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Dodd-Frank Orderly Liquidation Authority: Too Big for the Constitution?

The Dodd–Frank Act, enacted in the wake of the U.S. financial crisis of 2007 to 2009, is the federal government’s attempt to address a number of systemic issues perceived to be at the root of the financial meltdown. Title II of the Act goes to the heart of this effort by creating a new specialized insolvency regime for the orderly liquidation of systemically significant nonbank financial companies. This regime, largely modeled after the FDIC’s process for shutting down insolvent federally insured banks, theoretically provides a substitute for bankruptcy and bailouts by giving the executive branch authority to take control of and liquidate nonbank financial companies that are deemed to be too big to fail.

Unfortunately, in the government’s haste to create a viable resolution process, it overlooked a number of fundamental constitutional benchmarks–including due process, Article III, and First Amendment requirements–rendering Title II susceptible to future judicial invalidation. Of particular concern is the statute’s procedure for appointing the government as receiver of the financial firm, which requires a secret, ex ante judicial proceeding in which an Article III judge is permitted to review only two of the seven orderly liquidation prerequisites–and given just twenty-four hours to do so. The very broad discretion bestowed on the executive branch to decide whether to subject a financial firm to orderly liquidation also creates a potential conflict with the uniformity requirement of the Constitution’s Bankruptcy Clause. And finally, there are cognizable Fifth Amendment takings concerns implicated by the expansive powers that Title II affords to the government as receiver.

Given that issues of standing make the success of any anticipatory challenge questionable at best, Title II’s constitutional vulnerabilities will likely remain dormant until the government actually avails itself of its orderly liquidation authority. This is quite troublesome given that such a constitutional challenge would likely further exacerbate the financial havoc that Title II is intended to mitigate. The good news is that this disastrous eventuality can be avoided with a few simple amendments–foremost by providing for plenary judicial review after rather than before the orderly liquidation receiver is appointed.