Johnson v. Bank of Bentonville
| Decision Date | 21 November 2000 |
| Docket Number | No. CIV.00-3026.,CIV.00-3026. |
| Citation | 122 F.Supp.2d 994 |
| Parties | Steve JOHNSON, Ph.D., Plaintiff, v. BANK OF BENTONVILLE, Defendant. |
| Court | U.S. District Court — Western District of Arkansas |
Steven B. Davis, Davis & Goldie, Harrison, AR, for Plaintiff.
Allen W. Bird, II, Little Rock, AR, for Defendant.
This case is before the court for decision on cross-motions for summary judgment. The legal question to be determined is whether Congress exceeded the legislative authority given it by the Commerce Clause when it enacted § 731 of the Gramm-Leach-Bliley Financial Modernization Act of 1999, Pub.L. No. 106-102, codified at 12 U.S.C. § 1831u. Section 731 allows instate banks, that is, banks chartered in Arkansas, to charge the same rate as any out-of-state bank that has a branch in the state.
The effect of this is to override the maximum lawful rate of interest set by Article 19, Section 13, of the Arkansas Constitution. Plaintiff contends § 731 must be struck down as an impermissible exercise of congressional power and the usury provisions of the Arkansas Constitution enforced.
The parties have stipulated to the following facts:
1. Plaintiff, Steve Johnson, is a citizen and resident of Mountain Home, Baxter County, Arkansas.
2. Defendant, the Bank of Bentonville, is a banking corporation organized and existing under the laws of the State of Arkansas, with its principal place of business in Bentonville, Benton County, Arkansas.
3. The defendant is a member of the Federal Deposit Insurance Corporation (FDIC), and its deposits are insured pursuant to 11 U.S.C. § 1811 et seq.
4. The defendant is a wholly owned subsidiary of the Arvest Bank Group, Inc., a bank holding corporation organized and existing under the laws of the State of Arkansas. Arvest Bank Group has its principal place of business in the State of Arkansas and owns an interest in banks located in the states of Oklahoma and Missouri. The defendant has branches in the states of Arkansas and Missouri.
5. On or about March 17, 2000, in the State of Arkansas, the plaintiff executed and delivered to the defendant his promissory note in the original principal sum of $5,000, bearing interest at a stated rate of 16.5% per annum.
6. The loan was for personal, family, and household use of the plaintiff.
7. The terms of the note were negotiated within the State of Arkansas, the proceeds were disbursed within the State of Arkansas, and the repayment of the note is to be made within the State of Arkansas.
8. Under the terms of the addendum of the note, the parties agreed that the note, and all provisions thereof, would be governed by the laws of the State of Arkansas and federal law, including but not limited to 12 U.S.C. § 1831u.
9. On or about March 24, 2000, the plaintiff drew his personal check in the sum of $60.00 payable to the Bank, in payment of an origination fee of $25.00, document preparation fee of $25.00, and an application fee of $10.00. The payment of these fees was required by the Bank before it would disburse the loan proceeds.
10. Under prior Arkansas supreme court rulings, the original, document preparation, and application fees constitute interest under Arkansas law. After deducting these fees, the true principal balance of this loan was $4,940.00.
11. If the net balance of the funds disbursed to the plaintiff from the original loan was $4,940, then the true annual percentage rate of interest charged by the defendant under the terms of the note is 17.915%.
12. At the time the note was made, the maximum legal rate of interest, if calculated pursuant to Article 19, Section 13 of the Arkansas Constitution was 10.5% per annum.
13. Under the provisions of Article 19, Section 13 of the Arkansas Constitution, the loan would be usurious and void as to principal and unpaid interest.
14. As of June 30, 1999, the total deposits of all branches of all commercial banks in Arkansas equaled $29.765 billion. Of that total $22.191 billion were held by branches of all banks chartered in Arkansas (hereinafter "In-State-Banks") and $7.574 billion were held by all branches of banks whose home states are not Arkansas, which had branches in Arkansas (hereinafter "Out-of-State Banks"). Thus, of all deposits held by all branches in the State, 25.37% were, on June 30, 1999, held by branches of Out-of-State Banks.
15. The total loans of all branches of In-State-Banks, as of June 30, 1999, equaled $15.757 billion. Thus 70.60% of all deposits held in the State by In-State-Banks, as of June 30, 1999, were outstanding as loans.
