Compliance Blog

Jul 17, 2017

Appeals Court Sends Lifeline to First Cannabis Credit Union

The 10th Circuit Court of Appeals has revived the efforts of Colorado-based The Fourth Corner Credit Union (Fourth Corner) to become the nation's first cannabis credit union.  The credit union, chartered under an obscure provision in Colorado law that permits the state financial services commissioner to grant a charter so long as the credit union has "applied for" share insurance, was formed in 2014 to serve the state's legalized marijuana industry and its supporters.  On June 27, in a 2-1 majority opinion, the appellate court overturned the district court's ruling in the credit union's lawsuit against the Federal Reserve Bank of Kansas City (Fed Bank) after the bank denied Fourth Corner's application for a master account. Vacating the district court’s order and remanding with instructions dismiss the amended complaint without prejudice, the divided 10th Circuit panel decision essentially gives Fourth Corner another shot at applying to the Fed Bank for a master account, which could pave the way for the credit union to finally open its doors for business. 


In 2012, Colorado, along with Washington, became the first states in the nation to legalize recreational marijuana under state law.  However, under the Controlled Substances Act (CSA), marijuana remains a Schedule I substance, which makes it illegal under federal law to manufacture, distribute, or dispense marijuana.  See12 U.S.C. §812(b)(1).  As such, despite legalization under state law, financial transactions involving proceeds from marijuana-related activity can still form the basis for federal criminal prosecution.  As discussed in a prior blog post, this conflict between federal and state law presents a significant challenge to financial institutions in providing banking services to marijuana-related businesses (MRBs).  As a result, MRBs that are operating legally under state law remain largely unbanked and typically operate as cash-only businesses, increasing public safety risks.

In late 2014, Fourth Corner sought to address this banking void by forming a state-chartered credit union to exclusively serve MRBs and supporters of legalized marijuana in the state of Colorado.  According to its Facebook page, the credit union's mission is "to [provide] compliant banking services to those who share a common bond of support for the legalized marijuana industry." 

After getting the green light from the Colorado financial services commissioner, the newly-chartered credit union planned to open its doors in Denver in early 2015.  But the credit union's momentum was short-lived.  In July 2015, NCUA denied Fourth Corner's application for federal share insurance and, shortly after, the Fed Bank denied Fourth Corner's application for a master account, basing its denial, in part, on NCUA's insurance denial.  In response, Fourth Corner filed suit against the Fed Bank and NCUA in two related actions essentially alleging that "The NCUA and [the Fed Bank] acted in concert to unlawfully block [Fourth Corner] from gaining access to the Federal Reserve payments system," which the credit union deems is crucial to its operations.  SeeComplaintThe Fourth Corner Credit Union v. National Credit Union Administration.  Indeed, without access to a master account, the credit union cannot access the Fed's payments system to electronically transfer funds. 

In short: no master account, no business. 

District Court Decision

In December 2015, the U.S. District Court for the District of Colorado dismissed, with prejudice, Fourth Corner's lawsuit against the Fed Bank.  Fourth Corner had asked the court for a mandatory injunction directing the Fed Bank to grant it a master account, but the court declined to grant such relief, finding that "courts cannot use equitable powers to issue an order that would facilitate criminal activity."  See, Dismissal OrderThe Fourth Corner Credit Union v. Federal Reserve Bank of Kansas City.  While acknowledging that the "situation [is] untenable," the district court nevertheless concluded that the credit union's stated purpose in providing financial services to MSBs violated the CSA and "[a] federal court cannot look the other way" just because "financial institutions don’t mind violating the law."  See, Dismissal Order.  Fourth Corner appealed the decision to the U.S. Court of Appeals for the 10thCircuit, which heard oral argument on the matter in November 2016.

10th Circuit Court of Appeals Decision

In a deeply divided decision, the three-judge panel of the 10th Circuit issued three separate opinions that overlapped on some points, but were in direct conflict on others.  Essentially, however, the appellate court vacated the lower court’s order and directed the district court to dismiss the amended complaint without prejudice.  In short, the decision allows Fourth Corner to reapply to the Fed Bank for a master account and to have the case heard again if the bank denies that request.  The court also noted that according to statute the Fed Bank must indiscriminately make Federal Reserve services available to "all depository institutions."  See, 12 U.S.C. § 248a(c)

But… It is important to note that the appellate decision largely relies on Fourth Corner's promise in its amended complaint that it would service marijuana-related businesses only if doing so is legal:

"The district court dismissed the amended complaint, reasoning that Fourth Corner would use the master account to violate federal drug laws. This ruling was erroneous. The district court should have presumed that Fourth Corner would follow the court’s determination that servicing marijuana-related businesses is illegal. And in the amended complaint, Fourth Corner essentially promised to obey the law that would be set out in the eventual declaratory judgment. In these circumstances, the district court had little reason to jettison the standard on a motion to dismiss and rely instead on suspicions about what Fourth Corner would do." (Emphasis added).

Basically, the appeals court found that the district court relied on mere suspicions about what Fourth Corner might do, which was an insufficient standard to approve a motion to dismiss.

In other words, the appellate decision comes with a big caveat—while Fourth Corner may serve marijuana industry supporters and advocates, it may not serve MSBs that are illegal under federal law.

What does this mean for marijuana banking?

Given Fourth Corner's original goal of bringing vital financial services to unbanked MSBs, the 10th Circuit decision is only a limited win for the would-be credit union.  The credit union is now presumably free to adjust its business plan, reapply for a master account and, if granted, to open for business to serve legal-marijuana advocates and other individuals and groups within its field of membership that it may legally serve under federal law.  But here's the thing—regardless of the disposition in court, the credit union was already able to serve those legally innocuous groups.  The key, of course, has always been the ability to serve MSBs that are legal under state law but illegal under federal law.  Viewing the decision through that lens, it's hard to say that the 10th Circuit ruling has moved the ball forward for marijuana banking.  In fact, the decision may have brought the conflict of laws into even sharper focus.  

Indeed, the appeals court was unambiguous in one regard: 

"Today, two of the three panel members hold that servicing marijuana-related businesses remains illegal under federal law. With this holding by a panel majority, Fourth Corner will know that servicing marijuana-related businesses is illegal." (Emphasis added).

Oh, and don't forget that Fourth Corner's lawsuit against NCUA is still pending.  While the Colorado state financial services commissioner appears to have hinted that a denial of federal share insurance is not necessarily fatal to the credit union's business plan, a court ruling in favor of NCUA would certainly raise yet another roadblock for the embattled credit union.  Thus, while Fourth Corner has indicated that it will move forward in pursuing a master account, the credit union—and marijuana banking in general—continues to face a long and difficult road ahead.