[00:00:00] Speaker 03: You're Mr. Craig, right? [00:00:01] Speaker 03: Yes, Your Honor. [00:00:01] Speaker 03: All right, please proceed. [00:00:03] Speaker 04: Good morning, Your Honors, and may it please the court. [00:00:05] Speaker 04: I'd like to reserve five minutes for rebuttal. [00:00:08] Speaker 04: Pay Services Bank is a de novo banking institution that has received their preliminary approval to establish a state-chartered bank from the state of Idaho. [00:00:18] Speaker 04: It is subject to the regulatory supervision of the Idaho Department of Finance and the federal laws and regulations regulating the operations of all banks in the United States. [00:00:28] Speaker 04: It is applied for a master account with the Federal Reserve Bank of San Francisco, which I'll refer to as the Reserve Bank or the San Francisco Fed. [00:00:35] Speaker 04: The Reserve Bank has refused to give them the account and that refusal is illegal. [00:00:40] Speaker 04: The Federal Reserve Act specifically provides that all Federal Reserve Bank services shall be available to non-membered depository institutions. [00:00:50] Speaker 03: Okay, you know, we're going to be talking a lot of sub-details here. [00:00:54] Speaker 03: The services shall be available, but I think it's slightly different wording. [00:00:59] Speaker 03: Let me just ask you this. [00:01:00] Speaker 03: What is your best argument that we'll call it the Reserve Bank is a federal agency? [00:01:08] Speaker 04: The Federal Reserve Bank is an arm of the Federal Reserve System Board of Governors, which is indisputably a federal agency. [00:01:16] Speaker 03: Well, it's not indisputable. [00:01:17] Speaker 03: I want you to tell me why you think it is. [00:01:19] Speaker 03: Because under the standard of whether it has substantial independent authority, that's the standard we're looking at. [00:01:25] Speaker 03: Based on that standard, what is your best argument that the Reserve Bank is a federal agency? [00:01:34] Speaker 04: Well, my point, Your Honor, was that the Federal Reserve System Board of Governors is a federal agency. [00:01:39] Speaker 03: That is, that is, but we're talking about the Reserve Bank here, the San Francisco Reserve Bank. [00:01:44] Speaker 03: Why is that a federal agency? [00:01:47] Speaker 04: The Federal Reserve Bank exercises independent authority and decision-making power based on the authority to receive applications for master accounts and approve those applications. [00:02:00] Speaker 04: without direct review or oversight from the Federal Reserve System Board of Governors. [00:02:06] Speaker 04: They have the authority to decide whether an eligible depository institution has access to the U.S. [00:02:13] Speaker 04: payment system and they can decide, make that decision without consulting with or approval from the Federal Reserve System. [00:02:23] Speaker 03: I understand it correctly. [00:02:24] Speaker 03: The Federal Reserve Board in D.C. [00:02:27] Speaker 03: sets out certain rules as to what's supposed to happen. [00:02:30] Speaker 03: The regional banks then can decide what they're going to do, whether they're going to do it or they will do it. [00:02:35] Speaker 03: They can reject them, too. [00:02:37] Speaker 03: Do you agree with that under the Federal Reserve rules? [00:02:39] Speaker 03: The language is specifically in there that they can reject them. [00:02:44] Speaker 04: No, Your Honor. [00:02:44] Speaker 04: The Federal Reserve Act, as amended by Congress in December 2022, provides that [00:02:52] Speaker 04: The master account database must list applications that are approved, rejected, or withdrawn. [00:03:00] Speaker 03: So by definition, they contemplate that everybody that applies for a master account doesn't automatically get it, right? [00:03:08] Speaker 04: It's not a requirement. [00:03:11] Speaker 04: Every eligible depository institution has a nondiscretionary right to a master account. [00:03:18] Speaker 04: The issue is that there are certain institutions that don't meet the baseline criteria to obtain a master account. [00:03:25] Speaker 03: So your argument is that your particular bank, which admittedly has a lot of approvals from Idaho and so on, is per se eligible. [00:03:36] Speaker 03: There's no discretion at all on the part of the Reserve Bank [00:03:40] Speaker 03: to whether to give it a master account. [00:03:43] Speaker 03: Is that correct? [00:03:45] Speaker 04: Yes, Your Honor. [00:03:46] Speaker 04: The Federal Reserve Act provides and defines depository institution as an institution that is eligible to become an insured bank under the Federal Deposit Act. [00:03:55] Speaker 03: I understand that it's eligible, but what I'm talking about is I understand you to be saying that your client [00:04:03] Speaker 03: has a per se right to a master account that the regional bank, the reserve bank, has no discretion at all on whether to give it a master account. [00:04:13] Speaker 03: Is that correct? [00:04:14] Speaker 04: Yes, that's correct, Your Honor. [00:04:16] Speaker 04: And I think that it's important to establish that [00:04:20] Speaker 04: That's not the end-all be-all. [00:04:23] Speaker 04: There is a non-discretionary right to a master account because the Federal Reserve Bank services shall be available to non-member depository institutions, and all of the services provided under 248A are services that require the use of an account. [00:04:39] Speaker 02: How do we know a bank is statutorily eligible for [00:04:43] Speaker 02: a master account. [00:04:44] Speaker 02: Is there some discretion by the bank to make that determination? [00:04:49] Speaker 02: There must be, because the language that Judge Smith quoted indicates clearly that they can be approved or rejected. [00:04:57] Speaker 02: Here, what demonstrates that pay services was statutorily eligible for a master account? [00:05:04] Speaker 02: Well, under 12 U.S.C. [00:05:06] Speaker 04: 461, an institution is defined as a depository institution if it is eligible to make application for insurance under the Federal Deposit Insurance Act. [00:05:17] Speaker 04: and 461 incorporates by reference the Federal Deposit Insurance Act. [00:05:21] Speaker 04: The Federal Deposit Insurance Act provides that any institution that is in the business of receiving deposits other than trust funds is an eligible institution. [00:05:30] Speaker 