Sparks Fly in Fourth Corner Hearing

Fourth Corner

On Dec. 28, 2015, the United States District Court for the District of Colorado heard oral arguments in Fourth Corner Credit Union v. Federal Reserve Bank of Kansas City. Fourth Corner sued the Fed in July when the latter denied its application for a master account. While the credit union, which has been chartered by the state of Colorado, is specifically designed to serve the needs of Colorado’s burgeoning cannabis industry, it cannot operate without a master account.

But the struggle is about more than the arcane minutiae of banking law. Mark Mason, Fourth Corner’s attorney, told MJINews,

Fourth Corner is fighting hard for the rights of patients, for public safety and for equality of treatment for supporters of the fastest growing social movement in America. This fight is about personal liberty, state’s rights and wellness. This is not going away.

The central bank based its argument on the federal illegality of marijuana commerce. In its filing, it likened Colorado’s chartering of Fourth Corner to “a scheme to allow trade with North Korea in derogation of federal laws, and then [chartering] a credit union to handle the finances for companies conducting such illegal trade,” or chartering a credit union “for the purpose of banking funds derived from illegal trade in endangered species.”

A rejection of the Federal Reserve’s preemption argument would be an upset victory for legal cannabis in its ongoing battle to bank, but court watchers think such a sweeping conclusion unlikely.

It is more likely that the decision will turn on the narrower question of whether the Federal Reserve must grant a master account to any financial institution that has a state or federal charter or whether it may exercise discretion not to do so if it perceives a risk like that the Fed claims to see in Fourth Corner’s request.

The language of 12 U.S.C. § 248a (c)(2) states, “All Federal Reserve bank services covered by the fee schedule shall be available to nonmember depository institutions and such services shall be priced at the same fee schedule applicable to member banks” and appears to preclude the exercise of discretion.

Nonetheless, in its Motion to Dismiss, the Fed cited other sections of the statute that use the permissive “may” and a Supreme Court case from 1923 to support the argument that the grant of a master account is discretionary. “The key fact that came out at the hearing,” remarked Mason, “was that the Federal Reserve has never denied a master account to any state chartered financial institution; it has never exercised discretion.”

Pushing past the maddeningly academic parsing of “shall” and “may,” Mason reportedly asked U.S. District Judge R. Brooke Jackson, “Does the Federal Reserve set national drug policy now?” As he put the matter to MJINews,

The Federal Reserve Bank of Kansas City does not have unfettered discretion to determine what social movements have the right to travel on the highway of commerce. It operates the nation’s centralized payments system for the benefit of all people, even those with views that differ from those held by the Reserve Bank.

After the hearing,  Mark Goldfogel, executive vice president of Fourth Corner, told the Los Angeles Times that he knows exactly when the laws would change:

In 2016, $1.2 billion in cash will be transacted by the cannabis industry in Colorado. That’s all in $20 bills. At some point, someone is going to die. And then we will be allowed to bank.

District Court Judge R. Brooke Jackson reportedly agreed that “there ought to be banking and regulation” for the cannabis industry, but believes the question is not one to be resolved by the courts, but by Congress.

He also pointedly noted the inconsistency in the Fed’s position that it could not sanction the deposit of proceeds from an illegal trade, noting that Wells Fargo handles the business of the Colorado, which includes the proceedings from the sale of marijuana within that state and ends up going “into the nation’s banking system already.”

The Court has declined to discuss a deadline for its decision. Meanwhile, of course, some Colorado financial institutions have reportedly begun to quietly accept deposits from legal cannabis businesses, apparently concluding that the burden of complying with FinCen regulations is worth the benefit of getting in on the ground floor with a new industry.

Anne Wallace is a New York lawyer who writes extensively on legal and business issues. She also teaches law and business writing at the college and professional level. Anne graduated from Fordham Law School and Wellesley College.

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