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Attorney Johnathan D. Horton

Johnathan D. Horton


Little Rock, AR


Bankers are subject to numerous federal laws and regulations, so banking highlights the tension in the current legal environment for marijuana-related business like no other industry. While at last count 28 states and the District of Columbia had legalized either the medical or recreational use of marijuana, bankers working with marijuana-related businesses risk a range of consequences from additional costs to comply with existing federal oversight to possible prosecution for aiding and abetting drug traffickers or money laundering. In light of the risks and uncertainty of enforcement, many banks refuse to work with marijuana-related businesses. This reality has led to a shortage of available banking channels for many marijuana-related businesses, in an industry driven largely by cash. One creative attempt to solve this dilemma resulted in a recent appellate opinion from the Tenth Circuit Court of Appeals.

A Creative Solution

To address the lack of access to banking channels, a group of Colorado business owners sought to create a state-chartered credit union. In November 2014, the State of Colorado issued a charter to The Fourth Corner Credit Union, a credit union open to any legal marijuana enterprise in Colorado and anyone who is a member of a nonprofit that supports legalized cannabis. Fourth Corner promptly obtained a bank routing transit number from the American Bankers Association and applied for a master account from the Federal Reserve Bank of Kansas City (the Fed). (If you do not know, a master account permits an institution to access the Federal Reserve payment system and transact business. Without access — either through a master account or a correspondent bank — Fourth Corner will find it difficult to conduct its business.) Unfortunately, the Fed denied its application. So, Fourth Corner filed suit asking the court to make the Fed issue it a master account. The Fed asked the court to dismiss the suit for three reasons. First, federal law, which criminalizes marijuana, preempts Colorado state law. Second, the Court ought not to use its equitable powers to facilitate a crime. Finally, Fourth Corner misinterpreted the controlling law.

In response to the motion to dismiss, Fourth Corner amended its complaint to allege that it would serve marijuana-related businesses only if it was authorized to do so. Fourth Corner then sought a ruling in its favor without a trial. The Fed renewed its motion to dismiss.

District Court Ruling

The District Judge dismissed the case and denied Fourth’s Circuit’s motion. In a nine page opinion, he noted that, in 2015, the Bankruptcy Appellate Panel for the Tenth Circuit had rejected bankruptcy relief for marijuana-related businesses because the business activities were federal crimes, and thought he ought not to support violating federal law. While not directly quoting Captain Hector Barbossa from Disney’s Pirates of the Caribbean: The Curse of the Black Pearl, who of the Pirate’s Code said, “The Code is more of what you would call guidelines, than actual rules,” the district judge took a similar approach to Fourth Corner’s argument that the Cole Memorandum and the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) guidance had changed the law. The judge said the Cole Memorandum set the Department of Justice’s (DOJ) enforcement priorities for the Controlled Substances Act, while the Treasury Department’s guidelines simplified reporting requirements for marijuana-related businesses. While he characterized the guidance as suggesting “prosecutors and bank regulators might ‘look the other way’ if financial institutes don’t mind violating the law,” the court could not. He dismissed the suit with prejudice, meaning it could not be re-filed, and granted costs to the Fed.


Fourth Corner appealed to the United States Court of Appeals for the Tenth Circuit, which includes the states of Colorado, Kansas, Oklahoma, New Mexico, Utah and Wyoming. On June 28, 2017, the three-judge panel of the Tenth Circuit issued its opinion. The remainder of this article will look at the parties’ arguments on appeal, and the fractured ruling issued by the appellate court.

Fourth Corner argued that the district judge erred by finding federal law prevails against Colorado state law. It argued that the Fed overstepped its role by essentially acting as law enforcement in denying its application, because only the Justice Department can assert preemption, not banking regulators. Because the Justice Department is still working on regulations, it is still determining whether Colorado law impacts federal and state enforcement of anti-marijuana trafficking laws. Until it decides, the court should state the rule of law on state-regulated marijuana that controls its decision, not merely recite the federal marijuana prohibition.

