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United States Court of Appeals for the Federal Circuit
04-5126
TEXAS STATE BANK
(successor by merger to COMMUNITY BANK & TRUST),
Plaintiff-Appellant,
v.
UNITED STATES,
Defendant-Appellee.
Blake Henry Bailey, Bailey Law Firm, of Tyler, Texas, argued for plaintiff-
appellant. With him on the brief was J. Bennett White, Wilson, Sheehy, Knowles,
Robertson & Cornelius, P.C., of Tyler, Texas.
Kyle Chadwick, Trial Attorney, Commercial Litigation Branch, Civil Division,
United States Department of Justice, of Washington, DC, argued for defendant-
appellee. With him on the brief were Peter D. Keisler, Assistant Attorney General,
David M. Cohen, Director, and Mary A. Melnick, Assistant Director. Of counsel on the
brief were Richard M. Ashton, Associate General Counsel, and Katherine Wheatley,
Assistant General Counsel, Board of Governors of the Federal Reserve System, of
Washington, DC.
Appealed from: United States Court of Federal Claims
Senior Judge Bohdan A. Futey
United States Court of Appeals for the Federal Circuit
04-5126
TEXAS STATE BANK
(successor by merger to COMMUNITY BANK & TRUST),
Plaintiff-Appellant,
v.
UNITED STATES,
Defendant-Appellee.
___________________________
DECIDED: September 21, 2005
___________________________
Before NEWMAN, SCHALL, and DYK, Circuit Judges.
Opinion for the court filed by Circuit Judge DYK. Opinion filed by Circuit Judge
NEWMAN concurring in part, dissenting in part.
DYK, Circuit Judge.
Appellant Texas State Bank (“Texas State”) is a state-chartered bank that holds
(and has held) reserves in accordance with the requirements of the Monetary Control
Act of 1980, Pub. L. 96-221, Title I, 94 Stat. 132. Texas State claims that a Fifth
Amendment taking occurred when the United States allegedly directed the Federal
Reserve Board to pay earnings generated by Texas State’s mandated reserves to the
United States Treasury (“Treasury”).
The Court of Federal Claims dismissed for lack of jurisdiction, holding that Texas
State’s “action [was] directed against the activities of the Federal Reserve Board”; that
the Federal Reserve Board was a non-appropriated funds instrumentality (“NAFI”); and
that the NAFI doctrine precluded the exercise of subject matter jurisdiction. Tex. State
Bank (successor by merger to Cmty. Bank & Trust) v. United States, 60 Fed. Cl. 815,
819 (2004). We hold that the Court of Federal Claims had jurisdiction under the Tucker
Act because Texas State’s claim is based on actions by the United States and not the
Federal Reserve Board. We conclude that the case must nonetheless be dismissed
because Texas State has failed to assert a valid takings claim.
BACKGROUND
The Federal Reserve System was established in 1913 pursuant to the Federal
Reserve Act (“FRA”). Federal Reserve Act, Pub. L. No. 63-43, 38 Stat. 251, codified as
amended at 12 U.S.C. §§ 221 et seq. (1913). A principal function of the Federal
Reserve System has been to determine and implement monetary policy “so as to
promote effectively the goals of maximum employment, stable prices, and moderate
long-term interest rates.” 12 U.S.C. § 225a. The System is composed of the Board of
Governors of the Federal Reserve System and twelve regional Reserve banks (“the
Federal Reserve”). Monetary policy is set by the Federal Open Market Committee and
is implemented through open market operations, that is, the purchase and sale of
government securities. Open market operations are funded with reserves supplied by
participating banks, and these operations are profitable for the Federal Reserve. The
Federal Reserve banks also provide check clearing and other banking services to
financial institutions. See generally 12 U.S.C. §§ 221 et seq.
Before the passage of the Monetary Control Act of 1980, only national banks
were required to join the Federal Reserve System and to maintain non-interest bearing,
04-5126 2
or “sterile” reserves with the Federal Reserve. State-chartered banks could elect to
join, but their participation in the system was not mandatory. Member banks did not
earn interest on reserves, but were entitled to several free services, including free
check-clearing. When inflation rates rose in the late 1970’s and interest rates
increased, voluntary participation of state-chartered banks in the Federal Reserve
System declined as did the level of reserve deposits. See generally Joshua N.
Feinman, Reserve Requirements: History, Current Practice, and Potential Reform, 79
Fed. Res. Bull. 569 (1993).
In 1980 Congress sought to reverse this trend through the passage of the
Monetary Control Act, and required that all depositary institutions, i.e., all banks, hold
sterile reserves, in the form of non-interest bearing deposits at the Federal Reserve
Bank, or in the form of Federal Reserve notes (that is, currency) stored at the depository
institution. The currency deposits are known as “vault cash.” Id.; 12 U.S.C. § 461(c).
