Banco San Juan Internacional, Inc. v. The Federal Reserve Bank of New York

Background

Banco San Juan Internacional, Inc. (BSJI), a Puerto Rico international banking entity, had a Master Account with the Federal Reserve Bank of New York (FRBNY). The account agreement and later supplemental terms allowed the FRBNY to suspend or terminate the account by written notice. The supplemental terms also required enhanced risk-mitigation measures.

After reviewing BSJI’s compliance reports and transaction activity, the FRBNY concluded that BSJI posed an undue risk. The review identified compliance-program weaknesses, missing or inconsistent information, large inflows from shell companies in high-risk jurisdictions connected to BSJI’s owner, and transactions that lacked clear business purposes or appeared suspicious. The FRBNY notified BSJI that it would close the Master Account and end BSJI’s access to the FRBNY’s financial services.

BSJI sued the FRBNY and the Board of Governors of the Federal Reserve System and sought a preliminary injunction under Federal Rule of Civil Procedure 65. A preliminary injunction is an order intended to preserve the situation while a case is pending. BSJI asked the court to require that its Master Account remain open until a final judgment.

Ruling on the FRBNY

The court denied BSJI’s motion for a preliminary injunction against the FRBNY. Because the requested injunction would prevent government action taken in the public interest, BSJI had to show irreparable harm and a likelihood of success on the merits. The court also considered whether BSJI had raised serious legal questions and whether an injunction would serve the public interest.

The court found that BSJI had not shown irreparable harm. BSJI predicted that it would lose customers and might cease to exist without the Master Account, but the court viewed those predictions as speculative. The court also noted that BSJI’s customer base had already been reduced as part of its own effort to reduce its risk profile and that its remaining account holders were closely connected to the owner.

The court rejected BSJI’s argument that federal law gave it a right to a Master Account. The court interpreted 12 U.S.C. § 342 as authorizing, but not requiring, Federal Reserve banks to accept deposits and maintain Master Accounts. It also concluded that 12 U.S.C. § 248a(c)(2) concerns pricing and equal access to covered services, not a requirement that every depository institution receive a Master Account. The court further relied on the Master Account Agreement and supplemental terms, which gave the FRBNY the contractual right to terminate BSJI’s account.

The court also concluded that BSJI was unlikely to succeed on its Administrative Procedure Act claim. The court explained that Federal Reserve banks are not executive agencies and that, in any event, the statute gives the FRBNY discretion to open or terminate Master Accounts. The court found that the FRBNY had conducted a thorough review, considered relevant information, explained its decision, and did not act arbitrarily or contrary to law.

BSJI’s due process claim also failed because the court found that BSJI had no protected property interest in a Master Account that the FRBNY was required to provide. The court further found that BSJI had received an adequate opportunity to present its position. Finally, the court concluded that BSJI was unlikely to prove that the FRBNY breached the contractual duty of good faith and fair dealing because the agreements permitted termination and BSJI had not shown that the FRBNY acted in bad faith.

The court determined that the public interest weighed against an injunction. It cited the risks that money laundering and other illicit activity could pose to the financial system and found that the FRBNY’s stated concerns about BSJI justified closing the account.

Ruling on the Board

The court dismissed BSJI’s motion for a preliminary injunction against the Board as moot. The Board supervised the Federal Reserve banks but did not have statutory authority to receive deposits, open or close Master Accounts, or provide the relevant banking services. Because the Board could not reopen BSJI’s account, a favorable order against the Board could not redress BSJI’s injury. The court therefore concluded that BSJI lacked standing to obtain the requested injunction against the Board.

Disposition

The plaintiff’s motion for a preliminary injunction against the FRBNY was denied. The plaintiff’s motion for a preliminary injunction against the Board was dismissed as moot. The Clerk was directed to close ECF No. 6.