Banking and Finance Law Daily FAST Act reduction of Federal Reserve Bank stock dividends upheld
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Friday, August 9, 2019

FAST Act reduction of Federal Reserve Bank stock dividends upheld

By Richard A. Roth, J.D.

Large banks that held Federal Reserve Bank stock before the FAST Act reduced their dividends have no contractual right to the previous 6 percent, according to the Federal Circuit. The change did not constitute an unconstitutional taking, the court also determined.

The Federal Reserve Act did not create a contract under which the U.S. government agreed to pay Federal Reserve bank shareholders a 6-percent annual dividend, the U.S. Court of Appeals for the Federal Circuit has decided. National banks, which are required to hold FRBank stock, had no property interest in receiving dividends at that rate, the court also said. As a result, the reduction of dividends paid to larger banks that was required by the Fixing America’s Surface Transportation Act was neither a breach of contract nor an unconstitutional taking of property without compensation (American Bankers Assn. v. U.S., Aug. 8, 2019, Hughes, T.).

National banks are required to be members of the Federal Reserve System and to purchase, or "subscribe to," stock in their regional FRBank (12 U.S.C. §282). Beginning when the FRA was enacted, shareholding banks were entitled to an annual 6-percent dividend. However, that changed in 2016 when Congress, looking for a way to fund infrastructure expenses, cast its eyes on these dividends and made a change: while banks with assets of no more than $10 billion would continue to receive dividends at the 6-percent rate, larger banks would not. Larger banks would receive dividends at the lesser of 6 percent or the interest rate of the last 10-year Treasury note auctioned before the dividend was paid.

Effect on Washington Federal. Washington Federal converted from a federal savings association to a national bank in 2013 and, as required, subscribed to stock in the San Francisco Fed. It began receiving dividends at the expected 6-percent rate. However, after the FAST Act, that rate dropped to only about 2 percent, the court said.

The bank, accompanied by the American Bankers Association, sued the government, asserting contract and constitutional claims. A U.S. district court decided that the ABA did not have standing to sue and that the bank had no claim (see Banking and Finance Law Daily, Oct. 31, 2017).

The Federal Circuit focused its analysis on the bank’s claims. Since the ABA wanted to make the same substantive claims as the bank, the defects of those claims made the consideration of the association’s appeal on standing unnecessary, according to the court.

No dividends contract. The bank was unable to convince the court that the government intended the FRA to create either an implied or explicit contract for 6-percent dividends.

The implied contract theory characterized the FRA as an offer by the government to contract, while the explicit contract theory characterized the Act as the government’s invitation to receive banks’ offers to contract. However, under either theory, the bank was required to show a mutual intent to contract, the court said. The bank could not meet that burden.

As a general rule, a law sets public policy, according to the court. A law does not create contractual rights. Explicit statutory language is needed to create a contract, and no such language was included in the FRA. Requiring a national bank to "subscribe" to the stock might reveal an intent to contract in a private agreement, but "the use of terminology that carries contractual connotations when used in the private sector does not, on its own" reveal an intent to contract by the government, the court said.

The bank’s claim that the stock purchase and the 6-percent dividend amounted to a quid pro quo arrangement also was rejected. The two transactions were set out in different FRA sections, the court observed. Also, the capital generated by the stock purchases was intended to create a reserve that the Federal Reserve System could use to maintain systemic stability, not to be part of a commercial transaction.

The San Francisco Fed’s correspondence about the dividends when the bank made the stock purchase did not amount to a promise of future payments, the court added.

No constitutional taking. The bank also offered two theories on why the FAST Act amendment amounted to an unconstitutional taking: first, that the Act deprived the bank of a property interest in the 6-percent dividend with compensation; second, that the Act deprived the bank of its capital investment in the San Francisco Fed without just compensation. Again, both theories were rejected.

Contract rights can constitute property that, when taken, call for compensation, the court conceded. However, the bank had no contract right in the 6-percent dividend.

Likewise, the bank had no statutory right to the dividend. Statutes can be amended at any time, the court pointed out, and the bank’s "unilateral expectation" that the dividend would continue was not a property right.

The bank’s stock purchase was characterized by the court as "part of its voluntary participation in a regulatory scheme." Compensable property rights cannot be created by voluntarily taking part in an activity that is subject to pervasive government regulation. The court also noted that the bank could, by converting to a different charter, withdraw from the Federal Reserve System, surrender its San Francisco Fed stock, and recover its capital investment.

As a result, there was no compensable taking.

The case is No. 2018-1341.

Attorneys : Stephen Joseph Obermeier (Wiley Rein LLP) for American Bankers Association and Washington Federal, N.A. Eric Peter Bruskin, U.S. Department of Justice, for the United States.

Companies: American Bankers Association; Washington Federal, N.A

MainStory: TopStory InterestUsury FedCirNews FederalReserveSystem

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