SEC v. First Tenn. Bank NA Memphis

• Decision Date: 27 February 1978
• Docket Number: No. 77-2778.,77-2778.
• Citation: 445 F. Supp. 1341
• Parties: SECURITIES AND EXCHANGE COMMISSION, Petitioner, v. FIRST TENNESSEE BANK N. A. MEMPHIS, Respondent.
• Court: U.S. District Court — Western District of Tennessee

445 F. Supp. 1341

SECURITIES AND EXCHANGE COMMISSION, Petitioner, v. FIRST TENNESSEE BANK N. A. MEMPHIS, Respondent.

No. 77-2778.

United States District Court, W. D. Tennessee, W. D.

February 27, 1978.

Joseph L. Grant, James E. Long, Jane H. Heitman, Securities & Exchange Commission, Atlanta, Ga., for petitioner.

Michael F. Pleasants, Stephen D. Wakefield, Memphis, Tenn., for respondent.

ORDER

WELLFORD, District Judge.

The Securities and Exchange Commission has filed an application in this Court for an Order to require obedience to a subpoena filed December 21, 1977. It seeks production of certain bank records pertaining to accounts of two customers pursuant to an investigation of that Commission purportedly within the bounds of its duly constituted authority.

The respondent Bank relies upon the Bank Privacy Act of 1977, T.C.A. § 45-2601(a) et seq., as it may apply to such a subpoena, as limiting plaintiff's right in this regard. In addition, the Bank takes the position that the Attorney General should be joined under a duty, imposed by T.C.A. § 8-609(8) to defend the constitutionality of statutes enacted by the Tennessee Legislature. The Bank also takes the position that it should not be called upon to produce the records without the SEC's compliance with T.C.A. § 45-2604(a) which directs that such a subpoena be served upon the customer as well as the Bank, unless a court has waived service upon the customer for good cause.

Subpoenas issued by the SEC are issued pursuant to statutory authority, Section 19(b) of the Securities Act of 1933 and Section 21(b) of the Securities Exchange Act of 1934. By its terms, the Tennessee Bank Privacy Act of 1977 purports to apply to all lawful subpoenas which request fiduciary institutions to disclose financial records of their customers' accounts. No distinction is made between subpoenas issued by federal entities and those issued by state entities. It requires that a lawful subpoena requesting bank disclosure of financial records relating to the accounts of its customer be served upon the customer in addition to the fiduciary institution. It goes on to state that a court (which particular court is unspecified) for good cause may waive service of the subpoena upon the customer. T.C.A. § 45-2604(a) (Supp. 1977).

A federal court having jurisdiction over SEC subpoenas, in determining jurisdiction, must look to the Constitution and the federal statutes. Here a state attempts to confer jurisdiction by statute upon a federal court (or even a state court) to decide in a given case whether an obligation created by state statute — that of service of a subpoena upon a bank customer — may be waived. State law cannot enlarge or restrict, however, the jurisdiction of federal courts. Poitra v. Demarrias, 502 F.2d 23 (8th Cir. 1974) and Markham v. City of Newport News, 292 F.2d 711 (4th Cir. 1963).

The rules and regulations promulgated by the Commission, which have the force and effect of law,¹ do not require notification to the customer when a subpoena is issued to a bank calling for the production of records relating to the customer's account. The Tennessee statute establishes a prerequisite then which purports to require compliance by the Commission as a condition precedent to a bank's disclosure of its own records in response to a Commission subpoena.

This attempt by the state of Tennessee to place restrictions and additional requirements upon the Commission imposes an unreasonable burden and serves to hinder statutorily authorized investigations into possible securities law violations. Any actions taken by a customer contemplated by Tennessee law to assert his opposition to a subpoena will serve only to delay an SEC investigation. Such an effort on the part of a customer would be fruitless in light of federal court decisions which refuse to recognize any proprietary right of a depositor in bank records of his accounts. United States v. Miller, 425 U.S. 435, 96 S.Ct. 1619, 48 L.Ed.2d 71 (1976). The Tennessee Bank Privacy Act therefore is an unnecessary burden upon interstate commerce because of detrimental effects on prompt SEC investigations to protect the public interest. If the SEC were forced to comply with the Tennessee statute, it would likewise have to comply with many different state acts relating to bank records, resulting in substantial frustration of the effective enforcement of the federal securities laws. See Securities and Exchange Commission v. Brigadoon Scotch Distributing Company, 480 F.2d 1047 (2d Cir. 1973).

