The Myth That All Foreclosures By Power Of Sale Provisions Are Constitutional

The issue is one of First Impression because the				equally denied to the banks. As John Locke said
Supreme Court of the United States has never				nearly 300 years ago: "...Nobody can transfer to
decided whether a federally chartered bank				another more power than he has in himself "
corporation created under an act of Congress to				[John Locke, TWO TREATISE OF GOVERNMENT,
provide an important public and national purpose				BOOK II] The Supreme Court decisions show us
could use a non- judicial procedure that allows the				that the conduct of banks in pursuit of non-judicial
taking of a property interest without a hearing				foreclosures must be done under the authority of
thus violating the 5th Amendment. The Court,				the federal charter which is a "law of the United
however, has made numerous decisions which				States" and therefore "under color of federal law".
would have been relevant in determining whether				Thus National banks and federal savings
non-judicial procedures were applicable given the				associations Mortgage fsb could be considered a
nature of these corporations. Though several				"governmental actor" like the assumption made
appellate courts have had occasion to determine				by the First Circuit in Gerena v Puerto Rico Legal
the constitutionality of non-judicial procedures in				Services, Inc., 697 F. 2d 447(1st Cir. 1983)
the form of a trustee sale provision, none have				D. CONGRESS CANNOT AUTHORIZE OR
vetted the corporations seeking this remedy. The				DELEGATE A RIGHT OR POWER THAT
issue goes to the core of the nature of federally				IT CANNOT EXERCISE ITSELF
chartered corporations created under special law				If all the acts, rights and obligations of
for public and national purposes. This issue deals				corporations with federal charters must be done
with the right of these corporations to put such a				under the authority of the federal charter and a
provision in a contract and rests on whether the				law of the United States, including rights created in
act of foreclosure is a governmental act or a				contract, how can Congress authorize a provision
proprietary act. It is an issue which, in the context				that it could not exercise itself? The provision can
of the current economic crisis and massive				only be validated by what it represents and the
foreclosures, sweeps the breadth of this nation				constitutional implications it may give rise to.
like a plague destroying families and communities				In United States v Grimaud, 220 U.S. 506 (1911)
as it spreads, swelling the homeless population in				the Supreme Court decided that very issue and
its wake. This issue involves a constitutional right				the court citing Justice Marshall at 220 US pg. 517
affecting the lives of millions of families across this				said.
nation.				The court held that Congress can only delegate
It would allow homeowner a level playing field with				those powers, or rights that they could exercise
the banks to negotiate loan modification. If the				themselves.
bank had to take them to court, the homeowner				The powers of a corporation are express and
could raise affirmative defenses and a right to a				incidental. Runyan at p. 129 supra. If Congress
jury trial. I ask that you look at the arguments				cannot confer the power to foreclose non
proffered in this letter to make your decision and				judicially to National banks and federal savings
that you act quickly.				associations then the provision is ultra vires and
ARGUMENT				void.
I. BANK'S USE OF NON-JUDICIAL				II. THE LENDING FUNCTIONS OF
FORECLOSURES				OF NATIONAL BANKS AND FEDERAL SAVINGS
IS NOT WITHIN THE SCOPE OF A LAW OF				ASSOCIATIONS ARE GOVERNMENTAL
CONGRESS				In Federal Land Bank v. Bismarck Co. of St. Paul,
To resolve the issue of the constitutionality of a				314
trustee sale by National banks and federal savings				U. S. 95 (1941) the court was faced with
associations, we must first identify the nature of				determiningwhether the lending functions were
the corporations. NATIONAL BANKS AND				proprietary or governmental. The court held that
FEDERAL SAVINGS ASSOCIATIONS are				the lending functions of the land bank were
federally chartered corporations created under				governmental and not proprietary because it was
acts of Congress (The Homeowner Loan Act				created under an act of Congress in which the
(HOLA) and the National Bank Act(NBA) for a				government lawfully acted. It included foreclosure
public and national purposes. In Conference of				as part of the general lending functions. As part
Federal Savings and Loan Associations et al v.				of their general lending functions, the land banks
Alan L. Stein et al. 604 F.2d 1256 (9th Circuit)				are authorized to foreclose their mortgages and
(1979) the court related the history of HOLA and				to purchase the real estate at the resulting sale.