The Federal Reserve has consistently, but unsuccessfully, urged Congress to allow for
the payment of a market-rate of interest on required reserves.1 On the other hand, the
1
The Federal Reserve has taken the position that “[n]oninterest-bearing
reserve requirements represent a tax on depository institutions that is not borne by
other suppliers of financial services [and which] impairs the efficiency of resource
allocation. . . . Paying such interest would circumvent the ill-effects of reserve
requirements while preserving their advantages for monetary policy. . . . [R]eserve
requirements provide for a reasonably predictable demand for overall reserve balances
[which] is essential for the effective implementation of open market operations.” Letter
from Alan Greenspan, Chairman, Board of Governors of Federal Reserve System, to
Rep. Stephen Neal, Chairman, Subcommittee on Domestic Monetary Policy of House
Committee on Banking, Finance, and Urban Affairs (March 6, 1992).
04-5126 3
Treasury has opposed what it views as “the use of taxpayer resources for this
purpose.”2
The parties have stipulated that the Federal Reserve’s open market operations,
funded by required reserves, generate substantial income. The parties have also
stipulated that the “Federal Reserve notes held as mandatory reserves in the form of
vault cash result in earnings for Federal Reserve Banks in the same manner the
maintenance of reserve balances in the accounts at the Federal Reserve Banks
generate [sic] income for the Federal Reserve Banks.” Pl. Contentions Together with
Defendant’s Responses at ¶ B5. The income generated by the sterile deposits and
vault cash is used to pay the expenses of the Federal Reserve, and the remainder is
transferred by the Federal Reserve Banks to the Treasury on a yearly basis. This
transfer occurs each year by direction of Treasury. In fiscal years 1997, 1998, and
2000, the transfer was statutorily mandated. Omnibus Budget Reconciliation Act of
1993, Pub. L. 103-66 § 3002(a), 107 Stat. 312; Appendix to District of Columbia
Appropriations Act, Pub. L. 106-113, § 302, 113 Stat. 1501 (Nov. 29, 1999).
Texas State has maintained sterile reserves and vault cash in accordance with
the Monetary Control Act since 1980. Cmty. Bank & Trust v. United States, 54 Fed. Cl.
352, 354 (2002).3 In October 2001, Texas State brought suit against the United States
in the Court of Federal Claims, alleging jurisdiction under the Tucker Act, 28 U.S.C.
§ 1491(a)(1). Texas State did not challenge the statutory requirement to maintain
2
Testimony of Treasury Acting Under Secretary Donald V. Hammond
before the Subcommittee on Financial Institutions and Consumer Credit of the
Committee on Financial Services, U.S. House of Representatives, March 13, 2001.
3
Texas State is the successor by merger to Community Bank and Trust,
the party which made the deposits in earlier years.
04-5126 4
reserves pursuant to the Monetary Control Act, nor allege that such a requirement
constituted a taking.4 Rather, in its complaint, Texas State asserted that “[i]ncome on
the principal is the property of the owner of the principal. As such, the income on
deposits and vault cash belong [sic] to the depository institutions that have maintained
required reserves.” Complaint at ¶ 28. Texas State alleged that the United States had
engaged in a Fifth Amendment taking by directing the Federal Reserve to transfer the
“earnings on required reserves maintained by depository institutions” to the Treasury.
Id. at ¶¶ 28-31. The complaint also alleged, in the alternative, a violation of due process
or an illegal exaction. Id. at ¶¶ 30-31. Texas State sought money damages equal to the
earnings plus interest. Id. at ¶ 32. It also sought certification of a class of similarly
situated depositary institutions that since 1980 maintained required reserves in
accordance with the Monetary Control Act. Id. at ¶¶ 20, 22.
The government moved to dismiss, arguing that jurisdiction was precluded
because the Federal Reserve was a non-appropriated funds instrumentality (“NAFI”),
and the NAFI doctrine barred suit. Cmty. Bank & Trust, 54 Fed. Cl. at 355-59.5 The
NAFI doctrine is “an established exception to the Tucker Act . . . based on the premise
that the government has never waived its sovereign immunity to allow private parties to
bring breach of contract claims against NAFIs.” AINS, Inc. v. United States, 365 F.3d
4
Under our decision in Commonwealth Edison Co. v. United States, the
“mere imposition of an obligation to pay money . . . does not give rise to a claim under
the Takings Clause of the Fifth Amendment.” 271 F.3d 1327, 1340 (Fed. Cir. 2001) (en
banc).
5
The government also argued that the claim was time-barred by the Tucker
Act’s six-year statute of limitations, 28 U.S.C. § 2501. The Court of Federal Claims
disagreed, holding that Texas State’s cause of action—as limited to the damages
claimed for the statutory six years prior to the date of the complaint—had accrued within
the limitations period. Cmty. Bank & Trust, 54 Fed. Cl. at 355-56, 361.
04-5126 5
1333, 1336 (Fed. Cir. 2004). In response, Texas State pointed out that this case
involves a takings claim rather than an effort to recover on a government contract.