03: So, for example, an institution that only maintains... My counsel, with respect, I know you're aggregating these all together and incorporating by reference, but doesn't 248C show that the Reserve Bank can reject master account requests? [00:05:46] Speaker 04: Your Honor, I think the issue is that the Reserve Bank is arguing that the word rejected means that they have unfettered discretion and unreviewable discretion to deny. [00:05:57] Speaker 03: Certainly reject means that they cannot approve, right? [00:06:00] Speaker 04: Yes, they cannot approve accounts that have two problems. [00:06:06] Speaker 04: The first problem is that the applicant is not eligible to maintain a master account. [00:06:11] Speaker 04: It's not eligible to apply for insurance with the FDIC. [00:06:15] Speaker 04: It holds funds in trust, such as the status of a bank. [00:06:19] Speaker 04: that acts as a trustee or an executor of an estate, and that's specifically excluded under the FDIC Act. [00:06:26] Speaker 04: The second problem is if a bank has violated state or federal law, like the Bank Secrecy Act or the Anti-Money Laundering Act, it's barred from engaging in banking business under that law. [00:06:36] Speaker 04: And the case involving Banco San Juan Internacional against the Federal Reserve Bank of New York establishes that particular principle. [00:06:46] Speaker 04: They were stripped of their master account by the New York Fed because they were found to have engaged in violations of federal banking statutes. [00:06:53] Speaker 02: What role does Idaho's approval process, the state bank regulatory scheme play here? [00:07:01] Speaker 04: The state banking regulatory scheme allows a state to create a state-chartered bank, which is consistent with the Supreme Court's continued affirmance time and, again, of the nation's dual banking system, most recently in the unanimous decision of Quintero v. Bank of America last term. [00:07:22] Speaker 02: Did Pay Services get approval from Idaho as a state-chartered bank? [00:07:25] Speaker 04: It received a preliminary approval to establish a state chartered bank with specific conditions laid out in the preliminary approval, and it applied for a master account in order to complete this process of establishing a state chartered bank. [00:07:40] Speaker 02: Is that material or significant here that it has preliminary approval of a state charter? [00:07:46] Speaker 02: For the purposes of your argument, does it matter? [00:07:48] Speaker 04: Well, I think it matters to the extent that that means it's an eligible institution. [00:07:53] Speaker 04: It's a non-member state bank, which is considered an eligible type of institution. [00:07:58] Speaker 04: And it's eligible to make application under the FDIC Act. [00:08:02] Speaker 04: So its status as having received this preliminary approval or being in the business of receiving deposits means it's an eligible institution. [00:08:14] Speaker 00: Can I ask? [00:08:15] Speaker 00: The reason why the Fed Bank said that they rejected your bank here is it has unproven risk management, unproven risk management framework. [00:08:23] Speaker 00: Does Idaho analyze the risk management framework when deciding to grant approval to the bank? [00:08:29] Speaker 04: Yes, it does, Your Honor. [00:08:30] Speaker 04: So the Pay Services Bank and corporators submitted a large amount of information, including a Bank Secrecy Act and any money laundering policy and its own compliance manuals. [00:08:45] Speaker 00: So in essence here, the Fed Bank just overruled Idaho's decision on whether or not there is an appropriate risk management framework. [00:08:52] Speaker 04: Exactly. [00:08:53] Speaker 04: It did. [00:08:54] Speaker 00: uh... the uh... if and what do you think uh... what what gives them the authority to overall state making decisions [00:09:01] Speaker 04: they don't have the authority under the Federal Reserve Act to overrule the decisions of state-chartered banks. [00:09:06] Speaker 04: And the guidelines framework that they've developed in August, that they developed in August of 2020, essentially redlines state-chartered banks out of access to master accounts. [00:09:17] Speaker 04: It sets up a three-tiered system that appears nowhere in the Federal Reserve Act. [00:09:21] Speaker 00: So under the authority they claim now, they could just say, we're not going to accept any banks from Idaho, right? [00:09:26] Speaker 03: That's correct. [00:09:28] Speaker 03: I want to get back to what, at least I started with, which is whether the Reserve Bank is a federal agency. [00:09:35] Speaker 03: I think you said it was. [00:09:37] Speaker 03: Yes. [00:09:38] Speaker 03: Arguendo, if it is not, do you agree that the Administrative Procedure Act would not apply? [00:09:44] Speaker 04: If it's not a federal agency, the Administrative Procedure Act would not apply because it applies only to agency action. [00:09:52] Speaker 03: Okay. [00:09:55] Speaker 03: we have to decide whether it's an agency. [00:09:58] Speaker 03: But if it isn't, then we're not dealing with arbitrary and capricious. [00:10:02] Speaker 03: If that's the case, and again, I'm not saying it is, but if that's the case, then what's your argument, mandamus? [00:10:07] Speaker 04: Well, our argument is the due process clause argument that we raised under the Fifth Amendment to the US Constitution, that there is a right of procedural and substantive due process, both of which have been violated. [00:10:21] Speaker 04: The procedural due process requires [00:10:24] Speaker 04: that there be a post deprivation hearing at a minimum in addition to pre or post deprivation hearing procedures. [00:10:33] Speaker 04: After the San Francisco Fed submitted this one page denial letter, there was no opportunity for review or hearing, whether that be an informal hearing or an evidentiary hearing. [00:10:45] Speaker 00: Why isn't the Fed the proper defendant here? [00:10:50] Speaker 00: Because I think they provided guidelines to the Fed banks to whether or not to deny these master accounts. [00:10:59] Speaker 00: So wouldn't their guidance on how to be an agency action [00:11:05] Speaker 00: Isn't this the implementation of the Fed Board of Governors guidelines on how to and when to deny master accounts, reserve accounts? [00:11:16] Speaker 04: No, Your Honor. [00:11:17] Speaker 04: Pay Services Bank