Full text
(1 of 62), Page 1 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 1 of 62
No. 24-2355
IN THE UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
PAYSERVICES BANK,
Plaint 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.
APPELLANT'S OPENING BRIEF
Jade A. Craig, Esq.
Jade A. Craig, P.A.
1048 S. Clearview Avenue, #3
Tampa, Florida 33629
Telephone: (813) 459-1309
jade@jadeacraigpa.com
Attorney for Appellant
PayServices
(2 of 62), Page 2 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 2 of 62
DISCLOSURE STATEMENT
Pursuant to Federal Rule of Appellate Procedure 26.1, Appellant PayServices
Bank discloses that it does not have a parent corporation. There is also no publicly
held corporation that owns 10% or more of its stock.
Date: May 28, 2024
Jade A. Craig, P.A.
/s/ Jade A. Craig
Jade A. Craig
Attorney for Appellant PayServices Bank
i
(3 of 62), Page 3 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 3 of 62
TABLE OF CONTENTS
Page
DISCLOSURE STATEMENT .................................................................................. i
TABLE OF AUTHORITIES ................................................................................... iv
INTRODUCTION .....................................................................................................1
JURISDICTIONAL STATEMENT ..........................................................................7
STATUTORY AND REGULATORY AUTHORITIES ..........................................7
ISSUES PRESENTED...............................................................................................8
STATEMENT OF THE CASE.................................................................................. 8
SUMMARY OF THE ARGUMENT ......................................................................20
STANDARD OF REVIEW .....................................................................................23
ARGUMENT ...........................................................................................................23
1. The Federal Reserve Bank of San Francisco Is An "Agency" Covered
By the Administrative Procedure Act. ................................................23
11. FRBSF Lacked the Statutory Authority To Deny Payservices A
Master Account. ..................................................................................32
A. This Court may exercise its mandamus authority to compel the
granting of PayServices' request for a master account.............37
111. FRBSF's Decision to Deny Payservices A Master Account Was
Arbitrary and Capricious Under the APA. ..........................................41
IV. Payservices Properly Alleged A Denial of Procedural Due Process..47
v. The District Court Erred In Striking The Declaration Of Lionel
Danenberg. ..........................................................................................48
CONCLUSION ........................................................................................................ 50
ii
(4 of 62), Page 4 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 4 of 62
STATEMENT OF RELATED CASES..................................................51
CERTIFICATE OF COMPLIANCE......................................................52
ADDENDUM................................................................................53
iii
(5 of 62), Page 5 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 5 of 62
TABLE OF AUTHORITIES
Cases
Bank Stationers Ass 'n, Inc. v. Bd. of Governors offed. Rsrv. Sys. , 704 F.2d 1233
(nth Cir. 1983) .............................................................................................12
Barrington Manor Apts. Corp. v. United States, 392 F.2d 224 (Ct. Cl. 1968) .......24
8a'. of Liquia'ation v. McCone, 92 U.S. 531 (1875) ................................................38
8a'. of Regents of State Coils. v. Roth, 408 U.S. 564 (1972) ...................................47
Blintz v. Calif Dep 't of Corr. & Rehab., Div. of Corr. Health Care Servs. , 727
F.3d 917 (9th Cir. 2013) ................................................................................47
Bowen v. Georgetown Univ. Hosp., 488 U.S. 204 (1988) ................................ 42, 43
Bozeman Fin. LLC v. Fed. Rsrv. Bank of Atlanta, 955 F.3d 971 (Fed. Cir. 2020) .30
Camacho v. Bridgeport Fin. Inc., 430 F.3d 1078 (9th Cir. 2005).. .23
Clark v. Community for Creative Non-Violence, 468 U.S. 288 (1984) .. .36
Comm. for Monetary Reform v. Bd. of Governors offed. Rsrv. Sys. , 766 F.2d 538
(D.C. Cir. 1985) ...............................................................................................9
Conservation L. Found. of New England, Inc. v. Harper, 587 F. Supp. 357 (D.
Mass. 1984)....................................................................................................27
Ctr. for Biological Diversity v. Zinke, 900 F.3d 1053 (9th Cir. 2018) .. .46
Custodian Bank, Inc. v. Fed. Rsrv. Bd. of Governors, 640 F. Supp. 3d 1169 (D.
Wyo. 2022) ................................................................................... 6, 25, 38, 39
Data Disc, Inc. v. Systems Tech. Assoc., Inc., 557 F.2d 1280 (9th Cir.1977).. .49
Doe v. United States, 58 F.3d 494 (9th Cir. 1995) ..................................................46
Dong v. Smithsonian Inst., 125 F.3d 877 (D.C. Cir. 1997) .....................................25
Elec. Priv. Info. Ctr. v. Nat 'I Sec. Comm 'n on A.[, 466 F. Supp. 3d 100 (D.D.C.
2020) ..............................................................................................................25
Farmers ' and Merchants ' Bank of Monroe v. Federal Reserve Bank of Riehmona',
262 U.s. 649 (1923).......................................................................................34
iv
(6 of 62), Page 6 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 6 of 62
Fed. Rsrv. Bank ofSt. Louis v. Metro centre Imp. Dist. No. 1, 657 F.2d 183 (8th
Cir. 1981) .......................................................................................................30
Flight In 'I Gap., Inc. v. Fed. Rsrv. Bank of Chi., 583 F. Supp. 674 (N.D. Ga. 1984)
.......................................................................................................................30
Fourth Corner Credit Union v. Fed. Rsrv. Bank of Kansas City, 861 F.3d 1052
(10th Cir. 2017) ............................................................................ 5, 33, 34, 35
In re Hong Ranches, 846 F.2d 1225 (9th Cir. 1988) ...............................................30
In re Perkins, 106 B.R. 863 (Bankr. E.D. Pa. 1989) ...............................................44
Independence Mining Co., Inc. v. Babbitt, 105 F.3d 502 (9th Cir. 1997).. .39
Indri-Plex Techs., Inc. v. Crest Group, Inc., 499 F.3d 1048 (9th Cir. 2007) .. ..48
Jet Courier Servs., Inc. v. Fed. Rsrv. Bank of Atlanta, 713 F.2d 1221 (6th Cir.
1983) ..............................................................................................................30
Kam Koon Wan v. Black, 188 F.2d 558 (9th Cir. 1951)..........................................29
Kats iavelos v. Fed. Rsrv. Bank of Chi., 859 F. Supp. 1183 (N.D. 111. 1994).. .30
Lacey v. Maricopa Cnty., 693 F.3d 896 (9th Cir. 2012)..........................................46
Landgrafv. USI Film Prods., 511 U.S. 244 (1994).................................................43
Lee Constr. Co., Inc. v. Fed. Reserve Bank of Riehmond, 558 F. Supp. 165 (D. Md.
1982) ........................................................................................... 27, 28, 30, 31
Lewis v. United States, 680 F.2d 1239 (9th Cir. 1982)............................................ 30
Motor Vehicle Mfrs. Ass 'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S.
29 (1983)........................................................................................................45
Network Project v. Corp.for Pub. Broad., 398 F. Supp. 1332 (D.D.C. 1975) 31
New York v. All. States Marine Fisheries Comm 'n, 609 F.3d 524 (2d Cir. 2010) ..25
Olson v. California, 62 F.4th 1206 (9th Cir. 2023) .................................................47
Paekingham v. North Carolina, 582 U.S. 98 (2017) ...............................................36
Patel v. Reno, 134 F.3d 929 (9th Cir. 1997) ............................................................39
Persian Broad. Serv. Glob., Inc. v. Walsh, 75 F.4th 1108 (9th Cir. 2023).. .24
V
(7 of 62), Page 7 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 7 of 62
Pub. Citizen Health Rseh. Gap. v. Dep 't of Health, Ed., & Welfare, 449 F. Supp.
937 (D.D.C. 1978) .................................................................................. 27, 29
Scott v. Fed. Rsrv. Bank of Kan. City, 406 F.3d 532 (8th Cir. 2005) .. .30
Singh v. Still, 470 F. Supp. 2d 1064 (N.D. Cal. 2007).............................................39
Snyder v. Phelps, 562 U.S. 443 (2011) ....................................................................36
Solar Energy Indus. Ass 'n v. FERC, 80 F.4th 956 (9th Cir. 2023) .. . 42, 43
Soucie v. David, 448 F.2d 1067 (D.C. Cir. 1971)............................................. 25, 27
Syed v. M-L LLC, 853 F.3d 492 (9th Cir. 2017) ......................................................24
Tellabs, Inc. v. Makar Issues & Rts., Ltd., 551 U.S. 308 (2007).. .50
United States ex rel. Kraus v. Wells Fargo & Co., 943 F.3d 588 (2d. Cir. 2019)
............................................................................................................ ...26, 29
United States v. Johnson, 529 U.S. 53 (2000) .................................................. 24, 47
United States v. Wells Fargo & Co., 943 F.3d 588 (2d Cir. 2019) .........................30
Valiente v. SwW Transp. Co. of Ariz., LLC, 54 F.4th 581 (9th Cir. 2022) .. .43
W B. Fishburn Cleaners, Inc. v. Army & Air Force Exeh. Serv., 374 F. Supp. 162
Q91~ .Tex.1974)............................................................................................29
Wash. Res. Project, Inc. v. Dep 't of]-IEW, 504 F.2d 238 (D.C. Cir. 1974) .. .27
Weston Far. P 'ship LLLP v. Twitter, Inc., 29 F.4th 611 (9th Cir. 2022).. .50
WMX Techs., Inc. v. Miller, 104 F.3d 1133 (9th Cir. 1997) ....................................46
Statutes
12 U.S.C. § 1738 ......................................................................................................24
12 U.S.C. § 1739 ......................................................................................................24
12 U.S.C. § 1743 ......................................................................................................24
12 U.S.C. § 1744 ......................................................................................................24
12 U.S.C. § 1815 ...................................................................................................... 17
12 U.S.C. §241 ..........................................................................................................9
vi
(8 of 62), Page 8 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 8 of 62
12 U.S.C. § 248 ................................................................................................ passim
12 U.S.C. § 248a .............................................................................................. passim
12 U.S.C. §248c ................................................................................... 14, 15,21,37
12 U.S.C. § 302 ....................................................................................................9, 38
12 U.S.C. § 304 ....................................................................................................9, 38
12 U.S.C. § 341........................................................................................................38
12 U.S.C. § 342 ................................................................................................ passim
12 U.S.C. §461 ........................................................................................................ 17
12 U.S.C. § 632 ..........................................................................................................7
28 U.S.C. § 1291........................................................................................................7
28 U.S.C. § 1331........................................................................................................7
28 U.S.C. § 1361............................................................................................... 37, 38
31 U.S.C. § 5311 et seq..............................................................................................2
47 U.S.C. § 396 ........................................................................................................31
5 U.S.C. § 551..........................................................................................................23
5 U.S.C. § 555 ..........................................................................................................39
5U.S.C. § 701 ....................................................................................... 10,23,24,28
5 U.S.C. § 702 ..........................................................................................................23
5 U.S.C. § 706 ............................................................................................... 7, 39, 45
Act oflune 21, 1917, Pub. L. No. 65-25, 40 Stat. 232 ............................................ 10
Federal Reserve Act of 1913, Pub. L. No. 63-43, 38 Stat. 251 ...........................9, 10
James M Innofe National Defense Authorization Aetfor Fiscal Year 2023 , Pub. L.