Texas State also argued that it was the actions of Congress and Treasury that were the
cause of the alleged taking, not those of the Federal Reserve, and that the NAFI
doctrine did not apply. Cmty. Bank & Trust, 54 Fed. Cl. at 356. In the alternative, the
government moved to dismiss for failure to state a claim, and Texas State moved for
partial summary judgment with respect to liability on its takings claim, contending that in
light of the “interest follows principal” holdings of the Supreme Court’s decisions in
Webb’s Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155 (1980), and Phillips v.
Washington Legal Foundation, 524 U.S. 156 (1998), the “payment of interest on its
principal to the Treasury [was] a taking as a matter of law.” 54 Fed. Cl. at 360.
In an initial opinion, the court declined to dismiss for lack of jurisdiction under
the NAFI doctrine, and “reserve[d] judgment on the relevance and consequence of the
Board of Governors’ NAFI status until additional facts [became] available.” Id. at 356.
With respect to the merits of the takings claim, the court denied the government’s
motion to dismiss for failure to state a claim, and held that “[f]or the limited purpose of
this motion to dismiss, the court finds that plaintiff has a property interest in the principal
of its reserve accounts, cognizable under the Fifth Amendment.” Id. at 359. However,
the court noted that it was not “clear, for instance, that plaintiff’s funds are placed in the
type of separate, interest bearing . . . account at issue in” potentially analogous cases.
Id. The court also denied the plaintiff’s partial summary judgment motion. The case
was then stayed, pending the outcome of the Supreme Court’s decision in Brown v.
Legal Foundation of Washington, 538 U.S. 216 (2003), where certiorari had been
04-5126 6
granted to determine whether or not a taking occurred when the State of Washington
required that interest earned on IOLTA accounts be paid to government-designated
organizations providing legal services to the poor.
The Supreme Court decided Brown in March 2003, holding that transfer of
interest earned in IOLTA accounts to pay for legal services for the poor constituted a
per se taking, but that no compensation was due because there was no net loss to the
clients who owned the principal. Id. at 235-37. In June 2004, after further briefing and
an evidentiary hearing on the merits, the Court of Federal Claims dismissed this action
for lack of jurisdiction without reaching the merits. Tex. State, 60 Fed. Cl. at 821. The
court held that the Federal Reserve was a NAFI and that the NAFI doctrine barred
jurisdiction over takings claims against the United States based on actions taken by
NAFIs. The court rejected Texas State’s argument that the United States was the
responsible party, finding that “[a]t bottom . . . its action is directed against the activities
of the Federal Reserve.” Id. at 819.
Texas State timely appealed. We have jurisdiction pursuant to 28 U.S.C.
§ 1295(a)(3). Folden v. United States, 379 F.3d 1344, 1354 (Fed. Cir. 2004). Following
oral argument, we ordered the parties to submit supplemental briefing addressing the
question “[w]hether Texas State Bank had a cognizable property interest in any portion
of the net earnings of the Federal Reserve Board during the years in question.”
DISCUSSION
I
A decision of the Court of Federal Claims “to dismiss a complaint for lack of
jurisdiction is a question of law subject to . . . independent review by this court.” Shearin
04-5126 7
v. United States, 992 F.2d 1195, 1195 (Fed. Cir. 1993); see also AINS, 365 F.3d at
1336; Core Concepts of Fl., Inc. v. United States, 327 F.3d 1331, 1334 (Fed. Cir. 2003).
We conclude that the Court of Federal Claims erred in dismissing the action for lack of
jurisdiction pursuant to the NAFI doctrine.
We recently had occasion to review the NAFI doctrine in the takings context in
Lion Raisins, Inc. v. United States, 416 F.3d 1356, 1365-66 (Fed. Cir. 2005). The
doctrine has its origins in the Supreme Court’s decision in Standard Oil Co. v. Johnson,
316 U.S. 481, 485 (1942), where the Court, in ruling that Army “post-exchanges”
qualified for a federal government exemption from a California state tax, found that the
“post exchanges as now operated are arms of the Government” but that the
“Government assumes none of the obligations of the exchanges.” Id. Since Standard
Oil, we have repeatedly held that the NAFI doctrine precludes the exercise of Tucker
Act jurisdiction over contract claims against the United States based upon the
contracting activities of NAFIs that are not expressly mentioned in 28 U.S.C.
§ 1491(a)(1).6 See Lion Raisins, 416 F.3d at 1365-66 (collecting cases of this court and
of our predecessor, the Court of Claims). These cases have applied “[t]he general rule
. . . that the Court of Federal Claims lacks jurisdiction to grant judgment against the
United States on a claim against a NAFI because the United States has not assumed
6
In 1970, Congress amended the Tucker Act to allow jurisdiction over
contract claims against the armed forces exchanges, adding the following sentence to
28 U.S.C. § 1491(a)(1): “For the purpose of this paragraph, an express or implied
contract with the Army and Air Force Exchange Service, Navy Exchanges, Marine
Corps Exchanges, Coast Guard Exchanges, or Exchange Councils of the National
Aeronautics and Space Administration shall be considered an express or implied
contract with the United States.” See generally McDonald’s Corp. v. United States, 926
F.2d 1126, 1129-31 (Fed. Cir. 1991) (discussing the 1970 amendments and their
legislative history).