submitted this application to the San Francisco Fed more than a week before the guidelines were promulgated. [00:11:24] Speaker 04: It's submitted around August 10th and the guidelines were promulgated in August [00:11:27] Speaker 04: on August 19th, 2020. [00:11:31] Speaker 04: So what guidelines did the bank use in deciding to deny the bank pay services account? [00:11:37] Speaker 04: During the nine-month process of reviewing the application, they claimed that they relied on the guidelines in order to make the determination that pay services was not entitled to a master account. [00:11:50] Speaker 00: Well, doesn't that help you then? [00:11:52] Speaker 00: If they're implementing the Fed Board of Governors guidelines and Fed Board of Governors is clearly a federal agency, it seems like that's the agency action. [00:12:04] Speaker 00: I don't think, I think you've waived that, but anyway. [00:12:06] Speaker 04: I think that the problem is that the authority to issue master accounts preceded the guidelines. [00:12:14] Speaker 04: I mean, the Federal Reserve Bank's authority to issue master accounts doesn't stem from the guidelines. [00:12:20] Speaker 04: They've had this authority under the Federal Reserve Act since the Federal Reserve Act was issued. [00:12:25] Speaker 00: So your argument is if the Fed Board, I'm sorry, if the bank did not have discretionary authority to deny [00:12:33] Speaker 00: the reserve account, then you can mandamus them because under the mandamus act, if there's a non-discretionary rule, then we could order them to do that. [00:12:43] Speaker 03: Yes, exactly, Your Honor. [00:12:44] Speaker 03: And that gets back to what I understood you to say before, that basically pay services has a per se right, that the reserve bank has no discretion whatsoever in denying the master account. [00:12:59] Speaker 03: Is that correct? [00:13:00] Speaker 04: Yes, Your Honor, and I'd like to explain that because I do understand the hesitancy around limiting the Reserve Bank's authority, particularly as an arm of the government. [00:13:09] Speaker 02: And especially if we have a risky business model coming in, you know, we've had as recently as 2008, a financial crisis in this country. [00:13:20] Speaker 02: Doesn't the Reserve Bank have some role in the system to make sure that these novel institutions, new business models that inject risk into the system are adequately policed? [00:13:31] Speaker 02: And for some of them, it may be a rejection of a master account because that can allow risk into the state and national banking system. [00:13:44] Speaker 04: 1980 was a watershed moment in the history of the Federal Reserve Act. [00:13:48] Speaker 04: In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act, which was designed to bring all banking institutions under the umbrella of the Federal Reserve System and to ensure that they complied with Fed regulations and that they had access to the monetary system. [00:14:07] Speaker 02: The Congress provided- It doesn't matter how outlandish the business model of the applicant is. [00:14:14] Speaker 02: No, Your Honor, that's not the case. [00:14:16] Speaker 02: So at 248- I thought I heard you say that because you said they're eligible institutions or they're not engaged in illegal conduct. [00:14:23] Speaker 02: And other than that, no matter what their business model is, they have a non-discretionary right to a master account. [00:14:30] Speaker 02: I mean, isn't that your argument? [00:14:33] Speaker 04: Yes, Your Honor, but I think part of the problem is that the assumption is that if you get a master account, then it's a free-for-all, and that's not the case. [00:14:41] Speaker 04: Under 248A, you get a master account, but also under 248C2, it specifies that the master account can be subject to other terms and conditions that apply to member banks. [00:14:53] Speaker 04: So the Federal Reserve Bank has the authority to place reasonable restrictions on the use of the account. [00:15:00] Speaker 04: The same restrictions that apply to member banks that pose no risk to the financial system or little risk to the system. [00:15:08] Speaker 04: Under 342, they also have the authority to [00:15:12] Speaker 04: essentially limit the deposits that come into the account and only certain types of deposits are considered lawful. [00:15:19] Speaker 04: So the Federal Reserve banks can also have the authority to reject certain types of deposits and they can set reasonable restrictions on those deposits. [00:15:29] Speaker 03: Mr. Craig, do you want to save? [00:15:30] Speaker 03: It's up to you, but you're down to four minutes and so many seconds. [00:15:33] Speaker 03: You want to save five minutes. [00:15:34] Speaker 03: You want to save the rest of your time or you want to keep going? [00:15:37] Speaker 04: Yes, Your Honor. [00:15:37] Speaker 04: I'd like to save five minutes for rebuttal. [00:15:39] Speaker 03: You don't get five anymore. [00:15:40] Speaker 03: You get what you got there. [00:15:41] Speaker 03: But anyway, that's right. [00:15:43] Speaker 03: Thank you very much. [00:15:44] Speaker 03: Thank you. [00:15:46] Speaker 03: All right. [00:15:46] Speaker 03: Now let's hear from Mr. Youngwood, please. [00:15:51] Speaker 01: Thank you, Your Honors. [00:15:52] Speaker 01: Jonathan Youngwood, Simpson Thatcher for the Federal Reserve Bank of San Francisco. [00:15:56] Speaker 01: May it please the court [00:15:59] Speaker 01: There are a lot of issues that the district court dealt with, but as we brief, we think there are two key issues. [00:16:07] Speaker 01: And if the district court got either of them right, nothing else really needs to be considered. [00:16:11] Speaker 03: Can I just start asking you what I asked your friend over there? [00:16:15] Speaker 03: Yes. [00:16:15] Speaker 03: And that is, is, I'm just going to call it the Reserve Bank. [00:16:19] Speaker 03: We know it's a longer name. [00:16:20] Speaker 03: But does, is the Reserve Bank an agency of the federal government? [00:16:26] Speaker 01: It is, it is not for these purposes, Your Honor. [00:16:29] Speaker 01: There's quite established law, particularly in this circuit, on that topic, the Lewis case, in a different context. [00:16:40] Speaker 01: And it's why I say for these purposes, because it is possible to analyze these questions in different purposes. [00:16:45] Speaker 01: But Lewis