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No. 24-2355
IN THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
PAYSERVICES BANK,
Plaintiff-Appellant,
v.
FEDERAL RESERVE BANK OF SAN FRANCISCO,
Defendant-Appellee.
On Appeal from the United States District Court
for the District of Idaho
No. 1:23-cv-00305-REP
Hon. Raymond E. Patricco, Jr.
APPELLEE’S ANSWERING BRIEF
Jonathan K. Youngwood
Meredith Karp
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017
Telephone: (212) 455-2000
jyoungwood@stblaw.com
Meredith.Karp@stblaw.com
Attorneys for Defendant-Appellee Federal
Reserve Bank of San Francisco
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DISCLOSURE STATEMENT
Pursuant to Federal Rule of Appellate Procedure 26.1, Appellee Federal
Reserve Bank of San Francisco discloses that it is a federally chartered corporation
chartered under the laws of the United States pursuant to the Federal Reserve Act of
1913, 12 U.S.C. § 221 et seq., and that it has no parent corporation(s). The stock of
the Bank is held by the member commercial banks within its Federal Reserve
District; ownership of Federal Reserve Bank stock is a condition of commercial
banks’ membership in the Federal Reserve System. See 12 U.S.C. § 222-223, 282,
287, 321, 327-328, 333. Bank stockholders do not possess a residual equity interest
in Bank assets. Id. § 288.
Date: July 29, 2024
Jonathan K. Youngwood
/s/ Jonathan K. Youngwood
Jonathan K. Youngwood
Attorney for Defendant-Appellee Federal
Reserve Bank of San Francisco
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TABLE OF CONTENTS
Page
INTRODUCTION .....................................................................................................1
JURISDICTIONAL STATEMENT ..........................................................................5
STATUTORY AND REGULATORY AUTHORITIES ..........................................5
STATEMENT OF THE ISSUES...............................................................................6
STATEMENT OF THE CASE ..................................................................................7
I. Statutory and Regulatory Background ............................................................7
A. The Federal Reserve System .................................................................7
B. Reserve Bank Master Accounts ............................................................9
C. Monetary Control Act .........................................................................11
D. The Board’s Guidelines for Evaluating Account and Service
Requests...............................................................................................12
E. Congress’s December 2022 Amendment to the FRA .........................13
F. PayServices’ Master Account Request ...............................................14
II. Procedural Background .................................................................................15
A. PayServices’ Complaint ......................................................................15
B. The District Court Dismisses the Complaint on Multiple,
Incurable Grounds ...............................................................................17
SUMMARY OF THE ARGUMENT ......................................................................18
STANDARD OF REVIEW .....................................................................................20
ARGUMENT ...........................................................................................................21
I. The District Court Properly Ruled That FRBSF Had Discretion to
Deny PayServices’ Request for a Master Account .......................................21
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A. The District Court Correctly Ruled That Section 342 Entrusts
FRBSF with Discretion to Accept Deposits and Maintain
Master Accounts ..................................................................................22
B. The District Court Correctly Ruled That Section 248a Does Not
Entitle PayServices to a Master Account ............................................25
1. The Plain Text of Section 248a Does Not Provide an
Affirmative Right to a Master Account ....................................25
2. The Purpose of the FRA and the MCA Confirm
Discretion ..................................................................................29
C. Discretion Is Consistent With Longstanding Practice ........................30
D. The December 2022 Amendment Confirms Discretion .....................33
E. Judge Bacharach’s Opinion in Fourth Corner Is Neither
Binding Nor Persuasive .......................................................................35
II. The District Court Properly Ruled that FRBSF Is Not a Federal
Agency for Purposes of PayServices’ Claims ...............................................37
A. Reserve Banks Are Not the Center of Gravity By Express
Congressional Design ..........................................................................38
B. The District Court Correctly Held That Master Accounts Are
Not a Substantial Governmental Power ..............................................41
C. The Issuance of Master Accounts Is Not a Delegated Power .............43
D. PayServices’ Authorities Do Not Support Its Argument That
FRBSF Is a Federal Agency ................................................................44
III. PayServices’ Mandamus Claim Is Moot, Waived, and Meritless .................47
IV. The District Court Properly Dismissed the APA Claim with Prejudice .......50
V. PayServices’ Due Process Claim Fails as a Matter of Law ..........................52
VI. The District Court Did Not Abuse Its Discretion in Striking the
Danenberg Declaration ..................................................................................54
CONCLUSION ........................................................................................................56
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TABLE OF AUTHORITIES
Cases
Abagninin v. AMVAC Chem. Corp.,
545 F.3d 733 (9th Cir. 2008) ................................................................................20
AK Futures Ltd. Liab. Co. v. Boyd St. Distro, Ltd. Liab. Co.,
35 F.4th 682 (9th Cir. 2022) .................................................................................25
Am. Bankers Ass’n v. United States,
932 F.3d 1375 (Fed. Cir. 2019) ..........................................................................7, 8
Am. Bankers Mortg. Corp. v. Fed. Home Loan Mortg. Corp.,
75 F.3d 1401 (9th Cir. 1996) ................................................................................40
Armstrong v. Reynolds,
22 F.4th 1058 (9th Cir. 2022) ...............................................................................52
Banco San Juan Internacional, Inc. v. FRB of N.Y.,
2023 U.S. Dist. LEXIS 193296 (S.D.N.Y. Oct. 27, 2023) ........................... passim
Bateman v. Am. Multi-Cinema, Inc.,
623 F.3d 708 (9th Cir. 2010) ................................................................................33
Bd. of Governors of Fed. Res. Sys. v. First Lincolnwood Corp.,
439 U.S. 234 (1978) ..............................................................................................29
Bell Atlantic v. Twombly,
550 U.S. 544 (2007) ..............................................................................................20
Biden v. Texas,
142 S. Ct. 2528 (2022) ..........................................................................................22
Bloomberg L.P. v. Bd. of Governors of the Fed. Res. Sys.,
649 F. Supp. 2d 262 (S.D.N.Y. 2009) ..................................................................30
Bobka v. Toyota Motor Credit Corp.,
968 F.3d 946 (9th Cir. 2020) ................................................................................26
Browning-Ferris Indus. of S. Jersey, Inc. v. Muszynski,
899 F.2d 151 (2d Cir. 1990) .................................................................................52
v
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Bruesewitz v. Wyeth LLC,
562 U.S. 223 (2011) ..............................................................................................35
Burlington N. Santa Fe Ry. Co. v. Feit,
663 F. App’x 504 (9th Cir. 2016) .........................................................................20
C.R. v. Eugene Sch. Dist. 4J,
835 F.3d 1142 (9th Cir. 2016) ..............................................................................52
Canup v. Chipman-Union, Inc.,
123 F.3d 1440 (11th Cir. 1997) ............................................................................28
City & Cty. of S.F. v. United States DOT,
796 F.3d 993 (9th Cir. 2015) ................................................................................50
Cohen v. NVIDIA Corp. (In re NVIDIA Corp. Sec. Litig.),
768 F.3d 1046 (9th Cir. 2014) ..............................................................................14
Cty. of Maui v. Haw. Wildlife Fund,
590 U.S. 165 (2020) ..............................................................................................28
Custodia Bank, Inc. v. Federal Reserve Board of Governors,
2024 U.S. Dist. LEXIS 76822 (D. Wyo. Mar. 29, 2024) ............................. passim
CVS Health Corp. v. Vividus, LLC,
878 F.3d 703 (9th Cir. 2017) ................................................................................30
Data Disc, Inc. v. Sys. Tech. Assocs., Inc.,
557 F.2d 1280 (9th Cir. 1977) ..............................................................................55
Dong v. Smithsonian Inst.,
125 F.3d 877 (D.C. Cir. 1997) ....................................................................... 37, 41
Dubin v. United States,
599 U.S. 110 (2023) ..............................................................................................45
Emergency Fleet Corp. v. W. Union Tel. Co.,
275 U.S. 415 (1928) ..........................................................................................7, 38
Entergy Corp. v. Riverkeeper, Inc.,
556 U.S. 208 (2009) ..............................................................................................24
vi
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Farmers & Merchs. Bank v. Fed. Rsrv. Bank of Richmond,
262 U.S. 649 (1923) ....................................................................................... 22, 28
Farmers Educ. & Coop. Union Of Am., N.D. Div. v. Wday,
360 U.S. 525 (1959) ..............................................................................................33
Fed. Rsrv. Bank of Boston v. Comm’r of Corps. & Tax’n,
499 F.2d 60 (1st Cir. 1974) ...................................................................................29
Firestone Tire & Rubber Co. v. Risjord,
449 U.S. 368 (1981) ................................................................................................5
Flight Int'l Grp. v. Fed. Res. Bank,
583 F. Supp. 674 (N.D. Ga. 1984) ........................................................................46
Fourth Corner Credit Union v. FRB of Kan. City,
154 F. Supp. 3d 1185 (D. Colo. 2016)..................................................................47
Fox News Network, LLC v. Bd. of Governors of the Fed. Res. Sys.,
601 F.3d 158 (2d Cir. 2010) .......................................................................... 40, 44
Fox TV Stations, Inc. v. Aereokiller, LLC,
851 F.3d 1002 (9th Cir. 2017) ..............................................................................35
Fulfillment Servs. v. UPS,
528 F.3d 614 (9th Cir. 2008) ................................................................................28
Graham-Sult v. Clainos,
756 F.3d 724 (9th Cir. 2014) ................................................................................20
Indep. Mining Co. v. Babbitt,
105 F.3d 502 (9th Cir. 1997) ................................................................................49
In re Hoag Ranches,
846 F.2d 1225 (9th Cir. 1988) ....................................................................... 44, 46
In re International Union, United Mine Workers of Am.,
231 F.3d 51 (D.C. Cir. 2000) ................................................................................48
Irwin Mem’l Blood Bank of S.F. Med. Soc’y v. Am. Nat’l Red Cross,
640 F.2d 1051 (9th Cir. 1981) ........................................................... 37, 40, 42, 45
vii
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Jet Courier Servs., Inc. v. Fed. Res. Bank,
713 F.2d 1221 (6th Cir. 1983) ....................................................................... 26, 46
Khoja v. Orexigen Therapeutics, Inc.,
899 F.3d 988 (9th Cir. 2018) ................................................................................55
King v. Burwell,
576 U.S. 473 (2015) ..............................................................................................29
Kuzova v. United States Dep’t of Homeland Sec.,
686 F. App’x 506 (9th Cir. 2017) .........................................................................48
Lee Construction Co., Inc. v. Federal Reserve Bank of Richmond,
558 F. Supp. 165 (D. Md. 1982) ...........................................................................47
Lewis v. United States,
680 F.2d 1239 (9th Cir. 1982) ...................................................................... passim
Lombardo v. Handler,
397 F. Supp. 792 (9th Cir. 1975) ................................................................... 39, 42
Loughrin v. United States,
573 U.S. 351 (2014) ........................................................................................ 27-28
McCaughn v. Hershey Chocolate Co.,
283 U.S. 488 (1931) ..............................................................................................33
McKinley v. Bd. of Governors of the Fed. Res. Sys.,
647 F.3d 331 (D.C. Cir. 2011) ............................................................................7, 8
Meritage Homes of Nev., Inc. v. FDIC,
753 F.3d 819 (9th Cir. 2014) ................................................................................22
Multnomah Legal Servs. Workers Union v. Legal Servs. Corp.,
936 F.2d 1547 (9th Cir. 1991) ..............................................................................42
New York v. Atl. States Marine Fisheries Comm’n,
609 F.3d 524 (2d Cir. 2010) .................................................................................37
Opati v. Republic of Sudan,
140 S. Ct. 1601 (2020) ..........................................................................................22
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Or. Nat. Res. Council v. Thomas,
92 F.3d 792 (9th Cir. 1996) ..................................................................................50
Owens v. Kaiser Found. Health Plan Inc.,
244 F.3d 708 (9th Cir. 2001) ................................................................................20
Pinnacle Armor, Inc. v. United States,
648 F.3d 708 (9th Cir. 2011) ......................................................................... 53, 54
Robinson v. Am. Home Mortg. Servicing, Inc. (In re Mortg. Elec.