04-5126 8
the financial obligations of those entities by appropriating funds to them.” El-Sheikh v.
United States, 177 F.3d 1321, 1324 (Fed. Cir. 1999) (quotation marks and citations
omitted); see also United States v. Hopkins, 427 U.S. 123, 127 (1976).
The United States asserts that, under our precedent, the Federal Reserve Board
is a NAFI. See AINS, 365 F.3d at 1340; Denkler v. United States, 782 F.2d 1003, 1004-
05 (Fed. Cir. 1986); accord Research Triangle Inst. v. Bd. of Gov. of the Fed. Res. Sys.,
132 F.3d 985 (4th Cir. 1997). The government further urges that the NAFI jurisdictional
bar be extended beyond contract claims, to encompass takings claims against the
United States based on actions by a NAFI. This argument was recently rejected in Lion
Raisins, where we concluded that the United States may properly be sued in the Court
of Federal Claims for any takings that are allegedly consummated by NAFIs acting as
its agents, finding “no basis in the text of the Tucker Act itself; the legislative history of
the 1970 amendments; or in the decisions of the Supreme Court or this court, for
limiting the scope of the jurisdictional grant over claims ‘against the United States . . .
founded upon the Constitution’ to exclude takings claims against the United States
based on actions by NAFIs.” Lion Raisins, 416 F.3d at 1367-68. Here, however, we do
not reach the question of whether the actions of the Federal Reserve can impose
takings liability on the United States. We hold that, contrary to the decision of the Court
of Federal Claims, it is the actions of the United States, and not those of the Federal
Reserve, which are alleged to give rise to the takings claim.
II
As originally stated in its complaint, confirmed in its filings before the Court of
Federal Claims, and reiterated before this court during oral argument, the only action
04-5126 9
being challenged by Texas State is the compulsion by Congress or the Treasury that
the Federal Reserve transfer to the Treasury its net earnings, earnings which were
based in part on income from open market operations funded by required reserves.
Indeed, Texas State contends that these transfers were effected over the objections of
the Federal Reserve, and that the United States “compels the Federal Reserve to send
earnings on required reserves to the Treasury rather than pay such earnings to
depository institutions that maintain required reserves.” Pl. Contentions Together with
Defendant’s Responses at ¶ I.7. Texas State argues that these earnings were its
property, and that by directing the Federal Reserve to transfer its property to the
Treasury, the United States accomplished a Fifth Amendment taking.
Here, it is alleged that the United States was responsible for directing the transfer
of earnings to the Treasury, and the Federal Reserve had no discretion but to comply.7
When the action that constitutes the taking is compelled by government, then the
government can be held liable for the taking. For example, in International Paper Co.
v. United States, 282 U.S. 399 (1931), the Supreme Court found the United States liable
for a taking when the Secretary of War ordered a private power company to divert water
from the owners of water-rights to increase power production for government uses. In
that case, the requisition order covered “all of the water capable of being diverted” and
was “intended to cut off the water being taken by the International Paper Company
[pursuant to their lease with the power company] and thereby increase [the power
7
While the calculation of net earnings “depends on the expenses of the
Federal Reserve, which are largely discretionary,” 60 Fed. Cl. at 819, the Federal
Reserve exercises no discretion with respect to the action alleged to constitute the
taking--the transfer of earnings generated by use of Texas State’s reserves to the
Treasury.
04-5126 10
company’s] productive capacity.” Id. at 405-06. The Court found that “it [was] hard to
see what more the Government could do to take the use” when the requisition order
directed the power company to withdraw water from the petitioner’s mill and turn it
elsewhere, to produce power for the benefit of the government. Id. at 407.
Our decisions also have recognized that a Fifth Amendment taking may occur
when the government commands actions by a third party that would constitute a taking
if undertaken directly by the government. See, e.g., Hendler v. United States, 952 F.2d
1364 (Fed. Cir. 1991); Turney v. United States, 126 Ct. Cl. 202, 115 F.Supp. 457
(1953); see also Aerolineas Argentinas v. United States, 77 F.3d 1564 (Fed. Cir. 1996).
“[A] compensable taking does not occur unless the government's actions on the
intermediate third party have a ‘direct and substantial’ impact on the plaintiff asserting
the takings claim.” Casa de Cambio Comdiv S.A., de C.V. v. United States, 291 F.3d
1356, 1361 (Fed. Cir. 2002). At the same time, we have held that there is no potential
taking when the government is alleged to have had only mere awareness of the actions
of the third party, see, e.g., Shewfelt v. United States, 104 F.3d 1333, 1337 (Fed. Cir.