case, different facts. [00:16:47] Speaker 01: But the core analysis there, which you're on already referred to, which is substantive government authority, wasn't present there, isn't present here. [00:16:55] Speaker 01: If you look at the structure between the board [00:16:58] Speaker 01: and the banks, something very carefully set up and very clearly set up. [00:17:03] Speaker 01: You can't treat it all as one. [00:17:05] Speaker 01: You can't treat the 12 banks and the board as the same thing. [00:17:08] Speaker 03: What role does the fact that the Reserve Bank is privately owned, at least the majority, play in this analysis? [00:17:16] Speaker 01: I think it would be a stunning thing, frankly, to find that a privately owned institution where six of the nine directors are elected by the stockholders, that somehow that entity [00:17:27] Speaker 01: is an agency, particularly for the purposes here. [00:17:29] Speaker 00: Well, doesn't it answer to the Board of Governors? [00:17:34] Speaker 01: There are guidelines that the Board of Governors gives, but it has a separate board of directors. [00:17:39] Speaker 00: Well, could it act contrary to what the Board of Governors tells it to do? [00:17:44] Speaker 01: I would have to think of an example where it could, Your Honor. [00:17:46] Speaker 00: It's probably unlikely. [00:17:48] Speaker 00: But the Board of Governors is an agency, for sure. [00:17:50] Speaker 00: Correct. [00:17:51] Speaker 00: And then sometimes the Board of Governors can delegate authority to the federal banks, right? [00:17:55] Speaker 01: It can. [00:17:56] Speaker 01: It did not here. [00:17:56] Speaker 00: But in that situation, you would agree that it is a federal agency at that point. [00:18:00] Speaker 01: I'd have to think of what the exact example is, Your Honor. [00:18:03] Speaker 01: It's not the case here. [00:18:05] Speaker 01: There's clearly not a delegation. [00:18:06] Speaker 00: Well, I mean, yeah. [00:18:07] Speaker 00: But there is clear guidance that the board can delegate to the banks, correct? [00:18:15] Speaker 01: Your Honor, I'd have to think. [00:18:16] Speaker 01: I'm not trying to be cute on it. [00:18:17] Speaker 01: I'd have to think of the exact example because I can't think of a case where it's happened and they've been held to be an agency. [00:18:23] Speaker 00: But you agree that there's an explicit, I think, authorization for the board to delegate authority to the banks? [00:18:31] Speaker 02: That can happen, Your Honor. [00:18:33] Speaker 02: So we have a non-federal agency private corporation, essentially, that has a discretionary gatekeeping rule for access to the national banking system, and there's no judicial review of that circumstance. [00:18:51] Speaker 02: Whatever discretion is exercised, there's no review of decisions that are made in denying master account status. [00:18:58] Speaker 01: For a variety of reasons, in this case, there is no opportunity for judicial review. [00:19:03] Speaker 01: That is correct. [00:19:04] Speaker 02: What if the bank's decision denies a master account because they don't like the ethnicity of the bank shareholders or the applicant shareholders? [00:19:19] Speaker 02: You know where I'm going. [00:19:20] Speaker 02: An impermissible factor. [00:19:23] Speaker 02: We just have to trust them. [00:19:26] Speaker 01: No, I don't think that is the answer, Your Honor. [00:19:28] Speaker 01: I think there's congressional oversight. [00:19:29] Speaker 01: And I think one of the reasons— But no judicial review. [00:19:32] Speaker 01: Not unless Congress finds a way to give you judicial review. [00:19:36] Speaker 01: But I think the congressional oversight shouldn't be overlooked. [00:19:40] Speaker 00: And in fact, if you look at the 2022 amendments— You really are asserting that the bank can discriminate against self-erase and that there's no judicial review of that? [00:19:49] Speaker 01: Your Honor, there may be other avenues if somebody discriminates over race, but it's not going to be an APA-type review. [00:19:56] Speaker 01: I mean, there's plenty of, obviously, issues of potential race or gender or other discrimination in the world that involve entities that are not agencies, and there may be ways to get judicial review in contractual relations and other— [00:20:11] Speaker 03: Title VII, Title IX, whatever. [00:20:14] Speaker 03: Yes, there are other laws. [00:20:16] Speaker 01: Congress passes. [00:20:16] Speaker 00: So could the bank say, we're not going to approve any bank from Idaho? [00:20:23] Speaker 01: I think we'd have a hard time saying that, Your Honor. [00:20:25] Speaker 00: But you could, right? [00:20:26] Speaker 00: Under your theory. [00:20:27] Speaker 01: I don't think it could under the guidelines, under the 2022 guidelines. [00:20:30] Speaker 00: But under your theory of the law, you could say that, and that would get no judicial review. [00:20:34] Speaker 01: It would not get judicial review under the APA. [00:20:37] Speaker 01: It would not get judicial review under the claims that are here. [00:20:40] Speaker 01: But Your Honor, I do think [00:20:42] Speaker 01: And again, I understand the hypothetical, and I appreciate you pushing me. [00:20:46] Speaker 01: It's not anything close to this case. [00:20:49] Speaker 01: If you look at the database that Congress set up in 2022, the total number of master accounts denied, rejected in that database is one. [00:21:03] Speaker 01: It's this bank. [00:21:04] Speaker 01: If you look beyond just... [00:21:08] Speaker 00: Isn't there another case in Wyoming? [00:21:11] Speaker 01: If you look in total, in the database, there are three. [00:21:15] Speaker 01: The second one is the Wyoming case, the custodian case that will be before the 10th Circuit. [00:21:20] Speaker 01: And not recorded in that, there is another one. [00:21:22] Speaker 00: And wasn't the first rejection in just 2017, right? [00:21:25] Speaker 01: There's a 2008, I'm sorry, of? [00:21:29] Speaker 00: Of a master account request. [00:21:31] Speaker 01: I think it may be 2018. [00:21:34] Speaker 00: So it's not a long-standing policy or practice of the bank to reject reserve accounts? [00:21:40] Speaker 01: It seems to be a very, very rare instance that they are rejected. [00:21:44] Speaker 00: And novel. [00:21:44] Speaker 01: At least based on this database. [00:21:47] Speaker 01: And