the reason for its' creation:				They are "instrumentalities of the federal
The Home Owners' Loan Act of 1933, 12 U.S.C.				government, engaged in the performance of an
§§ 1461 Et seq. (HOLA), was the result of				important governmental function."(cites)
congressional dissatisfaction with state law and				A.GOVERNMENT CANNOT EVADE ITS MOST
practice in the financing of home construction.				SOLEMN CONSTITUTIONAL OBLIGATIONS BY
..... The Federal Home Loan Bank Board (the Bank				SIMPLY RESORTING TO THE CORPORATE
Board) was created with extremely broad				FORM
powers to promulgate rules and regulations. 12				Can Congress divest itself of its identity with a
U.S.C. § 1464(a) provides in part:				corporation created and participated in for a public
...[T]he Board is authorized, under such rules and				purpose sufficiently to allow the corporation to
regulations as it may prescribe, to provide for the				use a procedure that does not allow a hearing?
organization, incorporation, examination, operation,				That question was asked and answered in Lebron
and regulation of associations to be known as				v National Railroad Passenger Corporation. 513 U.S.
'Federal Savings and Loan Associations' * * * and				pgs 374, 375 when the court held that amtrak
to issue charters therefore, giving primary				was created under an act of Congress to achieve
consideration to the best practices of local mutual				government objectives and that although
thrift and home-financing institutions in the United				Amtrak's authorizing statute provides that it "will
States." [bold added]				not be an agency or establishment of the United
A. BANKS CAN BE A GOVERNMENTAL				States Government," it was still held as an agency
ACTOR IN VIOLATION OF THE 5TH				or instrumentality for the purpose of determining
AMENDMENT				rights of it citizens affected by it's actions. Thus
National banks and federal savings associations are				amtrak was held to have violated Lebron 1st
agencies of the United States created to promote				Amendment Constitutional rights. Justice Scalia
its fiscal policies. National banks and federal savings				thus established that not only the priveleges of
associations benefit by not paying state taxes,				government are created in favor of the
avoiding state predatory lending laws through the				corporation but also the obligations of
concept of Federal preemption, allowing them to				government.
export high interest for the credit card thus				Like Amtrak, national banks and federal savings
avoiding the state usury laws. Federal Savings				associations are federal instrumentalities and
associations also have the same benefits and are				members in banking systems created for a public
no less instrumentalities of the federal				purposes and controlled by the director of The
government than national banks whose purpose is				Office of Thrift Supervision and the director of
to promote its fiscal policies. Alexander Hamilton				the Comptroller of the currency. Like Amtrak it is
argued that the Central Bank was necessary to				not for Congress to make the final determination
the nation in cases of emergency such as the				of the status of these corporations as
financing of war... Hamilton believed that there was				government entities for purposes of determining
a symbiotic relationship between agriculture,				the constitutional rights of citizens affected by its
commerce, and manufacturing, and that progress				actions. Consumers are citizens whose
in each of these sectors was necessary for				constitutional rights are affected when non- judicial
America's economic development. (In the Report				foreclosures are exercised by federally chartered
