Written by Pamela Yu, Special Counsel for Compliance and Research
A few months ago, I blogged about the appellate decision in a lawsuit filed by The Fourth Corner Credit Union (Fourth Corner) against the Federal Reserve Bank of Kansas City (FRB-KC) after the regional bank to the Federal Reserve (Fed) System denied Fourth Corner's application for a master account. Fourth Corner, a state-chartered credit union based in Denver, was formed in 2014 to serve Colorado's legalized marijuana industry and its advocates and supporters. Poised to become the nation's first cannabis credit union, since its inception, Fourth Corner has been entangled in lawsuits with the FRB-KS and NCUA and has seen its initial plans to open for business in 2015 go up in smoke. Essentially, without a master account to access the Fed's payments system the cannabis credit union's future has been hazy.
Without getting too into the weeds, or re-hashing our prior discussions on this topic, on June 27, 2017, the 10th Circuit Court of Appeals, in a split (2-1) opinion, overturned the U.S. District Court for the District of Colorado's December 2015 ruling in Fourth Corner's lawsuit against the FRB-KC. The appellate court decision, which vacated the lower court’s order and remanded the case with instructions to dismiss the amended complaint without prejudice, essentially gave Fourth Corner a second chance at applying to the FRB-KC for a master account. The ruling also left the door open to have the case heard again if the bank denied a new application. The appellate decision noted that according to statute the FRB-KC must indiscriminately make Fed services available to "all depository institutions." See, 12 U.S.C. § 248a(c). But, importantly, the appellate court relied on Fourth Corner's assurances that it would service marijuana-related businesses only if doing so is legal. In other words, the credit union could reapply for a master account to serve legal-marijuana supporters and other individuals and advocacy groups within its field of membership, but the 10th Circuit emphasized that servicing marijuana-related businesses (still illegal as a schedule 1 substance under the federal Controlled Substances Act) is impermissible.
While a legal victory for the embattled credit union, the high of its appellate win was seemingly short-lived because, according to Fourth Corner's new complaint that was filed on September 29, the FRB-KC is allegedly engaging in an "illegal discriminatory procedure" by "requesting information it is not entitled to receive from any depository institution seeking a master account" in relation to Fourth Corner's renewed application. Further, Fourth Corner alleges that the FRB-KC is refusing to make “Federal Reserve bank services covered by the fee schedule” available to Fourth Corner within the timeframe it has established for the issuance of master accounts to all depository institutions, in violation of federal statute. See, 12 U.S.C. § 248a(c)(2).
The credit union's new complaint, again filed in the U.S. District Court for the District of Colorado, claims that subsequent to the 10th Circuit's July ruling, on August 10, Fourth Corner received a letter from the FRB-KS stating that the credit union's "unique nature, structure, and history" raised legal and policy issues in connection with its account request and requesting the credit union submit information not required by the standard master account documents. See, Complaint. On September 12, Fourth Corner resubmitted to FRB-KC its executed standard master account documents, along with a letter from the state regulator attesting that Fourth Corner "has complied with all applicable requirement(s) of the Colorado Division of Financial Services and its charter is in good standing with this office," and a resolution from its board that "in all of its activities [Fourth Corner] shall follow state and federal law" and that "[Fourth Corner] shall not serve marijuana-related businesses until there is a change in federal law that authorizes financial institutions to serve marijuana-related businesses." See, Complaint. However, according to Fourth Corner, the FRB-KC nevertheless failed to issue it a master account as mandated by law within the 5-7 business day timeframe the Fed established for the issuance of master accounts to all depository institutions. The credit union argues that the FRB-KC has invoked an improper and discriminatory procedure in requesting information from the credit union that is outside of its normal protocol in processing master account applications.
The credit union is asking the court to "enforce the law of the case and/or declare anew" that federal statute "unambiguously entitles Fourth Corner to a Master Account," and for the court to issue a mandatory injunction to compel the FRB-KC to "comply with the statutory mandate" that creates a nondiscretionary obligation and "unambiguously entitles [Fourth Corner] to a master account within 5 to 7 business days" of its master account application. See, Complaint.
And so, the seeds are sown for round two in this budding legal fight. Watch this space for developments in the Fourth Corner case. Meanwhile, should Fourth Corner prevail and finally get its master account from the FRB-KC, the credit union must still contend with NCUA—the credit union's lawsuit against the agency for its denial of the credit union's federal share insurance application is still pending.
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