Texas State Bank v. U.S.

• Decision Date: 21 September 2005
• Docket Number: No. 04-5126.,04-5126.
• Parties: TEXAS STATE BANK (successor by merger to Community Bank & Trust), Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

423 F.3d 1370

TEXAS STATE BANK (successor by merger to Community Bank & Trust), Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.

No. 04-5126.

United States Court of Appeals, Federal Circuit.

September 21, 2005.

Blake Henry Bailey, Bailey Law Firm, of Tyler, Texas, argued for plaintiff-appellant. With him on the brief was J. Bennett White, Wilson, Sheehy, Knowles, Robertson & Cornelius, P.C., of Tyler, Texas.

Kyle Chadwick, Trial Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for defendant-appellee. With him on the brief were Peter D. Keisler, Assistant Attorney General, David M. Cohen, Director, and Mary A. Melnick, Assistant Director. Of counsel on the brief were Richard M. Ashton, Associate General Counsel, and Katherine Wheatley, Assistant General Counsel, Board of Governors of the Federal Reserve System, of Washington, DC.

Before NEWMAN, SCHALL, and DYK, Circuit Judges.

Opinion for the court filed by Circuit Judge DYK.

Opinion filed by Circuit Judge NEWMAN concurring in part, dissenting in part.

DYK, Circuit Judge.

Appellant Texas State Bank ("Texas State") is a state-chartered bank that holds (and has held) reserves in accordance with the requirements of the Monetary Control Act of 1980, Pub.L. 96-221, Title I, 94 Stat. 132. Texas State claims that a Fifth Amendment taking occurred when the United States allegedly directed the Federal Reserve Board to pay earnings generated by Texas State's mandated reserves to the United States Treasury ("Treasury").

The Court of Federal Claims dismissed for lack of jurisdiction, holding that Texas State's "action [was] directed against the activities of the Federal Reserve Board"; that the Federal Reserve Board was a non-appropriated funds instrumentality ("NAFI"); and that the NAFI doctrine precluded the exercise of subject matter jurisdiction. Tex. State Bank (successor by merger to Cmty. Bank & Trust) v. United States, 60 Fed.Cl. 815, 819 (2004). We hold that the Court of Federal Claims had jurisdiction under the Tucker Act because Texas State's claim is based on actions by the United States and not the Federal Reserve Board. We conclude that the case must nonetheless be dismissed because Texas State has failed to assert a valid takings claim.

BACKGROUND

The Federal Reserve System was established in 1913 pursuant to the Federal Reserve Act ("FRA"). Federal Reserve Act, Pub.L. No. 63-43, 38 Stat. 251, codified as amended at 12 U.S.C. §§ 221 et seq. (1913). A principal function of the Federal Reserve System has been to determine and implement monetary policy "so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." 12 U.S.C. § 225a. The System is composed of the Board of Governors of the Federal Reserve System and twelve regional Reserve banks ("the Federal Reserve"). Monetary policy is set by the Federal Open Market Committee and is implemented through open market operations, that is, the purchase and sale of government securities. Open market operations are funded with reserves supplied by participating banks, and these operations are profitable for the Federal Reserve. The Federal Reserve banks also provide check clearing and other banking services to financial institutions. See generally 12 U.S.C. §§ 221 et seq.

Before the passage of the Monetary Control Act of 1980, only national banks were required to join the Federal Reserve System and to maintain non-interest bearing, or "sterile" reserves with the Federal Reserve. State-chartered banks could elect to join, but their participation in the system was not mandatory. Member banks did not earn interest on reserves but were entitled to several free services, including free check-clearing. When inflation rates rose in the late 1970's and interest rates increased, voluntary participation of state-chartered banks in the Federal Reserve System declined as did the level of reserve deposits. See generally Joshua N. Feinman, Reserve Requirements: History, Current Practice, and Potential Reform, 79 Fed. Res. Bull. 569 (1993).

In 1980 Congress sought to reverse this trend through the passage of the Monetary Control Act, and required that all depositary institutions, i.e., all banks, hold sterile reserves, in the form of non-interest bearing deposits at the Federal Reserve Bank, or in the form of Federal Reserve notes (that is, currency) stored at the depository institution. The currency deposits are known as "vault cash." Id.; 12 U.S.C. § 461(c). The Federal Reserve has consistently, but unsuccessfully, urged Congress to allow for the payment of a market-rate of interest on required reserves.¹ On the other hand, the Treasury has opposed what it views as "the use of taxpayer resources for this purpose."²

