First Bank & Trust v. BD. OF GOV. OF FED. RES. SYS.

• Decision Date: 26 December 1984
• Docket Number: Civ. A. No. 81-38.
• Citation: 605 F. Supp. 555
• Parties: FIRST BANK & TRUST COMPANY, Plaintiff, v. BOARD OF GOVERNORS OF FEDERAL RESERVE SYSTEM, Defendant.
• Court: U.S. District Court — Eastern District of Kentucky

605 F. Supp. 555

FIRST BANK & TRUST COMPANY, Plaintiff, v. BOARD OF GOVERNORS OF FEDERAL RESERVE SYSTEM, Defendant.

Civ. A. No. 81-38.

United States District Court, E.D. Kentucky, Catlettsburg Division.

December 26, 1984.

COPYRIGHT MATERIAL OMITTED

Gillard B. Johnson, II, Ashland, Ky., James Park, Lexington, Ky., for plaintiff.

U.S. Atty., Louis DeFalaise, Lexington, Ky., James V. Mattingly, Jr., Associate General Counsel, Board of Governors of Federal Reserve System, Washington, D.C., for defendant.

MEMORANDUM OPINION AND ORDER

WILHOIT, District Judge.

This action is before the Court on objections to the Magistrate's Report and Recommendation (the "Report") that declared portions of the Monetary Control Act of 1980 (MCA), as originally enacted, to be unconstitutional by virtue of the Fifth Amendment's due process clause, although the Report upheld the constitutionality of the MCA as it was amended in 1982. The Board of Governors of the Federal Reserve (the "Board") filed objections to the Report, to which First Bank & Trust Company ("First Bank"), the plaintiff herein, responded. The Board has replied to bank's response, and the matter is, therefore, fully submitted to this Court.

I. FACTS

This action concerns the validity of the MCA of 1980, and as amended in 1982. In its pertinent parts, the MCA extended reserve¹ requirements to all banks in the United States whether the bank was a member of the Federal Reserve System or not. Prior to 1980, a dual system of reserve requirements for banks was in existence. Banks that were members of the Federal Reserve were required to post reserves in accordance with the regulations of the Board. Banks not a member of the Federal Reserve could keep reserves in accordance with state banking laws. All nationally chartered banks are required to be members of the Federal Reserve and comply with its reserve requirements. State-chartered banks could be members of the Federal Reserve, but if they were not, they did not have to comply with the Board's reserve requirements.

This dual system has been in existence for some time. In recent years it began to be unprofitable for many banks to maintain membership in the Federal Reserve System because of the relatively high cost of services provided by the Federal Reserve, and more importantly, because of the growing loss of profits occasioned by Federal Reserve's relatively high percentage of required reserves, many banks began to leave the System.

Prior to 1980, First Bank was a nationally chartered bank. Because of the greater amount of idle reserves it had to hold being a member of the Federal Reserve, First Bank's Board of Directors in 1979, decided to withdraw from the System and seek a state charter. The bank's shareholders approved the Board of Director's decision on February 26, 1980. A state charter was obtained March 3, 1980, and on the same day, the Bank withdrew its reserve balances from the Federal Reserve Bank of Cleveland, relinquishing its stock in the system.

The rising tide of "bank flight" from the Federal Reserve System did not escape Congress' attention. Indeed, in 1979, at least five bills appeared in Congress aimed at correcting the Federal Reserve's growing lack of control over the money supply.

Many of the proposed bills imposed mandatory reserve requirements for all banks including non-member banks. On November 1, 1979, however, the Senate passed S. 1347 with an amendment removing mandatory reserve requirements. The House had already approved legislation that did not require mandatory reserves for non-member banks. Therefore as of November 1, 1979, it appeared Congress would not pass legislation mandating reserves requirements for all banks.

Newsletters in the banking industry were circulated assuring bankers that Congress would not legislate mandatory reserve requirements because both houses had approved legislation without such a requirement. The news that Congress would not impose mandatory reserves reached the Board of Directors of First Bank and was one of the precipitating factors in its decision to withdraw from the Federal Reserve System.

The Conference Committee Report of the MCA, which was rendered on March 21, 1980, and which includes the provisions under dispute in this lawsuit, re-imposed mandatory reserve requirements. The Conference Report was approved by both houses of Congress and signed into law by President Carter on March 31, 1980.

The pertinent provisions of the MCA, as finally passed and signed by the President, provide that non-member banks shall be allowed an eight-year phase-in of the mandatory reserve requirements. Member banks, however, were not given any phase-in period and had to maintain reserves in accordance with federal regulations as always.

