Greetings, Court fans!
We’ve got quite a bit to report, so we’ll get right to it. First, in Watters v. Wachovia Bank, N.A. (05-1342), the Court considered whether a national bank’s operating subsidiary, which is engaged in real estate lending, can be subjected to state regulation. The short answer: No. Such regulation is preempted by federal law. Petitioner Watters administered Michigan’s lending laws, overseeing and investigating state banking institutions. Wachovia Mortgage, for several years, had operated in Michigan and subjected itself to state supervision, but after becoming a “wholly owned operating subsidiary” of Wachovia Bank, it informed Michigan that it was no longer subject to the state’s requirements because it now operated under the authority of the National Bank Act and the Office of the Comptroller of the Currency’s (OCC’s) exclusive “visitorial” authority. This lawsuit ensued; the district court agreed with Wachovia, and the Sixth Circuit affirmed.
The Court affirmed 5-3 (Justice Thomas did not participate). For the majority, led by Justice Ginsburg (joined by Kennedy, Souter, Breyer, and Alito), the analysis was simple. Generally, “federal control shields national banking from unduly burdensome and duplicative state regulation.” A national bank’s own exercise of its real estate lending power therefore could not be subjected to burdensome state regulation – like Michigan’s. But what about its operating subsidiary? The majority agreed with the OOC that, under the National Bank Act, banks may conduct business through operating subsidiaries under their “incidental” authority. Unlike “financial” subsidiaries (which may engage in additional investment activity), “operating” subsidiaries (such as Wachovia Mortgage here) merely do what national banks can do themselves. Taking a substance over form approach, the majority concluded that an operating subsidiary must be treated as a national bank because “we have focused on the exercise of a national bank’s powers, not on its corporate structure.” So, because Wachovia Mortgage is an operating subsidiary of Wachovia Bank, and does nothing more than Wachovia Bank could do itself, it escapes Michigan’s regulations.
Justice Stevens, joined by the Chief and Justice Scalia (not a combination you see every day), dissented. They would limit the reach of the National Bank Act to . . . actual national banks. The dissent was not persuaded by the statutory authority regarding operating subsidiaries and expressed concern about exempting subsidiaries from state regulation since, an operating subsidiary, as a separate corporation, “shields the national bank from the operating subsidiaries’ liabilities.” The dissent viewed the separate corporate forms as distinctions with a difference, and argued that a national bank desiring to exempt its mortgage business from state regulation could do so by making the mortgage business a department of the parent bank rather than a separate subsidiary.
Turning from relatively obscure banking law to a truly obscure school funding provision, we come to Zuni Public School District v. Department of Education (05-1508). The Federal Impact Aid Program (“FIAP”) provides funds to local school districts whose finances are adversely affected by a federal presence (such as a military base, which increases school expenditures without increasing local tax revenues). FIAP generally prohibits a State from decreasing its own funding to a district that receives the federal funds, but provides an exception where a State “equalizes expenditures” among local school districts (as found by the Secretary of Education). A State equalizes under FIAP if the expenditures by the school district with the highest per-pupil expenditures do not exceed those of the district with the lowest expenditures by more than 25 . To determine whether a State equalizes, FIAP requires the Secretary to calculate the disparity among local school districts in the State, but when doing so, to “disregard” outlier school districts with “per-pupil expenditures . . . above the 95th percentile or below the 5th percentile of such expenditures” (the so-called “disregard provision”). The Secretary promulgated regulations long ago to carry out this task. First, the Secretary ranks the districts in order of expenditure. Next, however, instead of excluding the 5 of districts with the highest and lowest expenditures, the Secretary’s regulations determine which districts to disregard by identifying those whose students account for the 5 of the State’s total student population at the high and low ends of the spending distribution. (This formula essentially weights districts by student population in determining which to disregard.) Under this methodology, the Secretary found that New Mexico equalized expenditures and therefore could cut State funding to Zuni and other districts (collectively “Zuni”) that received federal aid under FIAP. Zuni challenged the Secretary’s determination; an ALJ and the Secretary rejected the challenge; and an evenly divided en banc panel of the Tenth Circuit affirmed.