No. 117-263, 136 Stat. 2395 (Dec. 23, 2022)................................................15
Monetary Control Act of 1980, Pub. L. No. 96-221, 94 Stat. 132 .. 10, 12
Other Authorities
vii
(9 of 62), Page 9 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 9 of 62
., FDIC, Risk Management Manual of Examination Policies,
https://www.fdic. gov/regulations/safety/manual/section2-1 .pdf (Apr. 2015)
.........................................................................................................................4
A 8rief History of Deposit Insurance in the United States, FDIC (Sept. 1998),
https://www.fdic.gov/bank/historical/brief/brhist.pdf .....................................4
Adam J. Levitin, Safe Banking: Finance ana' Democracy, 83 U. Chi. L. Rev. 357
(2016) ...............................................................................................................4
ANTONIN SCALTA & BRYAN A. GAMER, READING LAW: THE INTERPRETATION OF
LEGAL TEXTS (2012)......................................................................................24
Bd. of Governors of the Fed. Rsrv. Sys., Federal Reserve 's Key Policies for the
Provision of FinaneiaI Services: About,
https://www.federalreserve. gov/paymentsystems/pfs_about.htm (last
updated Oct. 28, 2016)...................................................................................13
Bd. of Governors of the Fed. Rsrv. Sys., Policies: Principles for the Pricing of the
Federal Reserve Bank Services,
http://www.federalreserve.gov/paymentsystems/pfs_principles.htm (last
updated Nov. 8, 2008) ...................................................................................12
Bd. of Governors of the Fed. Rsrv. Sys., Policies: Standards Related to Priced-
Service Activities of the Federal Reserve Banks (emphasis added)
http ://www. federalreserve . gov/paymentsystems/p fs_standards.htm .. .12
Bd. of Governors of the Fed. Rsrv. Sys., Policies: The Federal Reserve in the
Payments System,
http://www.federalreserve. gov/paymentsystems/pfs_flrpaysys.htm (last
updated Aug. 11, 2020) .................................................................................12
Freedom of lnformation Requests, Fed. Rsrv. Bank of N.Y., .................................13
Julie Andersen Hill, From Cannabis to Crypto: Federal Reserve Discretion in
Payments, 109 Iowa L. Rev. 117 (2023) .......................................................14
Julie Andersen Hill, OpeningA Federal Reserve Account, 40 Yale J. on Reg. 453
(2023) ............................................................................................ 6, 13, 14, 32
Karla Karlson, Comment, Check and Balances: Using the Freedom of lnformation
Act to Evaluate the Federal Reserve Banks, 60 Am. U. L. Rev. 213 (2010)13
Operating Circular 1.' Account Relationshzps, Fed. Reserve Fin. Servs. (Aug. 16,
2021), https://perma.cc/9ZAJ-7465 ...........................................................9, 10
Operating Circular I .' Account Relationshzps, Fed. Reserve Fin. Servs. (eff. Sept.
1, 2023),
viii
(10 of 62), Page 10 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 10 of 62
https://www.frbservices.org/binaries/content/assets/crsocms/resources/ru1es-
regulations/090123 -operating-circular-1 .pdf.............................................9, 10
ROGER LOWENSTEiN, AMER1CA'S BANK: THE EPIC STRUGGLE To CREATE THE
FEDERAL RESERVE (2015)................................................................................3
SR 20-16: Supervision of De Novo State Member Banks, Ltd. from Bd. of
Governors of the Fed. Res. Sys., to the Oj§?eer in Charge of Supervision at
Each Fed. Res. Bank (June 24, 2020),
https://wwwfederalresewe.gov/supewisionreg/srletters/SR2016.htm.. .16
The Role and Activities of the Federal Reserve System in the Nation 's Cheek
Clearing and Payments System, Report of the Subcaste. on Domestic
Monetary Pol'y of the Cmte. on Banking, Fin., and Urb. Arr., U.S. House of
Representatives, 98th Cong., 2d Sess. (1984) ...............................................12
Rules
Fed. R. App. P. 4 ......................................................................................................30
Fed. R. App. P. 5 ........................................................................................................7
Fed. R. Civ. p. 12 ........................................................................................ 48,49, 50
Regulations
12 C.F.R. § 327.16 .....................................................................................................4
Guidelines for Evaluating Amount and Services Requests, 87 Fed. Reg. 51099
(Aug. 19, 2022) ...................................................................................... passim
Constitutional Provisions
U.S. Const., amend. V................................................................................... 7, 18, 47
ix
(11 of 62), Page 11 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 11 of 62
INTRODUCTION
A. Prologue
The glaring irony is undeniable: Federal Reserve Banks extend unrestricted
and uninsured access to the U.S. financial system to foreign retail banks and their
customers located in terrorist hotspots like Egypt (Hamas), Nigeria (Boko Harare),
and Pakistan (Al Qaeda), despite their failure to meet the minimum statutory
requirements for eligibility for a master account to which U. S. institutions are subject
and the lack of oversight and supervision by U.S. state or federal banking regulators
over such foreign banks' clientele. At the same time, Appellant PayServices Bank
("PayServices") is a private banking corporation incorporated under the Idaho Bank
Act and regulated under Idaho law. See ER-49 1 1. It is undisputed that the entity is
an eligible depository institution under the Federal Reserve Act. See ER-50, 114 &
ER-46. It assists local farmers in exporting their potatoes under the supervision of
the U.S. Customs and Border Protection, among other services. Yet it faces
vehement denial and the Federal Reserve Bank of San Francisco ("FRBSF") has
refused to grant the bank a master account.
This refusal was only issued after a congressional inquiry on PayServices'
behalf following FRBSF's 9.5-month disregard of PayServices without explanation,
despite months of requests for information, underscores a troubling disregard for the
law and due process. Considering PayServices's compliance with the federal Bank
51
(12 of 62), Page 12 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 12 of 62
Secrecy Act, 31 U.S.C. § 5311 et seq., and regulations from the Idaho Department
of Finance (PayServices's chartering banking authority and regulator), the federal
Office of Foreign Assets Control, the U.S. Financial Crimes Enforcement Network,
the Federal Bureau of Investigation, the Federal Bureau of Industry and Security, the
Federal Bureau of International Security and Nonproliferation, and the federal
Directorate of Defense Trade Controls, FRBSF's denial of access to a master
account for the institution is absurd. FRBSF's assertion that PayServices's
compliance with U.S. law while it processes payments on behalf of U.S. farmers
exporting potatoes poses a threat to the stability of the U.S. economy while allowing
unfettered and unregulated banking for potential terrorist groups from Paldstan, for
example, relies on logical fallacy, sophism, flawed reasoning, and borders on
deception, apparently motivated by pressure groups and internal turmoil within the
Federal Reserve. PayServices is the victim fighting an organization with unlimited
resources which disregards law, due process, accountability, and the wider interests
of Idaho small businesses and farmers.
B. Background
PayServices follows a long line of state-chartered financial institutions that
have brought innovation to America's dual banking system, that shares power
2
(13 of 62), Page 13 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 13 of 62
between the federal government and the states.1 On August 3, 2022, the Idaho
Department of Finance granted PayServices a provisional charter, approving its
application to establish a state-chaitered bank. ER-50, ii 2. PayServices is subject to
regulation by the Idaho Department of Finance and under Idaho law. PayServices '
business model focuses on providing payment processing solutions for merchants
and commercial buyers in international transactions, along with a host of other
services. It "focuses almost exclusively on facilitating trade commodities for the
small to medium enterprises from and to the United States." See ER 50, 58-59.
As the district court recognized, PayServices "is not a lender, but instead
provides payment processing to foreign merchants, buyers, and governments 'by
linking the actual transaction to a physical verification of the merchandise by the
customs agencies of both the United States and the equivalent agency of the
receiving country." ER-18. "PayServices will only release the funds allocated for
the transaction once it has received confirmation from the authorities that the
transaction complies with applicable law and presents no danger to the public." ER-
18-19. Indeed, PayServices alleged that "all deposits are available at all times
because 100% of deposits are kept in reserve." ER-53.
1 See ROGER LOWENSTErN, AMERICA'S BANK: THE EPIC STRUGGLE To CREATE
THE FEDERAL RESERVE 3 & 136 (2015).
3
(14 of 62), Page 14 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 14 of 62
This type of institution offers a form of "safe banldng. As a result, it does
not fit within the type of entity typically regulated by a federal banking agency.3 For
example, while many state-chartered banks are members of the Federal Deposit
Insurance Corporation ("FDIC") and are regulated by the FDIC, the FDIC provides
deposit insurance to protect depositors from losses based on a bank overleveraging
debt.4 In fact, the core factors in the FDIC's risk evaluation process for determining
the insurance premiums institutions may be required to pay5 involve leveraged
deposits put at risk by products and services that PayServices' proposed bank
2
The model within which a bank holds 100 percent of its deposits in reserve
and that it is prohibited from lending deposits has been referred to as "Pure Reserve
Banking." See Adam J. Levitin, Safe Banking: Finance ana' Democracy, 83 U. Chi.
L. Rev. 357, 417-19 (2016).
3 See, et., Levitin, supra note 2, at 418. Levitin, a professor at Georgetown
University Law Center in Washington, D.C., argues that "100% reserve banking
renders most of the prudential bank regulatory apparatus as well as federal deposit
insurance and the Federal Reserve System entirely supezjluous ana' unnecessary."
Id. at 418 (emphasis added). "Pure Reserve Banking presents the possibility of a
rationally designed system that produces greater financial stability with less
regulation and without the dangers of regulatory arbitrage." Id. at 419. Yet the
FRBSF's refusal to issue a master account has been to create more roadblocks and
to "increase the complexity of regulation." Id. at 418.
4 The FDIC focuses heavily on "lending and its related risks" and "trends in
credit risks." A 8rief History of Deposit Insurance in one United States, FDIC (Sept.
1998), at 53, https://www.fdic.gov/bank/historical/brief/brhist.pdf. The FDIC's
current risk management manual emphasizes that debt is the greatest threat to a
bank's stability and security. "Loans typically comprise a majority of a bank's assets
and carry the greatest amount of risk to their capital." See, et., FDIC, Risk
Management Manual of Examination Policies, § 3 .1-2,
https://www.fdic.gov/regulations/safety/manual/section2-1 .pdf (Apr. 2015).
5 See 12 C.F.R. § 327.16.
4
(15 of 62), Page 15 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 15 of 62
explicitly does not offer. Rather than increasing risk to the U.S. financial system,
PayServices's model actually contributes to making it safer and more stable. This
consideration is one of the reasons that, at the very outset of the application process,
a representative of the FDIC who participated in an April 2022 call with PayServices
and officials from the FRBSF about PayServices' application for a master account
noted that PayServices' business model did not merit the issuance of FDIC
insurance. ER-52, W 16- 17.
PayServices applied to the Federal Reserve Bank of San Francisco for a
master account. The district court below recognized, as other courts have, that a
master account is "put simply, a bank account for banks" that "gives deposit
institutions access to the Federal Reserve System's services, including its electronic
payments system." ER-16 (quoting Fourth Corner Credit Union v. Fed. Rsrv. Bank
of Kansas City, 861 F.3d 1052, 1053 (10th Cir. 2017) (Moritz, J.)). "A master
account is a deposit account that permits a depository institution to make deposits
into and withdrawals from an account held and administered by its regional Federal
Reserve Bank. Id. "Without such access, a depository institution is nothing more
than a vault." Id. "A master account also enables its holder to access various services
promised by 12 U.S.C. § 248a beyond deposit and withdrawal services, including
wire transfer services, automated clearinghouse services, settlement services,
5
(16 of 62), Page 16 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 16 of 62
securities safekeeping, and Federal Reserve float services." Custodian Bank, Inc. v.
Fed. Rsrv. Bd. of Governors, 640 F. Supp. 3d 1169, 1177 (D. Wyo. 2022).