Registration Sys.),
754 F.3d 772 (9th Cir. 2014) ................................................................................48
Schneider v. Cal. Dep’t of Corr.,
151 F.3d 1194 (9th Cir. 1998) ..............................................................................54
Scott v. FRB of Kan. City,
406 F.3d 532 (8th Cir. 2005) ......................................................................... 38, 39
Shame On You Productions, Inc. v. Banks,
893 F.3d 661 (9th Cir. 2018) ................................................................................49
Starz Ent., LLC v. MGM Dom. Television Distrib., LLC,
39 F.4th 1236 (9th Cir. 2022) ...............................................................................19
Texas Dep’t of Hous. and Cmty. Affairs v. Inclusive Communities Project,
135 S. Ct. 2507 (2015) ..........................................................................................23
Thornton v. City of St. Helens,
425 F.3d 1158 (9th Cir. 2005) ..............................................................................53
Trout Unlimited v. Pirzadeh,
1 F.4th 738 (9th Cir. 2021) ...................................................................................51
U.S. Fidelity & Guar. Co. v. Fed. Rsv. Bank of N.Y.,
590 F. Supp. 486 (S.D.N.Y. 1984) .......................................................................10
United States ex rel. Kraus v. Wells Fargo & Co.,
943 F.3d 588 (2d Cir. 2019) .................................................................................38
United States v. McNinch,
356 U.S. 595 (1958) ..............................................................................................45
ix
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United States v. Randall,
34 F.4th 867 (9th Cir. 2022) .................................................................................35
United States v. Ritchie,
342 F.3d 903 (9th Cir. 2003) ................................................................................54
United States v. Rutherford,
442 U.S. 544 (1979) ..............................................................................................33
Whitman v. Am. Trucking Ass’ns,
531 U.S. 457 (2001) ..............................................................................................27
Status and Regulations
12 C.F.R. § 265.20 ...................................................................................................43
12 U.S.C. § 1457(e) .................................................................................................39
12 U.S.C. § 1820(k) .................................................................................................39
12 U.S.C. § 1831j .....................................................................................................39
12 U.S.C. § 241 ....................................................................................................7, 27
12 U.S.C. § 248(k) ...................................................................................................39
12 U.S.C. § 248a .............................................................................................. passim
12 U.S.C. § 248c ............................................................................................... 13, 35
12 U.S.C. § 301 ....................................................................................................9, 43
12 U.S.C. § 302 ....................................................................................................8, 39
12 U.S.C. § 304 ........................................................................................................39
12 U.S.C. § 341 ........................................................................................... 5, 8, 9, 43
12 U.S.C. § 342 ................................................................................................ passim
12 U.S.C. § 343(3) ...................................................................................................27
12 U.S.C. § 632 ..........................................................................................................5
12 U.S.C. § 635(a) ...................................................................................................39
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22 U.S.C. § 285d ............................................................................................... 24, 27
22 U.S.C. § 290f(a) ..................................................................................................39
28 U.S.C. § 1291 ........................................................................................................5
28 U.S.C. § 1361 ........................................................................................................5
5 U.S.C. § 701(a) .....................................................................................................50
5 U.S.C. § 701(b) .....................................................................................................37
5 U.S.C. § 702(b) .....................................................................................................45
5 U.S.C. § 706(2) .......................................................................................................5
7 U.S.C. § 941-50b...................................................................................................39
Monetary Control Act of 1980, Publ. L. No. 96-221, 94 Stat. 132 ............ 11, 22, 30
Regulatory Materials
86 Fed. Reg. 25,865 (May 11, 2021) .......................................................................12
86 Fed. Reg. 29,225 (Aug. 6, 1987).........................................................................31
87 Fed. Reg. 51,099 (Aug. 19, 2022)............................................................... passim
Secondary Authorities
50 Cong. Rec. H.4643 (Sept. 13, 1913) ...................................................................38
95 Cong., 1st Sess. 3 (Statement of Sen. Proxmire) ................................................11
Act of June 21, 1917, Publ. L. No. 65-25, 40 Stat. 232 .............................................9
FINRA Rule 3100, Anti-Money Laundering Compliance Program, 31
C.F.R. § 1023.210 .................................................................................................15
Bd. of Governors of the Fed. Rsrv. Sys., FED. RSRV. BULL., Vol. 50,
Domestic Branches of Foreign Banks and Private Banks as “Banks,”
168 (1964) ...................................................................................................... 23, 31
Cynthia Lummis, The Fed Battles Wyoming on Cryptocurrency, Wall
Street Journal (Nov. 30, 2021) ..............................................................................34
xi
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Gary C. Zimmerman, The Pricing of Federal Services under the MCA,
FED. RSRV. BANK OF S.F., ECON. REVIEW (WINTER 1981) ..........................11
Minutes of the Board of Governors of the Federal Reserve System
Meeting, Washington, July 26, 1945, Vol. 32 ......................................................11
Nathaniel Popper, Banking for Pot Industry Hits a Roadblock, N.Y. TIMES
(Jul. 30, 2015) .......................................................................................................34
Nomination of Jerome H. Powell, of Maryland, to be Chairman of the
Board of Governors of the Federal Reserve System: Hearing Before the
S. Comm. on Banking, Hous., & Urb. Affs., S. Hrg. 117-335 before the
S. Comm. on Banking, Hous., & Urb. Affs., 117th Cong. 33-34 (Jan.
11, 2022) ...............................................................................................................34
Nomination of Sarah Bloom Raskin, of Maryland, to be Vice Chairman
for Supervision and a Member of the Board of Governors of the Federal
Reserve System: Hearing Before the S. Comm. on Banking, Hous., and
Urb. Affs., S. Hrg. 117-340 before the S. Comm. on Banking, Hous., &
Urb. Affs., 117th Cong. 28-30 (Feb. 2, 2022) ......................................................34
Federal Reserve Banks Operating Circular 1, Account Relationships,
(Jan. 2, 1998).........................................................................................................31
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INTRODUCTION
PayServices Bank (“PayServices”) seeks to strip the Federal Reserve Bank of
San Francisco (“FRBSF”) of its ability to protect itself and the financial system from
exposure to unacceptable levels of risk. PayServices, whose founder resides in
Florida, is an online-only bank with no physical branch in Idaho (or anywhere in this
country) that purportedly wants to process high-risk cross-border transactions
between domestic exporters and foreign governments and merchants in unspecified
countries (Br. at 3). To facilitate these transactions, PayServices requested a deposit
account at FRBSF, known as a “master account.” If granted, PayServices could
access discounted financial services directly from the Federal Reserve System,
instead of relying on a private bank as an intermediary. After a nine-month review
and investigation, FRBSF determined—consistent with its duty to safeguard the U.S.
financial system—that granting PayServices’ account access request would pose
undue risk, including risk of money laundering and terrorism financing.
PayServices thinks risk is irrelevant. Although it spills much ink contrasting
“safe banking” from terrorism, PayServices says none of that matters: in its view,
FRBSF is required by statute to grant master accounts regardless of the risks. Three
federal courts, including the court below, have rejected that argument and confirmed
that Reserve Banks have discretion under Section 342 of the Federal Reserve Act to
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deny master account requests. No court has held otherwise. The District Court’s
opinion should be affirmed.
For most of their 110-year history, Reserve Banks primarily offered deposit
accounts and financial services to member banks (i.e., those subscribed to stock in
their regional Reserve Bank) although Reserve Banks had discretion to offer
accounts and services to nonmember banks for certain purposes. Beginning in 1980,
Congress broadly authorized Reserve Banks to offer deposit accounts and services
to nonmember depository institutions, which were largely traditional banks, and
required the Reserve Banks to offer such services to nonmember and member banks
at the same price. Recently, a growing number of novel institutions—some with
little to no U.S. footprint—have requested Federal Reserve deposit accounts and
services. Recognizing the emerging risks these novel institutions present, the Board
of Governors of the Federal Reserve System promulgated Guidelines in 2022 to
serve as a consistent framework guiding the individual Reserve Banks’ review of
account requests.
FRBSF reviewed PayServices’ request in accordance with the Guidelines. It
concluded that PayServices’ high-risk business model and inadequate risk
management controls posed unacceptable risk of illicit financial activity.
PayServices commenced this action because it disagreed with that decision. But the
merits of the decision are not at issue. Instead, PayServices argues that Congress
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implicitly granted it the unfettered right to a master account that no risk assessment
or discretion could ever infringe. It asked the District Court, through three
alternative claims, to enforce that as-of-yet unrecognized right and compel FRBSF
to enter into a master account relationship with PayServices.
The District Court dismissed PayServices’ claims with prejudice, on multiple
independent grounds. Two of the District Court’s holdings are essential to each of
PayServices’ claims.
First, the District Court correctly held that FRBSF has discretion to deny
master accounts. Section 342 of the Federal Reserve Act (“FRA”)—the only
statutory provision that governs FRBSF’s administration of master accounts—
provides FRBSF with discretion to deny master account requests. Section 248a—
the sole statutory provision on which PayServices relies—is a price discrimination
provision directed to the Board of Governors that neither entitles PayServices to a
master account nor imposes any duty on FRBSF. Moreover, the statutory scheme
of the FRA taken as a whole, Reserve Banks’ longstanding practice, and Congress’s
recent amendment to the FRA confirm that FRBSF has discretion (and in fact, an
obligation) to deny master account requests from institutions that pose undue risk to
the Federal Reserve System.
Second, the District Court correctly held that Reserve Banks are not
governmental agencies when they exercise their discretion to grant or deny master
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accounts. Instead, maintaining a depository account, like all routine banking
operations of the Reserve Banks, is by express Congressional design separate from
the sovereign.
Although PayServices raises a variety of additional (and meritless) arguments,
none would save its case unless this Court reverses both of those holdings. For these
reasons and those set forth below, FRBSF respectfully requests that this Court affirm
the District Court’s ruling.
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JURISDICTIONAL STATEMENT
Plaintiff-Appellant, PayServices, brought claims under the Administrative
Procedure Act (“APA”), 5 U.S.C. § 706(2); the Mandamus Act, 28 U.S.C. § 1361;
and the Due Process Clause of the Fifth Amendment to the U.S. Constitution.
Although the District Court concluded that FRBSF was not a “federal agency” for
purposes of PayServices’ claims, the District Court had subject matter jurisdiction
pursuant to 12 U.S.C. § 632 (“[A]ll suits of a civil nature at common law or in equity
to which any Federal Reserve bank shall be a party shall be deemed to arise under
the laws of the United States, and the district courts of the United States shall have
original jurisdiction of all such suits.”) and 12 U.S.C. § 341 (authorizing FRBSF to
“sue and be sued”).
This Court has jurisdiction pursuant to 28 U.S.C. § 1291, which provides that
the federal courts of appeals have jurisdiction over “all final decisions of the district
courts … except where a direct review may be had in the Supreme Court.” Firestone
Tire & Rubber Co. v. Risjord, 449 U.S. 368, 373 (1981).
STATUTORY AND REGULATORY AUTHORITIES
All relevant statutory and regulatory authorities appear in the Addendum to
Appellant’s principal brief.
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STATEMENT OF THE ISSUES
1. Did the District Court correctly rule that FRBSF has discretion to deny
requests for master accounts under Section 342 of the FRA?
2. Did the District Court correctly rule that FRBSF does not act as a
federal agency when it acts in its capacity to issue, or deny, a Reserve Bank master
account?
