Fourth Corner Credit Union v. Fed. Reserve Bank of Kan. City

• Decision Date: 27 June 2017
• Docket Number: No. 16-1016,16-1016
• Citation: 861 F.3d 1052
• Parties: The FOURTH CORNER CREDIT UNION, a Colorado state-chartered credit union, Plaintiff-Appellant, v. FEDERAL RESERVE BANK OF KANSAS CITY, Defendant-Appellee. Board of Governors of the Federal Reserve System, Amicus Curiae.
• Court: U.S. Court of Appeals — Tenth Circuit

861 F.3d 1052

The FOURTH CORNER CREDIT UNION, a Colorado state-chartered credit union, Plaintiff-Appellant,

v.FEDERAL RESERVE BANK OF KANSAS CITY, Defendant-Appellee.

Board of Governors of the Federal Reserve System, Amicus Curiae.

No. 16-1016

United States Court of Appeals, Tenth Circuit.

Filed June 27, 2017

Mark A. Mason, The Mason Law Firm, P.A., Mount Pleasant, South Carolina (Gabrielle Z. Lee, The Mason Law Firm, P.A. Mount Pleasant, South Carolina, with him on the briefs), for Plaintiff-Appellant.

Scott S. Barker, Wheeler Trigg O'Donnell LLP, Denver, Colorado (N. Reid Neureiter and Benjamin I. Kapnik, Wheeler Trigg O'Donnell LLP, Denver, Colorado, with him on the brief), for Defendant-Appellee.

Scott G. Alvarez, General Counsel; Richard M. Ashton, Deputy General Counsel; Katherine H. Wheatley, Associate General Counsel; Yvonne F. Mizusawa, Senior Counsel, Board of Governors of the Federal Reserve System, Washington, D.C., filed an amicus brief for Amici Curiae, the Board of Governors of the Federal Reserve System.

Before MATHESON, BACHARACH, and MORITZ, Circuit Judges.

PER CURIAM

In this appeal, we vacate the district court's order and remand with instructions to dismiss the amended complaint without prejudice. This disposition is addressed in three opinions—one by each member of the panel. Judge Moritz would affirm the dismissal with prejudice. Judge Matheson would vacate and remand with instructions to dismiss the amended complaint without prejudice on prudential-ripeness grounds. Judge Bacharach would reverse the dismissal of the amended complaint. By remanding with instructions to dismiss the amended complaint without prejudice, our disposition effectuates the judgment of the two panel members who would allow the Fourth Corner Credit Union to proceed with its claims.

Finally, we deny the Federal Reserve Bank of Kansas City's motion to strike the Fourth Corner Credit Union's reply-brief addenda.

MORITZ, Circuit Judge.

The Fourth Corner Credit Union applied for a master account from the Federal Reserve Bank of Kansas City. The Reserve Bank denied the application, effectively crippling the Credit Union's business operations. The Credit Union sought an injunction requiring the Reserve Bank to issue it a master account. The district court dismissed the action, ruling that the Credit Union's raison d'être—to provide banking services to marijuana-related businesses—would violate the Controlled Substances Act (CSA), 21 U.S.C. §§ 801 -904. Because the district court correctly declined to lend its equitable power to illegal activity, I would affirm the dismissal with prejudice.¹

BACKGROUND

In 2012, Colorado amended its constitution to legalize a wide array of recreational marijuana activity. See COLO. CONST. art. XVIII, § 16. An industry of marijuana growers and retailers sprang up to supply this new market, but they face a significant obstacle: traditional banks are wary of serving marijuana-related businesses (MRBs). Many MRBs thus operate solely in cash, a restriction that "raise[s] significant public safety concerns for customers and employees" and "make[s] it more difficult for the state and federal government to regulate and audit [MRBs]." App. 215.

The Credit Union aims to fill this banking void. Its purpose, according to its amended complaint, is to "provide much needed banking services to compliant, licensed cannabis and hemp businesses" and to marijuana-legalization supporters. Id . at 219. But there are many hurdles for a would-be depository institution to clear. The relevant hurdle here is obtaining a master account. A master account is, put simply, a bank account for banks. It gives depository institutions access to the Federal Reserve System's services, including its electronic payments system. In the Credit Union's words, "Without such access, a depository institution is nothing more than a vault." Id. at 225.

The Credit Union applied to the Federal Reserve Bank of Kansas City for a master account.² The Reserve Bank denied the application by letter, citing a host of concerns.

In general, the Reserve Bank determined that the Credit Union simply posed too great a risk to the Federal Reserve System—in large part because of its "focus on serving [MRBs]."³ Id. at 78.