16. Assuming the same percentage of 70.60% loan to deposit ratio, as of June 30, 1999, the total loans of all Arkansas branches of Out-of-State Banks, equals $5.344 billion. As of June 30, 1999, branches of Out-of-State Banks made 25% of the total loans made by all banks doing business in Arkansas.
17. As of June 1999, there were 1,080 branches of commercial banks in the State of Arkansas. Of these branches 256 (or 24%) were branches of Out-of-State Banks.
18. As of March 17, 2000, branches of Out-of-State FDIC insured depository institutions had been established in Arkansas, pursuant to 12 U.S.C. § 1831u, by depository institutions chartered in the states of Alabama, North Carolina, Tennessee, Texas, Mississippi, and Ohio.
19. Arkansas is the only State of the United States which has a constitution which contains a provision which sets a maximum lawful annual percentage rate of interest on any contract at not more than 5 percent above the discount rate for 90-day commercial paper in effect at the Federal Reserve Bank for the Federal Reserve district in which such State is located.
20. Steve Johnson's highest attained college degree is a Doctor of Education in the field of computer training.
On May 23, 2000, in accordance with the provisions of 28 U.S.C. § 2403(a), this court directed a certification to the United States Attorney General notifying her that this case called into question the constitutionality of Section 731 of the Gramm-Leach-Bliley Act, Pub.L. No. 106-102, 12 U.S.C. § 1831u. On September 8, 2000, the court was notified that the United States would not intervene in this case.
In order to better understand the current constitutional challenge to § 731, it is perhaps necessary to briefly discuss the situation as it stood prior to the enactment of § 731. Article 19, Section 13, of the Arkansas Constitution, as modified by Amendment 60, provides in relevant part:
(a) General Loans:
(i) The maximum lawful rate of interest on any contract entered into after the effective date hereof shall not exceed five percent (5%) per annum above the Federal Reserve Discount Rate at the time of the contract.
(ii) All such contracts having a rate of interest in excess of the maximum lawful rate shall be void as to the unpaid interest. A person who has paid interest in excess of the maximum lawful rate may recover, within the time provided by law, twice the amount of interest paid. It is unlawful for any person to knowingly charge a rate of interest in excess of the maximum lawful rate in effect at the time of the contract, and any person who does so shall be subject to such punishment as may be provided by law.
(b) ... All contracts for consumer loans and credit sales having a greater rate of interest than seventeen percent (17%) per annum shall be void as to principal and interest and the General Assembly shall prohibit the same by law.
The interest rate that national banking associations may charge is governed by federal law. Marquette Nat'l Bank of Mpls. v. First of Omaha Service Corp., 439 U.S. 299, 99 S.Ct. 540, 58 L.Ed.2d 534 (1978). Specifically, the National Bank Act, 12 U.S.C. § 85, allows a national banking association to charge interest at the rate allowed by the laws of the State where the bank is located.
The Supreme Court in Marquette determined that, for purposes of § 85, a bank was considered to be "located" in the State designated in its organization certificate. Thus, a national bank operating branch offices in Arkansas, or making loans within Arkansas, but considered to be "located" in some State other than Arkansas under § 85 could lawfully charge a rate of interest in excess of the maximum lawful rate of interest under the Arkansas Constitution. See e.g., Wiseman v. State Bank & Trust, N.A., 313 Ark. 289, 854 S.W.2d 725 (1993). Meanwhile a State bank chartered in Arkansas, or a national bank "located" in Arkansas, would be bound by the maximum lawful interest rate under the Arkansas Constitution.
Historically in Arkansas, the branching of State banks was restricted to severe geographical limits. In January of 1999 statewide branching was first allowed. Similarly, other states liberalized "restrictions on branching by permitting interstate branches." Financial Software Systems, Inc. v. First Union Nat. Bank, 84 F.Supp.2d 594, 601 (E.D.Pa.1999).
McQueen v. Williams, 177 F.3d 523, 537 (6th Cir.1999) (citations omitted).
In order for national banks to remain competitive, Congress amended the banking laws. Financial Software, 84 F.Supp.2d at 601. The goal of such laws was "to preserve the dual banking system by promoting `competitive equality' between national and State banks." McQueen, 177 F.3d at 537 (citations omitted). See also, First National Bank of Logan, Utah v. Walker Bank & Trust Co., 385 U.S. 252, 261, 87 S.Ct. 492, 17 L.Ed.2d 343 (1966).
"The McFadden Act, passed in 1927 and amended by the Glass-Steagall Act of 1933 (codified at 12 U.S.C. § 36), specifically deals with the conditions upon which a national bank may retain or establish...
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