Law professor Julie Hill explains: "Following the Monetary Control Act of
1980, banks opening an account at the Federal Reserve encountered a process like
that of customers opening standard bank accounts[.]9:6 "Federal Reserve Banks
opened accounts with little independent investigation as to the riskiness of the
applicant. For many years, the Federal Reserve Banks' forms implied that account
opening was quick, noting that ' [p]rocessing may take 5-7 business days.99:7
FRBSF took more than nine months to complete a review process that its
application materials indicate will take up to 30 days. See ER-56. FRBSF responded
with effectively a one-page letter that does not cite any of PayServices' application
materials or responses to requests for additional information to justify the decision
to deny PayServices an account.8 See ER-79. The reason given in the Motion to
Dismiss, including unsupported claims of a "risk of illicit financial activity,
including terrorism funding," are a post-hoc justification for a decision that was
6
Julie Andersen Hill, OpeningA Federal Reserve Account, 40 Yale J. on Reg.
453, 455 (2023) (footnotes omitted).
7 Id. at 456.
8 The letter continues from the first page to a second page that include two
lines of substantive content above the signature block. See ER-79-80. with the
perfunctory greeting and signature blocks removed, the letter amounts to a page of
substantive content. To describe it as "two pages" gives the impression that the letter
is filled with more of a substantive explanation than it actually contains.
6
(17 of 62), Page 17 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 17 of 62
made arbitrarily, capriciously, and with the intent to block PayServices from
operating its lawful business as a state-chartered banking institution. PayServices
meets and exceeds the requirements for the issuance of a master account, and
FRBSF's denial of the same is contrary to law.
JURISDICTIONAL STATEMENT
PayServices sued the Federal Reserve Bank of San Francisco ("FRBSF") in
the U.S. District Court for the District of Idaho, alleging a violation of the
Administrative Procedure Act ("APA"), 5 U.S.C. § 706(2), a claim for relief under
the Mandamus Act, 28 U.S.C. § 1361, and a violation of the Due Process Clause of
the Fifth Amendment to the U.S. Constitution. The district court had original
jurisdiction over the claims under 12 U.S.C. § 632 & 28 U.S.C. § 1331.
The district court granted FRBSF's motion to dismiss the complaint on March
30, 2024. ER-13-39. On March 30, 2024, the district court also entered final
judgment in favor of FRBSF and disposing of all of PayServices' claims. ER-12.
PayServices filed a timely notice of appeal and paid the filing fee required by Federal
Rule of Appellate Procedure 5(d) on April 13, 2024. ER-10-ll. This Court has
jurisdiction under 28 U.S.C. § 1291.
STATUTORY AND REGULATORY AUTHORITIES
All relevant statutory and regulatory authorities appear in the Addendum to
this brief.
7
(18 of 62), Page 18 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 18 of 62
ISSUES PRESENTED
1. Whether the Federal Reserve Bank of San Francisco's denial of master
accounts to eligible depository institutions is subj ect to judicial review under
the Administrative Procedure Act.
2. Whether 12 U.S.C. § 248a, as amended by the Monetary Control Act of 1980,
limits the authority of the FRBSF to deny PayServices' master account
application.
3. Whether access to a master account with FRBSF is a protected property
interest of an eligible non-member depository institution under the Due
Process Clause of the Fifth Amendment where federal law provides a right to
receive Federal Reserve services on the same terms as member banks and
those services require a master account to access them.
4. Whether the district court err in granting FRBSF's Motion to Strike the
Declaration of Lionel Danenberg attached to PayServices' response to the
Motion to Dismiss where it considered documents outside the four corners of
the complaint attached as exhibits to FRBSF's Motion to Dismiss?
STATEMENT OF THE CASE
A. History of Federal Reserve Act and MCA
Congress established the Federal Reserve System (the Federal Reserve) under
the Federal Reserve Act in 1913. Federal Reserve Act of 1913, Pub. L. No. 63-43,
8
(19 of 62), Page 19 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 19 of 62
38 Stat. 251. It serves as "the nation's central bank [and] is composed of both public
and private elements." Comm. for Monetary Reform v. Bd. of Governors offed.
Rsrv. Sys., 766 F.2d 538, 539 (D.C. Cir. 1985). The system includes twelve Federal
Reserve Banks, which "are private corporations whose stock is owned by the
member commercial banks within their districts." Id. at 540. They are, however,
quasi-private because "each Reserve Bank consists of six members elected by the
member commercial banks and three members appointed by the Board of Governors
of the Federal Reserve System." Id. (citing 12 U.S.C. §§ 302 & 304). The Board
members come through the political process, as they "are appointed by the President
with the advice and consent of the Senate." See id. (citing 12 U.S.C. § 241). The
Board, however, oversees the Reserve Banks' issuance of accounts, which the
Federal Reserve calls "master accounts," and payment systems by developing
regulations and exercising supervisory authority over the Reserve Banks. See 12
U.S.C. § 248(a) & (j), Operating Circular 1.' Account Relationships, Fed. Reserve
Fin. Servs. § 2.6 (Aug. 16, 2021) ("2021 Operating Circular"),
https://perma.cc/9ZAJ-7465.9 The Board also has the authority to delegate "any of
9
This document is the version of the Operating Circular in effect when
PayServices submitted its application for a master account on August 10, 2022. See
ER-19, 50 & 54. The current version became effective on September 1, 2023.
Operating Circular I .' Account Relationshzps, Fed. Reserve Fin. Servs. (eff. Sept. 1,
2023), https://www.frbservices.org/binaries/content/assets/crsocms/resources/rules-
regulations/090123-operating-circular-1.pdf ("2023 Operating Circular"). Notably,
the 2023 Operating Circular states that the Reserve Banks have discretionary control
9
(20 of 62), Page 20 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 20 of 62
its functions, other than those relating to Rulemaking or pertaining principally to
monetary and credit policies, to ... Federal Reserve banks[,]" along with other
specified entities, subject to provisions of the Administrative Procedure Act. See 12
U.S.C. § 248(k) (citing 5 U.S.C., tit. 7).
Since the Federal Reserve's inception in 1913, regional Reserve Banks have
had the authority to accept deposits from "member banks." Federal Reserve Act of
1913, Pub. L. No. 63-43 § 13, 38 Stat. 251, 263. Over time, however, Congress has
expanded the list of entities eligible for master accounts. As early as 19 17, four years
after the Federal Reserve Act was enacted, Congress amended the Act to make
nonmember banks and trust companies eligible to open Federal Reserve accounts
"solely for the purposes of exchange or collection" if they met sufficient balance
requirements. Act of June 21, 1917, Pub. L. No. 65-25, § 4, 40 Stat. 232, 235. In
1980, Congress further expanded the list of institutions eligible for master accounts.
Monetary Control Act of 1980, Pub. L. No. 96-221 § 105, 94 Stat. 132, 139 (codified
at 12 U.S.C. § 342). In addition to "member banks," "other depository institutions"
became eligible to open accounts. See id. As part of this expansion, Congress
over master accounts - a position it did not take in the earlier circular issued in 2021
when PayServices applied for an account. See id., § 2.6 ("A Reserve Bank has
discretion in deciding whether to provide a Financial Institution with access to a
Master Account and may require a Financial Institution to provide additional
information and documentation to the Reserve Bank to support its decision
malting."), of. 2021 Operating Circular, § 2.6.
10
(21 of 62), Page 21 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 21 of 62
provided that access to these services must be provided on a non-discriminatory
basis:
The schedule of fees prescribed pursuant to this section shall be based
on the following principles:
... (2) All Federal Reserve bank services covered by the fee schedule
shall be available to nonmember depository institutions and such
services shall be priced at the same fee schedule applicable to member
banks ....
12 U.S.C. § 248a(c)(2) (emphasis added).
The enumerated bank services include "(1) currency and coin services, (2)
check clearing and collection services, (3) wire transfer services, (4) automated
clearinghouse services, (5) settlement services, (6) securities safekeeping services,
[and] (7) Federal Reserve float ...." Id. § 248a(b)(1)-(7). In addition, access must
be given to (8) "any new services which the Federal Reserve System offers,
including but not limited to payment services to effectuate the electronic transfer of
funds." Id. § 248a(b)(8).
The Board has historically asserted that the MCA gave all eligible depository
institutions access to the Federal Reserve payments system. Immediately after
Congress passed the MCA, the number of institutions that could directly access Fed
services went from "5,400 member banks to over 40,000 depository institutions.m10
10 The Role and Activities of the Federal Reserve System in the Nation 's Cheek
Clearing and Payments System, Report of the Subcaste. on Domestic Monetary
11
(22 of 62), Page 22 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 22 of 62
In 1980, the Board announced: "Services covered by the fee schedule are available
to all depository institutions." Bd. of Governors of the Fed. Rsrv. Sys., Policies:
Principles for the Pricing of the Federal Reserve Bank Services,
http://www.federalreserve.gov/paymentsystems/pfs_principles.htm (last updated
Nov. 8, 2008) (emphasis added). An appeals court decision in 1983 noted that "[t]he
Board contends that the language and legislative history of § [248a] evince an intent
to provide nonmember financial institutions access to Federal Reserve services ..
." Bank Stationers Ass 'n, Inc. v. Bd. of Governors offed. Rsrv. Sys., 704 F.2d 1233,
1236 (nth Cir. 1983) (emphasis added). This consistent recognition of the principle
of open access has been maintained for almost forty years, until recently:
1984: "The Monetary Control Act of 1980 (MCA) has expanded the
Federal Reserve's role by requiring the Federal Reserve to provide its
services to all depository institutions on an equitable basis .. . ." Bd.
of Governors of the Fed. Rsrv. Sys., Policies: Standards Related to
Priced-Service Activities of the Federal Reserve Banks (emphasis
added)
http://www.federalreserve.gov/paymentsystems/pfs_standards.htm.
. 1984/ 1990/2001: "Federal Reserve payment services are available
to all depository institutions .... Bd. of Governors of the Fed. Rsrv.
97
Sys., Policies: The Federal Reserve in the Payments System,
http://www.federalreserve.gov/paymentsystems/pfs_frpaysys.htm (last
updated Aug. 11, 2020) (emphasis added).
2016: "Congress expanded the Federal Reserve's role in the payment
system with the enactment of the Monetary Control Act of 1980
(MCA). The MCA ... gave all depository institutions access to the
Pol'y of the Cmte. on Banking, Fin., and Urb. Arr., U.S. House of Representatives,
98th Cong., 2d Sess., at 11 (1984).
12
(23 of 62), Page 23 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 23 of 62
Federal Reserve's payment services." Bd. of Governors of the Fed.
Rsrv. Sys., Federal ReserveS Key Policies for the Provision of
Financial Services: About,
https://www.federalreserve.gov/paymentsystems/pfs_about.htm (last
updated Oct. 28, 2016) (emphasis added).
Although it is unclear when the shift occurred, "the Federal Reserve [has]
changed its approach to processing account requests. Rather than encountering a
process like opening a bank account, some recent Federal Reserve account
applicants have encountered a lengthy process more like applying for a bank
charter." See Julie Andersen Hill, Opening A Federal Reserve Account, 40 Yale J.
on Reg. 453, 456 (2023). The process has also become increasingly secretive. The
Reserve Banks claim that they are not subject to the Freedom of Information Act,
despite authority that suggests otherwise.11 The restricted access to master accounts
generally targets novel banks, such as non-lending banks like PayServices. 12
11 See, et., Freedom oflnformation Requests, Fed. Rsrv. Bank of N.Y.,
https://www.newyorkfed.org/aboutthefed/ freedom-of-information-requests
(stating that although the "[t]he Federal Reserve Bank of New York is not an agency
as defined by the Freedom of Information Act (FOIA) and is therefore not subj ect to
the provisions of FOIA," it nevertheless "is committed to complying with the spirit
of FOIA"), of Karla Karlson, Comment, Check and Balances: Using the Freedom
of lnformation Act to Evaluate the Federal Reserve Banks, 60 Am. U. L. Rev. 213
(2010) (describing how FOIA may be interpreted to apply to Reserve Banks).