In response, the Credit Union filed this suit. It sought a declaratory judgment that the Credit Union is entitled to a master account and an injunction requiring the Reserve Bank to issue it one. The Credit Union asserted that the Reserve Bank is required by statute to issue a master account to every applicant, citing 12 U.S.C. § 248a. The Reserve Bank moved to dismiss the complaint, arguing that (1) the Reserve Bank retains statutory discretion to deny master-account applications; (2) the district court couldn't use its equitable power to facilitate illegal activity—namely, violations of the CSA; and (3) the Credit Union's Colorado charter is preempted and void under the Supremacy Clause because it conflicts with the CSA. In apparent response to the Reserve Bank's illegality argument, the Credit Union amended its complaint. In its amended complaint, the Credit Union repeatedly alleges that it will serve MRBs only if it's authorized to do so by law. The Credit Union then moved for summary judgment on its claim, and the Reserve Bank renewed its motion to dismiss.

The district court granted the Reserve Bank's motion to dismiss and denied the Credit Union's motion for summary judgment. The district court didn't accept the Credit Union's allegations that it would follow the law. And based on the principle that "courts cannot use equitable powers to issue an order that would facilitate criminal activity," App. 707, the district court concluded that it couldn't grant the Credit Union its requested injunction. The district court declined to reach the Reserve Bank's preemption and statutory discretion arguments.

The Credit Union filed a motion for reconsideration requesting, in part, that the court decide the preemption and statutory discretion issues. The district court denied that motion. The Credit Union appeals.

DISCUSSION

The Credit Union argues that the district court erred in dismissing its claim based on the Reserve Bank's illegality defense. This court reviews de novo the district court's grant of the Reserve Bank's motion to dismiss, applying the same standard as the district court. Doe v. City of Albuquerque , 667 F.3d 1111, 1118 (10th Cir. 2012). Specifically, we accept the well-pleaded allegations of the complaint as true and construe them in the light most favorable to the Credit Union. Id .

The Reserve Bank's illegality defense is straightforward. It begins with the principle—which the Credit Union doesn't dispute—that a court won't use its equitable power to facilitate illegal conduct. See Warner Bros. Theatres, Inc. v. Cooper Found. , 189 F.2d 825, 829 (10th Cir. 1951) (holding that "[a] court of equity should not permit" a party to "take advantage of an admittedly illegal arrangement"); see also Precision Instrument Mfg. Co. v. Auto. Maint. Mach. Co. , 324 U.S. 806, 814, 65 S.Ct. 993, 89 L.Ed. 1381 (1945) (holding that clean-hands doctrine "presupposes [a court of equity's] refusal ... to be the ‘abetter of iniquity’ " (quoting Bein v. Heath , 47 U.S. 228, 247, 6 How. 228, 12 L.Ed. 416 (1848) )); Cartlidge v. Rainey , 168 F.2d 841, 845 (5th Cir. 1948) ("It is well settled that equity will not lend its aid to the perpetration of criminal acts.").

By its own allegations, the Credit Union would use the court's equitable relief to facilitate illegal activity. If given a master account, the Credit Union "intends to provide banking services to compliant state licensed cannabis and hemp businesses." App. 204. But even if these businesses are "compliant" with Colorado law, their conduct plainly violates the CSA. See 21 U.S.C. § 841(a)(1) ("[I]t shall be unlawful for any person knowingly or intentionally ... to manufacture, distribute, or dispense, or possess with intent to manufacture, distribute, or dispense, a controlled substance.").⁴ By providing banking services to these businesses, the Credit Union would—by its own admission—facilitate their illegal activity by giving them bank access that they currently lack. See App. 218 ("None of these [MRBs] have meaningful and stable access to traditional banking services.... The majority of MRBs are forced to operate in cash only, and to suffer the high cost of handling and safeguarding this cash."). And, critically, the Credit Union concedes that it won't be able to serve MRBs without the court's equitable relief. See Aplt. Br. 5 ("Without a master account[, the Credit Union] cannot function."). A court-ordered master account would thus serve as the linchpin for the Credit Union's facilitation of illegal conduct.

In response to the Reserve Bank's illegality defense, the Credit Union argues that the MRBs it proposes to serve aren't violating federal law. Specifically, it asserts that "[c]onduct in full compliance with a presumptively valid state medical or recreational marijuana law is legal under state and federal law until the state law is formally invalidated." Aplt. Br. 54. But the Credit Union seemed to abandon this position at oral argument, and for good reason: the CSA, by virtue of the Supremacy Clause, is the law of the land. See U.S. CONST. art. VI, cl. 2. Conduct prohibited by federal law is illegal, regardless of what Colorado law may permit. See Planned Parenthood of Kan. & Mid-Mo. v. Moser , 747 F.3d 814, 823 (10th Cir. 2014) ("[W]hen state or local law conflicts with federal law, federal law prevails."). For the same reason, I would decline the Credit Union's request to decide whether the CSA preempts Colorado law. Regardless of how we might resolve that issue, the MRBs' conduct would remain federally illegal.⁵

The Credit Union also argues that it may legally serve MRBs pursuant to certain Executive Branch guidance documents. In 2014, then-Deputy Attorney General James Cole issued a DOJ...