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STATEMENT OF THE CASE
I. Statutory and Regulatory Background
A. The Federal Reserve System
In 1913, Congress created the Federal Reserve System “to oversee banking
operations and promote [] greater economic stability.” Am. Bankers Ass’n v. United
States, 932 F.3d 1375, 1378 (Fed. Cir. 2019). The Federal Reserve System is “not
a single entity but rather a composite of several parts, both public and private,
organized on a regional basis with a central governmental supervisory authority.”
McKinley v. Bd. of Governors of the Fed. Res. Sys., 647 F.3d 331, 332 (D.C. Cir.
2011) (citation omitted). As relevant here, the Federal Reserve System includes the
Board of Governors (the “Board”) and the twelve regional Reserve Banks.1 The
Board, as the name suggests, “is the central governing body of the Federal Reserve
System.” ER-14. It is a federal agency, “directly accountable to Congress,” whose
seven members are appointed by the President and confirmed by the Senate. ER-
15; see 12 U.S.C. § 241.
By contrast, the regional Reserve Banks are corporations chartered pursuant
to the FRA which serve governmental interests but stand apart from the sovereign.
See Emergency Fleet Corp. v. W. Union Tel. Co., 275 U.S. 415, 425-26 (1928)
1
The Federal Reserve System also includes the Federal Open Market
Committee. See ER-16, at n.3.
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(“Instrumentalities like . . . the federal reserve banks, in which there are private
interests, are not departments of the government.”); 12 U.S.C. § 341 (Reserve Banks
are “a body corporate”). They serve as the Federal Reserve System’s operating arms,
subject to the general supervision of the Board. See id. § 341 et seq.; Am. Bankers
Ass’n, 932 F.3d at 1378. In effect, Reserve Banks operate as “bankers’ banks to
much of the banking industry.” ER-15. They carry out banking functions, including
collecting and clearing checks, making advances to commercial entities, and holding
reserves for depository institutions. 12 U.S.C. §§ 341-361; Lewis v. United States,
680 F.2d 1239, 1241 (9th Cir. 1982) (describing operations of the Reserve Banks).
From the inception of the Federal Reserve System, the Reserve Banks were
empowered to perform “the routine operations and banking” in a manner utilizing
the “detailed knowledge of local and individual” factors relevant to their respective
regions. Lewis, 680 F.2d at 1241 (quoting H.R. Report No. 69, 63 Cong. 1st Sess.,
at 18-19 (1913)). Reserve Bank stock is “owned by the member commercial banks
within their districts.” McKinley, 647 F.3d at 333. Member banks elect six of the
nine directors for their respective Reserve Bank—three directors which represent the
member banks, and three which represent the business and consumer interests of the
region. See 12 U.S.C. § 302 (describing the structure of the board of directors).
Congress empowered these directors to “perform the duties usually appertaining to
the office of directors of banking associations and all such duties as are prescribed
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by law.” See id. § 301. This includes the authority to appoint the “president,” “vice
presidents,” and other “officers and employees,” id. § 341 (Fifth), and to regulate
the “manner in which its general business may be conducted, id. § 341 (Sixth).
B. Reserve Bank Master Accounts
Since 1913, Reserve Banks have been authorized, but not required, to accept
deposits from the institutions designated by Congress in Section 342. See 12 U.S.C.
§ 342. Initially, Reserve Banks received deposits from member banks. Starting in
1917, Congress authorized Reserve Banks to accept deposits “from any nonmember
bank and trust company” for the “purposes of exchange or collection.” See Act of
June 21, 1917, c. 32, § 4, 40 Stat. 232, 235 (12 U.S.C. § 342).
Reserve Banks maintain deposits in “master accounts,” which “reflect the
financial rights and obligations of an account holder and of the Reserve Bank with
respect to each other,” and serve as “the place where the opening and closing
balances are determined.” ER-16. Through these accounts, account holders are
permitted to obtain certain financial services directly from their respective Reserve
Bank. Accepting deposits from, and providing financial services to, a financial
institution exposes Reserve Banks and the financial system to risk. See 87 Fed. Reg.
51,099, 51,100 (Aug. 19, 2022) (financial institution’s access to an account and
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financial services “pose[s]” “risks . . . ranging from narrow risks (e.g., to an
individual Reserve Bank) to broader risks (e.g., to the overall economy)”).
Reserve Banks manage this risk in at least two ways. First, Reserve Banks
exercise discretion to limit, or deny, access to master accounts and financial services
where necessary. Id. at 51,102 (“[A] Reserve Bank may implement risk mitigants .
. . if necessary to mitigate risks . . . . Reserve Banks also retain the discretion to deny
a request for access to accounts and services where . . . access. . . would pose risks
that cannot be sufficiently mitigated.”).
Second, Reserve Banks monitor the risks posed by active account holders and,
in their discretion, may restrict or revoke account access. To that end, the account
relationship between a Reserve Bank and a master account holder is governed by
Reserve Bank Operating Circulars. U.S. Fidelity & Guar. Co. v. Fed. Rsv. Bank of
N.Y., 590 F. Supp. 486, 492 (S.D.N.Y. 1984) (Operating Circulars are binding
contracts). For example, Operating Circular 1 set forth the “terms by which a
depository institution may request to open, maintain, and terminate a Master
Account.” ER-26.
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C. Monetary Control Act
Historically, Reserve Banks would provide financial services to member
banks free of charge.2 Given concerns about the anticompetitive effect of the
“discriminatory pricing system”3 of certain financial services as between member
and nonmember banks, Congress in concert with the Board began discussing the
pricing and availability of Reserve Bank services in the late 1970s. See, e.g., 95
Cong., 1st Sess. 3 (Statement of Sen. Proxmire) (noting that the Reserve Banks
should “begin charging for the services . . . which it provides free of charge to
member banks”).
In 1980, Congress passed the Monetary Control Act of 1980 (“MCA”),
Pub. L. No. 96, to “facilitate the implementation of monetary policy.” 94 Stat.
132. As relevant here, the MCA amended Section 342 to authorize Reserve
Banks to offer accounts and services to eligible nonmember depository
institutions, in addition to members. See 12 U.S.C. § 342 (adding “other
depository institutions” to the list of entities from which Federal Reserve Banks
“may receive” deposits). To prevent price discrimination in the provision of
those services, Congress required the Board to establish a schedule of fees for
2
See Gary C. Zimmerman, Economist, The Pricing of Federal Services under
the MCA, FED. RSRV. BANK OF S.F., ECON. REVIEW, (WINTER 1981),
https://www.frbsf.org/wp-content/uploads/81-1_22-40.pdf.
3
Id.
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certain enumerated services that applied to both member and nonmember banks.
See 12 U.S.C. § 248a.
D. The Board’s Guidelines for Evaluating Account and Service
Requests
In light of the rapidly changing landscape of novel financial institution
charters and increased master account requests from a variety of institutions, the
Board published for notice and comment Proposed Guidelines for Evaluating
Account and Services Requests in May 2021. The Proposed Guidelines recognized
that “[w]hile decisions regarding individual access requests remain at the discretion
of the individual Reserve Banks,” “it is important that the Reserve Banks apply a
consistent set of guidelines when reviewing such access requests to promote
consistent outcomes across Reserve Banks and to facilitate equitable treatment
across institutions.” 86 Fed. Reg. 25,865, 25,867 (May 2021).
On August 19, 2022, the final Guidelines for Evaluating Account and Services
Requests (“Guidelines”) became effective after two rounds of notice and comment.
87 Fed. Reg. 51,099. The Guidelines reiterated that “[d]ecisions on individual
requests for access to accounts and services are made by the Reserve Bank.” Id. at
51,106.
The Guidelines set forth six principles for Reserve Banks to use in evaluating
access requests. Id. at 51,106-109. They established a three-tiered review
framework “to serve as a guide to the level of due diligence and scrutiny to be
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applied by Reserve Banks to different types of institutions,” with “institutions in a
higher tier [] on average fac[ing] greater due diligence and scrutiny.” Id. at 51,109.
As relevant here, Tier 3 institutions are “not federally insured” and not “subject (by
statute) to prudential supervision by a federal banking agency,” and therefore “will
generally receive the strictest level of review.” Id. at 51,110. The Guidelines state
that “a Reserve Bank has the authority to grant or deny an access request by an
institution in any of the three proposed tiers . . . on a case-by-case, risk-focused
basis[.]” Id. at 51,109.
E. Congress’s December 2022 Amendment to the FRA
On December 23, 2022, the President signed into law the National Defense
Authorization Act. Section 5708 of Title LVII of this act amends the FRA by
inserting a provision entitled “Master Account and Services Database” (the
“December 2022 Amendment”). The December 2022 Amendment requires the
Board to “create and maintain a public, online, and searchable database” that
includes “a list of every entity that submits an access request for a reserve bank
master account and services . . . including whether . . . a request was approved,
rejected, pending, or withdrawn[.]” 12 U.S.C. § 248c(b)(1), Pub. Law No. 117-263
tit. LVII, § 5708 (2022).
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F. PayServices’ Master Account Request4
PayServices is an exclusively online bank, “operates no physical branches,”
and does not carry FDIC insurance. ER-58, ¶ 46. Its business model “focuses almost
exclusively on facilitating trade of commodities for the small to medium enterprises
from and to the United States.” ER-58, ¶ 44; ER-79 (“[PayServices’] business model
[focuses] almost entirely on . . . foreign import and export merchants and buyers,
and foreign governments.”). On August 3, 2022, PayServices—whose founder
resides in Florida—received a preliminary approval to establish a state-chartered
bank in Idaho. ER-50, ¶ 3; ER-56, ¶ 40. On August 10, 2022, PayServices requested
a master account from FRBSF. ER-54, ¶ 23. FRBSF reviewed PayServices’ request
for a master account in accordance with the Guidelines. ER-86, ¶ 85.
On May 31, 2023, FRBSF denied PayServices’ request after determining it
did “not meet the standards outlined in the [Guidelines].” ER-79 (“Denial Letter”);5
ER-86, ¶ 85. In the Denial Letter, FRBSF found that PayServices’ “novel, monoline
business model and focus on transactions that are largely foreign in nature or involve
4
As is appropriate during the appeal of a dismissal on Rule 12(b)(6) grounds,
factual allegations taken from the Complaint and documents incorporated by
reference therein are assumed to be true solely for the purpose of this appeal. See
Cohen v. NVIDIA Corp. (In re NVIDIA Corp. Sec. Litig.), 768 F.3d 1046, 1051
(9th Cir. 2014).
5
Although not attached to the Complaint, the District Court properly held that
the Denial Letter was incorporated by reference into the Complaint. ER-19-20.
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mostly foreign participants present[ed] undue risks.” Id. Specifically, FRBSF found
that PayServices’ “unproven risk management framework” was insufficient “to
mitigate money laundering and terrorism financing risks.” Id. FRBSF identified
multiple specific concerns, including “[Bank Secrecy Act, Anti-Money Laundering,
and Office of Foreign Assets Control]6 risk management,” “the limited banking and
bank-specific risk management experience among management,” and the possibility
that the master account could be used to “fund or facilitate illicit activity.” Id.
II. Procedural Background
A. PayServices’ Complaint
On June 27, 2023, PayServices filed this lawsuit against FRBSF in the U.S.
District Court for the District of Idaho. ER-73. PayServices asserted causes of
action under (1) the Administrative Procedure Act (“APA”) (Count I), (2) the
Mandamus Act (Count II) and (3) the Due Process clause (Count III). See ER-66-
68. Each claim asserted that Section 248a’s price discrimination provision required
Reserve Banks to grant PayServices—and all eligible nonmember depository
institutions—a master account regardless of the risks to FRBSF or the Federal
6
Bank Secrecy Act and Anti-Money Laundering controls serve to “detect and
report suspicious activity,” including money laundering, terrorist financing, and
securities fraud. See FINRA Rule 3100, Anti-Money Laundering Compliance
Program, 31 C.F.R. § 1023.210 . In the absence of effective controls, the master
account could be used to facilitate illicit activity, causing significant financial and
reputational risk.
