By Dawn Causey, Tom Pinder and Andrew DoersamThe term “highway robbery” originated in the 17th century to describe the actions of bold and shameless outlaws who preyed on unlucky pilgrims traversing the plains. On December 4, 2015, select banks experienced 21st century highway robbery when Congress and the president enacted the bold and shameless Fixing America’s Surface Transportation Act, legislation that literally steals the capital of select Federal Reserve member banks to fund national highways. Appalled at the government’s brazen heist, on February 8, 2017, the American Bankers Association and Seattle-based Washington Federal fought back by filing suit in the U.S. Court of Federal Claims.
The complaint against the government alleges breach of contract, breach of the implied covenant of good faith and fair dealing, and taking of private property without just compensation in violation of the Fifth Amendment to the U.S. Constitution. The reason the suit was filed in the Court of Federal Claims rather than federal district court is that, pursuant to the Tucker Act, the Court of Federal Claims has exclusive jurisdiction over takings and breach of contract claims for money damages. The purpose of the complaint is to obtain money damages because these damages are the only available remedy for breach of contract and uncompensated takings.
In passing the FAST Act, Congress broke the government’s promise to pay all banks that are members of the Federal Reserve System a fixed annual dividend of 6 percent on stock purchased in one of 12 regional Federal Reserve Banks. Congress established the Fed through the Federal Reserve Act of 1913, which mandated that banks purchase stocks to fund the Fed. Since then, banks that join the Fed are required to buy shares of stock from their local Federal Reserve Bank. Unlike most bank capital, the Fed shares can never be sold, traded or used as collateral. To temper the Fed’s onerous capital requirements, Congress promised an annual 6 percent dividend on bank holdings of Fed stock as an incentive for banks to join the Fed.
The government honored the membership agreement and paid the 6 percent dividend for 105 years, until shortsighted lawmakers concocted the FAST Act.
The legislation authorized the use of $305 billion from 2016 through 2020 for highway, motor vehicle safety and public transportation programs. To fund these nationwide transportation initiatives, the FAST Act targeted the 72 financial institutions with more than $10 billion in assets and permanently reduced the 6 percent dividend promised to those institutions. The act imposed a new variable dividend rate of approximately 2 percent in 2016. This lower dividend rate resulted in the transfer of approximately $1.1 billion from these targeted member bank stockholders to the United States Treasury in 2016 to help pay for our country’s highways, and that figure is expected to balloon to $17 billion over a 10-year period.
ABA’s lawsuit seeks to reimburse banks for the government’s unprecedented reduction of the dividend payments owed to the affected institutions, because neither Congress nor the Fed can break its contracts with banks or seize funds without adequate restitution.
For example, Washington Federal paid more than $24 million and agreed to become a member of the Federal Reserve System. In return, the government issued 479,610 shares of stock to Washington Federal in exchange for the promised six percent dividend. Thanks to the FAST Act, Washington Federal’s first dividend payment was reduced by more than $900,000.
Pilgrims learned that the best way to combat highway robbers was to travel in large groups and avoid traveling alone. Let’s hope the FAST Act’s thievery serves as a wake-up call to banks that our industry is much stronger when we fight together.
Dawn Causey is general counsel at ABA, where Tom Pinder is SVP for litigation and Andrew Doersam is a paralegal.