#22 Fall 1998

     Free Speech in Public Universities
     FDIC v. Small-Town Banker
     Sovereign Immunity

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By Stephen Plafker

In the lead article of the Spring 1998 issue of this Bulletin, Lauren Bain, Esq. discussed the Line Item Veto Act of 1996. This Act allowed the president to "cancel" certain spending items and tax cuts from any bill within five days of its passage. Ms. Bain’s article showed the Act's clear unconstitutionality by reference to the language of the Presentment Clause (Art. I, sec. 7, cl. 2).1 She went on to point out that this Clause is one aspect of the Separation of Powers Doctrine which the founding fathers, particularly Madison, believed to be a "fundamental article of liberty."

At the time Ms. Bain’s article appeared, the issue was before the Supreme Court. On June 25, in a 6-3 decision, the Supreme Court decided the issue in accordance with Ms. Bain’s conclusion.2

Two cases were involved in this decision. In the first, Clinton v. City of New York, the President “canceled” Section 4722(c) of the Balanced Budget Act of 1997 which declared New York State eligible for certain subsidies to help finance medical care for the indigent. In the second case, the President “canceled” Section 968 of the Taxpayer Relief Act of 1997 which would have allowed owners of certain food refiners and processors to defer the recognition of capital gains upon sale of their stock to eligible farmers’ cooperatives.

The majority opinion, written by Justice Stevens, begins by pointing out the obvious: "In both legal and practical effect, the President has amended two Acts of Congress by repealing a portion of each." Then, since "[t]here is no provision in the Constitution that authorizes the President to enact, to amend, or to repeal statutes," the President’s action and the Line Item Veto Act are unconstitutional.3

With an indisputable result before it, one may ask, why was the decision not unanimous? The interesting opinion is, therefore, the dissent, written by Justice Breyer and joined by Justices O'Connor and Scalia. To understand the dissenting argument, one focuses on the New York case. The situation would be no different, Justice Breyer argues, had Congress added to Section 4722(c) the language: “provided however

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that the President may prevent the just mentioned provision from having legal force or effect if he determines x, y and z. (Assume x, y and z to be the same determinations required by the Line Item Veto Act)."4 Therefore, the case is not as simple as it appears; the majority has mischaracterized the President's action:

     For that reason, one cannot dispose of this case through a purely literal analysis
     as the majority does. Literally speaking, the President has not "repealed" or
     "amended" anything. He has simply executed a power conferred upon him by
      Congress, which power is contained in laws that were enacted in compliance
      with the exclusive method set forth in the Constitution.5

In addition to the fact that this opinion ignores the clear language of the Constitution, it is based on a fundamental misunderstanding of that document as well as of the modern process of making laws.

Enacting legislation under the American system is purposely cumbersome. The Constitution requires certain minima before a bill becomes law. It must, at least, be acceptable to a majority of the House of Representatives, to a majority of the Senate, and to the president. The required procedure requires compromise on the part of representatives of differing views. (This would be true under a rational system of government. It is at the base of the present one.) Once the president signs the law, it cannot be tinkered with. The Constitution is explicit on this point. The president's sole relationships with legislation are his veto power and the requirement that "he shall take care that the laws be faithfully executed . . ."6

The Line Item Veto Act seeks to short-circuit the Constitutional procedures in such a way that, after all sides have had their say and made their mutual compromises, one man chooses whose negotiated benefit survives and whose is sacrificed.

Justice Breyer implicitly recognizes that he has an insurmountable problem by admitting his inability to formulate an equivalent law in a way that is clearly constitutional. His position is especially strange in light of a question he asked the government lawyer at argument: "What's the

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difference between 'giving a president the authority to pick and choose' projects and tax-break winners and losers and 'a president who rules by decree'?"

Something is basically wrong when Congress would pass a law so clearly unconstitutional and a president would approve it. And that three of the most prestigious American lawyers find it acceptable demands an explanation. The explanation is found in Justice Breyer s reference to "the genius of the Framers' pragmatic vision, which this Court has long recognized in cases that find additional room for necessary institutional innovation." (emphasis added)

Wrong. The Framers' vision was not pragmatic. The Framers believed in facts existing "antecedent" to the mind. Their vision was based on a belief in objective reality with a definite identity, on a belief that thought is used to evaluate reality, that truth or falsity lies in consistency with reality. They believed in a "rigid doctrine of natural rights inherent in individuals independent of social organization." They believed that words have meanings. That, when a document describes a particular method of enacting laws, it describes the way laws are to be enacted. The Framers understood that "institutional innovation" was not "necessary", but in fact harmful, that it led to arbitrary governmental edicts; i.e., tyranny. They therefore organized a government in which "institutional innovation" was impossible.

The best statement in the case was made by Justice Kennedy. In answer to a claim that no injustice could be caused by the procedures of the Line Item Veto Act, he said, "The Constitution's structure requires a stability which transcends the convenience of the moment * * * Liberty is always at stake when one or more of the branches seek to transgress the separation o powers." (emphasis added).