The Court agreed, in an opinion by Justice Breyer, joined by Kennedy, Ginsburg, Stevens and Alito. The majority found that FIAP’s disregard provision was ambiguous as to how to calculate the 5th and 95th percentiles and that the Secretary’s interpretation was reasonable and therefore should be accorded deference under Chevron U.S.A. v. Natural Resources Defense Council, Inc. The majority’s conclusion was clearly driven by the legislative history. The Secretary had been using this formula to determine whether states equalized expenditures for over 30 years, even before the disregard provision was added in 1994 – and the provision itself originated in draft legislation provided by the Secretary! And the Secretary’s interpretation furthers the purpose of disregard provision – to eliminate outlier districts – in a way that can be sensibly applied across states and differing factual circumstances (in contrast, disregarding districts on a percentile of districts basis could lead to exclusion of districts with 20 of the student population in one state and 2 in another state depending on the size and number of districts).
The really interesting part of Zuni though is not its interpretation of FIAP (after all, how many of us litigate FIAP cases?), but its discussion of the use of legislative history. The majority invited the expected complaints when it “flipped” the normal order of analysis – beginning not with the language of the statute, but instead with its history. Justice Stevens then stoked the fire when he concurred separately to state that the Court’s duty was to determine the legislature’s intent, even if that meant overlooking statutory language that, if read literally, would require a different result since “in rare cases the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.” To ensure they weren’t lumped into the Stevens’ camp, Kennedy and Alito then wrote separately to emphasize that FIAP really is ambiguous and that it would be “preferable, and more faithful to Chevron, to arrange the opinion differently,” starting with the text of the statute. (So Breyer’s decision got a 5-Justice majority, but 3 felt compelled to explain how they would have drafted the decision differently!) Justice Scalia, joined by the Chief and Thomas and by Souter (as to Part 1 only) dissented to state that FIAP’s plain language requires exclusion of the top and bottom 5 of school districts, and does not permit consideration of percentage of student population. The dissent (minus Souter) then went on a bit of a rampage about plain language, strict construction, and the paltry value of legislative history: “Contrary to the Court and to Justice Stevens, I do not believe that what we are sure the Legislature meant to say can trump what it did say.” Not to be left out, Souter dissented separately to say that the majority and Stevens were probably correct that Congress intended to permit the Secretary to continue to use his formula for calculating the disregard districts, but “I find the statutory language unambiguous and inapt to authorize that methodology.” This is a discussion the Justices have been having for many years and is likely to continue for just as long…
Finally, we turn to the companion cases of Abdul-Kabir v. Quarterman (05-11284) and Brewer v. Quarterman (05-11287), where the Court considered whether jury instructions involving “special issues” under Texas law “prevented jurors from giving meaningful consideration to constitutionally relevant mitigating evidence.” If this question sounds familiar, it’s not just déjà vu – as Justice Roberts’ dissent notes, the Court “had considered similar challenges to the same instructions no fewer than five times in the years before the state habeas courts considered the challenges at issue here.”
