On January 8, the United States District Court for the Southern District of New York dismissed the claims brought by Banco San Juan Internacional, Inc. (BSJI) against the Federal Reserve Bank of New York (FRBNY) and the Board of Governors of the Federal Reserve System (Board). BSJI alleged that the termination of its master account by the FRBNY violated various federal laws. The ruling in the BSJI case underscores the discretionary authority of Federal Reserve Banks in granting or denying master accounts.

What is a Master Account?

A master account is a deposit account held by a depository institution at a Federal Reserve Bank. It grants the account holder direct access to the Federal Reserve’s payment systems, allowing for the settlement of transactions, access to Fedwire services, and other critical banking functions. Master accounts are essential for financial institutions as they facilitate efficient and secure transactions, providing a direct link to the nation’s central banking system.

Case Background

BSJI, a Puerto Rico International Banking Entity, had its master account with the FRBNY terminated. The bank argued that this termination violated the Administrative Procedure Act (APA), the Mandamus Act, the Declaratory Judgment Act (DJA), and the Due Process Clause of the Fifth Amendment. Additionally, BSJI claimed that the FRBNY breached a contractual duty of care and an implied covenant of good faith and fair dealing.

Central to the dispute was the interpretation of the Federal Reserve Act (FRA). BSJI contended that it had a right to a master account under 12 U.S.C. § 248a, while the defendants argued that 12 U.S.C. § 342 granted the FRBNY discretion to grant or deny master accounts.

Court’s Analysis and Ruling

The court sided with the defendants, finding that the FRA did not provide BSJI with an unqualified right to a master account. The court emphasized that 12 U.S.C. § 342 uses the term “may,” indicating that Federal Reserve Banks have the discretion to accept or reject deposits from depository institutions. This interpretation was supported by historical context and recent legislative amendments, including the National Defense Authorization Act for Fiscal Year 2023, which reaffirmed the discretionary nature of master account approvals.

As for the bank’s APA claims, the court determined that the FRBNY’s decision to terminate BSJI’s master account was “committed to agency discretion by law” and thus not subject to judicial review under the APA. Additionally, the court found that the FRBNY is not an “agency” under the APA, further precluding BSJI’s APA claims.

BSJI’s claims under the Mandamus Act and DJA were dismissed for lack of subject-matter jurisdiction. The court concluded that the FRA did not impose a nondiscretionary duty on the FRBNY to maintain a master account for BSJI, and the DJA did not provide an independent source of federal jurisdiction.

The court also dismissed BSJI’s due process claims, finding that BSJI had no protected property interest in the master account. The FRA’s discretionary language meant that BSJI could not claim an entitlement to the account.

BSJI’s state law claims for breach of contractual duty of care and breach of the implied covenant of good faith and fair dealing were dismissed. The court noted that the Master Account Agreement explicitly allowed the FRBNY to terminate the account at any time, and BSJI had agreed to these terms.

Our Take

The Federal Reserve Banks have a strong track record in similar cases, as evidenced by recent rulings in the Custodia Bank and PayServices Bank cases. In both instances, courts upheld the Federal Reserve Banks’ discretion to deny master account requests, reinforcing the principle that access to master accounts is not an entitlement but a privilege subject to regulatory scrutiny.

In the Custodia Bank case, the U.S. District Court for the District of Wyoming affirmed that the Federal Reserve Bank of Kansas City had discretion to deny the master account request. The court found that the statutory language of 12 U.S.C. § 248a did not eliminate the FRBs’ discretion to deny access to master accounts. Similarly, in the PayServices Bank case, the U.S. District Court for the District of Idaho ruled that the Federal Reserve Bank of San Francisco had discretion to deny the master account request based on 12 U.S.C. § 342. The court also concluded that the FRBSF was not an agency of the federal government, further undermining the plaintiff’s claims.