12 See Julie Andersen Hill, OpeningA Federal Reserve Account, 40 Yale J. on
Reg. 453, 458 (2023) ("Novel banks undergo a risk assessment, but there are no
processes or bright-line rules that would facilitate consistent decisions across the
twelve Federal Reserve Bank districts.... Novel banks requesting Federal Reserve
accounts often wait years for a decision. The Federal Reserve does not make any of
its decisions public.") (internal footnote omitted), Julie Andersen Hill, From
Cannabis to Crypto: Federal Reserve Discretion in Payments, 109 Iowa L. Rev.
13
(24 of 62), Page 24 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 24 of 62
On August 19, 2022, more than a week after PayServices submitted its
application for a master account, the Board adopted Guidelines for Evaluating
Account and Services Requests, 87 Fed. Reg. 51099 (Aug. 19, 2022) (the
"Guidelines"). While the Board recognized that the suddenly opaque process could
benefit from "a more transparent and consistent approach," id., 87 Fed. Reg. at
51099, "the Guidelines do little to provide the transparency and consistency the
Federal Reserve claims to value[,]" other than formalize the process that de novo
banks like PayServices have faced that resembles applying for a bank charter, but
without the clarity of statutes and regulations to make it clear the materials and proof
necessary to obtain approval.13 See Hill, Opening A Federal Reserve Account, 40
Yale J. on Reg. at 457-58.
The Federal Reserve Board and Banks have faced increasing criticism
regarding the lack of transparency they have injected into the master account
application process. In light of this criticism, Congress amended the Federal Reserve
Act at 12 U.S.C. § 248c(b)(1), to require disclosure of applications for accounts and
the decisions the board has reached on such applications. James M Inhofe National
117, 188 n.428 (2023) ("In litigation with Fourth Corner Credit Union, [The Narrow
Bank], Custodia Bank, PayServices, and [Bar co San Juan International], the Federal
Reserve has not provided any examples of Federal Reserve member banks that have
been denied access to accounts or payment services.")
13 Indeed, the Board acknowledged that "[i]n developing the Account Access
Guidelines, the Board sought to incorporate as much as possible existing Reserve
Bank risk management practices[.]" Guidelines, 87 Fed. Reg. at 51099 n.3.
14
(25 of 62), Page 25 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 25 of 62
Defense Authorization Act for Fiscal Year 2023, Pub. L. No. 117-263, § 5708, 136
Stat. 2395, 3419-20 (Dec. 23, 2022) (codified at 12 U.S.C. § 2480). This statute
requires the Federal Reserve Board to "create and maintain a public, online, and
searchable database that contains ... a list of every entity that currently has access
to a [R]eserve [B]ank master account and services." 12 U.S.C. § 248c(b)(1)(A). In
addition, the Board must provide "a list of every entity that submits an access
request" for a master account and whether the request "was approved, rejected,
pending, or withdrawn." 12 U.S.C. § 248c(b)(1)(B)(ii).
B. PayServices Application Process
PayServices began communicating with FRBSF officials regarding its master
account application request at least as early as April 2022. ER-52, 11 16. The
consistent theme of the allegations is that over several months, FRBSF never
indicated that there was a problem with the application or the likelihood of approval
given its business model. According to the complaint, an FDIC official at an April
2022 indicated that "PayServices' business model did not warrant the need to carry
FDIC insurance coverage of deposits because PayServices' business model does not
involve any type of credit product such as loans, mortgages, or investments." ER-
52, 1117. "At the meeting, the officials concluded that the likelihood of a bank failure
at PayServices is not possible because, at PayServices, all deposits are available at
all times because 100% of deposits are kept in reserve. As a result, there would never
15
(26 of 62), Page 26 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 26 of 62
97
be a run on the bank or pose a risk of failure to due to a bank run for the FRBSF.
ER-53, 'I 18.
PayServices' regulator, the Idaho Department of Finance, determined that its
"entire application [for a bank charter], procedures and risk management framework
was the most sophisticated they had seen to date." ER-53-54, 1 21. Idaho issued a
preliminary approval with conditions that "included the requirement to meet all
federal regulations and be subject to a yearly examination by the Department instead
of one every 18 months," more frequently than other banks. 14 Id. PayServices agreed
to the conditions and a preliminary approval was issued on August 3, 2022. ER-54,
ii 22. According to the complaint, PayServices filed an application on or around
August 10, 2022 and timely provided the follow up documents FRBSF requested to
process the application. ER-54, W 23-25. For almost a year, Appellant "repeatedly
reached out to the FRBSF and has repeatedly inquired as to the status of its approval
request[.]" ER-54, 1 26. Consistent with the recent secrecy around the process,
14 Indeed, the Board has directed Federal Reserve Banks to follow similar
guidelines for de novo banks that seek to become State member banks. SR 20-16:
Supervision of De Novo State Member Banks, Ltd. from Bd. of Governors of the Fed.
Res. Sys., to the Oy§?cer in Charge of Supervision at Each Fed. Res. Bank (June 24,
2020), https: www.federalreserve.gov/sulgrvisionreg/srletters/SR20l6.htm ("The
responsible Reserve Bank should conduct a full-scope examination, independently,
jointly, or concurrently with the state, within 12 months of the de novo's formation
or its conversion to a state member bank. Thereafter, the bank should remain on a
l2-month cycle until two full-scope, on-site examinations have been conducted...
.").
16
(27 of 62), Page 27 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 27 of 62
FRBSF "repeatedly replied that 'the review continues' and that they are 'not sharing
our process with you." Id. (emphasis in original).
It took political intervention, from the office of Florida Sen. Marco Rubio, to
spur FRBSF to issue a decision on May 31, 2023. See ER-57-58. In the meantime,
PayServices repeatedly asked whether the FRBSF had identified any deficiencies in
or concerns about the application. See ER-56-57. FRBSF consistently said no and
agreed to notify PayServices if changes were necessary. ER-56-57. It never did so.
See id. Instead, it issued a letter summarily denying the application based on
Guidelines that had not been promulgated when PayServices applied for the account.
PayServices alleged in its complaint and federal law provides that it qualifies
as a "depository institution" within the meaning of the Federal Reserve Act. It is a
"bank which is eligible to make application to become an insured bank," 12 U.S.C.
§ 461(b)(l)(A)(i) & (b)(1)(B), as it will be "engaged in the business of receiving
deposits[.]" 12 U.S.C. § 1815(a)(1). It is undisputed that the entity is eligible for an
account. See ER-46 & 53.
c. Procedural History of the Case
PayServices filed its complaint against FRBSF on June 27, 2023. ER-73.
PayServices alleged that the Federal Reserve Act, as amended by the MCA, provides
a non-discretionary obligation to grant master accounts to eligible non-member
depository institutions. "All Federal Reserve bank services covered by the fee
17
(28 of 62), Page 28 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 28 of 62
schedule shall be available to nonmember depository institutions ...."12 U.S.C. §
248a(c)(2) (emphasis added). ER-65. The services subject to the fee schedule all
require a master account to use them. See id. Appellant contends that FRBSF
constitutes an "agency" under the APA and its denial of a master account is subj ect
to judicial review. See ER-66-70. Its three-tiered framework for reviewing
applications in the Guidelines essentially places so-called "Tier 3" institutions, non-
member banks which do not have a federal regulator, in the "no-tier" category,
virtually redlining them out of access to the U.S. payment system. See id.
PayServices also alleged that it holds a property interest in a master account where
Congress has determined that eligible non-member banks are entitled to services
provided by the account. ER-72. As a result, the deprivation violates the Fifth
Amendment to the U.S. Constitution. See id. PayServices sought mandamus relief,
in which the court would perform the non-discretionary to issue an account based on
PayServices' eligibility. ER-70-71 .
FRBSF filed a Motion to Dismiss in which it attached a declaration. ER-75.
The declaration included a copy of FRBSF's denial letter as an exhibit. ER-78-80.
PayServices filed a response to the Motion to Dismiss that included the Declaration
of Lionel Danenberg ("Danenberg Declaration"), its incorporator, accompanied by
an exhibit that countered the statements raised in the declaration and exhibit filed by
FRBSF. ER-81. The district court dismissed the Complaint on FRBSF's Motion
18
(29 of 62), Page 29 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 29 of 62
without granting leave to amend. ER-39. The district court also granted FRBSF's
Motion to Strike the Danenberg Declaration. See ER-37.
The district court essentially adopted FRBSF's arguments on all counts. The
district court concluded that section 248a was a "pricing" provision related to
services and that FRBSF had the authority to reject applications from eligible
institutions based on the direction that a Federal Reserve Bank "may receive from
any of its member banks, or other depository institutions, ... deposits of current
funds in lawful money, national-bank notes, Federal reserve notes, [etc.]" 12 U.S.C.
§ 342 (emphasis in opinion). ER-23 & 29. It also interpreted the amendment
requiring disclosure of "rejected" applications in a database as indicative of
Congress/s approval of FRBSF's authority to reject master account applications
from eligible institutions. See ER-26. The district court also ruled that, as an
alternative ground for dismissal, that FRBSF was not an "agency" within the
meaning of the APA because, although Federal Reserve Banks are "integral
components of the Federal Reserve System, such that it can legitimately be argued
that they are federal instrumentalities," ER-32, they are "more accurately described
as private corporations, owned by their member commercial banks." ER-33 .
Despite the ruling that the APA does not apply to Federal Reserve Banks, the
district court determined that FRBSF's decision to deny PayServices a master
account was not arbitrary and capricious because § 342 applies to master account
19
(30 of 62), Page 30 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 30 of 62
requests, not § 248a(c)(2) and that PayServices has not alleged a failure to follow
the Guidelines. ER-37. With respect to the due process claim, the district court
dismissed the claim based on its determination that there was no property interest
associated with the account since FRBSF has complete discretion as to whether the
grant the account and PayServices was not "denied any procedural protections." ER-
37. The district court granted the Motion to Strike in a footnote, indicating that it
could not consider material beyond the complaint, despite its reliance on evidence
FRBSF submitted outside the complaint. See ER-19-20, 37. This appeal timely
followed.
SUMMARY OF THE ARGUMENT
FRBSF is an "agency" within the meaning of the APA. It is an "authority of
the Government of the United States," even given its quasi-private characteristics.
The APA specifies the entities that are excluded from its coverage and even
identifies other banking-related functions that are specifically excluded. Yet it does
not exclude Federal Reserve Banks. The Board has also delegated functions to
FRBSF, including the authority to establish accounts and approve account requests.
The authority by which these functions were delegated is subject to APA and,
accordingly, SO is FRBSF. Given that the APA applies to FRBSF, its denial of
PayServices' application for a master account is not immune from judicial review.
