Federal Appeals Court Gives Colorado Marijuana Credit Union Another Chance

A Colorado credit union will get another shot in its quest to provide banking services to the state’s legal marijuana industry as the Tenth Circuit on Tuesday opened the door for the financial institution to reapply for a master account at the Federal Reserve Bank of Kansas City.

A Tenth Circuit panel vacated a Colorado federal court’s decision to dismiss Fourth Corner Credit Union’s challenge to the Kansas City Fed’s application denial with prejudice, instead sending it back to the lower court with instructions to dismiss the suit without prejudice.

The upshot of the appeals court’s ruling is that the credit union can again ask the Kansas City Fed to grant it a master account, which gives financial institutions access to the Fed’s automated clearinghouse system and the ability to do things like clear checks and perform other transactions on behalf of customers.

Mark A. Mason, an attorney for Fourth Corner, told Law360 in an email Tuesday that the credit union will immediately submit a revised master account application to the Kansas City Fed, characterizing the outcome of the Tenth Circuit’s decision as a win that “paves the way for supporters of legalized cannabis and hemp to have their own member controlled not for profit financial institution.”

“While Fourth Corner has to limit its activities to the service of legalization supporters until federal law evolves, legal banking for [marijuana-related businesses] is inevitable,” Mason said. “When it happens, Fourth Corner will be positioned to hit the ground running.”

The battle between the credit union and the Kansas City Fed is part of a broader problem that marijuana dispensaries and other related businesses have with gaining access to financial services in states where the drug is legal for medicinal and adult-use purposes. Because marijuana is still considered illegal under federal law, most banks and credit unions will not provide accounts or other services to marijuana-related businesses.

Fourth Corner Credit Union filed its suit against the Kansas City Fed in July 2015 after the reserve bank refused to grant it a master account on the grounds that marijuana remained illegal under federal law despite Colorado’s move to legalize it for recreational use. Without this account, the credit union has claimed it “cannot function.”

After the lower court upheld that move on the grounds that marijuana is subject to the federal Controlled Substances Act, the credit union appealed to the Tenth Circuit. Fourth Corner argued the lower court decision was incorrect because only the U.S. Department of Justice has the authority to preempt state law under the CSA, not banking regulators.

The credit union asked the appeals court to force the Kansas City Fed to grant it access to a master account or else give a clear reason why federal law trumps Colorado’s policy toward the drug.

Declining to issue such an order, the circuit judges did not reach firm consensus on the deeper issues surrounding conflicting state and federal laws on marijuana, focusing their three separate opinions instead on their disagreements about how much credence to give to Fourth Corner’s promise to serve marijuana-related businesses only if the law allows it.

That promise, made in an amended complaint, should have stopped the lower court from dismissing the case on illegality grounds in January 2016 because the Kansas City Fed never established that what the credit union planned to do was actually illegal, Fourth Corner has argued.

But U.S. Circuit Judge Nancy Moritz wasn’t buying it, arguing that the court doesn’t “owe the presumption of truth to illusory allegations.” By its own admission, Fourth Corner endeavors to facilitate what is plainly illegal activity by federal standards, Judge Moritz said, so its pledge to follow the law isn’t worth much, particularly when that pledge has been made conditionally.

“The credit union will either serve [marijuana-related businesses] or it won’t — its allegations can’t depend on the answer to a legal question,” Judge Moritz wrote.

While Judge Moritz would have affirmed the lower court’s dismissal with prejudice, her fellow panel member U.S. Circuit Judge Robert E. Bacharach reached the opposite conclusion. Assessing the credibility of the credit union’s promise is the kind of factual inquiry that is inappropriate for the dismissal stage, the judge argued.

“At this stage, the district court must accept as true all of Fourth Corner’s well-pleaded factual allegations and view them in the light most favorable to Fourth Corner,” Judge Bacharach said. “The district court was not free to scuttle these requirements.”

But U.S. Circuit Judge Scott M. Matheson Jr. thought Fourth Corner’s only-if-legal promise changed the nature of the suit entirely, pushing it into the realm of hypothetical debates that are not yet ripe for the court to decide.

“The credit union’s plan to serve [marijuana-related businesses] was a key reason why the Reserve Bank denied the master account application,” Judge Matheson said. “With that justification gone, we do not know what would happen under the credit union’s revised stance.”

According to Judge Matheson, Fourth Corner should submit another application reiterating its only-if-legal promise and see how the Kansas City Fed decides. Until then, the judge said, the credit union’s appeal was “premature” and should be dismissed.

Fourth Corner believes that if it reapplies for a master account with this caveat, the Kansas City Fed will not be able to deny its application.

“If the Fed denies it — Judge Bacharach’s opinion is unequivocal — that would be a violation of federal law,” Mason said in an email to Law360.

According to Judge Bacharach, Federal Reserve banks don’t have discretion to deny access to these accounts, and to the extent federal law might preempt Fourth Corner’s charter, it would do so only as far as the charter authorizes serving marijuana-related businesses.

“Thus, Fourth Corner would still be authorized to pursue its broader mission of servicing the supporters of legalization,” Judge Bacharach said. “Because the charter would not be completely invalidated, Fourth Corner would remain entitled to a master account.”

Representatives for the Kansas City Fed declined to comment.

Circuit Judges Matheson, Bacharach and Moritz sat on the panel for the Tenth Circuit.

Fourth Corner is represented by Mark A. Mason and Gabrielle Z. Lee of The Mason Law Firm PA.

The Kansas City Fed is represented by Scott S. Barker, N. Reid Neureiter and Benjamin I. Kapnik of Wheeler Trigg O’Donnell LLP.

The case is The Fourth Corner Credit Union v. The Federal Reserve Bank of Kansas City, case number 16-1016, in the U.S. Court of Appeals for the Tenth Circuit.


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