1. "Every Bill which shall have passed the House of Representatives and the Senate, shall, before it become a Law, be presented to the President of the United States; If he approve he shall sign it, but if not he shall return it, with

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his Objections to that House in which it shall have originated, who shall enter the Objections at large on their Journal, and proceed to reconsider it. If after such Reconsideration two-thirds of that House [and thereafter two-thirds of the other House] shall agree to pass the Bill, . . . it shall become a Law . . . If any Bill not be returned by the President within ten Days (Sundays excepted) after it shall have been presented to him, the Same shall be a Law, in like Manner as if he had signed it, unless the Congress by their Adjournment prevent its Return, in which Case it shall not be a Law."

2. Clinton v. City of New York, 118 S.Ct. 2091, 141 L.Ed.2d 393 (1998)

3. A large part of this opinion was necessary to consider the question whether the parties had standing to raise the substantive issue involved in the case. None of these procedural questions will be discussed here.

4. For Justice Breyer's information, x is "reduce the federal budget deficit", y, "not impair any essential Government functions," and z, "not harm the national interest."

5. What would Justice Breyer consider an amendment? Amend... 2. To make alterations (in a bill before Parliament). Shorter Oxford English Dictionary (1933)

6. Article II, Section 3. This provision is quoted in none of the opinions in this case.


Free Speech in Public Universities
Using college students' mandatory fees for student advocacy groups was stopped by the 7th Circuit U. S. Court of Appeals. In Southworth v. Grebe, the court prohibited state universities from engaging in the practice of charging student fees which are distributed to campus political organizations. It held the practice to be in conflict with the First Amendment when the fees are used "to fund organizations which engage in political or ideological activities, advocacy or speech." The opinion follows other cases regarding union fees and bar association fees. The court quoted Thomas Jefferson (in the Virginia Statute of Religious Liberty of 1786): "To compel a man to furnish contributions of money for the propagation of opinions which he disbelieves, is sinful and tyrannical."

FDIC v. Small-Town Banker

Glen Garrett, owner of First State Bank of Purdy, Missouri, knows his customers on a first-name basis. He likes to lend money to the customers he knows but is a little lax on the paperwork. He has never lost one penny on the poorly documented loans. Nevertheless, the FDIC thinks Garrett needs a lesson on how to run a bank. The FDIC contends that the six loans in question were made more or less for the benefit of Garrett, because his son and friends borrowed from the bank to support their interests in business deals with Garrett. In all, $137,000 was borrowed, and all was repaid, with interest. The FDIC thinks that is bad banking and proposes a fine of $25,000. It also wants him to sign a document in which he would have to admit wrong-doing. After hearing the FDIC proposal, Garrett didn't think about it for long. "I would have to agree to something

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that I didn't do, so I told them to stick it." Now, $1,000,000 later in attorney's fees and expenses, from his own money, and six years of administrative battles with the FDIC, Garrett continues the fight. "And we still do business on a handshake, by the way," says Garrett.

Sovereign Immunity

Under the doctrine of sovereign immunity, governmental agencies and government employees are usually immune from law suits. The doctrine originally came from England where it originated in the principle that "The King Can Do No Wrong." In this country, the rule is justified by the necessity to protect the financial well-being of the government and the (proper) reticence to give the judicial branch leverage over government spending.

There are two modern trends in connection with this doctrine. On the one hand, governments are consenting to be sued in many situations. On the other, with the expansion of government activity, the doctrine causes more unredressed harm.

An example of the latter is found in regulation of the securities industry. In addition to the Securities and Exchange Commission, some stock exchanges regulate the market. A recent case illustrates how a stock exchange, NASDAQ in this case, can use sovereign immunity to avoid the consequences of its actions.

Sparta Surgical Corp. is a corporation traded on NASDAQ. After making applications to, and getting the appropriate rulings from, NASDAQ and the SEC, Sparta and its underwriter began selling its shares. Later, NASDAQ "de-listed" Sparta's stock and suspended trading without an explanation. It subsequently lifted the suspension, and trading in the stock resumed. However, this did not eliminate the damage to Sparta's reputation and resulting harm to its ability to sell its stock.

Sparta sued NASDAQ to redress these damages, but the court held that NASDAQ was immune from suit because of its quasi-governmental character---even if its action was done in bad faith.

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[According to the court], this immunity is necessary because NASDAQ is "entrusted with the authority to preserve and strengthen the quality of and public confidence in its market." How does having legal immunity for completely arbitrary acts preserve this confidence? In Ayn Rand's words, "blank out."

Copyright © 1998 The Association for Objective Law. All rights reserved. The Association for Objective Law is a Missouri non-profit corporation whose purpose is to advance Objectivism, the philosophy of Ayn Rand, as the basis of a proper legal system.