20
(31 of 62), Page 31 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 31 of 62
Congress enacted the Monetary Control Act of 1980 to ensure that "[a]ll
Federal Reserve services shall be available" to eligible non-member depository
institutions. 12 U.S.C. § 248a(c)(2). As opposed to the discretionary authority that
FRBSF "may accept deposits" under 12 U.S.C. § 342, the mandate to provide
services requires the issuance of master accounts because master accounts are
required to access all of the services Congress specified in the MCA. To be sure,
FRBSF may deny accounts to ineligible institutions, refuse to take certain deposits,
and reasonably regulate the use of the account. But it cannot deny the account
altogether where the entity meets the statutory eligibility requirements. The Board
has held this view for almost forty years and may not depart from it without
congressional authorization. While the 2022 amendment to the Federal Reserve Act
indicates that Congress wanted transparency with respect to "rejected" applications,
see 12 U.S.C. § 248c(b)(1), it does not confer discretion to reject accounts for
eligible depository entities to whom Federal Reserve services "shall be available[.]"
12 U.S.C. § 248a(c)(2). Consequently, mandamus relief is available to require the
completion of this non-discretionary duty on the part of FRBSF.
FRBSF has an obligation to carry out the review of master account
applications and avoid acting arbitrarily or capriciously under the APA. PayServices
has sufficiently alleged an APA claim given that the complaint includes detailed
allegations that directly contradict FRBSF's stated grounds for denial. PayServices
21
(32 of 62), Page 32 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 32 of 62
is, at a minimum, entitled to discovery to determine whether FRBSF sufficiently
reviewed its application prior to issuing its denial. Likewise, the right to access
Federal Reserve services for eligible institutions such as PayServices, provided
under federal law, constitutes a protected property interest for which PayServices
has a right to procedural and substantive due process under the U.S. Constitution.
PayServices has sufficiently alleged a protected property interest and a lack of due
process where the denial does not establish any lack of eligibility and FRBSF's
findings are unsupported by the record, according to the complaint's allegations.
Finally, with respect to the Motion to Strike, what is good for the goose is good for
the gander. The district court specifically considered documents outside the four
corners of the complaint filed by FRBSF. The district court had a responsibility to
consider the documents that PayServices filed in response to those allegations that
were based on matters specifically incorporated into and arising out of the complaint.
Thus, the order striking PayServices' exhibit in response to the Motion to Dismiss
must be reversed.
If this Court concludes that the complaint is defective in alleging any of its
claims, it should at least reverse and remand to permit PayServices the chance to
cure any defect on amendment.
22
(33 of 62), Page 33 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 33 of 62
STANDARD OF REVIEW
"[This Court] review[s] a district court's decision to grant or deny a motion to
dismiss pursuant to Rule 12(b)(6) de novo. [It] also review[s] questions of statutory
interpretation de novo." Camacho v. Bridgeport Fin. Inc., 430 F.3d 1078, 1079 (9th
Cir. 2005) (internal citations omitted).
ARGUMENT
I. THE FEDERAL RESERVE BANK OF SAN FRANCISCO IS AN
"AGENCY" COVERED BY THE ADMINISTRATIVE PROCEDURE
ACT.
The district court determined that Federal Reserve Banks are not "agencies"
under the Administrative Procedure Act ("APA"). This position is incorrect and the
consequences of such a position, writ large, would be astonishing. An entity that
exercises many binding regulatory powers including, as FRBSF asserts, the final
authority over decisions affecting the U.S. financial system would operate free of
accountability.
The APA allows courts to review "agency actions." 5 U.S.C. §702 ("A person
suffering legal wrong because of agency action, or adversely affected or aggrieved
by agency action within the meaning of a relevant statute, is entitled to judicial
review thereof....") (emphasis added). The APA defines "agency" as "each
authority of the Government of the United States, whether or not it is within or
subject to review by another agency[.]" 5 U.S.C. §§ 551(1) & 701(b)(1). The
23
(34 of 62), Page 34 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 34 of 62
definition includes exceptions not applicable here. See id. The very presence of those
exceptions, however, indicates that Congress specified the entities that are
specifically not to be considered agencies by statute. "When a provision contains
express exceptions, 'the familiar judicial maxim expressio unius est exclusio alterius
counsels against finding additional, implied, exceptions.m715 Persian Broad. Serv.
Glob., Inc. v. Walsh, 75 F.4th 1108, 1113 (9th Cir. 2023) (quoting Syed v. M-L LLC,
853 F.3d 492, 501 (9th Cir. 2017)), see also United States v. Johnson, 529 U.S. 53,
58 (2000). These exceptions include, for example, "functions conferred by" specific
statutes, including specific authority conferred in title 12 of the U.S. Code - the same
title in which the main statutory provisions at issue in this case are located. See 5
U.S.C. § 701(b)(1)(H).
The APA specifically does not apply to 12 U.S.C. § 1738, relating to the
insuring of mortgages by the Federal Housing Administration ("FHA"). See id. ,' see
also Barrington Manor Apps. Corp. v. United States, 392 F.2d 224, 227 (Ct. Cl.
1968), supplemented, 459 F.2d 499 (Ct. Cl. 1972). It also does not apply to 12 U.S.C.
§§ 1739, 1743, & 1744, which all relate to lending related to housing. With all of
these exceptions related to banks and banking that Congress specifically provided in
the APA, it defies reason to conclude that a Federal Reserve Bank is not subj ect to
15 This Latin maxim has been translated to mean that "expression of one thing
implies the exclusion of others ...." ANTONIN SCALIA & BRYAN A. GAMER,
READHWG LAW: THE INTERPRETATION OF LEGAL TEXTS 107 (2012).
24
(35 of 62), Page 35 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 35 of 62
the APA and the functions of taldng deposits (12 U.S.C. § 342) and providing
Federal Reserve services to eligible non-member depository institutions (see 12
U.S.C. § 248a) would likewise not be covered. If Congress had intended to exempt
Federal Reserve Banks from the APA, it knew how to do SO.
Admittedly, as one court has observed, "the law is currently unsettled on
whether a Federal Reserve Bank is an 'agency' for APA purposes." Custodian Bank,
Inc. v. Fed. Rsrv. Bd. of Governors, 640 F. Supp. 3d 1169, 1179 (D. Wyo. 2022).
An analysis of the cases in which district courts have defined the contours of the
types of entities covered under the APA, however, indicate that Federal Reserve
Banks fall within the ambit of the statute. Courts look to "the structure, function,
and mandate of the entity." New York v. Atl. States Marine Fisheries Comm 'n, 609
F.3d 524, 531 (2d Cir. 2010) (internal quotation marks omitted). Particularly key is
whether the entity exercises "substantial independent authority" to "take final and
binding action affecting the rights and obligations of individuals." Dong v.
Smithsonian Inst., 125 F.3d 877, 881-82 (D.C. Cir. 1997) (internal alterations
omitted), accord Soucie v. David, 448 F.2d 1067, 1073 (D.C. Cir. 1971), Elec. Priv.
Info. Ctr. v. Nat 'I Sec. Comm 'n on Al, 466 F. Supp. 3d 100, 109-11 (D.D.C. 2020).
The district court admitted that "Federal Reserve Banks are integral
components of the Federal Reserve System, such that it can legitimately be argued
that they are federal instrumentalities." ER-32 (citing United States ex rel. Kraus v.
25
(36 of 62), Page 36 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 36 of 62
Wells Fargo & Co., 943 F.3d 588, 592 (Zd. Cir. 2019)), Kraus, 943 F.3d at 592
(Federal Reserve Banks "are instrumentalities of the federal government and the
operating arms of its central bank."). Yet it concludes that this level of authority
"does not zpso facto make them government agencies." Id. The district court
reasoned that Federal Reserve Banks are not subj ect to the APA in part because they
are "separate ... from the government", "do not 'have the authority to promulgate
regulations", and Congress did not "convert them formally into government
agencies." ER-32-33 (quoting Kraus, 943 F.3d at 597-98) (emphasis in opinion).
The district court also concluded that Federal Reserve Banks are not subject
to the APA because they "are more accurately described as private corporations,
owned by their member commercial banks." ER-33. The district court emphasized
the "combination of public and private characteristics" that historically has
characterized FRBs and that they are "private corporations in which the government
has an interest." Id. In determining whether the APA applies to a particular
instrumentality of the federal government, courts have :
[taken] cognizance of the varying arrangements Congress has designed
for implementing governmental functions through private or quasi-
private entities. Recognizing the "myriad organizational arrangements"
adopted "for getting the business of the government done," it was
forced to the "unavoidable fact" that each arrangement must be
examined in its own context to determine whether or not it constitutes
an "agency" within the term agency as defined in the APA.
26
(37 of 62), Page 37 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 37 of 62
Pub. Citizen Health Rsch. Gap. v. Dep't of]-Iealth, Ed., & Welfare, 449 F.
Supp. 937, 940 (D.D.C. 1978) (quoting Wash. Res. Project, Inc. v. Dep't of HEW,
504 F.2d238 (D.C. Cir. 1974), cert. denied, 421 U.S. 963 (1975)) (emphasis added).
The "APA apparently confers agency status on any administrative unit with
substantial independent authority in the exercise of specific functions." Souse v.
David, 448 F.2d 1067, 1073 (D.C. Cir. 1971). "A court should inquire, therefore,
whether the governmental unit has substantial authority to act with the sanction of
the government behind it." Conservation L. Found. of New England, Inc. v. Harper,
587 F. Supp. 357, 364 (D. Mass. 1984) (citing Lee Constr. Co., Inc. v. Fed. Reserve
Bank of Richmond, 558 F. Supp. 165, 172-76 (D. Md. 1982)). While "all factors
must be weighed, 'the important consideration is whether it has any authority in law
to make decisions. "' Public Citizen, 449 F. Supp. at 941 (quoting Wash. Res. Project,
504 F.2d at 248).
The Board has extensively delegated its functions and its authority to the
Federal Reserve Banks. See 12 U.S.C. § 248(k), Lee Constr. Co. v. Fed. Rsrv. Bank
of Richmond, 558 F. Supp. 165, 177 (D. Md. 1982) (citing 12 U.S.C. § 248(1<)). 12
U.S.C. § 248(k) provides in relevant part that
[t]he Board of Governors of the Federal Reserve System shall be
authorized and empowered ... (k) [t]o delegate, by published order or
rule and subject to subchapter II of ... chapter 7, of Title 5, any of its
functions, other than those relating to rulemaking or pertaining
principally to monetary and credit policies, to ... Federal Reserve
banks.
12 U.S.C. § 248(k).
27
(38 of 62), Page 38 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 38 of 62
Thus, there are two limitations provided by statute: the delegation must be "by
published order or rule" and it must be "subject to subchapter II of ... chapter 7, of
Title 5[.]" Id. In August 2022, the Board issued the Guidelines. Accordingly, if this
Court accepts the conclusion that the Guidelines apply to Appellant, a published rule
was issued that governed the denial. Likewise, chapter 7 of Title 5 includes the
provisions of the APA under which Appellant has sought judicial review. See 5
U.S.C. §§ 701-706. Accordingly, both conditions are met.
"Thus, Federal Reserve Banks seemingly possess substantial independent
authority in the exercise of specific functions, and seemingly have authority in law
to make decisions.... [T]he Federal Reserve Banks would appear to be vested with
substantial powers to act with respect to individuals and to function as a discrete,
decision-producing layer," despite the Board's power to review their actions. Lee
Construction, 558 F. Supp. at 178 (internal citations and quotation marks omitted).
Based on these facts, which remain true for FRBSF, the court concluded that "since
the language of the APA itself provides that an 'agency' is 'each authority of the
Government of the United States, whether or not it is within or subject to review by
another agency," a Federal Reserve Bank may be considered such an 'agency' even
though its actions may be subject to review by the Board." Id.
The Guidelines indicate that the Federal Reserve System Board of Governors
provided Reserve Banks with the authority to deny master accounts on its behalf.
