MASTER ACCOUNT
Custodia Bank Inc. v. Federal Reserve Board of Governors and Federal Reserve Bank of Kansas City
Date: March 29, 2024
Issue: Whether the Federal Reserve and the Federal Reserve Bank of Kansas City (the agencies) illegally delayed Custodia Bank’s application process to deny critical payment services.
Case Summary: A Wyoming federal district court ruled the Kansas City Fed was not required to grant Custodia’s request for a master account even though it was legally eligible for a master account.
Custodia is a Wyoming-chartered special-purpose depository institution. A master account is a type of bank account granting access to the Federal Reserve’s payment networks. Without the account, banks are forced to rely on a partner bank for access. Master accounts are highly sought after by fintech firms trying to avoid added costs and risks associated with these partnerships. Custodia received a Wyoming special-purpose depository institution charter, a crypto-friendly banking license. These charters allow companies to accept deposits, provide custody services, and engage in other banking activities such as payments.
Custodia sued the agencies alleging they unlawfully refused to act on its application for a master account. Custodia claimed it submitted a valid application for a master account to the Kansas City Fed, and the agencies illegally delayed the application process. According to Custodia, the agencies must take final action on an application within one year under 12 U.S.C. § 4807.
The agencies moved to dismiss Custodia’s complaint, which the court previously granted in part and denied in part. The court dismissed the agencies’ claims based on the Appointments Clause, Separation of Powers Doctrine, due process/fundamental unfairness, and two alternate remedies for mandamus and declaratory judgment if Custodia Bank’s application is denied. At the same time, the court refused to dismiss Custodia’s claims under the Administrative Procedure Act (APA) and Due Process Clause asserting the agencies’ unreasonably delayed processing Custodia Bank’s application.
On March 29, the court denied Custodia’s motion for judgment as a matter of law and granted the agencies’ cross-motion for summary judgment. At the outset, the court ruled Custodia lacked Article III standing because it did not challenge a final agency action under the APA. Custodia contended the final agency action occurred when the Fed sent an email to the Kansas City Fed expressing “no concerns” regarding the latter’s intention to deny the application. The court concluded this email was not a final agency action because it was an implementation decision and not part of an agency rule, order, license, sanction or relief.
Next, the court ruled Custodia is not statutorily entitled to a master account. Custodia contended Section 248a of the Depository Institution Deregulation and Monetary Control Act of 1980 (DIDMCA) requires all legally eligible depository institutions to receive a master account. But the court concluded Section 248a is unambiguous and does not support Custodia’s position for six reasons:
- The express language of section 248a does not instruct Federal Reserve banks to grant a master account to every eligible depository institution that asks for one;
- Section 248a only applies to the Federal Reserve Board, not the Federal Reserve banks;
- Section 248a does not expressly require the Federal Reserve banks to make their payment services available to all legally eligible depository institutions;
- Section 248c—the amendment to the Federal Reserve Act proposed by former Sen. Patrick Toomey (R-Pa.)—implies Congress believed the Federal Reserve banks had the discretion to grant or deny applications for master accounts;
- Federal Reserve banks had the discretion to grant or deny master accounts to eligible depository institutions before 1980, and a decision to strip that discretion out of DIDMCA in 1980 would have been a significant policy change;
- 12 U.S.C. § 342 suggests that DIDMCA, by adding Section 248a to the Federal Reserve Act, did not strip the Federal Reserve banks of their discretion to grant or deny master account applications from legally eligible nonmember depository institutions like Custodia; and
- If the Federal Reserve banks did not have the discretion to deny applications for master accounts from otherwise legally eligible depository institutions, they could be forced to grant master accounts to state-chartered depository institutions that are not “soundly crafted.”
Bottom Line: On April 26, Custodia filed a notice of appeal to the Tenth Circuit.
Document: Opinion
