Part Two of a Three-Part Series
In the second part of this series, we explore the practical effects of the FinCEN and DOJ guidance documents on industries attempting to serve marijuana related business (“MRBs”). On June 27, 2017, the Tenth Circuit issued an interesting and divided opinion showing us how difficult it can be to square the prohibitions in the federal Controlled Substances Act (“CSA”) and money laundering statutes with state legislation legalizing certain MRB activity and the seemingly permissive nature of the FinCEN and DOJ guidance documents.
In November 2014, Denver-based Fourth Corner Credit Union applied directly to the Federal Reserve Bank of Kansas City, the regional bank for the board of governors of the Federal Reserve System, for a master account. A master account is necessary for a bank to transact business. After a nine-month review process, the FRB turned down Fourth Corner’s application, stating “that the Credit Union posed too great a risk to the Federal Reserve System – in large part because of its focus on serving MRBs.” In response, Fourth Corner filed suit seeking a declaratory judgment that it was entitled to a master account and seeking an injunction requiring the FRB to issue one. Fourth Corner relied upon 12 U.S.C. § 248a(c)(2), which was enacted as part of the 1980 Deregulation and Monetary Control Act, and which provides in relevant part:
The schedule of fees prescribed pursuant to this section shall be based on the following principles:
. . . .
(2) All Federal Reserve bank services covered by the fee schedule shall be available to nonmember depository institutions and such services shall be priced at the same fee schedule applicable to member banks . . . .
FRB moved to dismiss and argued, among other things, that the district court could not use its equitable power to facilitate illegal activity- namely, violations of the CSA. Fourth Corner responded by filing an amended complaint specifically alleging that it will serve MRBs only if it is authorized to do so by law. It filed for summary judgment. As we blogged about on Monday, nearly a year earlier, the Financial Criminal Enforcement Network (FinCEN) issued its guidelines giving banks the go-ahead to work with marijuana-related business or MRBs. This guidance, along with the DOJ Cole Memo, issued in the summer of 2013, seemed to suggest that the federal government was clearing a path towards “greater financial transparency” to the marijuana industry – a demand that Fourth Corner was trying to fill. Indeed, Fourth Corner specifically argued that this combined federal guidance had legalized the servicing of MRBs.
Nevertheless, the district court granted FRB’s motion to dismiss and denied Fourth Corner’s motion for summary judgment noting, among other things, “these guidance documents simply suggest that prosecutors and bank regulators might ‘look the other way’ if financial institutions don’t mind violating the law. A federal court cannot look the other way.”
The Tenth Circuit Opinion: A Three-Way Split
Fourth Corner appealed. All three judges wrote separately and on separate bases. In order to give effect to two out of the three opinions, the court remanded the matter with instructions to dismiss the amended complaint without prejudice. We review the holdings separately.
Judge Mortiz affirmed the dismissal of Fourth Corner’s complaint with prejudice. In so finding, the Judge agreed with the district court’s analysis of the FRB’s “illegality defense,” i.e., the court cannot use its equitable powers to facilitate illegal conduct. For Judge Mortiz it was clear that by Fourth Corner’s own allegations, any relief granted by the court would “facilitate illegal activity” because if given a master account, the credit union intended to provide services to compliant state licensed cannabis and hemp businesses. Judge Mortiz noted that such activity, even if it was compliant with state marijuana laws, still would violate the CSA. Nor were the FinCEN guidelines or the Cole Memo persuasive because neither guidance document “nullified the CSA or federal money laundering statutes.”
Judge Mortiz noted that such activity, even if it was compliant with state marijuana laws, still would violate the CSA. Nor were the FinCEN guidelines or the Cole Memo persuasive because neither guidance document “nullified the CSA or federal money laundering statutes.”
Finally, Judge Mortiz was unconvinced with Fourth Corner’s allegations in its amended complaint that it would only serve MRBs if it was legal to do so, stating the court did not “owe the presumption of truth to illusory allegations” and declaring that Fourth Corner will “either serve MRBs or it won’t – its allegations can’t depend on the answer to a legal question.”
Judge Matheson relied on judicial procedure in order to reverse the lower court’s dismissal of Fourth Corner’s complaint. Specifically, Judge Matheson relied on principles of prudential ripeness. Judge Matheson reasoned that because Fourth Corner’s application to the FRB for a master account did not limit its service of MRBs to instances sanctioned by federal law, it was entirely possible that the FRB would grant the master account if Fourth Corner resubmitted an application based on the new plan alleged in its amended complaint (i.e., an application making clear that Fourth Corner would serve MRBs only if it is authorized to do so by law). Thus, any decision issued by the Tenth Circuit or the district court would be merely advisory.
Judge Bacharach went the furthest of any judge, holding that he would reverse the dismissal of the amended complaint completely. As to the issue of ripeness, and in contrast to Judge Matheson, he found that there was “relative certainty” that the FRB still would deny Fourth Corner’s master account application even if it stated in any new application that it would only serve MRBs if legally allowed to do so. Judge Bacharach therefore reached the substantive issues in FRB’s motion to dismiss. He credited Fourth Corner’s commitment to obey the law and stated the district court erred in (i) improperly discounting Fourth Corner’s stated intent and (ii) failing to presume that Fourth Corner would obey the ruling of the court that serving MRBs is illegal. This was especially so where Fourth Corner through its declaratory action acknowledged the court’s role as arbiter of the law.
Judge Bacharach thereafter went on to find that Fourth Corner had an unambiguous entitlement under Section 248a(c)(2) to a master account and that the FRB did not have discretion on whether to issue the account.
Judge Bacharach thereafter went on to find that Fourth Corner had an unambiguous entitlement under Section 248a(c)(2) to a master account and that the FRB did not have discretion on whether to issue the account. He focused on the provision’s use of the word “all,” modifying “Federal Reserve bank services,” and the phrase “shall be available to nonmember depository institutions[.]” (emphasis added).
Of import in this opinion are the various ways in which each judge decided to navigate the practical issues facing industries attempting to serve MRBs. Nevertheless, each judge was clear on one point: the CSA, via the Supremacy Clause, preempted any state laws which legalized the use of medical or recreational marijuana. In this opinion, it was clear that the practical effect of the Cole Memo and the FinCEN guidance can be limited when these issues are challenged in a court.
In the next and final installment of this blog post series, we will discuss SEC enforcement actions which implicate MRBs.
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