the only other case, Your Honors, because you see it in the briefing, is the Bank of San Juan. [00:21:51] Speaker 01: That's slightly different because it was a withdrawal. [00:21:53] Speaker 02: We haven't talked much about the statute, and I am from the 10th Circuit, and I'm [00:22:00] Speaker 02: fond of Judge Bacharach's work. [00:22:01] Speaker 02: And I guess I'd appreciate your kind of taking him on and explaining why he got it wrong in his concurrence. [00:22:11] Speaker 02: Sure. [00:22:12] Speaker 01: And with all respect, of course, to him, he was the first to have to address it. [00:22:17] Speaker 01: And perhaps that was what you were referring to, Your Honor. [00:22:20] Speaker 00: I think in his opinion, he said that this was the first time it's ever happened. [00:22:25] Speaker 01: I think that's what he said. [00:22:26] Speaker 01: I can't tell you for sure if that's factually correct or not. [00:22:29] Speaker 01: It's not in the record. [00:22:31] Speaker 01: Let me walk through that. [00:22:32] Speaker 01: I do want to mention one thing that is not in the record, but it does go to some of the comments my friend said. [00:22:39] Speaker 01: Based on what we've now been made aware of, on October 16th, the Idaho Department of Finance actually told Pay Services that their charter, preliminary or otherwise, had expired. [00:22:51] Speaker 01: and issued a cease and desist order on October 18. [00:22:55] Speaker 01: I understand that's under appeal or on an appeal, but the facts, again, not in the record, obviously, because it's after the district court decision. [00:23:02] Speaker 00: Doesn't that show that they're also doing this type of review that you're doing, that they're looking for risk management issues and whether or not they're causing a risk? [00:23:11] Speaker 01: I don't know, Your Honor, why they took that step at all. [00:23:15] Speaker 01: But what I will say perhaps to answer that, and I do want to get to Judge Baccarat, [00:23:19] Speaker 01: Your Honor, there are state systems and there are federal systems. [00:23:24] Speaker 01: And I am not saying that the state of Idaho, the state of Wyoming, the state of New York, any state, can't charter a bank. [00:23:33] Speaker 01: What we're saying is if they want access to a master account, which is an important thing, then there are guidelines. [00:23:40] Speaker 01: We are not stopping them from getting a corresponding bank relationship. [00:23:45] Speaker 01: So they could take that charter that Idaho gives them, and if another [00:23:49] Speaker 01: bank, and there are something like 9,000 with master accounts, wants to enter into a contractual relationship with them, a commercial arrangement, they can get access. [00:23:59] Speaker 01: So this is not my client saying, we are telling Idaho or any state what to do. [00:24:05] Speaker 01: It's saying, once you've done something, we get to decide [00:24:11] Speaker 01: under the right whether or not you have to whether whether you have to get to be a bank but you need a master account to operate as a functional no you don't your honor you you can get a corresponding banking right or you have to go through someone else another bank exactly so you can't be your own bank you you can't get a master account without [00:24:29] Speaker 01: being given a master account. [00:24:30] Speaker 01: That's it. [00:24:32] Speaker 01: Really? [00:24:33] Speaker 00: That's amazing. [00:24:35] Speaker 03: So you can't get a master account without getting a master account. [00:24:38] Speaker 00: And you can't get it without what the bank's giving it to you. [00:24:41] Speaker 00: You would agree you can't operate as an independent bank without a master account? [00:24:44] Speaker 01: I think I don't agree with that statement, Your Honor. [00:24:46] Speaker 01: I think you'd be an independent bank if you have a corresponding bank relationship. [00:24:49] Speaker 01: I'm not sure what the word independent means in the sentence. [00:24:52] Speaker 03: As I understand it, pay service, your friends say your pay services [00:24:58] Speaker 03: provided it, filed its application with the Reserve Bank just prior to the Federal Reserve Board promulgating guidelines. [00:25:09] Speaker 01: Is that your understanding as well? [00:25:12] Speaker 01: So the timeline, Your Honor, that is not incorrect. [00:25:16] Speaker 01: It's not incorrect in your sense? [00:25:19] Speaker 01: It is. [00:25:20] Speaker 01: But that's correct. [00:25:20] Speaker 01: I don't think it's complete. [00:25:21] Speaker 01: Okay. [00:25:25] Speaker 01: series of meetings that pay services had and pleads ranged from April 22, and in terms of phone calls and other things, all the way through, frankly, the learning of the denial. [00:25:38] Speaker 01: The guidelines became effective on August 19. [00:25:44] Speaker 01: And that is after an application, but it is in the midst of pay services continuing to have communication and supply information. [00:25:54] Speaker 03: So basically, when we speak of an application from pay services, it isn't just the paperwork. [00:25:58] Speaker 03: There's ongoing conversations and so on. [00:26:01] Speaker 03: And the guidelines became effective before any final decision was made. [00:26:05] Speaker 01: Is that correct? [00:26:06] Speaker 01: That is correct, Your Honor. [00:26:07] Speaker 01: OK. [00:26:07] Speaker 01: So the guidelines, from your perspective, clearly do apply in this case. [00:26:13] Speaker 01: We believe they do apply in this case. [00:26:14] Speaker 01: And, Your Honor, if they didn't apply, then you'd be left with just the statute and the word may, which I think actually is against the argument. [00:26:23] Speaker 02: My counsel friend would want to be- Isn't your argument, though, that the guidelines are purely advisory? [00:26:27] Speaker 02: There's no mandatory obligation on the bank to follow them, apply them, use them, look at them, whatever. [00:26:33] Speaker 02: They're purely advisory. [00:26:35] Speaker 01: They are, I think, drafted in a way that allows discretion for the person who's applying them. [00:26:43] Speaker 01: Your honor, I want to make sure I don't forget to go to Fourth Corner. [00:26:47] Speaker 02: I'm keeping an eye on that. [00:26:50] Speaker 01: OK. [00:26:50] Speaker 01: So your honor, unless there's other questions, I'd go to Fourth Corner now for a