1997); or the government is alleged to have only engaged in “friendly persuasion” with
respect to that activity, see, e.g., Langenegger v. United States, 756 F.2d 1565, 1572
(Fed. Cir. 1985); or the third party has exercised its own discretion, see, e.g., Erosion
Victims of Lake Superior Regulation v. United States, 833 F.2d 297, 300-01 (Fed. Cir.
1987).
To be sure, not every requirement by the United States that a third party take
action that adversely affects the economic interests of another entity implicates the
Takings Clause, or requires that the private party actions be treated as equivalent to
04-5126 11
government action. But where, as here, the government command to a third party
results in the transfer of alleged private property to the United States, we think that the
United States must bear responsibility if a direct government appropriation would itself
constitute a compensable taking. Under Texas State’s theory of the case, the alleged
taking was accomplished by the Federal Reserve in compliance with the command of
Treasury and Congress. It alleged that Treasury compelled the transfer of Texas
State’s property to the United States.8 We thus hold that there is no jurisdictional bar to
this takings claim against the United States.
III
That is not the end of the matter. Although the Court of Federal Claims erred in
dismissing the suit for lack of jurisdiction, we conclude that we may appropriately
address the merits.
The relevant facts are not in dispute. Texas State does not assert a taking with
respect to the requirement that it maintain sterile reserves with the Federal Reserve.
This case turns solely on the purely legal question of whether Texas State owned a
compensable property interest in the earnings generated by the Federal Reserve
through investment of its reserves. See, e.g., Webb's, 449 U.S. at 161; Cermak v.
Babbitt, 234 F.3d 1356, 1361 (Fed. Cir. 2000) (holding that the nature of property
interests is a question of law); Coast Indian Cmty. v. United States, 550 F.2d 639, 649
8
The government appears to dispute that this transfer was compelled in the
non-statutory years but for the purposes of considering this appeal, we accept the
plaintiff’s well-pled allegations as true. Leider v. United States, 301 F.3d 1290, 1292
(Fed. Cir. 2002).
04-5126 12
(Ct. Cl. 1977) (determination of plaintiffs’ ownership of a compensable property interest
was a question of law).
The merits of the takings claim were fully briefed twice in the Court of Federal
Claims. The legal question of whether Texas State had a property interest in the
earnings of the Federal Reserve was addressed at oral argument in this court, and the
parties had yet another opportunity to present supplemental briefing on this issue after
oral argument. In their supplemental briefing, neither party objected to our considering
the merits. We conclude that it is appropriate to address the merits, and we conclude
that Texas State had no property interest in the income generated by the Federal
Reserve through its open market operations, and that the complaint should be
dismissed for failure to state a claim. See, e.g., Helvering v. Gowran, 302 U.S. 238, 245
(1937).
“It is axiomatic that only persons with a valid property interest at the time of the
taking are entitled to compensation.” Chancellor Manor v. United States, 331 F.3d 891,
901 (Fed. Cir. 2003). Indeed, we have previously observed that plaintiffs must identify a
property interest cognizable under the Fifth Amendment as a “bedrock requirement” of
any successful takings challenge. Leider, 301 F.3d at 1295 (citing Wyatt v. United
States, 271 F.3d 1090, 1097 (Fed. Cir. 2001)). Here, Texas State has failed to assert a
valid property interest.
Texas State argues that its property interest in the share of the net earnings of
the Federal Reserve that was generated by the reserve deposits is indistinguishable
from the property interests that owners of principal deposited in interest-bearing
04-5126 13
accounts claim to the interest earned in those accounts, and that decisions by the
Supreme Court have held constitutional “property”. App. Supp’l Br. at 7-8.
The “interest follows principal” cases relied upon by Texas State all involved
situations where third parties held plaintiffs’ funds in separate interest-bearing accounts.
Webb’s, 449 U.S. at 157-61; Phillips, 524 U.S. at 164; Brown, 538 U.S. at 235. In
Webb’s, a company filed a complaint of interpleader in state court against Webb and
Webb’s creditors, and tendered the disputed amount to the court. 449 U.S. at 156-57.
The court deducted the statutorily prescribed fee for maintenance of the fund and
deposited the remainder in an “assignable interest-bearing account at the highest
interest” in a bank. Id. at 157. The Florida court ultimately ordered that the principal be
paid to the claimants, but retained more than $100,000 interest earned on the principal.
Id. at 157-158. The Supreme Court found that the court appropriation of the interest
earned on the interpleader fund, in excess of a fee for services, resulted in a taking.
449 U.S. at 160-61, 164-65. The Court applied the “usual and general rule . . . that any
interest on an interpleaded and deposited fund follows the principal and is to be
allocated to those who are ultimately to be the owners of the principal,” and held that the
county’s taking of the earned interest implicated the Takings Clause. Id. at 162, 165.