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Reserve System posed by the institution. See ER-68, ¶ 81 (APA) (“As an agency,
FRBSF has a non-discretionary duty to make available Federal Reserve Bank
services through master accounts”); ER-70, ¶ 95 (Mandamus Act) (“PayServices has
a clear and certain claim to have its master account granted”); ER-72, ¶ 100 (Due
Process Clause) (“Section 248a requires the issuance of master accounts”).
PayServices sought the same relief for each claim—an order “compelling the
FRBSF to rescind the denial of PayServices’ master account application and instead
grant the application.” ER-72, ¶ 98(b); ER-73, ¶ 103(c).
On August 14, 2023, FRBSF filed its Motion to Dismiss the Complaint
(“Motion”) pursuant to Federal Rule of Civil Procedure 12(b)(6). In support of its
Motion, Defendant submitted a copy of the Denial Letter, ER-79, which was
incorporated by reference into the complaint by Plaintiff’s reliance on the document.
See ER-58; Section V, infra.
On August 31, 2023, Plaintiff opposed FRBSF’s Motion and attached a
Declaration of Lionel Danenberg (“Danenberg Declaration”) (ER-75) with new,
unsupported factual allegations. On September 14, 2023, Defendants moved to
strike the Danenberg Declaration, which was not incorporated by reference in the
Complaint.
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B. The District Court Dismisses the Complaint on Multiple, Incurable
Grounds
On March 30, 2024, the District Court dismissed the Complaint with prejudice
and granted Defendant’s Motion to Strike. ER-13–39.
First, the District Court dismissed each of PayServices’ claims because
FRBSF had no duty to grant PayServices a master account “regardless of its risk
profile.” ER-22. In so doing, the court held that the plain text of Section 342 “makes
clear that Federal Reserve Banks are authorized”—but not required—“to accept
deposits, and thus open master accounts.” ER-31. The court found that PayServices
cited “precious little” authority to the contrary. ER-26. The District Court also
rejected PayServices’ argument that Section 248a implicitly entitled PayServices to
a master account. ER-22–23; ER-28–29. It reasoned that when “read in context,”
Section 248a is a “fee schedule,” not a “mandate.” ER-30.
Second, the District Court dismissed all three of PayServices’ claims because
FRBSF is not a federal agency “for the purposes of PayServices’ claims against
FRBSF.” ER-31, 34-35. The court reasoned that, although Reserve Banks are an
“integral” part of the Federal Reserve System, “Congress has gone out of its way to
formally separate the [Federal Reserve Banks] from the government.” ER-32.
Applying this Court’s precedent in Lewis, the District Court emphasized the “unique
statutory authorizations” in the FRA and the “intentional detachment” of the Reserve
Banks “from the federal government itself.” ER-35 (citing Lewis, F.2d at 1241).
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Third, the District Court ruled that, to the extent PayServices alleged that
FRBSF’s denial was arbitrary and capricious in violation of the APA, PayServices
had failed to plead any facts supporting such a claim. ER-37.
Fourth, the District Court held that Appellant’s Due Process claim further
failed because, even if PayServices did have a protected interest in a master account,
it had been afforded procedural protections that satisfy the Due Process Clause. ER-
38.
Fifth, the District Court granted FRBSF’s Motion to Strike the Danenberg
Declaration because, “as a general rule,” courts may not consider materials beyond
the complaint in ruling on a Rule 12(b)(6) motion. ER-37.
On May 28, 2024, Appellant filed a notice of appeal, initiating this action.
SUMMARY OF THE ARGUMENT
The District Court’s ruling should be affirmed. First, the District Court
properly ruled that the plain text of Section 342 of the FRA entrusts FRBSF with
discretion to deny PayServices’ request for a master account. See Section I.A, infra.
The District Court also properly rejected PayServices’ argument that Section 248a—
a price discrimination provision directed to the Board—requires the Reserve Banks
to grant master accounts to all eligible institutions. See Section I.B, infra. Even if
the plain text of the FRA were ambiguous (it is not), Reserve Bank discretion over
master account access is consistent with the purpose of the FRA as a whole, long-
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standing Reserve Bank practice, and the 2022 amendment to the FRA. See Sections
I.C-D, infra. Two other federal courts have reached the same conclusion. No court
has held otherwise.
Second, the District Court’s decision should also be affirmed because FRBSF
is not a federal agency for purposes of PayServices’ claims. See Section II. For over
a century, Congress has repeatedly and intentionally separated the Reserve Banks’
routine banking activities, like maintaining a master account, from the sovereign.
See Section II.A, infra. Contrary to PayServices’ contention, the denial of a master
account request is not a substantial power of the government or a power delegated
to the Reserve Banks by the Board. See Sections II.B-C, infra.
PayServices’ other arguments cannot save its claims. PayServices’
mandamus claim is moot, waived, and meritless. See Section III. The District Court
properly dismissed PayServices’ APA claim with prejudice because both the FRA
and the Guidelines entrust the merits of individual account access requests to
FRBSF’s discretion. See Section IV, infra. PayServices’ Due Process claim fails as
a matter of law because PayServices admits that it received notice and opportunity
to be heard. Finally, the District Court did not abuse its discretion in striking the
unsupported factual declaration PayServices attached to its Opposition to
Defendants’ Motion. See Section IV, infra.
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STANDARD OF REVIEW
This Court’s review of the District Court’s decision to grant FRBSF’s Motion
to Dismiss is de novo. Starz Ent., LLC v. MGM Dom. Television Distrib., LLC, 39
F.4th 1236, 1239 (9th Cir. 2022). Dismissal pursuant to Federal Rule of Civil
Procedure 12(b)(6) is appropriate where a cause of action fails to state a claim upon
which relief can be granted. Id. A complaint must include “facts to state a claim to
relief that is plausible on its face.” Bell Atlantic v. Twombly, 550 U.S. 544, 545
(2007).
The District Court’s dismissal with prejudice and without leave to amend is
reviewed for abuse of discretion. Graham-Sult v. Clainos, 756 F.3d 724, 748 (9th
Cir. 2014). Generally, courts in this circuit permit leave to amend following the
dismissal of a complaint “when justice so requires.” Owens v. Kaiser Found. Health
Plan Inc., 244 F.3d 708, 712 (9th Cir. 2001). But where a dismissal is premised
upon the court’s analysis of an issue as a matter of law, and the plaintiff could not
allege additional facts to cure deficiencies that are “consistent with the challenged
pleading,” dismissal with prejudice is appropriate. See Abagninin v. AMVAC Chem.
Corp., 545 F.3d 733, 742 (9th Cir. 2008).
The District Court’s ruling on a motion to strike is reviewed only for an abuse
of discretion. Burlington N. Santa Fe Ry. Co. v. Feit, 663 F. App’x 504, 508 (9th
Cir. 2016).
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ARGUMENT
I. The District Court Properly Ruled That FRBSF Had Discretion to Deny
PayServices’ Request for a Master Account
The District Court held—and PayServices does not dispute on appeal—that
its claims must be dismissed if FRBSF had discretion to deny its request for a master
account. ER-21.7 The District Court properly ruled that the plain text of the FRA
entrusts FRBSF with discretion to deny master account requests.
This case “rises and falls,” id. at 22, with the interpretation of two provisions
of the FRA: Section 342 and Section 248a. The District Court correctly held that
Section 342 entrusts Reserve Banks with the discretion, but not the duty, to grant
master account requests from all eligible institutions. Id. at 27. The District Court
also correctly held that Section 248a does not implicitly establish any rights
upending that discretion. Id. Two other federal courts have reached the same
conclusion. In Banco San Juan Internacional, Inc. v. FRB of N.Y. (“BSJI”), the
United States District Court for the Southern District of New York held that a
depository institution, which had its master account revoked, had no statutory right
under Section 248a to a master account. 2023 U.S. Dist. LEXIS 193296, at *27
(S.D.N.Y. Oct. 27, 2023). In Custodia Bank, Inc. v. Federal Reserve Board of
7
PayServices appeals the District Court’s dismissal with prejudice of its APA
claim. See Section IV, infra. It does not dispute that, if FRBSF had discretion,
the Complaint as pled fails to state a claim under the APA.
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Governors, the United States District Court for the District of Wyoming similarly
held that a depository institution, which alleged improper denial of its master
account request, had no statutory entitlement to a master account. 2024 U.S. Dist.
LEXIS 76822, at *32-36 (D. Wyo. Mar. 29, 2024) (“[T]he plain language of the
relevant statutes can only reasonably be read to give the Federal Reserve Banks
discretion in granting or denying requests for a master account.”).
A. The District Court Correctly Ruled That Section 342 Entrusts
FRBSF with Discretion to Accept Deposits and Maintain Master
Accounts
Section 342 provides that a Reserve Bank “may receive from any of its
member banks, or other depository institutions, . . . deposits . . . .” 12 U.S.C. § 342
(emphasis added). “‘[M]ay’ does not just suggest discretion, ‘it clearly connotes
it.’” Biden v. Texas, 142 S. Ct. 2528, 2541 (2022) (citation omitted) (emphasis in
original); Opati v. Republic of Sudan, 140 S. Ct. 1601, 1604 (2020) (same); Meritage
Homes of Nev., Inc. v. FDIC, 753 F.3d 819, 826 (9th Cir. 2014) (“‘may,’ when used
in a statute, usually implies some degree of discretion”).
The Reserve Banks’ discretion to receive deposits includes the discretion to
decline deposits. In 1923, the Supreme Court confirmed that Section 342 does not
“impose[] upon reserve banks any obligation to receive” deposits; it merely “confers
authority to do so.” Farmers & Merchs. Bank v. Fed. Rsrv. Bank of Richmond, 262
U.S. 649, 662 (1923). Although Congress has amended the FRA multiple times in
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the past century—including in the MCA on which PayServices relies—Congress
never altered the permissive “may” to a mandatory “shall.” Id. (noting that although
Section 342 had been amended multiple times, “in each amendment . . . the words
used were ‘may receive’—words of authorization merely”); see 94 Stat. 132, 139.
Congress can therefore be presumed to have “accepted and ratified” the Supreme
Court’s reading of “may receive” as discretionary in nature. Texas Dep’t of Hous.
and Cmty. Affairs v. Inclusive Communities Project, 135 S. Ct. 2507, 2520 (2015).
As the District Court properly found, the authority—and corresponding
discretion—to open a depository account necessarily flow from the authority to
accept deposits. ER-31. This is not only “commonsensical” as the District Court
found, id. at 24; it is borne out in history. Prior to the MCA, the Reserve Banks and
the Board looked to Section 342 to determine the institutions “for which a Federal
Reserve Bank may open and maintain a nonmember [] account.”8 If a nonmember
bank fit the definition set by Congress, accounts and services to these institutions
were to “be made available in the discretion of the Federal Reserve Bank . . .
pursuant to [Section 342].”9 The MCA did not supplant Section 342 or alter the
8
Bd. of Governors of the Fed. Rsrv. Sys., FED. RSRV. BULL. VOL. 50,
Domestic Branches of Foreign Banks and Private Banks as “Banks,” 168, 168-69
(1964).
9
Id.
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discretionary “may.” Instead, as PayServices concedes, it simply “expand[ed] the
list of institutions eligible for master accounts.” See Br. at 10.