moment. [00:26:57] Speaker 00: All right. [00:26:57] Speaker 00: OK. [00:26:57] Speaker 00: Sorry, can I just ask one little preliminary question? [00:27:00] Speaker 00: Is there any argument that the mandamus act does not apply to the federal bank, or do you agree you could see that it applies to the bank? [00:27:08] Speaker 01: I don't see how it would apply, particularly if the [00:27:13] Speaker 01: First of all, no, I don't think it applies, because I think you've still got to have some aspect of government. [00:27:21] Speaker 00: It might be a different test. [00:27:22] Speaker 00: So there's no officer or employee of the United States or an agency within the federal bank? [00:27:28] Speaker 01: There's a waived argument that they make on the inferior officer related to the president of the bank, but that argument isn't before you. [00:27:37] Speaker 01: I also think it's wrong. [00:27:40] Speaker 00: The president of the bank is not an inferior officer. [00:27:42] Speaker 01: Maybe an inferior officer, but the argument isn't made. [00:27:46] Speaker 01: And if you were an inferior officer for these purposes, first of all, he's not making the decision. [00:27:51] Speaker 01: There's no allegation, as opposed to the custodian case, which is before you, where there were some allegations of involvement. [00:27:59] Speaker 01: But it also goes down to whether or not it's a ministerial act, a discretionary act, and you have all those other problems. [00:28:06] Speaker 01: On 258A and 342, [00:28:11] Speaker 01: Judge Baccarat's analysis of it in that decision, there are a number of problems with it. [00:28:18] Speaker 01: First, the pure text of the statute, 258A, is clearly directed to the board. [00:28:25] Speaker 01: If you had any— Forty-eight A, you're sorry. [00:28:28] Speaker 01: I'm sorry, 248A, yes. [00:28:29] Speaker 01: If I said 258, I was wrong. [00:28:32] Speaker 01: You don't have to, if you had any doubt, you can go to the headings, and I know there are arguments in cases that say headings don't control, but I think when you combine the actual text of the statute with the heading, you go to the use of the word all, and the fact that all is in one place, all federal bank services, but it's not about all member. [00:28:52] Speaker 00: Before you move on, you're saying that this only applies to the board of governors and doesn't apply to the bank. [00:28:59] Speaker 01: I think what I'm saying is, well, the instruction is to the Board of Governors. [00:29:04] Speaker 01: That is clear by the statute. [00:29:06] Speaker 01: But the argument that counsel has is that 342 is somehow overridden by the changes to 248, right? [00:29:20] Speaker 01: And when you look at 342, which interestingly enough was amended at the very same time by the Monetary Control Act of 1980, to add in the non-member [00:29:29] Speaker 01: but not to delete the word may. [00:29:31] Speaker 01: And we know 342 is what goes to the banks. [00:29:35] Speaker 00: But 248A, you would agree that those mandates apply to the bank. [00:29:41] Speaker 01: The instruction is to the board. [00:29:44] Speaker 00: But it says all federal reserve bank services. [00:29:47] Speaker 01: It's about bank services, but the instruction. [00:29:50] Speaker 00: So you're saying the bank does not have to follow 248A? [00:30:00] Speaker 01: I think the bank probably does have to follow 248A. [00:30:05] Speaker 00: Right, so it applies, yeah. [00:30:06] Speaker 00: Because it couldn't discriminate between members and non-members, right? [00:30:09] Speaker 00: The bank couldn't. [00:30:12] Speaker 01: For services that each are eligible for. [00:30:15] Speaker 01: I think that's fair, Your Honor, but if you're talking about the provision where it is [00:30:22] Speaker 01: It is very hard to read it as overriding something that was specifically directed to the bank in the word may, particularly if given that they were touched at the same time by Congress. [00:30:33] Speaker 01: Your Honor, I'll keep going through. [00:30:34] Speaker 01: It's all in our briefs. [00:30:36] Speaker 01: Obviously, the 2022 amendment, if you have... You mentioned the all argument. [00:30:40] Speaker 00: I don't understand that one. [00:30:41] Speaker 00: Can you explain that one? [00:30:43] Speaker 01: Sure. [00:30:44] Speaker 01: The statute reads, all Federal Reserve bank services covered by the fee schedule [00:30:50] Speaker 01: I'm sorry. [00:30:53] Speaker 01: Yes. [00:30:54] Speaker 01: All federal reserve bank services covered by the fee structure shall be available to non-member depository institutions. [00:30:59] Speaker 01: It's significant that the all's in one place and not the other. [00:31:02] Speaker 00: Why? [00:31:03] Speaker 01: Because the all means all services. [00:31:08] Speaker 01: The non-member depository institutions means without the word all doesn't mean that every non-member depository institution has to have it or that everyone who's applicable, which is I think how they're trying to [00:31:19] Speaker 00: I don't know if that's true linguistically. [00:31:22] Speaker 00: I mean, you say, all ducks are birds. [00:31:25] Speaker 00: If you just said, ducks are birds, they mean the same thing. [00:31:30] Speaker 01: I guess I respectfully disagree with you on that. [00:31:33] Speaker 01: Oh, really? [00:31:37] Speaker 00: You agree that ducks are birds. [00:31:39] Speaker 01: I do agree with you that ducks are birds. [00:31:41] Speaker 00: And all ducks are birds. [00:31:43] Speaker 01: Those two sentences mean the same thing. [00:31:46] Speaker 01: Not my specialty, I suspect that's correct. [00:31:48] Speaker 01: But I do think... They mean the same thing, you have to concede that. [00:31:51] Speaker 01: Respectfully, Your Honor, I don't think so. [00:31:53] Speaker 01: There could be, if you have 20 species of things that people call ducks, and whatever way scientists, not my field, categorize them, 10 of them would be in the category of birds and 10 of them are in some other category, it would still be true to say ducks are birds. [00:32:12] Speaker 03: the birds of the flagger flock together? [00:32:14] Speaker 03: I don't know. [00:32:17] Speaker 02: I'm worried about two things. [00:32:18] Speaker 02: We've talked about the potential for arbitrary decision-making here and exclusionary practices or protectionism, whatever. [00:32:29] Speaker 02: