bad actors tarnish the good reputation of regulated lenders who operate within a complete  framework of federal and state regulations,” wrote Jamie Fulmer, a spokesman for Advance America, the largest U.S. payday lender, in an e-mail earlier this month.

Mr. Fulmer said his company, which also runs an online lending operation “does not lend in New York or any state where our services are prohibited.”

"The good reputation." The article doesn't reflect any collapse into hysterical laughter, so I guess he was serious. You don't make loans in New York because, unlike the Indian tribes, you don't have a valid preemtion argument to make. It sounds like sour grapes more than legitimate support for the high road.

At any rate, the tribes are likely to continue this fight. The money at stake is substantial, and as long as there's a chance that the preemption argument might prevail, there's no reason to back off.