Under regulations promulgated by the Board shortly after the MCA was passed, a bank that was formerly a member but had withdrawn, must have taken some unambiguous, irrevocable action toward withdrawal before July 1, 1979 to be eligible for the eight-year phase-in program. The regulations further provided that the Board may extend the time for posting reserves in "hardship" cases. These regulations, however, were promulgated without notice or comment as laid out in the procedures, of 5 U.S.C. § 553(b).

On June 13, 1980, First Bank petitioned the Board for a determination that it had withdrawn from membership prior to July 1, 1979. On July 19th, the bank petitioned a second time seeking in the alternative a determination that the financial hardship exception as laid out in the regulations was applicable to it. Both petitions were denied on September 26, 1980: the first, for the reasons that the bank had not taken unambiguous, irrevocable steps to withdraw before July 1, 1979; and the second, for the reason that the bank's financial condition as of June 30, 1980 did not warrant application of the hardship exception. After the Board denied reconsideration of its decision, the bank posted its required reserve deposits in October 1980. In February 1981, First Bank brought this action seeking judicial review of the Board's decision under 5 U.S.C. §§ 701-06 and 12 U.S.C. § 632.

In October 1982, Congress passed the Garn-St. Germain Act amending the MCA. Congress recognized that the lack of any phase-in period for banks that had recently withdrawn from the Federal Reserve System could work an extreme hardship. The Garn-St. Germain amendments granted banks that had withdrawn between July 1, 1979 and March 31, 1980 a limited phase-in period.

This matter was referred to the United States Magistrate for a Report and Recommendation, see 28 U.S.C. § 636(b)(1)(B), after the defendants moved to dismiss or in the alternative for summary judgment and the plaintiff responded and cross-moved for summary judgment. The Court agrees with most of the Magistrate's Report and adopts portions of the Report herein as and for its own opinion.

II. DEFENDANT'S MOTION TO DISMISS; ACTION COMMITTED TO AGENCY DISCRETION WITHIN THE MEANING OF 5 U.S.C. SECTION 701(a)(2)

The basis of defendant's motion to dismiss is that matters now before the Court are committed to the Board's discretion and, hence, are excluded from judicial review according to 5 U.S.C. § 701(a).

The exception found in Section 701(a), however, is very narrow. A-T-O, Inc. v. Pension Benefit Guaranty Corp., 634 F.2d 1013, 1019 (6th Cir.1980). Nonreviewability must be established by a clear showing of Congressional intent to preclude review. Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 410, 91 S.Ct. 814, 820, 28 L.Ed.2d 136 (1971); Independent Bankers Assoc. of America v. Board of Governors of the Federal Reserve System, 500 F.2d 812, 814 (D.C.Cir. 1974); Cf. Olson v. U.S., 514 F.Supp. 355, 356 (W.D.Ky.1981). Further, the agency has the burden of demonstrating that its decision is insulated from review. Dunlop v. Bachowski, 421 U.S. 560, 567, 95 S.Ct. 1851, 1857, 44 L.Ed.2d 377 (1975).

No reported case seems to have dealt with the precise issue of whether Section 701 precludes review of the Board's actions under the MCA and related statutes. However, several suits challenging the Board's actions under other sections of the MCA have, in fact, been brought under the Administrative Procedure Act (APA). Jet Courier Services, Inc. v. Federal Reserve Board of Atlanta, 713 F.2d 1221 (6th Cir. 1983); Bank Stationers Association v. Board of Governors of the Federal Reserve System, 704 F.2d 1233 (11th Cir. 1983).

In Jet Courier, the Sixth Circuit apparently approved the idea of APA review of the Federal Reserve Board's actions under the Monetary Control Act of 1980 although it dismissed the case because of standing problems. See Jet Courier, supra at 1224.

The Board seeks to meet the burden of demonstrating that its decision is insulated from review merely by making general comments about the agency's discretion under "loose statutory terms". However, while an agency may retain the discretion to act, its actions may not be ones `committed to agency discretion by law" under Section 701. Hondros v. United States Civil Rights Commission, 720 F.2d 278, 292 (3d Cir.1983.) Under that section: (1) the agency must have broad discretionary powers, in the sense that there is almost no law to apply; (2) the actions must implicate political, economic, military or other choices not readily susceptible to judicial review; and (3) even those actions which are committed to the agency's discretion are reviewable on the ground that the decision violates a constitutional command. Id. at 293. Clearly, the Board has not established that any of these criteria have been met.

Therefore, Section 701 does not preclude judicial review of the present action and in that regard, defendant's motion to dismiss is denied.

III. MOTIONS FOR SUMMARY JUDGMENT

A. STANDARD OF REVIEW

The principles a court must apply in deciding a motion for summary judgment are well established. Under Rule 56 of the Federal Rules...