The Bank Privacy Act of 1977 hinders the Commission in discharging its responsibilities under the federal securities laws. Such interference is expressly prohibited by Article VI, Clause 2 of the United States Constitution. See McCulloch v. Maryland, 17 U.S. 415, 4 L.Ed. 579 (1819).² See also Johnson v. State of Maryland, 254 U.S. 51, 41 S.Ct. 16, 65 L.Ed. 126 (1920).

The Bank has moved to dismiss the Commission's application because it fails to join the attorney general of the state of Tennessee, who the respondent claims is a necessary party to this action. The attorney general is not, however, a necessary or indispensable party since the Commission has not sought relief from him or from the State and since this Court is able to determine the constitutionality of a state statute without his joinder. Liquifin Aktiengesellschaft v. Brennan, 383 F.Supp. 978 (S.D. N.Y.1974). Therefore, the respondent's motion should be denied.

The Bank has further moved to join the Tennessee Attorney General, citing the duty imposed upon his office to defend the constitutionality of statutes enacted by the legislature. See T.C.A. § 8-609(8) (Supp. 1977). As pointed out by the attorney general, however, he is under no obligation to defend a statute when "he is of the opinion that such legislation is not constitutional." An Opinion of the Attorney General rendered on February 9, 1978 (a copy of which is attached as Exhibit A to this Order) makes it clear that application of the Bank Privacy Act to subpoenas issued by any federal agency acting under constitutional laws and within the scope of its authorization would constitute a violation of the Supremacy Clause of the United States Constitution.

Since federal laws create the duties and responsibilities of the Commission, such laws must prevail when there is a conflict between laws of the federal government properly enacted to enumerated powers and laws enacted by states which conflict with them. Perez v. Campbell, 402 U.S. 637, 91 S.Ct. 1704, 29 L.Ed.2d 233 (1971). Consequently, this Court finds the Bank Privacy Act unconstitutional as to any application to federal agencies acting within the scope of their lawful authority. It is therefore unnecessary for the SEC or any other federal agency to resort to the courts whenever a financial institution refuses to obey a subpoena on the basis of the agency's failure to comply with the customer notification requirement of the Tennessee Bank Privacy Act.

Judgment will accordingly be entered for the petitioner.

APPENDIX

EXHIBIT A

State of Tennessee

OFFICE OF THE ATTORNEY GENERAL 450 JAMES ROBERTSON PARKWAY NASHVILLE, TENNESSEE 37219

February 9, 1978

Joe H. Hemphill, Commissioner Department of Banking 460 Capitol Hill Building Nashville, Tennessee 37219

Dear Commissioner Hemphill:

In response to your request of January 13, 1978, and acting pursuant to T.C.A. § 8-609 as amended by Chapter 149, Acts of 1977, we hereby provide you with an opinion of this office as to the following question.

QUESTION

Can a bank domiciled in Tennessee lawfully refuse to disclose financial records of a customer in response to a Federal subpoena, summons, warrant, or court order ("Federal Demand") where such Federal Demand has been served only upon the bank, and not upon the customer whose financial records are sought, and when the person who causes issuance of the Federal Demand has not obtained waiver of service upon the customer from a Court?

OPINION

A bank may not refuse to make disclosure in response to a Federal Demand in reliance upon the provisions of the Bank Privacy Act of 1977, T.C.A. § 45-2601, et seq. (the "Act"). We do not at this time express any opinion as to other possible justifications for refusing to respond to a Federal Demand.

ANALYSIS

A. The Statutory Scheme

Under § 3 of the Act, no fiduciary institution (which term includes banks domiciled in Tennessee) may disclose any "financial records" (as defined) pursuant to any subpoena, summons, warrant or court order ("Demand") unless the customer authorizes the disclosure, or the Demand complies with the provisions of § 4 of the Act. Under § 4 the Demand must be "served" upon the customer as well as the bank, unless a court has waived service upon the customer for good cause. Exceptions are set forth in § 5, criminal penalties are provided in § 6 and § 7 is a broad severability provision.

B. Application of the Act to Federal Demands

The Act does not expressly state its applicability to Federal Demands, whether issued by Federal Courts, or Federal agencies acting within the scope of their authorization. Its applicability to both can be inferred from § 5 which exempts activities of "supervisory agencies" and certain activities pursuant to the Internal Revenue Code. In § 2, "supervisory agencies" is defined to include several Federal agencies. This creates a negative inference that other Federal agencies and, presumably, courts, are intended to be subjected to the provisions of the Act.

C. Constitutionality of Application to Federal Demand

1. Application of the Act to Federal Demands would have an impact on the manner in which they are served. Either the agency would serve the customer, or it would initiate court action to obtain a waiver. If the agency served the Federal Demand upon the customer its desire for secrecy, if any, would be impaired and its standard operating procedure would have to be revised. If to...