Judge Hears Oral Arguments in Fed Dividend Lawsuit

A federal judge yesterday heard oral arguments in the lawsuit filed by ABA and Seattle-based Washington Federal seeking over $1.1 billion in damages resulting from the United States’ improper reduction in dividends paid to Federal Reserve member banks.

The cut to the long-established dividend was part of the 2015 highway spending bill, which reduced the annual dividend for Fed member banks with more than $10 billion in assets by two-thirds. ABA and Washington Federal’s claim asserted breach of contract and taking of private property without just compensation in violation of the Fifth Amendment to the Constitution.

In her questioning, Chief Judge Susan Braden focused heavily on ABA and Washington Federal’s breach of contract claim and whether the Federal Reserve Act’s establishment of the 6 percent dividend rate demonstrated an intent to contract. Washington Federal argued that it had entered into a contract with the United States when it subscribed to the Federal Reserve Bank stock and that the U.S. breached this contract by paying a dividend of approximately 2 percent in 2016.

The government argued that no such contract exists between the banks and the federal government with respect to the Fed dividend, and that Washington Federal was unable to demonstrate that it had entered into a contract through an agent with authority to bind the United States. The government likened ownership of Federal Reserve Bank stock to fees paid by regulated entities to a regulator.

Judge Braden is expected to issue an opinion on the breach of contract claim in October. ABA will continue to update member banks as the lawsuit moves forward. For more information, contact ABA’s Tom Pinder.

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