In Phillips v. Washington Legal Foundation, the Court addressed the question of
whether interest earned on clients’ funds held in IOLTA accounts in private banks
constituted private property for purposes of the Takings Clause. 524 U.S. 156. Texas,
like other states, required that lawyers holding nominal amounts of client funds, that
would otherwise be unable to earn interest, place such funds in a separate, interest-
bearing Negotiable Order of Withdrawal (NOW) bank account (an IOLTA account). Id.
04-5126 14
“All agree[d] that under Texas law the principal held in IOLTA trust accounts [was] the
‘private property’ of the client.” Id. at 164. The Court applied the “interest follows
principal” rule set forth in Webb’s and held that that the interest earned on client funds
held in IOLTA accounts was the private property of the client for Takings Clause
purposes. Id. at 160. The Supreme Court further clarified in Brown v. Legal Foundation
of Washington that a per se taking occurred when the state then withdrew this interest
and used it to pay for legal services for the indigent. Id. at 235. However, in that case
no “just compensation” was due to the clients as a result of this taking, because “without
IOLTA those funds would not have produced any net interest,” id. at 230, and the value
of compensation owed “must be measured by [the Plaintiff’s] net losses rather than the
public’s gain,” id. at 237. All of the additional cases relied upon by Texas State in its
Supplemental Brief similarly involve claims to interest that was actually generated by
specific funds according to the terms of the investment in question.9
In contrast to Webb’s, Phillips, and Brown, where the deposited funds were held
by third party banks, here Texas State did not provide funds to a third party that were
then deposited in an interest-bearing account in a private bank, but entered into a direct
depositor relationship with the Federal Reserve. Under normal principals of banking
law, “the relationship between a bank and its depositor is that of debtor and creditor.”
Michie on Banks and Banking, ch. IX, § 1 (1994). As the Supreme Court put it almost a
century ago, when a bank receives deposits, the funds “belong to the bank, become
part of its general funds, and can be loaned by it as other moneys. . . . The general
9
See, e.g., Schneider v. Cal. Dep’t of Corr., 151 F.3d 1194 (9th Cir. 1998);
Hampton v. Hobbs, 106 F.3d 1281 (6th Cir. 1997); Gillihan v. Schillinger, 872 F.2d 935
04-5126 15
doctrine that upon a deposit made by a customer, . . . the title to the money . . . is
immediately vested in, and becomes the property of, the bank, is not open to question.”
Burton v. United States, 196 U.S. 283, 301-02 (1905) (internal quotations omitted); see
also City of Douglas v. Fed. Reserve Bank of Dallas, 271 U.S. 489, 492-94 (1926). A
debtor/creditor relationship also existed with respect to the amounts paid to receive the
Federal Reserve notes held as vault cash. Texas State conceded during oral argument
that “there is no private account to which interest was credited.”10 Texas State fails to
recognize that its reserve deposits, which by their own terms did not generate income,
were fundamentally different from the interest-bearing accounts at issue in Webb’s,
Brown, and Phillips. And, contrary to Texas State’s argument, the mere fact that Texas
State was compelled to maintain the reserves on deposit by law—a requirement that is
itself not challenged here—did not transform the nature of their underlying property
rights. Under such circumstances, even if the funds received by the Federal Reserve
were used to earn interest, Texas State did not acquire a property interest in the
earnings.
Our court considered this very question in United States Shoe Corporation v.
United States. 296 F.3d 1378 (Fed. Cir. 2002). There, exporters paid a harbor
maintenance tax that was subsequently found to be unconstitutional. The tax payments
were refunded, but the exporters also claimed entitlement to interest on the refunded
tax under the Takings Clause. Id. at 1384. The exporter’s takings claim alleged that the
(10th Cir. 1989); Morton Grove Park Dist. v. Am. Nat’l Bank & Trust Co., 399 N.E. 2d
1295 (Ill. 1980); Bordy v. Smith, 34 N.W.2d 331 (Neb. 1948).
10
The colloquy at oral argument proceeded as follows:
Question: But there is no private account to which interest was credited?
Answer: I agree. It’s all in one big pot.
04-5126 16
“government’s retention of the interest income earned on the tax revenue [was] a
continuing taking.” Id. We noted that the “tax revenue . . . became the property of the
Treasury upon payment [and] [a]ccordingly, the interest earned on the tax payments is
also the property of the government.” Id. We rejected the exporter’s takings claim, and
held that “for the accrued interest to rise to the level of private property, the principal
must be held in an identified private account,” for example, by a third party bank. Id.
Under our decision in United States Shoe, Texas State had no property right to any
earnings generated through the Federal Reserve’s investment of its required reserves.
