Custodia Bank Inc. v. Fed. Reserve Bd. of Governors
| Decision Date | 11 November 2022 |
| Docket Number | 22-CV-125-SWS |
| Parties | CUSTODIA BANK, INC., Plaintiff, v. FEDERAL RESERVE BOARD OF GOVERNORS, and FEDERAL RESERVE BANK OF KANSAS CITY, Defendants. |
| Court | U.S. District Court — District of Wyoming |
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' 12(b)(6) MOTIONS TO DISMISS
This matter comes before the Court on Defendants' motions to dismiss (ECF 48, 50). Plaintiff filed a consolidated opposition to both motions (ECF 58), and Defendants replied (ECF 96, 97). Plaintiff supplemented its opposition (ECF 98) and Defendant Board of Governors responded to the supplement (ECF 99). The Court has also reviewed and considered the amici briefs from the State of Wyoming (ECF 88), State Senator Rothfuss and State Representative Olsen (ECF 89), and Members of the U.S. Senate Banking Committee and U.S. House of Representatives Financial Services Committee (ECF 92), all of which oppose Defendants' motions to dismiss. The Court heard arguments from counsel on October 28, 2022. (ECF 100.) Having considered the parties' arguments, reviewed the record herein, and being otherwise fully advised, the Court determines the motions to dismiss must be granted in part and denied in part.
Plaintiff Custodia Bank is a Wyoming depository institution that is unlike a traditional bank because it is “designed to provide custody services for digital assets such as Bitcoin via their trust departments” and “provide a bridge connecting digital asset companies to the U.S payments system,” which would allow, for example, a Custodia customer to use a cryptocurrency like Bitcoin “to make a direct transfer, a purchase, or an investment, rather than having to first convert the” cryptocurrency into U.S. Dollars. (Compl. (ECF 1) ¶ 29.) Custodia is state-chartered as a Special Purpose Depository Institution (SPDI), a unique-to-Wyoming financial institution intended to facilitate cryptocurrency banking that is prohibited from making loans. (Compl. ¶ 28.) It is also chartered to allow the traditional banking service of U.S Dollar deposit-taking. (Id. ¶ 4.) As a state-chartered institution, it is subject to Wyoming's banking regulatory system and is not required to be insured by the Federal Deposit Insurance Corporation (FDIC). (Id. ¶¶ 2, 18, 23, 26.) In August 2021 Custodia also applied to Defendant Federal Reserve Board of Governors for membership in the Federal Reserve, which would subject Custodia to oversight and regulation by the Federal Reserve Board (in addition to the state's banking regulatory system). (Id. ¶¶ 4, 24.)
On October 29, 2020, Custodia applied to Defendant Federal Reserve Bank of Kansas City (FRBKC) to obtain a Federal Reserve “master account,” which is “put simply, a bank account for banks” that “gives deposit institutions access to the Federal Reserve System's services, including its electronic payments system.” Fourth Corner Credit Union v. Fed. Rsrv. Bank of Kansas City, 861 F.3d 1052, 1053 (10th Cir. 2017) (Moritz, J.).
“Without such access, a depository institution is nothing more than a vault.” Id. at 1053 (Moritz, J.) (internal quotation marks omitted).
The master account is both a record of financial transactions that reflects the financial rights and obligations of an account holder and the Reserve Bank with respect to each other, and the place where opening and closing balances are determined. For each institution, all credits and debits resulting from the use of Federal Reserve services at any Federal Reserve office are booked to this single master account at one Reserve Bank.
Id. at 1064 n.1 (Bacharach, J.). A master account also enables its holder to access various services promised by 12 U.S.C. § 248a beyond deposit and withdrawal services, including wire transfer services, automated clearinghouse services, settlement services, securities safekeeping, and Federal Reserve float services. Except for certain unique circumstances, any financial institution can have only one master account with its Federal Reserve Bank.
Custodia asserts, “Direct access to the Federal Reserve is vital to Custodia's ability to operate effectively and efficiently in pursuit of its core mission to offer a secure, compliant bridge between digital assets and the United States dollar payment system.” (Compl. ¶ 3.) Custodia currently accesses the Federal Reserve through an intermediary (“correspondent”) bank that has a master account, but this arrangement “is much costlier and introduces counterparty credit risk and settlement risk that would” be avoided with its own master account. (Id. ¶ 8.) A master account “would allow Custodia to access directly the Federal Reserve, sharply reduce its costs, and bring new products and options to users of financial services.” (Id. ¶ 3.)
Now two years later, FRBKC has yet to grant or deny Custodia's application for a master account. Custodia alleges, “Upon information and belief, the [FRBKC's] consideration and impending approval of Custodia's application was derailed when, in spring 2021, the [Defendant Federal Reserve Board of Governors] asserted control over the decision-making process.” (Compl. ¶ 6.) Custodia sues for an order compelling Defendants to “promptly decide” the application. (Id. ¶ 81.) Alternatively, Custodia also says that if FRBKC denies the application, the Court should “issue a writ of mandamus” ordering Defendants to grant the application. (Id. ¶ 130.) Defendants have moved to dismiss Custodia's complaint in its entirety under Federal Rule of Civil Procedure 12(b)(6), asserting Custodia has failed to state any claim on which the Court can grant relief.
“The court's function on a Rule 12(b)(6) motion is not to weigh potential evidence that the parties might present at trial, but to assess whether the plaintiff's complaint alone is legally sufficient to state a claim for which relief may be granted.” Dubbs v. Head Start, Inc., 336 F.3d 1194, 1201 (10th Cir. 2003) (citations and quotation marks omitted). To survive a motion to dismiss under Fed.R.Civ.P. 12(b)(6), a complaint's factual allegations, assumed to be true, must “raise a right to relief above the speculative level” and must contain “enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). In the context of a 12(b)(6) motion to dismiss, this plausibility standard requires the plaintiff to plead facts that allow “the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). The Court accepts the nonmoving party's well-pled factual allegations as true and construes them in the light most favorable to the nonmoving party, but it is not bound to accept an asserted legal conclusion as true. Hall v. Bellmon, 935 F.2d 1106, 1109 (10th Cir. 1991); Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 555).
The Court starts with Custodia's primary causes of action before moving to its alternative claims.
1. Claim I - Violation of Administrative Procedure Act (APA) for Unreasonable Delay of Agency Action
In its first claim for relief, Custodia contends the Administrative Procedures Act (APA) allows it to “compel agency action unlawfully withheld or unreasonably delayed,” 5 U.S.C § 706(1), and Defendants have unlawfully withheld or unreasonably delayed the decision on Custodia's application for a master account. (Compl. ¶¶ 61-81.) Defendant FRBKC argues it is not an “agency” for purposes of the APA, but even if it was, Custodia has not suffered an “unreasonable delay” under the APA. (ECF 51 pp. 25-32.[1]) Defendant Federal Reserve Board of Governors argues that while it is an “agency” for APA purposes, it is not the entity that decides Custodia's application and Custodia has not suffered an unreasonable delay under the APA. (ECF 49 pp. 32-41.)
1.1 Whether FRBKC is an Agency Subject to the APA
The APA defines an agency, with certain exceptions not applicable here, as “each authority of the Government of the United States, whether or not it is within or subject to review by another agency.” 5 U.S.C. § 551(1); 5 U.S.C. 701(b)(1). Simply put, the law is currently unsettled on whether a Federal Reserve Bank is an “agency” for APA purposes. Neither the Tenth Circuit nor the U.S. Supreme Court have decided the question, and other federal district courts are divided on the matter. For example:
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