David vs Goliath: Custodia Bank Survives Federal Reserve's Third Motion To Dismiss

The little Wyoming bank that could has survived the third attempt to knock the lights out of its lawsuit, in what promises to be a landmark decision for Wyoming’s digital asset banks

Renée Jean

June 13, 20235 min read

Custodia Federal Reserve Lawsuit graphic 4 20
(Cowboy State Daily Staff)

The third time around for a motion to dismiss Custodia Bank’s lawsuit challenging the Federal Reserve’s denial of its master account wasn’t the charm for the agency in what is fast becoming a precedent-setting David and Goliath digital banking case. 

The little Wyoming bank that could has survived the third attempt to knock the lights out of its lawsuit, in what promises to be a landmark decision for Wyoming’s digital asset banks, referred to as special purpose depository institutions, or SPDIs (pronounced speedies).

“We are pleased that the Fed’s attempt to provide itself a veto over state bank chartering decisions will now be tested in federal court,” Custodia Bank spokesman Nathan Miller told Cowboy State Daily in an email.

Miller went on to say that the Federal Reserve has never had authority to reject state banking charters.

“Nor does it need discretion to block banks that already have been validly chartered by state banking authorities that rigorously separate the wheat from the chaff,” he added. “Indeed, the Wyoming Division of Banking rejected more than 150 prospective applicants before Custodia received its bank charter. 

“After decades of automatically granting master accounts to chartered banks, the Fed ‘reinterpreted’ federal law to hand itself special authority that it never received from Congress. We look forward to the court’s review of this power grab by the Fed.”

The Federal Reserve declined to comment on the ruling in an email to Cowboy State Daily.

Custodia’s Claims Are Plausible

In his ruling, U.S. District Court Judge Scott W. Skavdahl said that Wyoming-based Custodia Bank has made a plausible claim, particularly if “discovery reveals the Board of Governors in fact inserted itself into (Federal Reserve Bank of Kansas City’s) consideration of Custodia’s application.”

Skavdahl also accepted as plausible Custodia’s suggestion that “puppet strings” were being pulled behind the scenes, above the Federal Reserve Bank of Kansas City, based on the timing of White House press releases that day, as well as other actions on record in the case.

“Thus, because the development of facts underlying or refuting certain allegations may prove particularly relevant to any statutory interpretation of (the relevant federal laws) the Court will not undertake a complete analysis at this stage of the proceedings without a further development of those facts,” Skavdahl wrote.

Federal Reserve Argument Not Convincing

Skavdahl also suggested he is not convinced by the Federal Reserve’s interpretation of former U.S. Sen. Patrick Toomey’s James Inhofe National Defense Authorization Act for Fiscal Year 2023 Amendment to the Federal Reserve. 

Toomey, a Republican from Pennsylvania, has written an amicus brief to the court outlining his own objections to the Federal Reserve’s interpretation of his amendment.

In that outline, Toomey explains his law was intended to require the Board of Governors of the Federal Reserve to create and publish a public database to identify every entity with access to a Federal Reserve master account, as well as every entity that has applied for such an account, along with a notation on whether the request was approved, rejected, pending or withdrawn. 

That amendment was intended to bring new transparency to the process surrounding master accounts after other entities, including Custodia Bank, had also run into trouble with their applications.

Skavdahl agreed in essence with Toomey’s assertion that the preparation of such a database did not necessarily mean that applications to it must somehow suddenly have become discretionary.

“It is public knowledge that master account applications have been ‘rejected’ or denied for non-discretionary reasons in the past,” Skavdahl wrote. “For example, in Fourth Corner, the district court dismissed the credit union’s lawsuit after determining FRBKS could not have issued a master account in that case because doing so would have aided the credit union in providing banking services to marijuana-related businesses, which would have violated federal drug laws.”

But that doesn’t mean, Skavdahl said, that the amendment carries the “statutory construction load the Board of Governors asserts it does.”

Custodia Bank’s assertion against the Board of Governors is thus plausible, Skavdahl wrote, and the board’s actual conduct will determine if the claim is successful. 

“Consequently, the Board of Governors’ request to dismiss Custodia’s APA claim will be denied,” Skavdahl wrote.

Writ of Mandamus Survives In Part

A writ of mandamus is the typical means of compelling an agency to perform a nondiscretionary action, if that body has ignored its statutory duty.

Skavdahl said based on the reasoning of Judge Bacharach in the aforementioned Fourth Corner case, Custodia’s claim of both unreasonable delay of a decision on its master account and legal entitlement to a master account is plausible, but only as it applies to the Federal Reserve Board of Kansas City.

“The APA permits Custodia to ‘compel agency action unlawfully withheld,’” Skavdahl wrote. But the “APA provides Custodia a means to its requested remedy if it prevails against the Board of Governors on administrative review.”

With these parameters decided, Skavdahl said Custodia’s claim for declaratory judgement is also plausible and won’t be dismissed either.

With that ruling, the Federal Reserve Bank of Kansas City now owes an answer to Custodia Bank’s amended complaint, Skavdahl concluded.

Renée Jean can be reached at renee@cowboystatedaily.com.

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Renée Jean

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