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October 31, 1978


The opinion of the court was delivered by: GASCH


This is a suit for declaratory and injunctive relief brought by the United States League of Savings Associations (USLSA), a national trade association representing approximately 4,400 state and federally chartered savings and loan associations (S & L's), to challenge regulations recently promulgated by the Board of Governors of the Federal Reserve System (the Board) and by the Federal Deposit Insurance Corporation (FDIC).

 On May 1, 1978, the Board amended section 217.5(c) of its Regulation Q, *fn1" which governs methods of withdrawal from savings deposits, to permit an individual depositor at a federally insured bank to arrange, pursuant to a prior written agreement, for the automatic withdrawal of funds from his savings account and the transfer of such funds to demand deposit or other accounts. *fn2" This automatic fund transfer (AFT) service may be used to cover overdrafts or to maintain a specified balance in a depositor's checking account. On May 5, 1978, the FDIC, which regulates all federally insured commercial banks that are not members of the Federal Reserve System, adopted similar rules by amending section 329.5(c) of its Rules and Regulations. *fn3" The amended regulations are scheduled to take effect on November 1, 1978.

  Plaintiff USLSA has challenged these regulations on the ground that they violate the statutory prohibitions against the payment of interest on demand deposits *fn4" and against withdrawal by negotiable instrument from interest-bearing savings deposits. *fn5" It notes that under the plan created by the amended regulations a check drawn on a demand deposit with insufficient funds would be covered automatically by a transfer from the drawer's savings deposit. The regulations do not require either a service charge for such transfers or a forfeiture of interest on the funds transferred. *fn6" Because funds needed to cover a check can remain in an interest-bearing savings deposit until the check is presented for payment, plaintiff contends that the demand deposit account, which can be maintained with a zero balance, will be a mere conduit between the savings deposit and the payee named in the check. The USLSA characterizes AFT services as a "device" for allowing banks to pay interest on demand deposits and for permitting withdrawals by negotiable instruments from interest-bearing deposits in violation of statutory prohibitions. Because of the threatened economic injury to savings and loan associations if the regulations take effect, *fn7" plaintiff has brought this suit for declaratory and injunctive relief.

 Defendants deny this characterization and maintain their regulations preserve the longstanding distinction between interest-bearing savings deposits and noninterest-bearing demand deposits because the AFT regulations require the bank to reserve the right to require a depositor to give at least thirty days' notice of withdrawal from AFT accounts. They also urge that there is no violation of the prohibition against third-party payment from savings deposits because separate savings and checking accounts must be maintained and negotiable instruments are drawn only against the checking account. This matter is presently before the Court on defendants' motion to dismiss or, in the alternative, for summary judgment and plaintiff's cross-motion for summary judgment.


 The Federal Reserve Board, which was established by the Federal Reserve Act of 1913, *fn8" is the agency of the federal government authorized by Congress to supervise and regulate commercial banks that are members of the Federal Reserve System. *fn9" The Federal Deposit Insurance Corporation has similar statutory responsibility for supervising and regulating all banks insured by it that are not members of the Federal Reserve System. *fn10" As a result, the regulations of these two bodies govern the activities of virtually all commercial banks in the United States.

 The Federal Reserve Act of 1913 specifically defined the terms "demand deposit" and "savings deposit" and prescribed separate reserve requirements for each. *fn11" Savings deposits were subject to the legal right of the bank, at its discretion, to require a depositor to give at least thirty days' notice before withdrawing funds from the account. In contrast, demand deposits were not subject to any such requirement. The Banking Act of 1935, *fn12" however, repealed the statutory definitions of "savings deposit" and "demand deposit" that had appeared in the 1913 Act and substituted provisions granting the Board and the FDIC authority to define such terms. *fn13" In addition, they were authorized to determine what shall be deemed a payment of interest, and to prescribe rules and regulations "necessary to effectuate the purposes of this section and to prevent evasions thereof." *fn14" Board regulations relating to deposits and the payment of interest by member banks are known collectively as Board "Regulation Q." Since 1936 Regulation Q and the corresponding FDIC regulations have continued to distinguish savings deposits and demand deposits on the basis of the bank's right to require "notice in writing . . . not less than 30 days before such withdrawal is made" from savings accounts. *fn15"

 On March 15, 1976, the Board and the FDIC published for comment proposals authorizing AFT that were essentially the same as the regulations challenged here. *fn16" No further action was taken on these proposals and on February 7, 1978, the Board republished for comment its proposal to authorize member banks to offer AFT plans. *fn17" The Board received a record number of comments on the AFT proposal, *fn18" and after considering the responses, adopted the amendments permitting automatic fund transfers on May 1, 1978. The FDIC took similar action on May 5, 1978. In adopting the challenged regulations, the Board stated that AFT would benefit the public by providing an additional and convenient means of savings withdrawal service and would also increase the efficiency of the Federal Reserve System's check clearing operations by reducing the number of return items processed by the system. *fn19"

 The regulations emphasize that AFT services are available only to individuals and that such services are entirely voluntary, both on the part of the bank and of the customer. The amended regulations require that any bank offering the AFT service reserve the right to require thirty days' notice before withdrawal and to disclose prominently and specifically the legal right of the bank to demand such notice. *fn20" Because of this requirement, the Board concluded that the amendment did not alter the basic distinction between savings and demand deposits and thus did not violate the statutory prohibition against the payment of interest on demand deposits. In addressing the argument that the amendments violated the prohibition of 12 U.S.C. ยง 1832 against negotiable orders or third-party payments from savings accounts, the Board concluded that the new regulations provide a withdrawal service that is "identical in its essential elements to withdrawal services that banks already are authorized to offer to depositors such as withdrawals in person or via telephone." *fn21" Plaintiff contends, however, that bank plans utilizing AFT services are being merchandized and are generally perceived as interest-bearing checking accounts. *fn22"


 A. Judicial Review.

 Defendants have moved to dismiss plaintiff's complaint on the ground that the subject matter of the challenged regulations is committed to agency discretion by law and therefore is not subject to judicial review. Section 10(a)(2) of the Administrative Procedure Act *fn23" exempts from judicial review any action by an agency that is committed to the discretion of the agency by law. This exemption, however, is a very narrow exception applicable only "in those rare instances where "statutes are drawn in such broad terms that in a given case there is no law to apply.' " Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 410, 91 S. Ct. 814, 821, 28 L. Ed. 2d 136 (1971).

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