Although PayServices briefly argues that “Section 342 does not prescribe
conditions” for opening a deposit account (id. at 33), that does not prohibit the
Reserve Banks from imposing reasonable conditions to account access. See Entergy
Corp. v. Riverkeeper, Inc., 556 U.S. 208, 222 (2009) (Scalia, J.) (“[S]ilence is meant
to convey nothing more than a refusal to tie the agency’s hands”). By contrast, where
Congress intended to impose an affirmative duty to accept deposits, or grant
depository accounts, Congress did so expressly. Cf. 22 U.S.C. § 285d (“Any Federal
Reserve bank which is requested to do so by the [Asian Development] Bank shall
act as its depository”).
“Master accounts are governed by [Section] 342.” BSJI, 2023 U.S. Dist.
LEXIS 193296, at *17. The only reasonable reading of Section 342 grants Reserve
Banks discretion to deny depository account requests, just as they have discretion to
deny deposits. Otherwise, Reserve Banks would be forced to maintain master
accounts yet be permitted (as PayServices concedes) to “reject every deposit that
comes from a bank” into that account. Br. at 33. As the District Court reasoned,
that interpretation “makes little sense.” ER-31.
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B. The District Court Correctly Ruled That Section 248a Does Not
Entitle PayServices to a Master Account
The District Court correctly held that Section 248a does not “upend[]” the
110-year history of Reserve Bank discretion over deposit accounts. ER-31. This
holding comports with the plain text and the statutory structure of the FRA.
1. The Plain Text of Section 248a Does Not Provide an
Affirmative Right to a Master Account
“When engaging in statutory interpretation, ‘we start where we always do:
with the text.’” AK Futures Ltd. Liab. Co. v. Boyd St. Distro, Ltd. Liab. Co., 35 F.4th
682, 690 (9th Cir. 2022). Section 248a, entitled “Pricing of services,” instructs the
Board “to put into effect a schedule of fees” for “Federal Reserve bank services.” 12
U.S.C. § 248a(a). Thereafter, “[a]ll Federal Reserve bank services covered by the
fee schedule shall be priced explicitly,” id. § 248a(c)(1) and “[a]ll 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.” Id. § 248a(c)(2). The Board can condition access to
the services “to any other terms,” including a “a requirement of balances,” as long
as the Board does not discriminate between member and nonmember banks. Id. §
248a(c)(2).
The meaning of this provision is clear on its face. As the District Court and
two other federal courts have held, Section 248a is a term and price discrimination
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provision. Custodia, 2024 U.S. Dist. LEXIS 76822, at *28-30 (“Congress was
instructing the Board of Governors to create a non-discriminatory pricing schedule,
not instructing the Federal Reserve Banks that they must provide master accounts to
all eligible depository institutions.”). First, the Board shall “price[] explicitly” “all”
of the enumerated Federal Reserve Bank services—which, before the MCA, were
free and generally provided only to member banks. See Jet Courier Servs., Inc. v.
Fed. Res. Bank, 713 F.2d 1221, 1222 (6th Cir. 1983) (“For many years prior to 1980,
the Federal Reserve Banks performed check collection services for member banks
without charge.”). Second, those services “shall be available” to nonmember banks
“at the same price” and according to “any other terms” applicable to member banks.
Id. at 1227 (“What is clear is that the covered services offered by Federal Reserve
Banks are to be priced explicitly, are to be made available to nonmember depository
institutions at the same fees charged member banks.”). Congress even titled it
“pricing of services” to be clear. See Bobka v. Toyota Motor Credit Corp., 968 F.3d
946, 954 (9th Cir. 2020) (“[T]he title of a statute or section can aid in resolving an
ambiguity in the legislation’s text.”).
The plain text of Section 248a does not, however, establish a duty for Reserve
Banks to provide the enumerated services to each and every eligible nonmember
institution. Section 248a—contained in subchapter of the FRA titled “Board of
Governors of the Federal System”—applies only to the Board, not Reserve Banks.
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Compare 12 U.S.C. §§ 241-52 with id. §§ 341-64 (subchapter titled “Powers and
Duties of Federal Reserve Banks”); see id. § 248a(a) (“the Board shall publish for
public comment a set of pricing principles”); id. § 248a(d) (“The Board shall require
reductions in the operating budgets of the Federal Reserve banks”). By contrast,
when Congress imposes mandatory duties on the Reserve Banks, it does so
expressly. See, e.g., id. § 343(3)(A) (“[T]he Federal reserve bank shall obtain
evidence…”); 22 U.S.C. § 285d (“Any Federal Reserve bank which is requested to
do so by the [Asian Development] Bank shall act as its depository”). It would be
anomalous for Congress to hide a requirement that Reserve Banks grant direct
master accounts to all depository institutions in a provision that is not even addressed
to the Reserve Banks. See Whitman v. Am. Trucking Ass’ns, 531 U.S. 457, 468
(2001) (Congress does not “hide elephants in mouseholes”).
Moreover, Section 248a provides that “[a]ll Federal Reserve bank services
covered by the fee schedule shall be available to nonmember depository
institutions.” Notably, “Congress chose to include the word ‘all’ before ‘Federal
Reserve bank services covered by the fee schedule, but not before ‘nonmember
depository institutions.” Custodia, 2024 U.S. Dist. LEXIS 76822, at *30. And
where Congress referred to “all” depository institutions elsewhere in Section 248a,
it did so expressly. 12 U.S.C. § 248a(e) (“All depository institutions”). The
distinction is presumed to have a difference. Loughrin v. United States, 573 U.S.
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351, 358 (2014) (When “Congress includes particular language in one section of a
statute but omits it in another—let alone in the very next provision—this Court
‘presume[s]’ that Congress intended a difference in meaning”) (citation omitted).
To accept PayServices’ theory, one must assume that Congress clarified that Section
248a covers “all” seven separately enumerated services, but forgot to clarify that
Section 248a entitles “all” of the “40,000 depository institutions” to accounts and
services. Br. at 11 (emphasis added). That omission is striking in a statute otherwise
“drawn with great care.” Farmers, 262 U.S. at 663.
If Congress intended to grant all institutions with an unfettered right to
accounts and services, Section 248a is a “surprisingly indirect route” to convey “an
important and easily expressed message.” Cty. of Maui v. Haw. Wildlife Fund, 590
U.S. 165, 180-81 (2020)—Congress omitted the word “all,” used no language
suggestive of a right, and provided no mechanism to enforce the right. It directed
the “duty” at the wrong entity in the wrong section of the FRA. Indeed, Congress
did not even identify the entitlement in the statutory purposes of the MCA. Courts
“expect Congress to speak more clearly if it intended such a radical change in the
application of its [] statutes.” Canup v. Chipman-Union, Inc., 123 F.3d 1440, 1443
(11th Cir. 1997); Fulfillment Servs. v. UPS, 528 F.3d 614, 624 (9th Cir. 2008) (“Had
Congress aspired to such a radical departure, it no doubt would have so indicated
with explicit language to that effect.”). In the absence of explicit Congressional
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intent to depart from the plain text of the statute and upend decades of accepted
practice, PayServices’ argument falls flat.
2. The Purpose of the FRA and the MCA Confirm Discretion
Construing Section 248a as granting an unconditional right of access to
Reserve Bank master accounts would undermine the purpose of the FRA, in
derogation of basic principles of statutory construction. See King v. Burwell, 576
U.S. 473, 492 (2015) (statutes should be construed in light of the “remainder of the
statutory scheme [to favor readings with] a substantive effect that is compatible with
the rest of the law”).
Congress charged Reserve Banks with oversight of the nation’s payment
system “in furtherance of the national fiscal policy.” See Fed. Rsrv. Bank of Boston
v. Comm’r of Corps. & Tax’n, 499 F.2d 60, 62 (1st Cir. 1974); cf. Bd. of Governors
of Fed. Res. Sys. v. First Lincolnwood Corp., 439 U.S. 234, 250 (1978) (“Congress
has evinced substantial concern for the financial soundness of the banking system.”).
Permitting every single state and territory to dictate which entities can obtain master
accounts—with no say for the Reserve Bank —would leave Reserve Banks unable
to guard against risks to the payment system like money laundering, cybersecurity
breaches, and myriad other risks. “[I]n that scenario, one can readily foresee a ‘race
to the bottom’ among states and politicians to attract business by reducing state
chartering burdens through lax legislation, allowing minimally regulated institutions
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to gain ready access to the central bank’s balance sheet and Federal Reserve
services.” Custodia, 2024 U.S. Dist. LEXIS 76822, at *35 (“States lack not only the
mission but also the resources to protect national interests.”) (citation omitted).
Nothing in the text or history of the FRA suggests that Congress intended to
substitute the judgment of an individual state for that of Reserve Banks to maintain
the “stability of financial systems and markets.” Bloomberg L.P. v. Bd. of Governors
of the Fed. Res. Sys., 649 F. Supp. 2d 262, 265 (S.D.N.Y. 2009). Indeed, the purpose
of the MCA, in which Section 248a was first enacted, is to “facilitate the
implementation of monetary policy.” 94 Stat. 132.
In all, the plain text of Section 342 affords Reserve Banks with discretion, and
the plain text of Section 248a affords PayServices’ no countervailing entitlement.
As a result, the statutory interpretation analysis ends where it begins: the plain text.
See CVS Health Corp. v. Vividus, LLC, 878 F.3d 703, 706 (9th Cir. 2017) (“If the
language has a plain meaning or is unambiguous, the statutory interpretation inquiry
ends there.”).
C. Discretion Is Consistent With Longstanding Practice
Eliminating Reserve Bank discretion regarding the availability of accounts
and services would upend longstanding practice. Prior to the MCA, Reserve Banks,
“in their discretion,” could offer accounts and services to certain eligible nonmember
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institutions for limited purposes.10 See also Minutes of the Board of Governors of
the Federal Reserve System Meeting, Washington, July 26, 1945, Vol. 32, Pt, 32,
1255-1257 at https://fraser.stlouisfed.org/files/docs/historical/nara/bog_minutes/
19450726_Minutes.pdf (“Accordingly, if a Federal Reserve Bank in its discretion
accepts such a[ nonmember] account it may prescribe such requirements and
conditions consistent with the law as in its judgment are advisable.”) (emphasis
added).
The MCA did not change that longstanding discretion. To the contrary, the
Board and Reserve Banks have repeatedly emphasized Reserve Banks’ role in
overseeing the risk posed by allowing access to Reserve Bank services. Shortly after
the MCA was enacted, the Board confirmed that a “Reserve Bank, of course, retains
the right to protect its risk exposure from individual institutions.” Interim Policy
Statement Regarding Risks on Large-Dollar Wire Transfer Systems, 52 Fed. Reg.
29,255, 29,260 (Aug. 6, 1987). Consistent with the Reserve Banks’ discretion to
limit the risk posed by providing accounts and services to specific institutions,
master account agreements with Reserve Banks have always been terminable at
will.11 Specifically, each agreement provides that Reserve Banks “may close [the]
10
Bd. of Governors of the Fed. Rsrv. Sys., FED. RSRV. BULL. VOL. 50, supra
note 8.
11
See Federal Reserve Banks Operating Circular 1, Account Relationships,
(Jan. 2, 1998),
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master account . . . at any time.” Id. at 3; BSJI, 2023 U.S. Dist. LEXIS 193296, at
*21-22 (“BSJI had a Master Account and specifically agreed that the FRBNY had
the right to terminate that account.”).
PayServices cites out-of-context statements on the Board’s website describing
the MCA as providing “access” to services for “all depository institutions.” Br. at
11-12. These non-statutory statements are consistent with Reserve Banks’
undisputed post-MCA ability to provide accounts and services to nonmember banks
as a class, subject to equitable pricing conditions, rather than a mandate to provide
accounts and services to every individual bank regardless of risk. None of the
statements speaks of eliminating the Reserve Banks’ longstanding discretion over
access to master accounts and financial services to institutions that pose risk to the
Federal Reserve System.