28
(39 of 62), Page 39 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 39 of 62
Therefore, FRBSF is subject to the APA as an instrumentality of the federal
government. Indeed, it is estopped from claiming otherwise. See W B. Fishburn
Cleaners, Inc. v. Army & Air Force Exeh. Serv., 374 F. Supp. 162, 165 (N.D. Tex.
1974) (citing Kam Koon Wan v. Black, 188 F.2d 558 (9th Cir.), cert. denied, 342
U.s. 826 (1951))
While the district court emphasized the unique structure of the Federal
Reserve Banks and noted that Congress uniquely designed FRBs in the Federal
Reserve Act of 1913 to "leave governance of money and credit, at least in part, in
private hands[,]" see ER-33 (quoting Kraus, 943 F.3d at 597), the fact that FRBs
have "private or quasi-private" characteristics do not make them immune from
judicial review under the APA. See Public Citizen, 449 F. Supp. at 940. As a general
matter, "[t]he authority to act with the sanction of government behind it determines
whether or not a governmental agency exists. The form the agency takes, or the
function it performs are not determinative of the question." Kam Koon Wan, 188
F.2d at 561 (interpreting meaning of "agency" under Portal-to-Portal Act).
Reserve Banks qualify as APA agencies because they wield significant,
independent federal regulatory powers. Congress tasked Reserve Banks with
implementing federal monetary policy and empowered the Board to "delegate ...
subject to the [APA], any of its functions, other than those relating to rulemaldng or
97
pertaining principally to monetary and credit policies, to ... Federal Reserve banks.
29
(40 of 62), Page 40 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 40 of 62
12 U.S.C. § 248(k). Indeed, the Guidelines indicate that the Board states that they
were issued based on the Board's authority to generally supervise Reserve Banks
under 12 U.S.C. § 248(j). Guidelines, 87 Fed. Reg. at 51106.
Multiple courts that have considered the question have deemed Reserve Banks
agencies for APA purposes, no case holds otherwise. See Flight In 'I Gap., Inc. v.
Fed. Rsrv. Bank of Chi., 583 F. Supp. 674 (N.D. Ga. 1984), vacated on other
grounds, 597 F. Supp. 462 (N.D. Ga. 1984), Lee Constr. Co. v. Fed. Rsrv. Bank of
Richmond, 558 F. Supp. 165 (D. Md. 1982), Jet Courier Servs., Inc. v. Fed. Rsrv.
Bank of Atlanta, 713 F.2d 1221, 1228 & n.1 (6th Cir. 1983). The cases rejecting the
Reserve Banks' status as "agencies" involved definitions that differ from the APA
and did not involve assertions of Reserve Banks' putative final decision-making
authority. 16
16 See Bozeman Fin. LLC v. Fed. Rsrv. Bank of Atlanta, 955 F.3d 971, 976
(Fed. Cir. 2020) (Reserve Banks are "distinct from the government" under America
Invents Act, not other statutes), United States v. Wells Fargo & Co., 943 F.3d 588,
597-98 (2d Cir. 2019) (False Claims Act), Scott v. Fed. Rsrv. Bank of Kan. City,406
F.3d 532, 534 (8th Cir. 2005) (28 U.S.C. § 451 definition), Fed. Rsrv. Bank ofSt.
Louis v. Metro eentre Imp. Dist. No. 1, 657 F.2d 183, 186 (8th Cir. 1981) (not
addressing Reserve Banks' agency status), aff'd, 455 U.S. 955 (1982), Kats iavelos
v. Fed. Rsrv. Bank of Chi., 859 F. Supp. 1183, 1185 (N.D. 111. 1994) ("Plaintiff does
not contend that the FRBC is an executive agency as that term is used in Title VII."),
In re Hoar Ranches, 846 F.2d 1225, 1227 (9th Cir. 1988) (citing Fed. R. App. P.
4(a)(1)), Lewis v. United States, 680 F.2d 1239, 1240 (9th Cir. 1982) ("critical
factor" for Federal Tort Claims Act "is the existence of federal government control
over the detailed physical performance and day to day operation of that entity")
(internal quotation marks omitted) .
30
(41 of 62), Page 41 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 41 of 62
Indeed, the reasoning in Lee Construction is particularly applicable here. The
district court explained: "[D]espite the ostensibly private ownership of Federal
Reserve Banks and despite the private election of six of the nine members of the
board of directors of each Bank, the affairs of each Federal Reserve Bank are
conducted under the close supervision and ultimate control of the Board, an
independent federal regulatory agency." Lee Constr., 558 F. Supp. at 177. Among
various provisions that demonstrate the Federal Reserve System Board of
Governors' oversight of the Reserve Banks, it refers to the authority "[t]o exercise
general supervision over [the] Federal reserve banks" at 12 U.S.C. § 248(j). Id. In
August 2022, the Board issued the Guidelines, citing its general supervisory
authority to do SO under Section 248(j). Guidelines, 87 Fed. Reg. at 51106.
At a minimum, the president of a Where Congress chooses to specify that a
private corporation it has established by law is not an "agency" within the meaning
of the APA or the Mandamus and Venue Act, it has chosen to use specific language
to do SO. See, et., 47 U.S.C. § 396(b) (providing that the Corporation for Public
Broadcasting "will not be an agency or establishment of the United States
Government"), Network Project V. Corp. for Pub. Broad., 398 F. Supp. 1332, 1339
(D.D.C. 1975), aff'd in part, rev 'd impart on other grounds and remanded, 561 F.2d
963 (D.C. Cir. 1977) (citing 47 U.S.C. § 396(b) to justify rejection of request for
mandamus relief). The district court has cited no such provision in the Federal
31
(42 of 62), Page 42 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 42 of 62
Reserve Act or any other relevant authority granting the Reserve Bank such an
exception and this Court should not recognize such a sweeping departure from
principles of judicial review here.
11. FRBSF LACKED THE STATUTORY AUTHORITY TO DENY
PAYSERVICES A MASTER ACCOUNT.
The district court has effectively concurred with FRBSF's account of a history
in which deposit accounts with Reserve Banks were limited to the U.S. government
and Federal Reserve 'member' banks" and that, even after the passage of the MCA,
the Reserve Banks have complete discretion to deny master account applications by
eligible depository institutions because they "may receive from any of its member
banks, or other depository institutions, ... deposits" on certain terms. 12 U.S.C. §
342. ER-23-24. This rendition of the history of the Federal Reserve Act and
description of the structure of the Federal Reserve System is inconsistent with the
history and structure of the underlying statutes.
Until 1980, Federal Reserve accounts "were for the most part ... available
only to banks that were members of the Federal Reserve System." In 1980, Congress
passed the MCA to open up access to the U.S. payment system - not to increase
Reserve Banks' power to keep eligible institutions out.17 The district court held that,
17 See Julie Andersen Hill, OpeningA Federal Reserve Account, 40 Yale J. on
Reg. 453, 455 (2023) (analyzing authority and finding that MCA "[gave] all
depository institutions access to Federal Reserve accounts.").
32
(43 of 62), Page 43 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 43 of 62
under 12 U.S.C. § 342 provides Reserve Banks with discretion to deny master
accounts. See ER-27. The only appeals court that has ruled directly on the question
of the right to a master account has reached the opposition conclusion to the district
court in this case. The ruling came from Judge Robert Bachrach on the U.S. Court
oflAppeals for the Tenth Circuit in a published opinion. Fourth Corner Credit Union
v. Fed. Rsrv. Bank of Kansas City, 861 F.3d 1052 (10th Cir. 2017).
As an initial matter, it must be noted that Section 342 does not address master
account access. Section 342 states that Reserve Banks "may receive from any of its
member banks, or other depository institutions, and from the United States, deposits
of current funds in lawful money, national-bank notes, Federal reserve notes, or
checks, and drafts, payable upon presentation or other items." A "deposit[]" and an
"account" are two different things. A Federal Reserve bank may reject every deposit
that comes from a bank subject to the limits in the language. But that tells one
nothing about whether they have the authority to deny "accounts" that hold the
deposits. Section 342 thus presupposes that various entities already have master
accounts, which are prerequisites to receive deposits. Section 342 merely describes
"types of monetary instruments that Federal Reserve Banks may receive for deposit
or collection" from entities possessing master accounts. Fourth Corner, 861 F.3d at
1074 (Bacharach, J.). Section 342 does not prescribe conditions for obtaining master
accounts.
33
(44 of 62), Page 44 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 44 of 62
The district court relies improperly on Farmers ' and Merchants ' Bank of
Monroe v. Federal Reserve Bank ofRiehmond, 262 U.S. 649 (1923), to support the
conclusion that 12 U.S.C. § 342 gives Reserve Banks discretion to deny master
accounts. ER-23. Farmers largely reinforces the position that Section 342 confers
some discretion over what types of monetary instruments Reserve Banks may accept
not discretion over the question of whether to grant master accounts in the first
place. Farmers held that "neither section 13, nor any other provision of the Federal
Reserve Act, imposes upon reserve banks any obligation to receive checks for
collection. The act merely confers authority to do so." 262 U.S. at 655, 662. The fact
that Reserve Banks need not accept every method of deposit is irrelevant to whether
they have discretion to deny master account applications. See Fourth Corner, 861
F.3d at 1074 (Bacharach, J.) (rejecting Appellee's interpretation).
Multiple courts of appeals have concluded that 12 U.S.C. §248a requires open
access to Federal Reserve services for eligible depository institutions. Despite the
district court's acceptance of the proposition that section 248a is a "anti-price
discrimination provision[,]" ER-30, in Fourth Corner, Judge Bachrach determined
that 12 U.S.C. § 248a requires Federal Reserve Banks to issue master accounts to
eligible depository institutions that apply for them. That section (part of the MCA)
requires that all Federal Reserve Bank services covered by a pricing fee schedule
which Congress directed the Federal Reserve System Board of Governors to adopt
34
(45 of 62), Page 45 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 45 of 62
"shall be available to nonmember depository institutions" on the same terms as are
offered to nonmember banks with certain exceptions. 12 U.S.C. § 248a(c)(2). Judge
Bacharach reasoned that the only way the "Federal Reserve bank services covered
by the fee schedule" can be made available to nonmember depository institutions is
by granting them a master account. See Fourth Corner, 861 F.3d at 1071 (Bacharach,
J.) ("The plain text of § 248a(c)(2) indicates that nonmember depository institutions
are entitled to purchase services from Federal Reserve Banks. To purchase these
services, a master account is required. Thus, nonmember depository institutions,
such as Fourth Corner, are entitled to master accounts.").
Judge Bachrach distinguished between Sections 342 and 248a, the statutes at
issue here:
Section 342 addresses the types of monetary instruments that Federal
Reserve Banks may receive for deposit or collection.... But § 342 does
not address which institutions can access Federal Reserve services, that
subject is governed instead by § 248a(c)(2), which establishes open
access to Federal Reserve services for all nonmember depository
institutions. As a result, § 342 does not affect Fourth Corner's
entitlement to a master account.
Fourth Corner, 861 F.3d at 1074.
"[T]his discretion does not encompass the issuance of master accounts." Id. at 1073-
74. Based on this authority, this Court should reject the district court's determination
that the FRBSF has the absolute discretion to deny master account applications as a
basis to dismiss Appellant's complaint.
35
(46 of 62), Page 46 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 46 of 62
With this limitation on the FRBSF's authority, the sky will not fall and the
parade of horribles trotted out by the FRBSF will not come to pass. The Federal
Reserve Barlk's authority, however, to administer master accounts and protect the
U.S. payment system remains strong. The Federal Reserve Act establishes that
Reserve Banks like FRBSF have an obligation to determine whether the entity
seeking an application meets the eligibility requirements to operate a financial
institution. Once it determines that the entity is eligible, it has an obligation to allow
the entity to open an account.