In response, the Fed said the district judge correctly considered the Controlled Substances Act and related laws – making marijuana illegal – so, as a matter of federal law, it wins. Similarly, no preemption analysis was necessary because federal law makes marijuana illegal, and the Supremacy Clause means that federal law controls over conflicting state law. Creation of a state-chartered credit union cannot trump the Controlled Substances Act. In a friend of the court brief, the Board of Governors of the Federal Reserve System unsurprisingly pressed similar arguments.

After the initial briefs, the three judges on the panel asked the parties to brief the issue of whether the court should consider prudential ripeness sua sponte, i.e., on the court’s own motion. Essentially, the judges brought up the ripeness issue and asked for briefing.

Tenth Circuit’s Ruling

The three judge panel (Judges Moritz, Bacharach and Matheson) of the Tenth Circuit could not agree on how the case ought to be decided. Two judges agreed on the same result – remanding the case with instructions to dismiss the case without prejudice – so that view ultimately prevailed. The three way split of opinions, however, demonstrates the complexity of the issue.

Judge Moritz

To Judge Moritz, this case was not that complicated. He voted to affirm the district court’s dismissal based on the Fed’s illegality defense. Because Fourth Corner intended to provide banking services to compliant, state-licensed marijuana-related businesses, it violated the Controlled Substances Act, even if the businesses complied with Colorado state law. Fourth Corner would, therefore, be facilitating illegal activity by giving these businesses the bank access they currently lack. Under the Supremacy clause, acts illegal under federal law are illegal, regardless of Colorado law. The Executive Branch’s guidance, namely the Cole Memorandum and the Treasury Department’s FinCEN guidance, did not change federal law. Nor did the court have to give credence to the complaint’s allegations that Fourth Corner intended to abide by federal law. Despite its allegations, Moritz was concerned equitable relief would facilitate illegal activity because, in its complaint, Fourth Corner never said it would not serve marijuana-related businesses or stated what it believed the law was. He departed from Judge Bacharach because he disagreed with Bacharach’s suggestion that the complaint’s request for declaratory judgment implied that Fourth Corner had agreed to be bound by a ruling regarding the legality of servicing marijuana-related businesses. Moritz felt that in ruling on that issue the district court “answered a question that the Credit Union never asked.” Ultimately, the illegality defense resolved the material issue, so the court did not need to address the other issues, including whether Fourth Corner was entitled to a master account or whether federal law preempted its charter.

Judge Matheson

Judge Matheson thought the case should be dismissed on ripeness grounds. He suggested that the amended complaint’s allegations that Fourth Corner would only serve marijuana-related businesses, only if it was legal, differed from an application by a credit union focused on serving such businesses. Because Fourth Corner never resubmitted an application to the Fed saying the credit union would only serve marijuana-related businesses, if it was legal, Fourth Corner never gave the Fed the opportunity to decide whether to approve the master account (which would make the case advisory) or reject the application on other grounds (which would make the case about a different dispute). He did not believe that resubmission was futile. Accordingly, Matheson agreed with the Fed that Fourth Corner sought review of a case that was not made and the district court did not consider. So, he felt the present case was premature, so it should be dismissed without prejudice.

Judge Bacharach

Judge Bacharach thought the district court was wrong for two reasons. First, he thought that, at the pleading stage, the district court should have presumed that Fourth Corner’s allegation that it would follow the law, as articulated by the court, was true. He felt by ignoring this allegation, the district court erred. Second, in the amended complaint, Fourth Corner promised to obey the law and, by seeking a declaratory judgment, acknowledged the court determined the law. Bacharach felt that the district court erred by not presuming that Fourth Corner would obey the ruling that servicing marijuana-related businesses is illegal. As a result, the district court erred by misapplying the standard for motions to dismiss.

Bacharach also rejected the Fed’s two arguments for dismissal: (1) Fourth Corner has no statutory right to a master account and (2) Fourth Corner’s charter is preempted by the Controlled Substances Act.