Moreover, PayServices concedes, as it must, that the phrase “all depository
institutions” comes with an asterisk. It incorporates limitations like legal eligibility,
the price set by the Board, and the terms and conditions set by the Board. See id. at
21 (“To be sure, FRBSF may deny accounts to ineligible institutions, refuse to take
certain deposits, and reasonably regulate use of the account.”). Consistent with the
http://web.archive.org/web/20010612051504/http://www.frbservices.org/Industr
y/pdf/Oc1.pdf.
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plain text of Section 342 and longstanding practice, it also incorporates the discretion
to refuse access to institutions that pose risk to the Reserve System.
D. The December 2022 Amendment Confirms Discretion
The December 2022 Amendment to the FRA confirmed that Reserve Banks
have discretion over individual account access requests, consistent with the Board’s
Guidelines and the Reserve Banks’ longstanding practice. An interpretation which
Congress has failed to amend is “at least persuasive of a legislative recognition and
approval of the statute as construed.” McCaughn v. Hershey Chocolate Co., 283
U.S. 488, 492-93 (1931). This long-standing canon of statutory interpretation
applies when with “full knowledge of the [entity’s] interpretation Congress has since
made significant additions to that section without amending it to depart from the
Commission’s view.” Farmers Educ. & Coop. Union Of Am., N.D. Div. v. Wday,
360 U.S. 525, 533 (1959). This doctrine “is particularly appropriate” where, as here,
the “interpretation involves issues of considerable public controversy, and Congress
has not acted to correct any misperception of its statutory objectives.” United States
v. Rutherford, 442 U.S. 544, 554 (1979); Bateman v. Am. Multi-Cinema, Inc., 623
F.3d 708, 720 (9th Cir. 2010) (“[I]n the midst of this disagreement, Congress stepped
in to amend [the Fair and Accurate Credit Transactions Act], and yet did nothing to
limit the availability of class relief or the amount of aggregate damages.”)
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When Congress amended the FRA in December 2022, it was indisputably
aware that Reserve Banks were exercising discretion over master account requests.
As early as 2015, the New York Times reported on Reserve Bank’s “discretion” in
“deciding which master accounts to open.”12 In November 2021, Senator Lummis
wrote an Op-Ed in the Wall Street Journal about master accounts.13 Master account
access was discussed in the Senate in January 2022,14 February 2022,15 and again in
June 2022. In August 2022, the Board promulgated the Guidelines after two rounds
of public notice and comment, repeatedly clarifying that “decisions regarding
individual access requests remain at the discretion of the individual Reserve Banks.”
87 Fed. Reg. 51,106.
12
“[T]he president of the Kansas City Fed . . . wrote that the Fed had ‘discretion’
in deciding which master accounts to open.” See Nathaniel Popper, Banking for
Pot Industry Hits a Roadblock, N.Y. TIMES (July 30, 2015),
https://www.nytimes.com/2015/07/31/business/dealbook/federal-reserve-denies-
credit-union-for-cannabis.html.
13
Cynthia Lummis, Opinion, The Fed Battles Wyoming on Cryptocurrency,
Wall St. J. (Nov. 30, 2021), https://www.wsj.com/articles/the-fed-battles-
wyoming-cryptocurrency-powell-brainard-bitcoin-digital-assets-spdi-fintech-
11638308314.
14
Nomination of Jerome H. Powell, of Maryland, to be Chairman of the Board
of Governors of the Federal Reserve System, S. Hrg. 117-335 before the S. Comm.
on Banking, Hous., & Urb. Affs., 117th Cong. 33-34 (Jan. 11, 2022) (statement of
Sen. Cynthia Lummis).
15
Nomination of Sarah Bloom Raskin, of Maryland, to be Vice Chairman for
Supervision and a Member of the Board of Governors of the Federal Reserve
System, S. Hrg. 117-340 before the S. Comm. on Banking, Hous., & Urb. Affs.,
117th Cong. 28-30 (Feb. 2, 2022) (questioning by Sen. Cynthia Lummis).
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Against that backdrop, Congress amended the FRA to require the Board to
create a “database” that includes “a list of every entity that submits an access request
for a reserve bank master account and services . . . including whether . . . a request
was approved, rejected, pending, or withdrawn.” 12 U.S.C. § 248c(b)(1) (emphasis
added). For each request, the database must track which category of eligible
institution issued the request. Id. § 248c(c). The fact that Congress affirmed Reserve
Banks’ ability to reject master account applications without placing any limitations
on their well-publicized, decades-long discretion thus “provide[s] further evidence .
. . that Congress intended [the existing] interpretation, or at least understood the
interpretation as statutorily permissible.” Fox TV Stations, Inc. v. Aereokiller, LLC,
851 F.3d 1002, 1014 (9th Cir. 2017).16
E. Judge Bacharach’s Opinion in Fourth Corner Is Neither Binding
Nor Persuasive
The District Court concluded that PayServices cited “precious little” authority
for its interpretation of the FRA, ER-27, ER-31, and it criticized PayServices’
“wholesale reliance” on a single opinion in a three-way split decision of the Tenth
16
Senator Toomey filed an amicus brief in Custodia arguing that he personally
did not intend the December 2022 Amendment to bolster Reserve Bank discretion
over master account requests. See Custodia Bank v. Federal Reserve Board of
Governors, et al, Case No. 24-8024, ECF No. 11102675 at 3 (10th Cir., Jul. 28,
2024). But, as this Court recently held,“‘[p]ost-enactment legislative history (a
contradiction in terms)’” is “a questionable tool of statutory interpretation.” United
States v. Randall, 34 F.4th 867, 877 (9th Cir. 2022) (quoting Bruesewitz v. Wyeth
LLC, 562 U.S. 223, 242 (2011)).
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Circuit in Fourth Corner, ER-30. PayServices repeats that strategy here,
characterizing a single judge’s opinion as a “ruling,” and characterizing Judge
Bacharach both as “an appeals court,” Br. at 33, and “[m]ultiple courts of appeals,”
id. at 34. As the District Court explained, Judge Bacharach’s opinion was issued
seven years ago—before the Guidelines were first posted, before Congress’s recent
amendment, and before any other court had considered this specific legal theory.
ER-31. Now three federal courts—including one in the Tenth Circuit—have reached
a different conclusion. See BSJI, 2023 U.S. Dist. LEXIS 193296, at *20-21 (“Judge
Bacharach’s opinion is neither controlling (even in the Tenth Circuit), nor
persuasive.”); Custodia, 2024 U.S. Dist. LEXIS 76822, at *27 (“The Court
respectfully deviates from Judge Bacharach's opinion in Fourth Corner.”).
* * *
In all, the District Court correctly held that Reserve Banks have discretion
under Section 342 to grant or decline a master account request and that Section 248a
does not entitle PayServices to a master account. As a result, PayServices’ APA,
Due Process, and Mandamus claims fail as a matter of law. ER-21. PayServices
does not (and cannot) dispute that its Due Process and Mandamus claims are subject
to dismissal with prejudice on these grounds. Nor does it dispute that, as pled, its
APA claim was properly dismissed. As discussed in Section II and Section IV, no
new facts could render FRBSF’s discretion to deny PayServices’ account reviewable
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under the APA. Accordingly, the District Court’s opinion should be affirmed, and
PayServices’ Complaint dismissed with prejudice.
II. The District Court Properly Ruled that FRBSF Is Not a Federal Agency
for Purposes of PayServices’ Claims
The District Court correctly dismissed all of PayServices’ claims for the
separate and independent reason that the APA, Mandamus Act, and Due Process
Clause rely on PayServices’ incorrect assertion that FRBSF is a federal agency here.
ER-36; cf. BSJI, 2023 U.S. Dist. LEXIS 193296, at *23 (“Federal reserve banks are
not part of any executive department or agency.”).
The District Court assessed whether FRBSF is an agency under the well-
established test under the APA.17 ER-36. An “agency” is “an authority of the
Government of the United States.” 5 U.S.C. § 701(b)(1). The “focal point of
analysis” is whether the entity exercises “substantial independent authority” of the
government. Irwin Mem’l Blood Bank of S.F. Med. Soc’y v. Am. Nat’l Red Cross,
640 F.2d 1051, 1053 (9th Cir. 1981) (emphasis added). It is not enough for an entity
to have “authority in law” to make decisions; it must exercise sufficient
“governmental” authority such that it is the “center of gravity in the exercise of
administrative power.” Dong v. Smithsonian Inst., 125 F.3d 877, 882 (D.C. Cir.
17
For the first time on appeal, PayServices asserts that it can pursue its
mandamus claim regardless of whether FRBSF is an agency. See Br. at 38. That
argument is both waived and meritless. See Section III, infra.
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1997); see also New York v. Atl. States Marine Fisheries Comm’n, 609 F.3d 524,
532 (2d Cir. 2010) (“The wording of section 701(b)(1) indicates that we should not
give the definition of ‘agency’ a more expansive reading” than what is present in the
text).
Applying this standard, the District Court correctly ruled that FRBSF is not a
federal agency “for the purposes of PayServices’ claims.” ER-36. This is not
“astonishing” (Br. at 23)—it is the plain intent of Congress. This ruling should be
affirmed.
A. Reserve Banks Are Not the Center of Gravity By Express
Congressional Design
For over a century, “Congress has gone out of its way to formally separate the
[Reserve Banks] from the government.” United States ex rel. Kraus v. Wells Fargo
& Co., 943 F.3d 588, 597 (2d Cir. 2019); 50 Cong. Rec. H.4643 (Sept. 13, 1913)
(“[T]he regional bank is given independent status”). As early as 1929, the Supreme
Court recognized that “the federal reserve banks . . . are not departments of the
Government.” Emergency Fleet, 275 U.S. at 425-26. Over the past century,
“Congress has considered the status of the [Reserve Banks] on multiple occasions,”
and it has repeatedly “decided not to convert them formally into government
agencies.” Kraus, 943 F.3d at 598 (holding that Reserve Banks are not agencies
under the False Claims Act). Indeed, “no statute designates Federal Reserve Banks
as federal agencies.” Scott v. FRB of Kan. City, 406 F.3d 532, 537 (8th Cir. 2005).
38
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By contrast, Congress has designated the Board, the FDIC, and the Comptroller of
the Currency to be “federal banking agencies,” see, e.g., 12 U.S.C. § 1831j
(designating the Board “federal banking agency”); and distinguished between a
“banking agency or reserve bank.” See id. § 1820(k)(1)(A).18
As the District Court correctly held, the twelve independently managed
Reserve Banks are not each the “center of gravity” of administrative power for the
Federal Reserve System. ER-34. The Reserve Banks bear none of the traditional
hallmarks of a federal agency: they cannot “promulgate regulations having the force
and effect of law,” Scott, 406 F.3d at 536; they cannot publish in the Federal
Register, cf. Lombardo v. Handler, 397 F. Supp. 792, 793-96 (9th Cir. 1975) (“[T]he
Federal Register only publishes notices for Federal agencies”); they “receive no
appropriated funds from Congress,” Lewis, 680 F.2d at 1242; they issue stock owned
by member banks, and the government appoints only a minority of their directors,
12 U.S.C. §§ 302; 304.
Instead, Congress vested all rulemaking and adjudicatory authority in the
Board, which is indisputably a federal agency. To further separate the Reserve
18
For over a century, Congress has never designated a Reserve Bank as an
agency. Cf. 12 U.S.C. § 1457(e) (designating the Federal Home Loan Mortgage
Corporation as an agency); 12 U.S.C. § 635(a)(1) (designating the Export-Import
Bank as an “agency of the United States.”); 22 U.S.C. § 290f(a) (1988) (the Inter-
American Foundation); 7 U.S.C. § 941-50b (1988) (Rural Telephone Bank pre-
privatization).