The parties have stipulated that the Federal Reserve's open market operations, funded by required reserves, generate substantial income. The parties have also stipulated that the "Federal Reserve notes held as mandatory reserves in the form of vault cash result in earnings for Federal Reserve Banks in the same manner the maintenance of reserve balances in the accounts at the Federal Reserve Banks generate [sic] income for the Federal Reserve Banks." Pl. Contentions Together with Defendant's Responses at ¶ B5. The income generated by the sterile deposits and vault cash is used to pay the expenses of the Federal Reserve, and the remainder is transferred by the Federal Reserve Banks to the Treasury on a yearly basis. This transfer occurs each year by direction of Treasury. In fiscal years 1997, 1998, and 2000, the transfer was statutorily mandated. Omnibus Budget Reconciliation Act of 1993, Pub.L. 103-66 § 3002(a), 107 Stat. 312; Appendix to District of Columbia Appropriations Act, Pub.L. 106-113, § 302, 113 Stat. 1501 (Nov. 29, 1999).

Texas State has maintained sterile reserves and vault cash in accordance with the Monetary Control Act since 1980. Cmty. Bank & Trust v. United States, 54 Fed.Cl. 352, 354 (2002).³ In October 2001, Texas State brought suit against the United States in the Court of Federal Claims, alleging jurisdiction under the Tucker Act, 28 U.S.C. § 1491(a)(1). Texas State did not challenge the statutory requirement to maintain reserves pursuant to the Monetary Control Act, nor allege that such a requirement constituted a taking.⁴ Rather in its complaint, Texas State asserted that "[i]ncome on the principal is the property of the owner of the principal. As such, the income on deposits and vault cash belong [sic] to the depository institutions that have maintained required reserves." Complaint at ¶ 28. Texas State alleged that the United States had engaged in a Fifth Amendment taking by directing the Federal Reserve to transfer the "earnings on required reserves maintained by depository institutions" to the Treasury. Id. at ¶¶ 28-31. The complaint also alleged, in the alternative, a violation of due process or an illegal exaction. Id. at ¶¶ 30-31. Texas State sought money damages equal to the earnings plus interest. Id. at ¶ 32. It also sought certification of a class of similarly situated depositary institutions that since 1980 maintained required reserves in accordance with the Monetary Control Act. Id. at ¶¶ 20, 22.

The government moved to dismiss, arguing that jurisdiction was precluded because the Federal Reserve was a non-appropriated funds instrumentality ("NAFI"), and the NAFI doctrine barred suit. Cmty. Bank & Trust, 54 Fed.Cl. at 355-59.⁵ The NAFI doctrine is "an established exception to the Tucker Act . . . based on the premise that the government has never waived its sovereign immunity to allow private parties to bring breach of contract claims against NAFIs." AINS, Inc. v. United States, 365 F.3d 1333, 1336 (Fed.Cir.2004). In response, Texas State pointed out that this case involves a takings claim rather than an effort to recover on a government contract. Texas State also argued that it was the actions of Congress and Treasury that were the cause of the alleged taking, not those of the Federal Reserve, and that the NAFI doctrine did not apply. Cmty. Bank & Trust, 54 Fed.Cl. at 356. In the alternative, the government moved to dismiss for failure to state a claim, and Texas State moved for partial summary judgment with respect to liability on its takings claim, contending that in light of the "interest follows principal" holdings of the Supreme Court's decisions in Webb's Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155, 101 S.Ct. 446, 66 L.Ed.2d 358 (1980), and Phillips v. Washington Legal Foundation, 524 U.S. 156, 118 S.Ct. 1925, 141 L.Ed.2d 174 (1998), the "payment of interest on its principal to the Treasury [was] a taking as a matter of law." 54 Fed.Cl. at 360.

In an initial opinion, the court declined to dismiss for lack of jurisdiction under the NAFI doctrine, and "reserve[d] judgment on the relevance and consequence of the Board of Governors' NAFI status until additional facts [became] available." Id. at 356. With respect to the merits of the takings claim, the court denied the government's motion to dismiss for failure to state a claim, and held that "[f]or the limited purpose of this motion to dismiss, the court finds that plaintiff has a property interest in the principal of its reserve accounts, cognizable under the Fifth Amendment." Id. at 359. However, the court noted that it was not "clear, for instance, that plaintiff's funds are placed in the type of separate, interest bearing . . . account at issue in" potentially analogous cases. Id. The court also denied the plaintiff's partial summary judgment motion. The case was then stayed, pending the outcome of the Supreme Court's decision in Brown v. Legal Foundation of Washington, 538 U.S. 216, 123 S.Ct. 1406, 155 L.Ed.2d 376 (2003), where certiorari had been granted to determine whether or not a taking occurred when the State of Washington required that interest earned on...