The petitioner in Abdul-Kabir was convicted of capital murder for strangling a 66-year-old man with a dog leash so that he could steal $20 to buy beer in 1987. The sentencing jury was asked to consider two special issues: whether petitioner deliberately meant to cause the death of another, and whether the petitioner posed a risk of future dangerousness. Although the petitioner was allowed to present his mitigating evidence, including evidence of childhood abuse and abandonment and a brain injury, the jury was not instructed to take into account his mitigating evidence, and the prosecutor had commented to the jurors during voir dire that they must answer only the special issues and not consider their own views about an appropriate punishment for the defendant. Justice Stevens’ majority opinion, joined by Kennedy, Souter, Ginsburg, and Breyer, concluded that the jury instructions as presented (compounded by the prosecutor’s comments) precluded the jury from considering mitigating evidence, stripped the jury of its ability to exercise a reasoned moral judgment, and were “contrary to . . . [and] an unreasonable application of[] clearly established federal law,” constituting reversible error under the Antiterrorism and Effective Death Penalty Act of 1996 (AEDPA). The Court painstakingly reviewed precedent relating to the rules for what circumstances allow juries to give “full consideration and full effect” to mitigating evidence, and it emphasized that “the mere ability to present [mitigating] evidence is not sufficient” if the evidence is effectively excluded “from meaningful consideration by the jury.” Under the majority’s view, the rule announced in Penry v. Lynaugh, 492 U.S. 302 (1989), that “in the absence of an appropriate instruction directing the jury to consider fully mitigating evidence as it bears on the extent to which a defendant is undeserving of a death sentence, we cannot be sure that it did so,” controls the analysis. And subsequent jurisprudence was not inconsistent with Penry (or, at least, any inconsistency has since been disavowed). Rooting its holding in the “basic legal principle” that a jury must be allowed “to give meaningful effect to any mitigating evidence providing a basis for a sentence of life rather than death,” the Court reversed the Court of Appeals’ judgment denying petitioner habeas relief.
The same 5 Justices found constitutional error with the same Texas jury instructions in Brewer, which addressed the additional wrinkle that the mitigating evidence presented in Brewer amounted to the “two-edged sword” mentioned in Penry—that is, that some evidence “may diminish [petitioner’s] blameworthiness for his crime even as it indicates that there is a probability that he will be dangerous in the future.” Brewer was convicted in 1991 of committing murder during the course of a robbery. He presented mitigating evidence of childhood abuse, substance abuse, and a brief hospitalization for depression. The prosecutor in Brewer informed the jurors that if they concluded Brewer answered the two “special issue” questions in the affirmative, and found that Brewer deliberately caused the death of another and posed a continuing danger to society, the jury essentially had no choice but to sentence Brewer to death. The majority concluded that “there is surely a reasonable likelihood that the jurors accepted the prosecutor’s argument” and failed to consider whether, “given Brewer’s troubled background, he may not be deserving of a death sentence.”
In a dissenting opinion joined by Justices Scalia, Thomas, and Alito in part, Chief Justice Roberts strongly disagreed with the majority’s conclusions in Abdul-Kabir and Brewer that the federal law was “clearly established.” The dissent felt that the pertinent precedents were Graham v. Collins, 506 U.S. 461 (1993) and Johnson v. Texas, 509 U.S. 350 (1993), which “adopted a more limited view of Penry [] than the Court embraces today” and found no error in the same jury instructions as applied to those defendants’ cases. “We give ourselves far too much credit in claiming that our sharply divided, ebbing and flowing decisions in this area gave rise to ‘clearly established’ federal case law.” Since prior precedent was ambiguous at best, the law was not “clearly established” and therefore the lower courts’ decisions could not be reversed under AEDPA. The dissent also stated that Brewer’s evidence was quantitatively and qualitatively less compelling than that presented by Penry, and, as such, the lower courts reasonably applied Penry in declining to grant Brewer relief. Justice Scalia’s separate dissenting opinion (joined by Justice Thomas and Justice Alito in part) registered his continuing belief that “limiting a jury’s discretion to consider all mitigating evidence does not violate the Eighth Amendment.” Justice Scalia also complained that the Court’s jurisprudence in this area unfortunately has been guided “by the moral perceptions of the Justices du jour” rather than the public understanding of the Eighth Amendment at the time of its adoption.
We’ll be back with more opinions and orders shortly. Until then, thanks for reading!
Ken & Kim
From the Appellate Practice Group at Wiggin and Dana
For more information, contact Kim Rinehart, Ken Heath, Aaron Bayer, or Jeff Babbin at 203-498-4400