An analogy to the First Amendment is appropriate here. "A fundamental
principle of the First Amendment is that all persons have access to places where they
can speak ...." Pa ckingham v. North Carolina, 582 U.S. 98, 104 (2017). Yet "[e]ven
protected speech is not equally permissible in all places and at all times." Snyder v.
Phelps, 562 U.S. 443, 456 (2011) (citation omitted). Speech is "subject to reasonable
time, place, or manner restrictions[.]" Id. (quoting Clark v. Community for Creative
Non-Violence, 468 U.S. 288, 293 (1984)). In the same way, the Federal Reserve Act
provides that every eligible depository institution has a right to access Federal
Reserve services on the same terms as member banks, and those services require a
master account to use them. Still, the Reserve Banks do not have to accept every
deposit into that account. See 12 U.S.C. § 342. They have the authority to reasonably
regulate the use of the account. The account cannot be used for money laundering or
36
(47 of 62), Page 47 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 47 of 62
other illegal purposes. All of these restrictions are permissible and consistent with
the Federal Reserve Act - but the one thing that is not permissible is totally denying
an account to a depository institution that is eligible under the Act. The Federal
Reserve Act provides the right to "[a]ll Federal Reserve services" in the fee schedule
to an eligible depository institution, which must carry a right to the account that is
necessary to access those services. See 12 U.S.C. § 248a(c)(2), 12 U.S.C. §
248c(a)(3)(B). Without this account, PayServices has no voice. It has no ability to
participate in its own right in the U.S. payment system and provide authorized
services to customers. This kind of blanket blockade must meet a high bar before it
survives judicial scrutiny.
The band<'s activity with the account is also subject to the regulation of a
network of other state and federal agencies which monitors and controls risks to the
U.S. payment system. But the Reserve Bank does not have the authority to deny
access to an account on this basis.
A. This Court may exercise its mandamus authority to compel the
granting of PayServices' request for a master account.
Appellant has sufficiently alleged that Appellee failed to perform a
nondiscretionary duty, namely to issue a master account to PayServices, where it is
undisputed that Appellant is an eligible depository institution. A writ of mandamus
compelling action from the FRBSF arises under 28 U.S.C. § 1361, which provides:
"The district courts shall have original jurisdiction of any action in the nature of
37
(48 of 62), Page 48 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 48 of 62
mandamus to compel an officer or employee of the United States or any agency
thereof to perform a duty owed to the plaintiff." Mandamus relief applies whether
or not the Court determines that FRBSF is an agency under 28 U.S.C. § 1361 because
Mary Daly, the president of the Federal Reserve Bank of San Francisco, is an
"officer" of the United States. See Custodian Bank, Inc. v. Fed. Rsrv. Bd. of
Governors, 640 F. Supp. 3d 1169, 1191-92 (D. Wyo. 2022) (holding that plaintiff
plausibly alleged that president oflFederal Reserve Bank oflKansas City is an inferior
"officer of the United States"), 12 U.S.C. § 341 ("The president [of a Federal reserve
bank] shall be the chief executive officer of the bank and shall be appointed by the
Class B [representatives of the public, see 12 U.S.C. §§ 302 & 304] and Class C
directors of the bank [directors appointed by the Board, see id.], with the approval
of the Board of Governors of the Federal Reserve System, for a term of 5 years[.]").
Thus, she may be compelled to grant an account by mandamus.
The U.S. Supreme Court indicated in 1875 that "it has been well settled, that,
when a plain official duty, requiring no exercise of discretion, is to be performed,
and performance is refused, any person who will sustain personal injury by such
refusal may have a mandamus to compel its performance." Bd. of Liquidation v.
McComb, 92 U.S. 531, 541 (1875). To obtain mandamus relief, the plaintiff must
show that "(1) [its] claim is clear and certain, (2) the official's duty is
nondiscretionary, ministerial, and SO plainly prescribed as to be free from doubt, and
38
(49 of 62), Page 49 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 49 of 62
(3) no other adequate remedy is available." Patel v. Reno, 134 F.3d 929, 931 (9th
Cir. 1997). In this case, Appellate has "failed to discharge a duty owed to plaintiffs
which Congress has directed them to perform." Custodian Bank, Inc. v. Fed. Rsrv.
Bd. of Governors, 640 F. Supp. 3d 1169, 1177 (D. Wyo. 2022)The issuance of master
accounts to eligible depository institutions is a nondiscretionary duty under Section
248a.
"For relief pursuant to Section 1331 and the APA, plaintiffs must show
unreasonable delay in the processing of their applications." Singh v. Still, 470 F.
Supp. 2d 1064, 1067-68 (nD. Cal. 2007), 5 U.S.C. § 555(b) ("[w]nh due regard
for the convenience and necessity of the parties or their representatives and within a
reasonable time, each agency shall proceed to conclude a matter presented to it."),
see also id., 5 U.S.C. § 706(1) (providing that courts shall "compel agency action
unlawfully withheld or unreasonably delayed"). Under the reasonable time standard,
the Court has discretion to determine whether the agency's delay is unreasonable.
Independence Mining Co., Inc. v. Babbitt,105 F.3d 502, 506-07 (9th Cir. 1997).
In this case, FRBSF took more than nine months to complete an application
process that has historically taken 5-7 business days.18 PayServices alleges that, at
an April 2022, at the beginning of the application process, FRBSF officials
18 See Julie Andersen Hill, OpeningA Federal Reserve Account,40 Yale J. on
Reg.453,456(2023)
39
(50 of 62), Page 50 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 50 of 62
concluded that the company's business model involved minimal risk because the
"likelihood of a bank failure at PayServices is not possible" because keeps all
customer deposits in reserve. ER-53. Appellant alleged that David Xu, representing
the FRBSF, concluded that "PayServices' business model is no different than an
ATM card ... and for this reason, the only requirement - from an operational risk
assessment - for the FRBSF" was that overdrafts would not be permitted, which
PayServices does not allow under its operating procedures. ER-53. Wallace Young,
the most senior official representing the FRBSF on the review of the application,
concluded that "PayServices will be eligible to apply to request approval of a Master
Account for PayServices to be connected to the U.S. payment system and that the
FRBSF would be in a position to approve the request for a Master Account based on
the business plan and business model that PayServices presented." ER-53. After
obtaining a preliminary approval for a charter from Idaho, PayServices formally
submitted its master account application based on the April 2022 meeting. ER-53-
54. For more than nine months, PayServices repeatedly inquired about the status of
its application and was told that the "review continues" and that FRBSF is "not
sharing our process with you." ER-54. FRBSF never identified and informed
PayServices about any aspect of PayServices' compliance and risk management
framework that required improvement. ER-56. PayServices asked multiple times
40
(51 of 62), Page 51 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 51 of 62
and in multiple ways if any changes were required to the application to obtain
approval, FRBSF said no. See ER-56-57.
On May 17, 2023, PayServices contacted the office of U.S. Senator Marco
Rubio for assistance in obtaining information regarding the excessive delay in
processing the application. ER-57. Sen. Rubio's office contacted FRBSF the next
day, asking FRBSF to take action on the application. That same day, Wallace Young
finally sent an email claiming that FRBSF was "wrapping everything up" and
provided a timeframe for completion - within two weeks. ER-58. On May 31, 2023,
FRBSF issued essentially a one-page denial letter. ER-58. FRBSF concluded the
application review that it could have completed much sooner only after a U.S.
senator's office placed a spotlight on their failure to timely complete the review.
Taken together, the allegations establish a plausible cause of action for unreasonable
delay against Appellee. Mandamus relief is available to remedy these failures.
III. FRBSF'S DECISION TO DENY PAYSERVICES A MASTER
ACCOUNT WAS ARBITRARY AND CAPRICIOUS UNDER THE
APA.
A. FRBSF did not have the authority to apply the Guidelines to
PayServices's application for a master account.
PayServices alleges that it applied to the FRBSF for a master account on
August 10, 2022.19 See ER-19, 50 & 54. The Board issued the Guidelines nine days
19 From the FRBSF's point of the view, the date may be even earlier. The
Master Accounts Requests for Access Database indicates that Appellant requested
41
(52 of 62), Page 52 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 52 of 62
later, on August 19, 2022. Guidelines, 87 Fed. Reg. 51099, 51106 (Aug. 19, 2022).
On May 31, 2023, FRBSF justified its decision to deny Appellant's application for
a master account based on "the standards outlined in the [Guidelines]." ER-19 & 79.
The district court dismissed PayServices' APA claim based on FRBSF's application
of the Guidelines, even though Appellant did not allege that the denial was based on
the Guidelines because the Guidelines were issued after PayServices submitted its
application. See ER-37 ("Absent any allegation that FRBSF failed to follow the
Guidelines, there is nothing anchoring PayServices' APA claim").
"It is axiomatic that an administrative agency's power to promulgate
legislative regulations is limited to the authority delegated by Congress." Bowen v.
Georgetown Univ. Hosp., 488 U.S. 204, 208 (1988), Solar Energy Indus. Ass 'n v.
FERC, 80 F.4th 956, 981 (9th Cir. 2023) (citing Bowen). "Retroactivity is not
favored in the law. Thus, congressional enactments and administrative rules will not
97
be construed to have retroactive effect unless their language requires this result.
Bowen, 488 U.S. at 208. Likewise, "a statutory grant of legislative rulemaking
authority will not, as a general matter, be understood to encompass the power to
promulgate retroactive rules unless that power is conveyed by Congress in express
an account on August 8, 2022. See Master Account and Services Database: Requests
for Access, Bd. of Governors of the Fed. Rsrv. Sys.,
https://www.federalreserve.gov/paymentsystems/master-account-and-services-
database-access-requests.htm (last visited May 26, 2024) .
42
(53 of 62), Page 53 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 53 of 62
terms." Id. "Whether a statute or agency decision applies retroactively is a question
of law that [the Ninth Circuit] review[s] de novo." Valiente v. SwW Transl. Co. of
Ariz., LLC, 54 F.4th 581, 584 (9th Cir. 2022).
"A provision operates retroactively when it would 'impair rights a party
possessed when he acted, increase a par*ty's liability for past conduct, or impose new
duties with respect to transactions already completed." Solar Energy, 80 F.4th at
981 (quoting Landgrafv. USI Film Prods., 511 U.S. 244, 280 (1994)). "TO assess
whether a change in law applies retroactively to a pending lawsuit, Landgrafdirects
that [this Court] appt[ies] a two-step test. First, [this Court] determine[s] 'whether
Congress has expressly prescribed the statute's proper reach." If the relevant change
in law is the result of an agency action, [this Court] must find both congressional
authorization for the agency to impose retroactive rules and agency intent for the
rules in question to apply retroactively." Valiente, 54 F.4th at 585 (quoting La ndgraf,
511 U.s. at 280).
The Federal Reserve Act does not provide the Board with the express
authority to engage in "retroactive" rulemaking. Likewise, the Guidelines do not
express any intent to apply the terms retroactively. In fact, the Original Proposal
upon which the Guidelines are based indicates that the Board stated that "the
Proposed Guidelines would be intended primarily to apply to new access requests,"
but they may also apply "to existing account and services relationships where
43
(54 of 62), Page 54 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 54 of 62
appropriate" with a Reserve Barlk's current account holders. See id., 87 Fed. Reg.
at 51100 (emphasis added), see also In re Perkins, 106 B.R. 863, 872 (Bankr. E.D.
Pa. 1989) (refusing to apply Federal Reserve Commentary published in Federal
Register retroactively "provide[d] no indication that its terms should be applied
retroactively").
