Buying Banks and Selling Hot Dogs Are the Same Under the Law

In the early 1970’s the Board of Governors of the Federal Reserve System (the Board) approved the acquisition of two Iowa (Bettendorf and Keokuk) banks by Minneapolis-based Northwest Bancorporation (Northwest).[1]

At the time, federal law provided that no acquisition of a state bank by an out-of-state bank holding company was permissible unless such an acquisition was “specifically authorized by the statute laws of the State in which . . . [the acquired] bank is located.”[2] An Iowa statute at the time generally barred out-of-state bank holding company acquisitions of Iowa banks “unless such bank holding company was on January 1, 1971, registered with the federal reserve board as a bank holding company, and on that date owned at least two banks in [Iowa].”[3] This is what is colloquially called a “grandfather clause,” and at the time Northwest was the only out-of-state bank holding company owned or controlled any Iowa banks and thus was the only person covered by this grandfather clause.[4]

The Board’s approval was contested and challenged by the Iowa Independent Bankers Corporation (Iowa Bankers), an association of over 400 Iowa banks on various grounds. The key ground was the Equal Protection Clause of the 14th Amendment to the U.S. Constitution. The Iowa Bankers argued that the Iowa statute violated equal protection by creating two classes of out-of-state bank holding companies: (a) those owning one or no Iowa banks and (b) those owning two or more Iowa banks with Northwest being the only such holding company in the latter class.[5]

The Board in approving the acquisitions declined to rule on this constitutional objection. It said that only the judiciary could do so.[6] Thus, the Iowa Bankers petitioned the appropriate federal court of appeals in Washington, D.C. to set aside the Board’s approval on this and other grounds.

Faegre & Benson was the regular outside general counsel for Northwest, and I was designated as the Faegre lawyer responsible for defending the Board’s approval of the acquisitions. With the help of others at the law firm, I wrote the appellate brief for Northwest and argued the case before the appellate court.

In February 1975, the appellate court unanimously affirmed the Board’s approval of the acquisitions and dismissed the petition by the Iowa Bankers.

On the Equal Protection issue, the court stated that as the Iowa statute did not create a suspect classification or impinge upon fundamental rights, the court’s review was limited to determining whether the statute had a rational relationship to a legitimate state purpose. The appropriate classes under the statute, said the court, were those holding companies not owning any Iowa banks and those that already did. More importantly, the court concluded it was “perfectly rational for the Iowa legislature to determine that Northwest . . .  [had] a pre-existing stake in the Iowa banking system and [had] . . . proven itself to be a positive force in the system [and] should be allowed to compete on the same basis as other Iowa banks . . . .” Likewise it was rational for the Iowa legislature, according to the court, to decide that Iowa would not be well served if other out-of-state holding companies “were allowed wholesale entry into the Iowa market.”[7]

At the same time as the Northwest litigation, the same legal issue was presented to the U.S. Supreme Court. In City of New Orleans v. Duke, a New Orleans ordinance banned pushcart vendors in the French Quarter except for those who already had done so continuously for over eight years with only two such vendors (one hot dogs; the other, ice cream) qualifying under that grandfather clause.[8] The Supreme Court held that the ordinance was constitutional. It stated, “When local economic regulation is challenged solely as violating the Equal Protection Clause, this Court consistently defers to legislative determinations as to the desirability of particular statutory discriminations.” Such regulations are valid, according to the Court, so long as their classifications are “rationally related to a legitimate state interest. States are accorded wide latitude in the regulation of their local economies under their police powers, and rational distinctions may be made with substantially less than mathematical exactitude.” Therefore, the Supreme Court concluded that the “record makes abundantly clear that the . . .  ordinance, including the ‘grandfather provision,’ is solely an economic regulation aimed at enhancing the vital role of the French Quarter’s tourist-oriented charm in the economy of New Orleans.”[9]

That is why I say buying banks is the same as selling hot dogs under the law.