of Credit II, Dec. 1790)				corporations like National banks and federal
B. A PARTY MUST STATE FACTS				savings associations.
SUFFICIENT TO STATE A EITHER A				B. THE POWER TO FORECLOSE IS AN
5th or 14th AMENDMENT DUE PROCESS CLAIM				INCIDENTAL POWER OF THE NATIONAL BANKS
Non-judicial foreclosures have been the subject of				AS WELL AS FEDERAL SAVINGS BANKS
a flurry of cases including the most current Apao				The history of national banking legislation has been
v. San Diego Home Loans, Inc.,324 F3d 1091, Ninth				"one of interpreting grants of both enumerated
Circuit (2002) a California corporation. Margaret				and incidental `powers' to national banks" as well
Apao lost her home to a foreclosure and sale				as federal savings associations[which include
under Hawaii's non-judicial foreclosure statute. The				savings banks]. Bank of America et al v City of
federal district court dismissed the complaint for				San Francisco et al 309 F.3d 551 (Ninth Circuit)
failure to state a claim and that the sale was a				(2002) Consider this hypothetical. The California
purely private remedy. Apao appealed to the				legislature would makes a law that as a matter of
Ninth Circuit. The Ninth Circuit affirmed the district				public policy foreclosures of any kind will not be
court's decision on the grounds that previous				permitted on a homeowner's primary residence.
decisions of appellate courts upheld the				The OTS is charged with the supervision of the
constitutionality of similar non-judicial procedures.				Home Owner Loan Act like the Office of the
The Ninth Circuit held in Apao that the case of				Controller of Currency is "charged with supervision
Charmicor v. Deaner, 572 F2nd 694 "was				of the National Bank Act" NationsBank of N.C.N.A.
controlling" although the consumers in Apao				v Variable Annuity Life Ins. Co. 513 U.S. 252,
attempted to distinguish it. In Charmicor, the				256(1995) The OTS and the OCC would
consumers claimed that the statute offended due				promulgate rules allowing the banks to foreclose
process by failing to provide a pre-sale hearing				on the homes that have defaulted and in concert
and that it offends civil rights statutes and the				with the banks claim that the power to foreclose
equal protection clause by discriminating against				was an incidental power of national banks and also
appellant's shareholders, who are black. The court				federal savings banks and therefore would
in Charmicor noted that the "complaint failed to				preempt state law. The State would challenge
state a claim for relief under the civil rights				that decision in court. Both Acts are silent on the
statutes, because the record was utterly barren				necessity of banks foreclosures to secure the
of any facts or allegations that could support a				residential property in the event of default. The
claim under the equal protection clause", the Ninth				Acts, however, do bestow upon banks the
Circuit affirmed. The court in these cases made				authority to exercise by its board of directors, or
no reference to several Supreme Court decisions				duly authorized officers or agents, subject to law,
which examined the nature of corporations				all such incidental powers as necessary to carry
created under an act of Congress and were				on the business of banking..."12
content with the notion that Congress could adopt				U.S.C.§24(Seventh). The OTS authority to
the local customs on debtor creditor relations				preempt state laws affecting its lending practices
without further analysis. The fact of the matter is				lies in 12 cfr §560.2. Because these sections are
that the issue should be determined under federal				not explicit on the limits of "incidental powers", an
law.				inquiry as to whether the NBA or HOLA would
C. NATIONAL BANKS ARE PUBLIC				support the use of either one or both methods of
NOT PRIVATE CORPORATIONS				foreclosures (Judicial foreclosures and/or
In Easton v. Iowa,188 U.S.220 (1903) the Court				non-judicial foreclosure) would be necessary. The
said of national banks:				holding in United States v. Grimaud, 220 U.S.
...[W]e cannot concur in the suggestions that				506(1911) would apply. The NBA or HOLA could
national banks, in respect to the powers				authorize the former but not the latter because
conferred upon them, are to be viewed as solely				the government could not exercise the power to
organized and operated for private gain.				foreclose non-judicially itself.
The Court in Easton went on to say at 188 U.S.				C. NATIONAL BANKS AND FEDERAL SAVINGS
220 at p. 230 that the principles enunciated in				ASSOCIATIONS MORTGAGE FSB CAN BE
McCullough v Maryland, 17 U.S. 316(1819), and in				CONSIDERED "AGENCIES" OF THE
Osborn v Bank of United States, 22 U.S.738				GOVERNMENT
(1824), though expressed in respect to banks				In Acron Investments, Inc. et al v Federal Savings
incorporated directly by acts of Congress, were				and Loan Insurance Corporation, 363 F.2nd 236
still applicable to the later and present system of				(9th Circuit, 1966) the court was given the task
national banks. The Court cited with approval the				of determining if the Federal Savings & Loan
holding of the latter as expressed by Chief Justice				Insurance Corporation (FSLIC) was an "agency".