As a matter of fairness, it is improper to apply the Guidelines to Appellant's
application, which were filed prior to the publication of the Guidelines and prepared
in consultation with FRBSF months in advance. See ER-52-54. The Board provided
that the Guidelines were issued in part to "establish a transparent and equitable
framework for Reserve Banks to apply consistently to access requests." Guidelines,
87 Fed. Reg. at 51101. It also indicated that it had not even completed a plan to
implement the Guidelines as of the date of publication. See id. ("To promote
consistency, the Reserve Banks are worldng together, in consultation with the Board,
to expeditiously develop an implementation plan for the final Guidelines."). The
developing plan is further evidence that the Guidelines were not meant to be applied
to pending requests like that of PayServices.
B. FRBSF's denial of PayServices's application for a master account was
arbitrary and capricious even if the Guidelines are applicable.
The district court concluded that FRBSF's decision was not arbitrary and
capricious under the APA based on its conclusion that section 342, rather than
section 248a(c)(2), applies to master account requests. ER-37. It further reasoned
44
(55 of 62), Page 55 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 55 of 62
that PayServices has not pled any facts showing that the FRBSF's decision was
inconsistent with the Guidelines. According to the court, "Absent any allegation that
FRBSF failed to follow the Guidelines, there is nothing anchoring PayServices'
APA claim." ER-37. Thus, it suggests that PayServices's claim is based on a
"disagreement with FRBSF's decision" when it may only be based on an opposition
"to the process involved." ER-37.
The APA allows courts to set aside agency actions that are "arbitrary,
capricious, and abuse of discretion, or otherwise not in accordance with law." 5
U.S.C. § 706(2)(A). In the seminal case on which the district court relies, the
Supreme Court has reasoned that:
Normally, an agency rule would be arbitrary and capricious if the
agency has relied on factors which Congress has not intended it to
consider, entirely failed to consider an important aspect of the problem,
offered an explanation for its decision that runs counter to the evidence
before the agency, or is so implausible that it could not be ascribed to a
difference in view or the product of agency expertise.
Motor Vehicle Mfrs. Ass 'n offS., Inc. v. State Farm Mut. Auto. Ins. Co., 463
U.S. 29, 43 (1983).
"[A]n agency rule would be arbitrary and capricious if the agency has relied
on factors which Congress has not intended it to consider, entirely failed to consider
an important aspect of the problem, offered an explanation for its decision that runs
counter to the evidence before the agency, or is SO implausible that it could not be
ascribed to a difference in view or the product of agency expertise." Ctr. for
45
(56 of 62), Page 56 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 56 of 62
8iological Diversizy v. Zinke, 900 F.3d 1053, 1067 (9th Cir. 2018). The Ninth Circuit
has ruled that, "[e]ven when an agency is acting within its area of expertise," courts
"need not defer to the agency when the agency's decision is without substantial basis
in fact." Id.
To the extent that the court determined that there was a lack of an allegation
that the denial of Appellant's application violated the Guidelines, the district court
should have provided an opportunity to amend the complaint rather than dismiss the
case with prejudice and without leave to amend. The Ninth Circuit's longstanding
rule is that "a district court should grant leave to amend even if no request to amend
the pleading was made, unless it determines that the pleading could not possibly be
cured by the allegation of other facts." Lacey v. Maricopa Cnty., 693 F.3d 896, 926
(9th Cir. 2012) (quoting Doe v. United States, 58 F.3d 494, 497 (9th Cir. 1995)). In
this case, the district court made no such finding. It simply granted Appellee's
motion to dismiss and on the same day, March 30, 2024, issued a judgment in favor
of the FRBSF and dismissed the case with prejudice. ER-12. The district court's
ruling is inconsistent with the Ninth Circuit's "general practice" in the context of
dismissals under Rule. 12(b)(6). Lacey, 693 F.3d at 927. A dismissal is meant to be
"a dismissal to be of the claims and not a final judgment on the complaint[.]" Id.
(citing WMXTechs., Inc. v. Miller, 104 F.3d 1133, 1135 (9th Cir. 1997)). Consistent
46
(57 of 62), Page 57 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 57 of 62
with this practice, this Court should reverse the dismissal of Appellant's complaint
and remand with directions to grant Appellant leave to amend the complaint.
Iv. PAYSERVICES PROPERLY ALLEGED A DENIAL OF
PROCEDURAL DUE PROCESS.
The district court rejected PayServices's allegations that it has a property
interest in a master account and that the denial of the master account violates its right
to procedural and substantive due process under the Fifth Amendment to the U.S.
Constitution. U.S. Const., amend. V. ER-38-39. The district court based its
conclusion that there was no protected property interest at issue on its flawed
analysis that PayServices "does not have a legitimate claim of entitlement to a master
account." ER-38. Likewise, it ruled that there was no substantive due process right
at issue. See ER-38.
To prevail on either a procedural or substantive due process claim, a plaintiff
must first establish that a defendant's actions deprived plaintiff of a pratectible
property interest. Johnson v. Ryan, 55 F.4th 1167, 1179 (9th Cir. 2022), Olson v.
California, 62 F.4th 1206, 1220 (9th Cir. 2023). "TO have a property interest in a
benefit, a person clearly must have more than an abstract need or desire for it. He
must have more than a unilateral expectation of it. He must, instead, have a
legitimate claim of entitlement to it." Blintz v. Calif Dep 't of Corr. & Rehab., Div.
of Corr. Health Care Servs., 727 F.3d 917, 922 (9th Cir. 2013) (quoting Bd. of
Regents of State Coils. v. Roth, 408 U.S. 564, 577 (1972)). Given that Section 248a
47
(58 of 62), Page 58 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 58 of 62
requires the issuance of master accounts to eligible depository institutions,
PayServices has a legitimate property interest in a master account.
Furthermore, FRBSF has denied PayServices procedural due process.
FRBSF's denial letter, which it attaches to the Motion to Dismiss in its declaration,
does not indicate any means by which PayServices could seek administrative review
or an appeal of the decision. It does not describe specific information that
PayServices can provide that would show it complies with the Guidelines that
FRBSF claims it followed in making the decision. It grants no opportunity to correct
the record and still protect its right to an account as an eligible depository institution.
Accordingly, PayServices has stated a claim for violation of its procedural and
substantive due process rights.
v. THE DISTRICT COURT ERRED IN STRIKING THE
DECLARATION OF LIONEL DANENBERG.
The district court suggested that "PayServices attempts to 'add meat to the
bone[,]"' presumably to "anchor" its APA claim "by attaching the Declaration of
Lionel Danenberg" to its response in opposition to the Motion to Dismiss. ER-37.
The court relied on the "general rule" that courts 'may not consider material beyond
the complaint in ruling on a Rule 12(b)(6) motion." ER-37 (quoting In tri-Plex
Techs., Inc. v. Crest Group, Inc., 499 F.3d 1048, 1052 (9th Cir. 2007)).
The district court's order indicates that it did not adhere to the restriction it set
in this case on considering documents outside of the four corners of the complaint.
48
(59 of 62), Page 59 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 59 of 62
The district court relied on an exhibit to the Declaration of Meredith Karp, counsel
for FRBSF, that Appellate filed as an attachment to its Motion to Dismiss. See ER-
19 (claiming that "[t]he proposed, novel, monoline business model and focus on
transactions that are largely foreign in nature or involve mostly foreign participants
presents undue risk.") (citing EX. A to Karp Declaration, ER-79) The exhibit was
FRBSF's denial letter sent to PayServices, which was not an exhibit to the
complaint. PayServices filed a declaration by its incorporator and proposed director,
Lionel Danenberg, to counter the statements in FRBSF's exhibit. ER-81-88. Yet the
district court relied Appellee's declaration and refused to consider - indeed, it struck
- Appellant's declaration filed in response to that declaration.
Once FRBSF submitted evidence that opposed the allegations in PayServices '
complaint, PayServices was obligated to offer its own controverting evidence. See
Data Disc, Inc. v. Systems Tech. Assoc., Inc., 557 F.2d 1280, 1284 (9th Cir.1977)
(finding that court "may not assume the truth of allegations in a pleading which are
controverted by affidavit"). Mr. Danenberg's testimony about the contents of the
documents was also proper because the documents referenced in the Declaration are
all discussed in the Complaint. On a motion to dismiss under Fed. R. Civ. P. l2(b)(6),
"[t]he court may consider all materials incorporated into the complaint by reference,
as well as evidence properly subject to judicial notice" without converting the
motion to one for summary judgment. See Weston Far. P 'shzp LLLP V. Twitter, Inc.,
49
(60 of 62), Page 60 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 60 of 62
29 F.4th 611, 617 (9th Cir. 2022), Tellabs, Inc. v. Maker Issues & Rts., Ltd., 551
U.S. 308, 322 (2007) ("[C]ourts must consider the complaint in its entirety, as well
as other sources courts ordinarily examine when ruling on Rule l2(b)(6) motions to
dismiss, in particular, documents incorporated into the complaint by reference ...
-"). See ER-81-86, 88, of ER-49-66, W 3, 17, 19, 20-22, 24, 27, 35-36, 44, 64.
Therefore, Appellant requests that this Court reverse the district court's order
striking the Danenberg Declaration.
CONCLUSION
Appellant PayServices respectfully requests that this Court reverse the U.S.
District Court for the District of Idaho's decision to dismiss Appellant's complaint
and remand for proceedings consistent with its opinion.
Date: May 28, 2024
Jade A. Craig, P.A.
/s/ Jade A. Craig
Jade A. Craig
Attorney for Appellant PayServices Bank
50
(61 of 62), Page 61 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 61 of 62
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
Form 17. Statement of Related Cases Pursuant to Circuit Rule 28-2.6
Instructions for this form: http://www.ca9.u5court5.gov/forms/form]7in5tructions.pdf
9th Cir. Case Number(s)
The undersigned attorney or self-represented party states the following:
[ ] I am unaware of any related cases currently pending in this court.
[ ] I am unaware of any related cases currently pending in this court other than the
case(s) identified in the initial briefly) filed by the other party or parties.
[ ] I am aware of one or more related cases currently pending in this court. The case
number and name of each related case and its relationship to this case are:
Signature s/Jade A. Craig Date 5/28/2024
51
(62 of 62), Page 62 of 62 Case: 24-2355, 05/28/2024, DktEntry: 9.1, Page 62 of 62
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
Form 8. Certificate of Compliance for Briefs
Instructions for this form: http://www.ca9.uscourts.gov/forms/form08instruction5.pdf
9th Cir. Case Number(s): 24-2355
I am the attorney.
This brief contains 12,438 words, excluding the items exempted
by Fed. R. App. P. 32(1) The brief' s type size and typeface comply with Fed. R.
App. P. 32(a)(5) and (6).
I certify that this brief (select only one) :
[ ] complies with the word limit of Cir. R. 32-1.
X
[ ] is a cross-appeal brief and complies with the word limit of Cir. R. 28. 1-1 .
[ ] is an amicus brief and complies with the word limit of Fed. R. App. P. 29(a)(5),
Cir. R. 29-2(c)(2), or Cir. R. 29-2(c)(3).
[ ] is for a death penalty case and complies with the word limit of Cir. R. 32-4.
[ ] complies with the longer length limit permitted by Cir. R. 32-2(b) because (select
[ ] it is a joint brief submitted by separately represented parties;
[ ] a party or parties are filing a single brief in response to multiple briefs, or
[ ] a party or parties are filing a single brief in response to a longer joint brief
[ ] complies with the length limit designated by court order dated
[ ] is accompanied by a motion to file a longer brief pursuant to Cir. R. 32-2(a).
Signature s/Jade A. Craig Date 5/28/2024
52