An international banking entity (the “bank”) opened a master account with the Federal Reserve Bank of New York (FRBNY). The master account provided the bank “direct access to Federal Reserve bank services.” The bank opened this account subject to a disclaimer that permitted the FRBNY to temporarily or permanently remove the bank’s access “at any time by giving written notice” to mitigate risks to the FRBNY. Additionally, the Board of Governors of the Federal Reserve System (the “Board”) determined what level of “due diligence and scrutiny” is necessary for different institutions. The bank did not have federal deposit insurance and thus “operate[d] outside the scope of the federal banking agencies’ supervisory framework” and received the “strictest level of review.” Afterwards, the FBI seized a portion of the bank’s assets, resulting in the temporary suspension of its master account. The FRBNY made the reinstatement of the master account contingent on proof that illegal transactions had not been and would not be processed through the master account, an agreement to be subject to “enhanced risk-mitigation measures,” and compliance with the FRBNY’s Account and Financial Services Handbook. After the bank’s master account was fully restored, it had to submit documentation that showed the effectiveness of the bank’s compliance programs. The bank sent two emails to the FRBNY requesting clarification on the deadlines for submitting the assessments, but the FRBNY did not reply. Consequently, the bank failed to file three of the assessments in a timely manner, and the FRBNY closed the bank’s master account. The FRBNY suspended closure to review the bank’s assessments; however, upon review, it found that the bank “posed undue risk” and ultimately decided to close its master account. The bank sued the FRBNY and the Board, arguing that: (1) the closure of the master account was an “unlawful final agency action” under the Administrative Procedure Act (APA); (2) the master account should be reinstated under the Mandamus Act; (3) the court should find that the closure violated the bank’s right to the master account; (4) the FRBNY and the Board violated its fifth amendment due process rights; (5) the FRBNY’s closure of the master account breached its duty of care and implied covenant of good faith and fair dealing. Most of the bank’s arguments rested on its assumption that it has an “unqualified statutory right” to the master account under the Federal Reserve Act (FRA). 12 U.S.C. § 248a. The FRBNY and the Board challenged this assertion and argued that the language of 12 U.S.C. § 342 provided the FRBNY the discretion to grant master accounts but does not impose any requirements.
In Banco San Juan Internacional, Inc. v. FRB of N.Y., 23-cv-6414 (JGK), 2025 WL 44259, 2025 U.S. Dist. LEXIS 3507 (S.D.N.Y. Jan. 8, 2025) (opinion not yet released for publication), the court found that the FRA does not grant an “unqualified statutory right” but instead provides the FRBNY discretion to grant master accounts to depository institutions and dismissed the bank’s claims without prejudice. The court noted that the language of 12 U.S.C. § 342, which governs master accounts, provides that Federal Reserve Banks (FRB) “‘may receive’ deposits… not that they ‘shall.’” In addition, § 248c(b)(1) of the FRA allowed the FRB to reject access to a master account without limitation; therefore, the FRB “‘may’ grant, deny, or close in the [FRB’s] discretion, any master account.” The court then rejected the bank’s argument that § 248a(c)(2) of the FRA requires that an FRB grant a master account to every depository institution upon request because that statute is directed at the Board rather than an FRB. Further, the court stated that all § 248a(c)(2) required were for nonmember depository institutions to be “allowed” to obtain FRB services. Therefore, because the FRBNY provided the bank the opportunity to acquire a master account, it had complied with the requirements of § 248a(c)(2). Additionally, the court found that the bank lacked standing to sue the Board because it failed to show that it had suffered any injury attributable to the Board and failed to show how a court order could redress its injury. Next, the court addressed the bank’s federal and state law claims. First, the court held that the bank’s “unlawful final agency action” APA claim against the FRBNY was precluded because the FRBNY’s closure of the master account was a “committed agency discretion by law” and the bank “failed to enunciate any meaningful standard… ‘to judge the [FRBNY’s] exercise of discretion.” Heckler v. Chaney, 470 U.S. 821, 830 (1985); 5 U.S.C. § 701. Similarly, the court found that the claims against the Board failed because its actions fall within § 701 and the bank did not provide a standard to review the Board’s “exercise of discretion.” Id. The court also found that FRBNY did not qualify as an “agency” under the APA because the FRBNY is a “private corporation” and does not have the power to make “‘final and binding’ decisions concerning the nation’s economic and monetary policies” that the Board has. Further, Congress intended to provide insulation to the FRB by keeping them “formally separate” from the federal government. United States ex rel. Kraus v. Wells Fargo & Co., 943 F.3d 588, 597 (2nd Cir. 2019). Therefore, the bank’s APA claim failed due to a lack of subject-matter jurisdiction. Nonetheless, the court also found that the bank’s APA claims failed on the merits. Even if the court had found that the FRBNY was an “agency,” the court was precluded from overturning the decision because the FRBNY had made its decision to close the master account after it reviewed the “relevant factors” and provided a detailed explanation that “include[ed] a rational connection between the facts found and the choice made.” Karpova v. Snow, 497 F.3d 262, 268 (2nd Cir. 2007). The court dismissed the bank’s APA claim against the Board on the merits because “[t]he APA authorizes only a challenge to a final action of an agency,” and the Board had not made any final decisions. Lunney v. United States, 319 F.3d 550, 554 (2d Cir. 2003). Second, the court dismissed the bank’s Mandamus Act claims against the FRBNY and the Board for lack of subject-matter jurisdiction because the act only applies to an “agency,” defined as “any corporation in which the United States has a proprietary interest.” 12 U.S.C. § 451. However, the United States held no stock in any FRB; thus, the FRBNY is not an agency (as defined in § 451), and the claims had to be dismissed. Notwithstanding, the Mandamus Act claim failed against the FRBNY and the Board because the court only had jurisdiction to “compel the performance of a nondiscretionary duty,” and § 342 only granted a discretionary power to the FRBNY. Duamutef v. Immigr. & Nat’y Serv., 386 F.3d 172, 180 (2d Cir. 2004). Third, the court found that it lacked subject-matter jurisdiction to hear the bank’s Declaratory Judgment Act (DJA) claims. The bank argued that § 248a(c)(2) entitled it to a master account. However, the DJA only provided a remedy for the bank; therefore, the court could not enter declaratory judgment unless there was “a private cause of action under [§ 248a(c)(2)].” Johnson v. JP Morgan Chase Bank, 488 F.Supp. 3d 144, 157 (S.D.N.Y. 2020). The court found that the FRA did not provide a private right of action; thus, it lacked subject-matter jurisdiction and dismissed the bank’s claims. Fourth, the court dismissed the bank’s due process claims because the bank was unable to “identify a valid cause of action” or “identify any property interest protected by the due process clause.” Fifth, the court addressed the bank’s state law claims against the FRBNY. The court found that the FRBNY had an “unqualified contractual right” to terminate the bank’s master account; therefore, the bank could not claim that by terminating its account, the FRBNY breached a contractual duty of care or implied covenant of good faith. Ultimately, the court dismissed all the bank’s claims but allowed it to amend its complaint.
By Hayden Mariott: [email protected]
Edited By Ashley Boyce: [email protected]