Marshall which held that banks were public and not				After reviewing all the relevant code sections the
private corporations and that they were federal				court concluded that the corporation was an
instrumentalities created for public and national				"agency" under 28 USC 451 because the control
purposes. The court in Osborn made it quite clear				of the government over the corporation was
that everthing that the corporations assumed to				more than custodial or incidental.
do must be done even under its contracts must				Under the Ninth Circuit's own test national banks
be done under the authority of the federal				and federal savings associations are "agencies".
charter and the law that created that corporation.				Any doubt as to government's control over the
In other words under "color of federal law". It				"operations" as being "custodial or incidental" is
was a theme recurring in other Supreme Court				dispelled in Fidelity Fed. S. & L. v. De la Cuesta,
decision.				458 U.S. 141 (1982) at p. 161 when the court held
In view of the holding in Osborn which Justice				that "Congress' explicit delegation of jurisdiction
Marshall held that banks were public and not				over the "operation" of these institutions must
private bank corporations because they were				empower the Board to issue regulations governing
created for public and national purposes, which				mortgage loan instruments
was approved and held applicable to later national				With respect to National Banks the holding in
bank corporations not directly created by				Easton would apply as the court held that
Congress by the Supreme Court in Easton, why				Congress has the sole power to regulate and
should we now consider national banks private				control the exercise of their operations.
corporations? And why not considerthem				CONCLUSION
"agencies of the Federal government" as referred				The subject corporations cited share a common
to in Easton? And why should the same reasoning				heritage with National banks and federal savings
not apply to FEDERAL SAVINGS				associations. They are corporations federally
ASSOCIATIONS.				chartered and created under acts of Congress
In Runyan v. Lessee of Coster, 39 U.S. 122, p. 129				for important public and national purposes for
(1840) the court Said:				which the Supreme Court has ruled on that
... The corporation must show that the law of its				premise in a number of cases that their activities
creation gave it authority to make such				were governmental. Thus in Bismarck the Court
contracts.".				ruled that the lending functions were
Did the law of its creation (HOME OWNER LOAN				governmental not proprietary; and that
ACT or NATIONAL BANK ACT ) give National				foreclosure was part of the general lending
banks and federal savings associations the right to				functions. In Lebron, the Court ruled that the
make this contract with this provision?				corporation was part of the government for the
Can it then be said that the provision in a				purpose of determining its constitutional obligations
mortgage contract requiring a mortgagor to				toward the rights of citizens affected by its
transfer his rights to a trustee with a power of				actions.
sale for the non-payment of a mortgage is				The Ninth Circuit and other appellate courts have
authorized by the federal charter? Is this not the				yet to apply the settled principles enunciated by
right to foreclose on an owner without resort to				these Supreme Court cases which lead to one
judicial process and a hearing? Is this not the right				conclusion--- that National banks and federal
to deprive a person of procedural due process?				savings associations' use of a Trustee
We must then ask the question: Is the act of the				Sales(non-judicial foreclosures) must be a
national or federal savings associations in				governmental acts and a 5th amendment violation
foreclosing non-judicially within the scope of a law				of due process.
of Congress? Can the government by way of a				Constitutional powers conferred on a corporation
federal charter authorize a right to a bank to do				should not be used to produce an unconstitutional
what it is forbidden to do itself? It is				result. The fallacy is that state law cannot
fundamentally clear that the government can				determine the manner of foreclosure, but federal
impart no greater power through a charter than				law with respect to the corporations created
they possess themselves. The power to deny a				under acts of Congress. And federal law cannot
person of procedural due process is denied to the				authorize a non-judicial foreclosure, nor can the
government under the 5th Amendment and is				Constitution allow it.

Democracy

The Myth That All Foreclosures By Power Of Sale Provisions Are Constitutional