We again addressed this issue in Leider v. United States, 301 F.3d at 1290. In
that case, the bankruptcy court issued a check to Leider, an unsecured creditor. Id. at
1293. Due to a change of address, Leider did not receive the check. Id. As required
by statute, after Leider’s check remained uncashed for 90 days, the unclaimed funds
were transferred to the bankruptcy court for deposit with the United States Treasury,
pending the filing of a petition claiming his distributive share. Id. Approximately two
years later, Leider filed a petition and received Leider’s share of the bankruptcy estate,
without interest. Id. He subsequently filed a suit in the Court of Federal Claims,
alleging “that the government’s failure to pay interest on his distributive share of the
unclaimed bankruptcy funds constituted a taking of property under the Fifth
Amendment.” Id. We found that, in contrast to the situations in Webb’s and Phillips,
“because there existed no interest, there was nothing that could be taken.” Id. at 1297.
“This accords with the traditional immunity of the Government from the burden of
interest unless it is specifically agreed upon by contract or imposed by legislation.”
United States v. Goltra, 312 U.S. 203, 207 (1941).
04-5126 17
So here, no deposit was made with a third party, such as a private bank, that
resulted in earned interest. The mere fact that the Federal Reserve owed a debt to
Texas State did not entitle Texas State to an imputed return on those funds or to a
share of earnings of the Federal Reserve.
Texas State has failed to state a claim for which relief can be granted, as it had
no property interest, cognizable under the Fifth Amendment, in the earnings generated
by the Federal Reserve through its investment of required reserves. Texas State’s lack
of a property interest in the earnings generated by its mandated reserves is fatal not
only to its takings claim, but also to its illegal exaction and due process claims. There
can be no illegal exaction or due process violation if the money exacted was never the
property of Texas State.
CONCLUSION
For the foregoing reasons, we affirm the Court of Federal Claim’s dismissal of
this action.
AFFIRMED
COSTS
No costs.
04-5126 18
United States Court of Appeals for the Federal Circuit
04-5126
TEXAS STATE BANK,
(successor by merger to COMMUNITY BANK & TRUST),
Plaintiff-Appellant,
v.
UNITED STATES,
Defendant-Appellee.
NEWMAN, Circuit Judge, concurring in part, dissenting in part.
I agree that the United States is the appropriator of the funds for which Texas State
Bank claims compensation; thus it is irrelevant whether the Federal Reserve System is or is
not a Non-Appropriated Funds Instrumentality (NAFI), for the requirement that the earnings
on Texas State Bank's deposits with the Federal Reserve Banks must be paid over to the
United States Treasury is an action of the United States. Thus I concur in the court's
holding that the United States was properly before the Court of Federal Claims, and that
the case was improperly dismissed on NAFI grounds.
The case should now be remanded to the Court of Federal Claims for determination
of the substantive question. I respectfully dissent from the panel majority's undertaking,
sua sponte and at the behest of neither party, to decide the complex questions raised by
the appropriation by the United States of the earnings on the banks' Reserve deposits.
This issue was not decided by the Court of Federal Claims, and no decision of the merits is
presented for appellate review. It is as unfair to the parties as it is irregular for this court to
reach out and decide this complex question upon the limited post-argument briefing we
requested. This appeal was taken solely on the jurisdictional NAFI question and, having
decided that question, the merits require adjudication by the Court of Federal Claims.
I
Since the substantive issue is nonetheless being decided by my colleagues, I must
dissent from the panel majority's misapplication of law and its unsupported conclusion. It is
beyond debate that money is property, and that the earnings on that money are property.
In Webb's Fabulous Pharmacies, Inc. v. Beckwith, 449 U.S. 155 (1980) the Court stated:
The earnings of a fund are the incidents of ownership of the fund itself and
are property just as the fund itself is property.
449 U.S. at 164. Again in Phillips v. Washington Legal Foundation, 524 U.S. 156, 160
(1998) the Court implemented this property right:
The question presented by this case is whether interest earned on client
funds held in [Interest on Lawyers Trust Accounts] is "private property" of
either the client or the attorney for purposes of the Takings Clause of the
Fifth Amendment. We hold that it is the property of the client.
