Marijuana business-targeted credit union gets second chance at Fed’s services "Credit News 24"
By Richard A. Roth, J.D.A Colorado credit union that has said it plans to provide banking services to marijuana-related businesses will be allowed to proceed with its suit demanding a master account at the Federal Reserve Bank of Kansas City. A fractured three-judge panel of the U.S. Court of Appeals for the Tenth Circuit has reversed an order dismissing the suit with prejudice, with each of the judges writing a separate opinion advocating a different result. However, the resulting order is that The Fourth Corner Credit Union’s complaint should be dismissed without prejudice, allowing the financial institution another opportunity to plead its case (The Fourth Corner Credit Union v. Federal Reserve Bank of Kansas City, June 27, 2017, per curiam).
A master account is an account that an FRBank opens for a bank or credit union to give the institution access to Federal Reserve System services. While the credit union could gain access through a correspondent account at another financial institution, it told the appellate court that efforts to do so had failed. And, as the district judge explained in his order, “Simply put, without this access The Fourth Corner Credit Union is out of business.”
The Kansas City Fed refused to open a master account for Fourth Corner. According to the FRBank, the credit union posed too much risk due to its plan to offer services that would facilitate customers’ violations of the federal Controlled Substances Act. The district court judge dismissed Fourth Credit Union’s suit seeking an injunction ordering the FRBank to open the account because a court’s equity powers cannot be invoked to aid illegal activity.
Appellate court indecision. Each of the three circuit judges had his own idea on how the appeal should be decided. One wanted to affirm the dismissal with prejudice; the second believed the complaint should have been dismissed because the matter was not ripe for decision; and the third believed the complaint should not have been dismissed. Ordering the complaint to be dismissed without prejudice was said to comply with the belief of the latter two judges that Fourth Corner should be able to proceed with its claims.
Dismissal with prejudice. Judge Nancy L. Moritz agreed with the district judge that the complaint should have been dismissed with prejudice because Fourth Corner apparently intended to facilitate business activities that violated federal criminal laws.
Judge Moritz was skeptical of the credit union’s assertion that it would not assist illegal businesses, noting that Fourth Corner’s statements on the issue were equivocal. As a result, there was no reason to accept them as true, as normally would be the case in considering a motion to dismiss.
Even if the marijuana-related businesses complied with Colorado law, they still would violate federal law, she pointed out. In fact, “A court-ordered master account would thus serve as the linchpin for the Credit Union’s facilitation of illegal conduct,” Moritz wrote.
She also rejected the argument that guidance issued by the Financial Crimes Enforcement Network and Department of Justice could make permissible activities that Congress had banned.
Dismissal for “unripeness.” Fourth Corner applied for a master account and sued when the application was denied. When the Kansas City Fed raised the illegality issue in its motion to dismiss, the credit union amended its complaint to include a promise to serve credit unions only if doing so was legal. As a result, the suit was not ripe for decision because it had “become divorced from the factual backdrop that gave rise to the original dispute,” said Judge Scott M. Matheson. Simply put, the credit union that promised only to serve legal marijuana-related businesses was not the same as the one that was denied a master account.
According to Judge Matheson, a claim is not ripe for adjudication if it relies on future events that might not take place as expected or might not take place at all. A dispute should be considered not to be ripe if it turns on facts that are not sufficiently developed and delay will not work a hardship on the parties.
There was no way to know whether the Kansas City Fed would open a master account for Fourth Corner based on a promise to serve only legal marijuana-related businesses because such an application had not been made, Judge Matheson observed. He noted that the Kansas City Fed cited several reasons for denying the master account. In addition to the credit union’s business plans, the FRBank was concerned about Fourth Corner’s capital, failure to obtain deposit insurance, and status as a de novo institution. Even if the FRBank believed the credit union’s promise, it still might deny the master account.
Putting off judicial consideration would not impose a hardship on Fourth Corner, Judge Matheson believed. If the credit union was seriously harmed by being unable to conduct business, it could apply for a master account after promising not to serve illegal businesses, a step it had never taken.
Dismissal was in error. Judge Robert E. Bacharach took the position that the credit union’s complaint should not have been dismissed at all. The district judge should have assumed that Fourth Corner would comply with any court decision on whether the marijuana-related businesses were legal and that it would live up to its promise, made in the amended complaint, that it would do so. As a result, a concern over the possible facilitation of illegal activity did not offer a reason to dismiss the complaint, he said.
In its amended complaint, Fourth Corner said that its charter committed it to “comply with both state and federal law, and it intends to do so,” Bacharach noted. The credit union added that it would implement its business plan to serve marijuana-related businesses only if doing so was legal under both state and federal law. It also said that if serving marijuana-related business was found to be illegal, it would restrict its activities to serving members of social groups that advocated the legalization of marijuana, which everyone agreed would be legal.
According to Judge Bacharach, the district judge interpreted Fourth Corner’s statements as promises to obey what the credit union believed the law to be, not what the court said the law was. This was contrary to the rule that, in considering a motion to dismiss, a judge should assume that the claims of a complaint are true.
Because he would have reversed the dismissal of the credit union’s complaint, Judge Bacharach moved on to discuss the Kansas City’s Fed’s arguments supporting the district court judge’s order.
- The Federal Reserve Act does not give the Kansas City Fed the discretion to refuse to open a master account for an applicant, Judge Bacharach said. The Fed Reserve System’s services must be available to all nonmember depository institutions.
- The charter granted by Colorado to Fourth Corner is not preempted in full by the Controlled Substances Act. The charter is preempted only to the extent that it would authorize the credit union to facilitate the activities of illegal businesses. Since the charter remained valid, at least in part, the credit union remained entitled to a master account.
Judge Bacharach also rejected the argument that the appeal was unripe. It was clear to him that the Kansas City Fed would refuse to allow a master account and that Fourth Corner would suffer a hardship as a result.
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