Judge Urges Negotiations on Marijuana, K.C. Fed Account

By Tripp Baltz

Dec. 28 — A federal judge suggested Dec. 28 that a Colorado credit union chartered to serve marijuana businesses try negotiations in its bid for full access to the U.S. payments system (Fourth Corner Credit Union v. Fed. Res. Bank of Kansas City, D. Colo., 15-cv-01633, oral arguments, 12/28/15).

The suggestion by Judge R. Brooke Jackson of the U.S. District Court for the District of Colorado came during arguments between Fourth Corner Credit Union and the Federal Reserve Bank of Kansas City. Fourth Corner's lawsuit says the Monetary Control Act of 1980 requires regulators to approve its application for a “master account.”

Jackson said marijuana, though legal in some form in 23 states and the District of Columbia, remains illegal under federal law. Lawyers for the Federal Reserve Bank said Fourth Corner's application presented several problems, including Fourth Corner's inability to obtain insurance, adding that the institution lacks sufficient startup capital.

As long as marijuana remains a Class 1 controlled substance under federal law, banks and other financial institutions will face significant barriers to providing services to state-licensed marijuana-related businesses (MRBs), lawyers representing both parties said.

‘Rock and a Hard Place'

“It's unfortunate they are stuck between a rock and a hard place,” said Scott S. Barker of Wheeler Trigg O'Donnell LLP in Denver, representing the Federal Reserve Bank of Kansas City. “But the Federal Reserve Bank of Kansas City did not create this problem.”

Barker said there were multiple “good reasons” why the Federal Reserve Bank of Kansas City denied Fourth Corner's application for a master account, namely that Fourth Corner cannot secure insurance and applied as a “de novo” organization, as opposed to as one with a relationship with an established bank.

To approve Fourth Corner would mark the first time a de novo organization would receive a master account “without having first established a correspondent banking relationship,” Barker said. “It would be a very unusual thing to do to give a de novo organization a master account.”

Entitled to Account

Mark A. Mason of the Mason Law Firm in Mount Pleasant, S.C., attorney for the credit union, argued that the credit union “is simply asking to be permitted to play on the same field under the same rules.”

Jackson said he was leaning toward the credit union's argument that it is entitled to equal treatment with other financial institutions. “I think there is a certain amount of unfairness in allowing these big banks to serve these businesses and keep you out,” he said. But later he told Mason: “You've got a bigger problem — what your credit union states it was organized to do is illegal. My job is to apply the law, and the law says it's illegal.”

Both sides said guidance issued in February 2014 by the Financial Crimes Enforcement Network outlining measures for financial institutions to take in accepting MRBs as customers has not, as intended, allowed more banks and credit unions to do business with the industry. Jackson called the guidance “namby-pamby.”

“It was just putting some words out there and hoping all this will go away,” he said.

Jackson ended the hearing by saying he would issue a ruling in writing “so both of you can have it when you appeal.”

To contact the reporter on this story: Tripp Baltz in Denver at abaltz@bna.com

To contact the editor responsible for this story: Seth Stern at sstern@bna.com