And then the other aspect is the statutory claim. [00:32:33] Speaker 02: And my concern is about the ability of the Federal Reserve System to control risk and avoid injecting undue risk into the system, which certainly cuts in favor of the bank's decision-making process and the guidelines. [00:32:50] Speaker 02: I hear Mr. Craig saying, well, everybody can get in through the master account door. [00:32:58] Speaker 02: but that risk can be managed in two ways. [00:33:01] Speaker 02: One, by state regulators, which apparently might have happened here, and secondly, on the federal side through the way the banks are allowed to accept or reject deposits and different types of services that are eligible. [00:33:19] Speaker 02: Explain to me why, if we let them in the door, why wouldn't risk management be covered by the rest of 248 and that we really, we need a serious gatekeeper for risk purposes at the 342 level? [00:33:34] Speaker 01: Your Honor, I think the level, first of all, it'd be a circular argument and frankly, if you take them at their word and they get their master account and then the bank doesn't allow a single deposit to be made, [00:33:46] Speaker 01: I'm not sure what would be accomplished. [00:33:47] Speaker 01: It just seems to be almost a silly way to read the statute that you can give them the ticket but not ever invite them to the party. [00:33:56] Speaker 01: But it would create burden on the banks. [00:33:59] Speaker 01: You've now got somebody in who your process said shouldn't be in, and now you've got to monitor every single step they do, rather than just saying this is not a risk in our discretion, which again, the data shows is almost [00:34:14] Speaker 01: never used for a no. [00:34:17] Speaker 01: In our discretion, they shouldn't be part of it. [00:34:19] Speaker 01: And perhaps just to answer the question on why can't we just let the states decide, again, they have their obligations to their citizens, and the banks and the board have obligations as a whole to the U.S. [00:34:32] Speaker 01: financial system. [00:34:33] Speaker 02: How could Pay Services fix its application? [00:34:38] Speaker 02: Could it resubmit an application here? [00:34:42] Speaker 02: It'll always be at the mercy of the bank under your theory, but were they told, here's a way you can fix your application that would get your master account? [00:34:52] Speaker 01: They have the letter that they have. [00:34:54] Speaker 01: I'm sure they had many phone calls. [00:34:57] Speaker 01: I'm sure if they wanted to reapply. [00:35:00] Speaker 01: had their charter back, they might be able to reapply, and then it would be judged. [00:35:06] Speaker 01: I mean, can it go on forever? [00:35:08] Speaker 01: You've, I'm sure, sometimes had litigants who've come in forever, and sometimes the courts say enough. [00:35:13] Speaker 01: I'm not sure one is enough, so I— Can I just sort of wind up with this? [00:35:17] Speaker 03: Assuming, arguendo, that the bank is a federal agency, [00:35:24] Speaker 03: Your friend suggests that it has acted in an arbitrary and capricious manner. [00:35:31] Speaker 03: What's your response to that? [00:35:33] Speaker 01: Your Honor, there's absolutely no record to support that. [00:35:38] Speaker 01: You have the guidelines. [00:35:39] Speaker 01: If they're applicable, they're applicable. [00:35:41] Speaker 01: If they're not, we just go back to the may. [00:35:42] Speaker 01: You have, as pled by the complaint, [00:35:48] Speaker 01: a very extensive set of process, two meetings, written submissions, written response. [00:35:55] Speaker 01: They don't like the result. [00:35:57] Speaker 01: They say the letter is too short. [00:35:58] Speaker 01: If you read the letter, it's pretty specific as to what the reasons are. [00:36:03] Speaker 01: It's not like we deny. [00:36:05] Speaker 01: There's no – the arbitrary capricious is a very high standard. [00:36:10] Speaker 01: In fact, if they are an agency, [00:36:12] Speaker 01: and you conclude they have discretion, that itself is almost never reviewable under the APA. [00:36:18] Speaker 01: And I think, I suggest, the district court didn't get deeply into this, but there is law to say that it wouldn't be reviewable at all. [00:36:24] Speaker 01: In other words, they really, it's where I started, Your Honor, and maybe I'll wrap up with that. [00:36:29] Speaker 01: They have to be, Judge Patricko has to be wrong on both points. [00:36:34] Speaker 00: Can I ask a question? [00:36:37] Speaker 00: I do think the strongest textual argument you have is under 48C, where the database says that it must provide rejected master account request. [00:36:50] Speaker 00: What's your response to your friend's argument that, well, the bank has the authority to reject ineligible non-members, that it can determine whether or not [00:37:00] Speaker 00: You're eligible, but once you're eligible, you don't have additional discretion to reject it for other reasons. [00:37:06] Speaker 00: So that's what that could be referring to, just rejected bank accounts because they're ineligible. [00:37:11] Speaker 00: But that doesn't mean that the bank is conferred extra discretionary authority. [00:37:17] Speaker 01: I think, Your Honor, that would be a reading that pays no account to the word may in the original statute. [00:37:24] Speaker 01: It pays no account. [00:37:26] Speaker 01: It doesn't harmonize. [00:37:27] Speaker 00: Well, I mean, the original statute doesn't talk about master accounts. [00:37:31] Speaker 01: The original statute does not talk about master accounts. [00:37:34] Speaker 01: 248A doesn't talk about master accounts. [00:37:36] Speaker 01: None of them specifically reference that. [00:37:38] Speaker 00: I agree. [00:37:38] Speaker 01: The first statute to refer to it is this. [00:37:41] Speaker 00: But what's wrong with that argument, though, that the rejected in the database could be referring to [00:37:48] Speaker 00: rejected accounts because they're not eligible non-member banks. [00:37:53] Speaker 01: I understand the argument, Your Honor. [00:37:55] Speaker 01: I think what's wrong with it is it limits in a way Congress did not specify, the board has not specified and no statute has specified the criteria by which the bank [00:38:08] Speaker 01: can make the decision, and there's just no, it doesn't say reject for a reason, it doesn't say why, it