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Banks from the center of administrative power, Congress forbade the Board from
delegating the authority to promulgate rules. See 12 U.S.C. § 248(k). The only
“authority” identified by PayServices is, ironically, the ability not to enter into a
master account relationship (Br. 23, 29-30)—the same “authority” PayServices
claims the Reserve Banks lack. That is not a “‘final and binding action’ affecting
the rights and obligations of individuals, particularly by the characteristic procedures
of rule-making and adjudication.” Irwin, 640 F.2d at 1053; cf. Am. Bankers Mortg.
Corp. v. Fed. Home Loan Mortg. Corp., 75 F.3d 1401, 1410 (9th Cir. 1996) (“The
powers exercised by Freddie Mac in participating in the secondary market for
mortgages and improving access to home loans for low- and moderate-income
families hardly qualify as powers.”).
As PayServices notes, Reserve Banks must be “examined in [their] own
context.” Br. at 26 (quoting Pub. Citizen Health Rsch. Grp. v. Dep’t of Health, Ed.,
& Welfare, 449 F. Supp. 937, 940 (D.D.C. 1978)). That is exactly what the District
Court did. See, e.g., ER-34 (discussing FRA’s “unique statutory authorizations”).
Congress structured the Federal Reserve System to incorporate regional, private, and
public components with federal oversight, not to place the twelve Reserve Banks (let
alone just one of them) as the “center of gravity.” See, e.g., Fox News Network, LLC
v. Bd. of Governors of the Fed. Res. Sys., 601 F.3d 158, 161 (2d Cir. 2010)
(“Congress divided the powers of the Federal Reserve System between the Board,
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which is a federal agency, and the [Reserve Banks], which were established as
regional banks. . . .”).
Recognizing this intentional separation, this Court held that Reserve Banks
are not federal agencies under the Federal Torts Claims Act. See Lewis, 680 F.2d
at 1241; Dong, 125 at 882-83 (noting that agency under the FTCA is defined
“broadly” compared to the APA). As this Court explained, “Congress did not intend
to give the federal government direction over the daily operation of the Reserve
Banks.” Lewis, 680 F.2d at 1241. Although Lewis arose in a different context, the
principles are just as, if not more, relevant here. Subjecting the Reserve Banks to all
suits under the APA would involve more governmental intrusion in the day-to-day
affairs of the Reserve Banks than any tort claim could. As the District Court
correctly found, designating FRBSF as an agency for all purposes and all suits would
upset this “historically intentional detachment from the federal government.” ER-
35.
B. The District Court Correctly Held That Master Accounts Are Not
a Substantial Governmental Power
As the District Court correctly held, the issuance and maintenance of master
accounts is not “substantial independent authority” of the Government. ER-34.
PayServices does not meaningfully contend otherwise. Indeed, according to
PayServices, FRBSF is required to rubber-stamp every request from an eligible
institution in “5-7 business days” with “no exercise of discretion.” Br. at 38-39.
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Issuing a master account cannot be both a “ministerial” and “plain” duty (id.) and a
“substantial power[] to act . . . as a discrete, decision-producing layer” (id. at 28). In
any event, issuing master accounts is not substantial authority. See Lombardo, 397
F. Supp. at 794-96 (holding that authority to veto EPA auto-emission standards was
not substantial authority). At most, PayServices suggests (although has not pled
with any facts) that FRBSF’s denial of its request is financially significant to
PayServices. But to accept that as sufficient would be to render every decision on a
job application an agency action. That is not the standard. Irwin, 640 F.2d at 1053
(Substantial independent authority is the authority “to take final and binding action’
affecting the rights and obligations of individuals, particularly by the characteristic
procedures of rule-making and adjudication.”).
Moreover, FRBSF does not act as the Government in this context.
PayServices seeks a contractual relationship for its financial benefit. BSJI, 2023
U.S. Dist. LEXIS 193296, at *22 (the “agreement governing the Master Account []
allowed the FRBNY to close the account”); Cf. Multnomah Legal Servs. Workers
Union v. Legal Servs. Corp., 936 F.2d 1547, 1556 (9th Cir. 1991) (“Where the LSC’s
authority derives from the existence of such a consensual relationship, it is
inappropriate to review its actions as we might those of an administrative agency.”).
As this Court held, “[i]t is evident from the legislative history of the Federal
Reserve Act that Congress did not intend to give the federal government direction
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over the daily operation of the Reserve Banks.” Lewis, 680 F.2d at 1241 (citing H.R.
Report No. 69, 63 Cong. 1st Sess., at 18-19 (1913)). Instead, Congress empowered
the Reserve Banks to perform the routine operations of banking “without day to day
direction from the federal government.” Id. These operations “include collecting
and clearing checks, making advances to private and commercial entities, holding
reserves for member banks, discounting the notes of member banks, and buying and
selling securities on the open market.” Id.; 12 U.S.C. §§ 301; 341; 342. For that
reason, the District Court correctly recognized that certain “prescribed function[s]
of Federal Reserve Banks within the Federal Reserve System” are not governmental
powers. ER-34.
C. The Issuance of Master Accounts Is Not a Delegated Power
PayServices incorrectly argues that the maintenance of master accounts is not
a power of the Reserve Banks at all. Br. at 27. Rather, PayServices claims, it is a
power that the Board delegated to the Reserve Banks in August 2022—a century
after the FRA was enacted and after PayServices itself applied for a master account.
The District Court properly rejected this argument. ER-34.
The Board did not delegate to the Reserve Banks the authority to accept
deposits or maintain master accounts. See 12 C.F.R. § 265.20 (listing the delegated
powers of the Reserve Banks). Nor could it. The Board does “not have the statutory
authority to receive deposits, open or close Master Accounts, or perform other
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banking services.” BSJI, 2023 U.S. Dist. LEXIS 193296, at *31-32. The Second
Circuit’s decision in Fox News Network, LLC v. Bd. of Governors of the Fed. Res.
Sys. is instructive. 601 F.3d at 160. There, the Second Circuit addressed whether
the Board had to search for, and disclose, Reserve Bank lending documents. As
relevant here, the Board’s duties to disclose Reserve Bank documents depended on
whether the Reserve Bank was acting pursuant to “delegated” authority from the
Board. See id. at 161. The Second Circuit held that:
[I]t seems clear from the statutory scheme that enacted the Federal Reserve
System that the lending activities of the Federal Reserve Banks do not take
place “on behalf of” or under the “delegated authority” of the Board. The
Board itself has no power to make a loan to any bank, and does not authorize
each loan made by the Federal Reserve Banks. The power to make loans is
explicitly granted by statute only to the Federal Reserve Banks themselves.
Id. at 161 (emphasis added). So too here. The power to issue master accounts is
granted to the Reserve Banks through Section 342.
D. PayServices’ Authorities Do Not Support Its Argument That
FRBSF Is a Federal Agency
Although PayServices claims that every federal instrumentality needs to be
examined in its own “context,” Br. at 26, it also argues that all federal
instrumentalities are per se agencies, id. at 26, 29 (“FRBSF is subject to the APA as
an instrumentality”). But as this Court has held, “[m]any financial institutions . . .
are considered federal instrumentalities, without attaining the status of government
agencies within the meaning of federal procedural rules.” See In re Hoag Ranches,
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846 F.2d 1225, 1227 (9th Cir. 1988). Moreover, this Court has specifically held that
an instrumentality is not a per se federal agency as defined by the APA. See Irwin,
640 F.2d at 1052 (holding that instrumentality status did not render American Red
Cross an agency under FOIA and APA).19
PayServices argues that the APA creates a presumption of agency status for
federal entities “related to banks and banking.” Br. at 24-25. Congress exempted
eight entities from the APA, including itself, the “courts,” and “military authority.”
5 U.S.C. § 701(b)(1). Among those exemptions, Congress also included certain
actions taken by the Federal Housing Administration. Id. § 701(b)(1)(H).
PayServices claims that, via expressio unius, the exemption of FHA from the APA
implies that the inclusion of the Reserve Banks in the APA. Br. at 24.
But another Latin phrase is more appropriate: noscitur a sociis—“a word is
known by the company it keeps.” “This canon is often wisely applied where a word
is capable of many meanings in order to avoid the giving of unintended breadth to
the Acts of Congress.” Dubin v. United States, 599 U.S. 110, 110 (2023) (citations
omitted). Here, Congress, the courts, and military authority are undoubtedly
“authorities” of the U.S. Government under the APA. Likewise, the “FHA is about
as much a part of the Government as any agency can be.” United States v. McNinch,
19
Indeed, this Court has held that instrumentality status may vary by statute.
See Lewis, 680 F.2d at 1242.
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356 U.S. 595, 598 (1958). Congress exempted entities that would clearly fall under
APA’s ambit; it was not a creating an unspoken presumption of agency status for
any other entity.
PayServices relies on three forty-year-old cases which purportedly held that
Reserve Banks were agencies under the APA. Br. at 30. None are persuasive, or
applicable to these facts. Indeed, in Jet Courier Servs, the court did not even analyze
whether Reserve Banks were agencies. 713 F.2d at 1228. The “plaintiffs did not
cite the Administrative Procedure Act,” the plaintiffs had named the entire Federal
Reserve System as Defendants, and the court dismissed the claim for lack of standing
with no discussion of agency status. Id. at 1224 n.1, 1225.20
The two district court cases cited by PayServices fare no better. In Flight Int’l
Grp. v. Fed. Res. Bank, 583 F. Supp. 674, 678 (N.D. Ga. 1984)—a since-vacated
decision—the court held that the Federal Reserve Bank of Chicago was an agency
“because other courts found that Federal reserve banks operated as instrumentalities
of the government.” BSJI, 2023 U.S. Dist. LEXIS 193296, at *24 (holding that
Flight Int’l was not persuasive precedent as to Reserve Bank status on those
grounds). As noted above, that is inconsistent with this Court’s precedent. See In
re Hoag, 846 F.2d at 1227.
20
The Sixth Circuit stated “Federal Reserve System” was an agency under the
Sherman Act because the “Board” was engaged in “governmental action” with
respect to the challenged to conduct. Jet Courier Servs., 713 F.2d at 1228.
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Lee Construction Co., Inc. v. Federal Reserve Bank of Richmond is inapposite
because the challenged agency action was a power that the Board delegated to the
Reserve Bank—it was not an inherent banking activity of the Reserve Bank. 558 F.
Supp. 165, 177-78 (D. Md. 1982). As discussed above, see supra II.C, this case does
not involve a Board-delegated function. Moreover, the Lee court also held that the
plaintiffs lacked standing and failed to state an arbitrary and capricious claim. Lee,
558 F. Supp. at 188.
In all, PayServices identified only one case in which a plaintiff stated an APA
claim against a Reserve Bank. Even the Fourth Corner opinion was not an APA
case, with the district court noting that a Reserve Bank is “not a federal agency.”
See Fourth Corner Credit Union v. FRB of Kan. City, 154 F. Supp. 3d 1185, 1187
(D. Colo. 2016). The lack of authority undermines PayServices’ claim that the
twelve Reserve Banks are per se federal agencies. See Br. at 10-11.
* * *
In sum, the District Court properly held that FRBSF is not an “agency” for
the purposes of PayServices’ claims. As a result, the District Court properly
dismissed each of PayServices’ claims with prejudice.
III. PayServices’ Mandamus Claim Is Moot, Waived, and Meritless
PayServices’ mandamus claim fails for multiple, independent reasons. First,
PayServices’ claim is moot. PayServices argues that it is entitled to mandamus
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because “[t]aken together, the allegations establish a plausible cause of action for
unreasonable delay against Defendant.” Br. at 40. But petitions for mandamus
alleging unreasonable delay of an agency action are moot if the agency has already
acted. See In re International Union, United Mine Workers of Am., 231 F.3d 51, 54
(D.C. Cir. 2000) (petition for mandamus based on unreasonable delay in initiating
rulemaking denied as moot after agency issued proposed rules); Kuzova v. United
States Dep’t of Homeland Sec., 686 F. App’x 506, 508 (9th Cir. 2017) (holding that
a claim for “unreasonable delay” under the APA is moot when plaintiffs’
“applications have been adjudicated”). Here, PayServices expressly pleads that it
has received a formal decision on its application for a master account. ER ¶ 85. In
so doing, PayServices expressly pleads its claim is moot.