As to the first, he began with the text of the federal law providing for a master account, 12 U.S.C. § 248a(c)(2) (2012). Bacharach found that the text created a nondiscretionary right that required Federal Reserve Banks to make all services covered by the “fee schedule” available to “nonmember depository institutions.” A nonmember depository institution, like Fourth Corner, could operate only by having its own master account or by using a middleman with an account, so Bacharach did not buy the Fed’s argument that because the statute did not list “issuing a master account” specifically, it could deny one. He thought that interpretation was contrary to the statute’s text. Nor did he agree with the interpretation offered by the Fed and the Board of Governors: because the statute did not say that its services had to be available to “all” nonmember depository institutions, it could reject some nonmembers. Bacharach felt the statutory text obligated regional Federal Reserve Banks to make the services available to all nonmembers. He rejected this argument, which the Board of Governors made in its friend of the court brief, by devoting more than seven pages of his opinion to an exposition of how the argument in litigation differed from its past pronouncements, official interpretations by the regional Federal Reserve Banks, legislative history, cases, scholarship and even its current website.

Bacharach also rejected the argument that Fourth Corner’s charter was preempted by the Controlled Substances Act. He noted that the charter was only partially preempted – to the extent it authorized servicing marijuana-related businesses – and Fourth Corner was free to pursue servicing supporters of legalization. Preemption would not completely undermine the charter, so Fourth Corner was entitled to a master account.

Finally, Bacharach disagreed with Matheson. He thought it clear that the Fed would refuse a master account, even if Fourth Corner promised to refrain from servicing marijuana-related businesses, and that dismissal was a hardship for Fourth Corner because it would prevent the credit union from accessing basic services from the Federal Reserve for any patron. Bacharach thought that the panel’s opinion (joined by two of the three judges) that servicing marijuana-related business was illegal provided Fourth Corner sufficient guidance, so that the district court had no reason to doubt Fourth Corner’s sincerity when it alleged it would service marijuana-related businesses, only if providing such services was legal. He thought it made no sense to require Fourth Corner to reapply to the Fed and say specifically “it will service marijuana-related businesses only if it is legal.” He noted the potential for delay in processing the new application, which would continue to drag the matter out and prevent Fourth Corner from operating. So, he would not have required it to apply again.

So, Bacharach ultimately would have reversed the district court, and remanded the case.


The ultimate result is a Pyrrhic victory for Fourth Corner. After nearly a year of time spent waiting on the Fed to process its application and about another two years of litigation, not including the amount spent on attorneys’ fees and related expenses, the change of the dismissal to one without prejudice means that Fourth Corner lives to fight another day, but it now has to start the process over again. Fourth Corner will likely reapply to the Fed for a master account. The Fed will then have to determine its new application. If Fourth Corner loses again, which appears likely, another suit and undoubtedly another appeal will follow.

While the panel fractured on other issues, at least two judges agree on one point: servicing marijuana-related businesses is illegal. This conclusion imposes a significant limitation on Fourth Corner’s clientele. While it is still free to service the other groups referenced in its charter, Fourth Corner cannot service marijuana-related businesses, the very businesses that led to its formation and which it has suggested may need its services the most.

Access to the Fed is, however, not the only issue preventing Fourth Corner from operating. It has also sought deposit insurance from the National Credit Union Administration, but that application was denied. That denial is the subject of a separate, pending lawsuit. So, deposit insurance remains an obstacle to be resolved, along with capital requirements and other issues raised by the Fed, even if Fourth Corner convinces the Fed to grant a master account to it in response to its new application.

Finally, more than six months into the current administration and the executive branch has offered no assurances that it will not change the Justice Department’s enforcement priorities again, just as the Obama administration did in the Cole Memorandum and FinCEN guidance. The current partisan tenor of Washington suggests a legislative solution to the present tension between federal and state laws is unlikely. While Congress could step in and address how marijuana is treated by amending the Controlled Substances Act, that appears unlikely to occur in the immediate future.

Until there is a change to address the differing federal and state laws, it is unlikely that most banks (or their bankers) will risk the criminal penalties that could result from accepting deposits from marijuana-related businesses, or deposits they either know or have reason to suspect come from marijuana-related transactions. The lack of access to traditional banking channels appears likely to continue to be a problem for marijuana-related businesses for the foreseeable future. However, if one business gets its way, at least legalization supporters may soon have access to banking services through a state-chartered credit union.