just says, it clearly allows that you can reject, and it was put forth in a time after Fourth Corner when clearly this type of issue would come forward. [00:38:24] Speaker 00: Yeah, they were studying it, yeah. [00:38:26] Speaker 03: Do you have any other questions? [00:38:28] Speaker 03: No, thank you. [00:38:28] Speaker 03: All right, thank you for your argument. [00:38:29] Speaker 03: Mr. Craig, you get to wind up here with four minutes and 32 seconds. [00:38:36] Speaker 04: Thank you very much, Your Honor. [00:38:37] Speaker 04: The right to a master account, as we explained in the principal brief, is similar to a right of free speech. [00:38:46] Speaker 04: People have a right to speak freely, but the government can set time, place, and manner restrictions on your speech. [00:38:54] Speaker 03: Wait a minute. [00:38:54] Speaker 03: Are you suggesting we have a First Amendment case here? [00:38:57] Speaker 04: No, I'm not. [00:38:58] Speaker 04: I'm simply providing an analogy as to the problem going on here in this case. [00:39:04] Speaker 04: So the Federal Reserve Act provides that all Federal Reserve Bank services shall be available to non-membered depository institutions. [00:39:14] Speaker 00: So, Council, you were mentioning that your theory is that the banks have authority to reject [00:39:21] Speaker 00: applicants to determine eligibility and whether or not they committed crime, but then once they've passed that level, they have no other discretion to reject the bank. [00:39:31] Speaker 00: Is that how you read it? [00:39:33] Speaker 04: No. [00:39:34] Speaker 04: No, Your Honor, that's not how I read it. [00:39:37] Speaker 04: That's not the full explanation of how I read it. [00:39:40] Speaker 04: I think as a starting point, [00:39:42] Speaker 04: All eligible non-member depository institutions have a right to a master account under 248A. [00:39:48] Speaker 00: Right. [00:39:48] Speaker 00: I'm agreeing with you on that. [00:39:49] Speaker 00: But I think all I'm asking is they have the right to reject eligibility if you're not eligible. [00:39:55] Speaker 04: That's right. [00:39:56] Speaker 00: And if you committed a crime. [00:39:58] Speaker 00: But once they've determined that you are eligible, then they have no more discretion. [00:40:03] Speaker 04: Once you have the account, that relationship is governed by the terms of the operating circular of the Federal Reserve Bank and Federal Reserve Board regulations. [00:40:13] Speaker 04: They are able to set reasonable restrictions on the use of the account that apply to all banks, both member and non-member banks. [00:40:22] Speaker 04: They are able to reject deposits that are not in lawful form provided by Section 342. [00:40:28] Speaker 04: The bank is also subject to, along with the master account, state and federal regulations. [00:40:37] Speaker 04: Pay Services Bank is subject to all of the regulations provided by Idaho law. [00:40:41] Speaker 04: It's also subject to the regulations set out by the [00:40:46] Speaker 04: every federal law that applies to banks, including the Bank Secrecy Act. [00:40:50] Speaker 04: The Banco San Juan is a perfect example. [00:40:53] Speaker 04: The FBI investigated allegations of money laundering related to the bank and issued a search warrant. [00:40:59] Speaker 02: What if your client got the master account and then the bank rejected every deposit that was intended to go into the account? [00:41:08] Speaker 02: So basically, through the back door, accomplishing what they couldn't through the 248 front door. [00:41:16] Speaker 04: Under 248A, C2, that wouldn't be permissible unless the basis for the rejection applied to both member and non-member banks. [00:41:25] Speaker 04: So if Pay Services Bank submitted the same kind of deposit as a member bank, a restriction that barred all deposits would not be allowed under section 248A, C2, because that provision says that [00:41:38] Speaker 04: the account could be subject to terms and conditions that apply to all member banks. [00:41:42] Speaker 02: But what if the bank thought that the funds coming in were the result of money laundering? [00:41:48] Speaker 02: Could they reject a deposit for that reason? [00:41:51] Speaker 04: If they applied that same standard to member banks and rejected member bank deposits for the same reason, yes, they could do that. [00:41:57] Speaker 04: But the point of the Monetary Control Act was to end discrimination between member and non-member banks and to provide equal access to Federal Reserve Bank services to bring all of the banks under the umbrella of the Federal Reserve System. [00:42:12] Speaker 04: rather than having a certain set of banks, namely here state chartered banks, be shut out of the system. [00:42:18] Speaker 04: At this point, it is possible for the Federal Reserve Bank to reject all applicants from Idaho that are not also subject to another federal regulator, even though the bank is a state chartered bank. [00:42:31] Speaker 04: The guidelines provide this three-tiered system, which is nowhere in the statute, and it says that the banks that are state chartered banks not subject to another federal regulator [00:42:42] Speaker 04: receive, quote, the strictest level of review, and all of those banks have been shut out. [00:42:47] Speaker 04: And they can't provide an example of a bank that is a state-chartered bank without a separate federal regulator that has been issued a master account, certainly not by the San Francisco Fed. [00:42:58] Speaker 04: And there's one example recently by another Federal Reserve Bank in a different part of the country. [00:43:04] Speaker 04: But here, we would submit that the Federal Reserve Bank is [00:43:09] Speaker 04: covered by the APA. [00:43:11] Speaker 04: It is a federal agency for purposes of the APA in this case, and that even if it is not, it's subject to mandamus review based on the due process allegations that we have also made. [00:43:22] Speaker 03: Okay. [00:43:22] Speaker 03: Let me ask my colleagues whether either has additional questions. [00:43:25] Speaker 03: Thanks to both counsel for your helpful argument. [00:43:27] Speaker 03: We appreciate it. [00:43:28] Speaker 03: The case is to argue the Pay Services Bank versus Federal Reserve Bank of San Francisco is submitted, and the court stands adjourned for the day. [00:43:37] Speaker 03: Thank you, Your Honor.