Second, PayServices has waived its new argument that Reserve Bank
presidents are inferior officers of the United States who are subject to mandamus
claims. As this Court has held, “arguments not raised in the district court will not
be considered for the first time on appeal.” Robinson v. Am. Home Mortg. Servicing,
Inc. (In re Mortg. Elec. Registration Sys.), 754 F.3d 772, 780 (9th Cir. 2014). Here,
FRBSF moved to dismiss the mandamus claim because FRBSF was not a
“department[] of the government” or “agency.” SER-03, 13. In Opposition,
PayServices never briefed this indirect “inferior officer” theory, nor did it even
mention the word “president.” See SER-40. PayServices did, however, mention
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the Custodia decision—the case underlying this new theory—nine separate times.
SER-42, 45, 47-48. Indeed, PayServices quotes Custodia in its mandamus argument
for a different proposition. See also SER-51. Rather than raising the “inferior
officer” argument (of which it should have been aware), PayServices instead briefed
the APA, Mandamus Act, and Due Process clause arguments as if they rose and fell
together for purposes of agency. SER-48-51. It has waived any right to argue
otherwise now.
Even if this argument were procedurally proper (it is not), mandamus is only
proper where the act at issue is “ministerial and so plainly prescribed as to be free
from doubt.” Id. at 392 (citations omitted). For the reasons described above, see
Section I, supra, Reserve Banks have discretion to grant or deny master account
requests.
The District Court likewise had discretion to deny mandamus relief. Indep.
Mining Co. v. Babbitt, 105 F.3d 502, 505 (9th Cir. 1997) (“The extraordinary remedy
of mandamus traditionally lies within the court’s discretion.”). In holding that “on
balance” and “in this setting” FRBSF was not the Government “for the purposes of
PayServices’ claims,” ER-35, the District Court properly exercised its discretion to
dismiss PayServices’ mandamus claim with prejudice.
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IV. The District Court Properly Dismissed the APA Claim with Prejudice
It is blackletter law that a court can deny leave to amend—and accordingly
dismiss a Complaint with prejudice—if the claim suffers from an “incurable” legal
defect. Shame On You Productions, Inc. v. Banks, 893 F.3d 661, 665 (9th Cir. 2018).
Here, two threshold defects bar PayServices’ APA claim as a matter of law. First,
as discussed above, FRBSF is not an “agency” or performing an “agency action.”
See Section II, supra. Second, even if FRBSF were an agency, the APA expressly
precludes review of agency action which is “committed to agency discretion by
law.” 5 U.S.C. § 701(a)(2). Here, as discussed above, see Section I, supra, the
denial of an account access request is committed to FRBSF’s discretion under
Section 342 of the FRA.
It is “well-settled that the touchstone of reviewability under [the APA] is
whether there’s ‘law to apply.’” Or. Nat. Res. Council v. Thomas, 92 F.3d 792, 798-
99 (9th Cir. 1996) (no APA claim when the “statute is drawn so that a court would
have no meaningful standard against which to judge the agency’s exercise of
discretion”). Id. at 798 (citation omitted). As discussed above, Section 248a does
not provide “law to apply” because it is a price discrimination statute directed to the
Board, not the Reserve Banks. See supra I.B. And PayServices effectively concedes
that there is “no law” to apply under Section 342. Br. at 33 (“Section 342 does not
prescribe conditions”); City & Cty. of S.F. v. United States DOT, 796 F.3d 993, 1002
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(9th Cir. 2015) (“[T]he text of the statute provides no indication that Congress
intended to restrict agency discretion”).
Nor do the Guidelines provide a “law to apply” for PayServices’ APA claim.
See Trout Unlimited v. Pirzadeh, 1 F.4th 738, 759 (9th Cir. 2021) (holding that a
regulation provides “law to apply” when “the agency intended the mandatory legal
standard to apply specifically and directly to” the challenged action) (emphasis
added). The “Guidelines” are just that—guidelines that entrust the merits of
“individual access requests” to the discretion of the Reserve Banks. 87 Fed. Reg. at
51,106. They do not “provide assurance that any specific institution will be granted
an account.” Id. at 51,104.
Rather, they are “principles” that “broadly outline considerations for
evaluating account access requests.” 87 Fed. Reg. at 51,106. The considerations
include whether the account would “present or create undue credit, operational,
settlement, cyber, or other risks to the overall payment system;” (id. at 51,100
(Principle 3)); whether “access to an account and services by an institution . . . could
introduce financial stability risk to the U.S. financial system” (id. at 51,108
(Principle 4(b)); and whether account access would “adversely affect the Federal
Reserve’s ability to implement monetary police” (id. at 51,109 (Principle 6)).
Together, the considerations provide a framework for the exercise of Reserve Banks’
accumulated expertise after decades of experience analyzing such requests. Cf.
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Browning-Ferris Indus. of S. Jersey, Inc. v. Muszynski, 899 F.2d 151, 160 (2d Cir.
1990) (“Courts should be particularly reluctant to second-guess agency choices
involving scientific disputes that are in the agency’s province of expertise.”).21
No fact that PayServices could plead would turn FRBSF into an agency or
demonstrate that the denial of PayServices’ master account application violated a
mandatory legal standard. As a result, the District Court’s dismissal of the APA
claim with prejudice should be affirmed.
V. PayServices’ Due Process Claim Fails as a Matter of Law
The District Court properly ruled that PayServices’ did not state either a
substantive or procedural Due Process claim.
First, the District Court properly held that the substantive due process claim
failed as a matter of law because PayServices has not identified a fundamental right
violated by FRBSF’s decision. ER-38. “[S]ubstantive due process protects an
individual’s fundamental rights to liberty and bodily autonomy.” C.R. v. Eugene
Sch. Dist. 4J, 835 F.3d 1142, 1154 (9th Cir. 2016). As the Ninth Circuit has held,
“substantive due process rights are created only by the Constitution.” Armstrong v.
Reynolds, 22 F.4th 1058, 1079 (9th Cir. 2022) (quotation omitted) (emphasis added).
21
Notably, PayServices asks this Court not to apply the Guidelines to its
application. See Br. At 41-42 (“It is improper to apply the Guidelines to
PayServices’ application.”). The Guidelines cannot be both inapplicable and a
binding legal standard.
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Here, PayServices does not allege, nor could it plausibly argue, that its claimed right
to a master account is a “fundamental” right created by the Constitution. Indeed, its
claimed right is not even in the text of the statute on which it relies. The Constitution
may have penumbras, but federal statutes like the Monetary Control Act do not.
Moreover, PayServices concedes in its Complaint that without a master account
from FRBSF, it can still access the Federal Reserve System through an
“intermediary bank.” Compl. ¶¶ 1; 98.
PayServices’ procedural Due Process claim is similarly flawed. A procedural
Due Process claim requires “(1) a protect[ed] liberty or property interest . . . and (2)
a denial of adequate procedural protections.” Pinnacle Armor, Inc. v. United States,
648 F.3d 708, 717 (9th Cir. 2011). Here, the District Court correctly found that
PayServices satisfies neither element. First, PayServices does not have a property
interest in a master account because FRBSF has discretion to deny the request.
Thornton v. City of St. Helens, 425 F.3d 1158, 1164 (9th Cir. 2005) (“[A] statute that
grants the reviewing body unfettered discretion to approve or deny an application
does not create a property right.”).
Second, PayServices has not identified any procedural protections which it
was denied. Critically, the Due Process Clause does not require a “formal hearing”
as long as the Plaintiff had a “full and fair opportunity to be heard.” Id. Plaintiff
expressly pleads that it received two opportunities to meet with FRBSF. ER-50, ¶¶
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16; 23. PayServices admits that it was permitted to submit written evidence
supporting its application. ER-50, ¶¶ 24; 25. And it admits that it received a written
decision explaining the basis for FRBSF’s decision. Id. ¶ 43. PayServices cites no
basis for its proposition that a denial letter needs to state a way to appeal. Br. at 48.
On this record, PayServies has not been denied any procedural protections, and thus
its Due Process claim must be dismissed. Pinnacle Armor, 648 F.3d at 717.
(“Considering that [Plaintiff] had ample opportunities to submit evidence both
before and after the Notice was revoked, and considering that [Defendant] explained
its decision, we believe that the [Defendant] afforded [Plaintiff] an adequate
opportunity to be heard, even if no formal administrative hearings took place.”).
VI. The District Court Did Not Abuse Its Discretion in Striking the
Danenberg Declaration
In response to Defendant’s 12(B)(6) motion to dismiss, PayServices attached
a declaration of facts it drafted while preparing its Opposition. The District Court
did not abuse its discretion in striking the Danenberg Declaration because it was not,
and could not have been, incorporated by reference in the Complaint. ER-81-88.
It is well-settled that “[i]n determining the propriety of a Rule 12(b)(6)
dismissal, a court may not look beyond the complaint to a plaintiff’s moving papers,
such as a memorandum in opposition to a defendant’s motion to dismiss.” Schneider
v. Cal. Dep’t of Corr., 151 F.3d 1194, 1197 n.1 (9th Cir. 1998); United States v.
Ritchie, 342 F.3d 903, 909 (9th Cir. 2003) (“[I]t would have been improper for the
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court to consider the declaration and exhibits attached to the government's
opposition without converting the motion to dismiss into a motion for summary
judgment[.]”).
First, the Declaration did not attach documents identified in the Complaint. It
was nothing more than a self-serving description of documents allegedly referenced
in the Complaint, drafted after the Complaint. See ER-81. That is exactly the
conduct that the doctrine of “incorporation by reference” seeks to prevent. As this
Court has explained, the doctrine “prevents plaintiffs from selecting only portions
of documents that support their claims, while omitting portions of those very
documents that weaken or doom their claims.” Khoja v. Orexigen Therapeutics,
Inc., 899 F.3d 988, 1002 (9th Cir. 2018).
The only document attached to the Declaration was a June 15, 2023, letter
from the Board of Governors of the Federal Reserve to Senator Marco Rubio—both
non-parties to this action. This letter is not referenced in the Complaint and has no
bearing on whether FRBSF had the right to safeguard the U.S. payment system by
denying PayServices’ request for a master account.
Second, FRBSF’s Declaration did not give PayServices’ a right to “offer
controverting evidence.” Br. at 49. The case on which PayServices relies does not
provide otherwise. Br. at 48. It stands for the indisputable, but irrelevant, position
that parties can submit declarations when contesting the court’s jurisdiction. Data
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Disc, Inc. v. Sys. Tech. Assocs., Inc., 557 F.2d 1280, 1284 (9th Cir. 1977) (“The
parties’ dispute pertain[s] to whether the district court could properly exercise in
personam jurisdiction”). FRBSF, however, only challenged PayServices’ motion
for failure to state a claim; it did not dispute the court’s jurisdiction. The Denial
Letter, unlike the Danenberg declaration, was deemed incorporated by reference in
the Complaint and properly admitted on that basis. PayServices’ alleged entitlement
to submit “controverting evidence”—like its alleged entitlement to a master
account—is not grounded in any legal authority. As a result, the District Court’s
decision should be affirmed.
CONCLUSION
For the foregoing reasons, this Court should affirm the District Court’s Order
dismissing PayServices’ Complaint with prejudice.
/s/ Jonathan K. Youngwood_
Jonathan K. Youngwood
Meredith Karp
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017
Telephone: (212) 455-2000
jyoungwood@stblaw.com
Meredith.Karp@stblaw.com
Attorneys for Defendant-Appellee
Federal Reserve Bank of San
Francisco
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UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
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