Again in Brown v. Legal Foundation of Washington, 538 U.S. 216, 235 (2003) the Court
held that the interest earned on deposits of clients' funds is the property of the client, not of
04-5126 2
the state. Although the Court recognized that when no interest was earned none had to be
paid, it is undisputed that substantial interest is here earned.1
Principal and interest are property. The post-argument brief filed by Texas Bank
contained expert testimony explaining that placement of a specified percentage of banks'
funds in Reserve is compulsory, that minimum deposits must be met or a penalty paid, that
the banks own their Reserve deposits, and can withdraw them and trade them in the "Fed
funds market." Indeed, it is not disputed that the banks own their reserve deposits. They
also own the interest earned by those deposits. "The rule that 'interest follows principal'
has been established under English common law since at least the mid-1700's." Phillips,
524 U.S. at 165. The Court in Phillips cited representative cases from the various states,
holding that the interest is the property of the owner of the principal:
E.g., Freeman v. Young, 507 So.2d 109, 110 (Ala.Civ.App. 1987) ("The
earnings of a fund are incidents of ownership of the fund itself and are
property just as the fund itself is property" (internal quotation marks omitted));
Pomona City School Dist. v. Payne, 9 Cal.App.2d 510, 512, 50 P.2d 822,
823 (1935) ("[O]bviously the interest accretions belong to such owner"); Vidal
Realtors of Westport, Inc. v. Harry Bennett & Assocs., Inc., 1 Conn.App. 291,
297-298, 471 A.2d 658, 662 (1984) ("As long as the attached fund is used for
profit, the profit . . . is impounded for the benefit of the attaching creditor and
is subject to the same ultimate disposition as the principal of which it is the
incident" (internal quotation marks omitted)); Burnett v. Brito, 478 So.2d 845,
849 (Fla.App. 1985) ("[A]ny interest earned on interpleaded and deposited
funds follows the principal and shall be allocated to whomever is found
entitled to the principal"); Morton Grove Park Dist. v. American Nat. Bank &
Trust Co., 78 Ill.2d 353, 362-363, 35 Ill.Dec. 767, 771, 399 N.E.2d 1295,
1299 (1980) ("The earnings on the funds deposited are a mere incident of
ownership of the fund itself"); B&M Coal Corp. v. United Mine Workers, 501
N.E.2d 401, 405 (Ind. 1986) ("[I]nterest earnings must follow the principal and
be distributed to the ultimate owners of the fund"); Unified School Dist. No.
1 In fiscal year 2000 the Federal Reserve was required to transfer net
earnings of $3,752 billion to the General fund of the Treasury. App. Br. at 16, U.S.
Supplemental Br. at 3.
04-5126 3
490, Butler County v. Board of County Commissioners of Butler County, 237
Kan. 6, 9, 697 P.2d 64, 69 (1985) ("[I]nterest follows principal"); Pontiac
School Dist. v. City of Pontiac, 294 Mich. 708, 715-716, 294 N.W. 141, 144
(1940) ("The generally understood and applied principles that interest is
merely an incident of the principal and must be accounted for"); State
Highway Comm'n v. Spainhower, 504 S.W.2d 121, 126 (Mo. 1973) ("Interest
earned by a deposit of special funds is an increment accruing thereto"
(internal quotation marks omitted)); Siroky v. Richland County, 271 Mont. 67,
74, 894 P.2d 309, 313 (1995) ("[I]nterest earned belongs to the owner of the
funds that generated the interest") . . . .
The Court's extensive list drums into consciousness the universality of the rule that interest
on deposited funds belongs to the owner of the deposited funds. Phillips, 524 U.S. at 165
n.5. No exception has been noted.
Law and precedent leave no doubt that earnings on deposited money are the
property of the depositor, not of the custodian and not of the state. If this court is to create
a unique exception for bank deposits with the Federal Reserve, more support is required
than the panel majority's theory that because the deposits are not labeled "interest-bearing"
and the earnings are placed "in one big pot" in the Federal Reserve banks, see maj. op.
n.10, the interest is not the property of the depositor.
Indeed, the government does not take the position that the United States owns
either the deposits in Reverse banks (or the vault cash) or the interest thereon; the
government's position is that the Federal Reserve owns the interest because the accounts
are designated as non-interest-bearing, and thus that when Texas State Bank made the
required deposits in a non-interest-bearing account, it yielded all right to the interest earned
by those deposits. That accounting argument does not support the appropriation of billions
of dollars of bank depositors' property.
The United States describes its diversion of the Reserve earnings to the general
04-5126 4
Treasury as "a tax upon the Federal Reserve System." U.S. Supplemental Br. at 3 n.3.
Texas State Bank observes that such a "tax" is not on the Federal Reserve System, but on
all persons who place their money in banks and, absent taxing authority, raises Fifth
Amendment concerns. Indeed, in some years the diversion of the Reserve income was by
act of Congress, and in some years only by Treasury demand. The entire case is rife with
unexplored legal, economic, and policy considerations, and the stakes are high. The
ultimately correct answer to all the questions awaits resolution, for the court's decision
today is as unsupported as it is premature. It demands the considered judgment, in the first
instance, by the Court of Federal Claims.2
II
The panel majority, justifying its treatment of this unappealed issue, states that it is
simply affirming the trial court's decision on an alternative ground. However, the trial court
did not decide the issue, on any ground. Only the threshold NAFI question was decided,
and only the NAFI question is before us.
2 The majority opinion suggests that the parties "did not object" to our
"considering" the merits. The parties were never told that we were going to decide the
merits. Indeed, the scope of the supplemental briefing that the panel requested was not
commensurate with the merits.
04-5126 5
Texas State Bank v. United States
Court: Court of Appeals for the Federal Circuit
Date filed: 2005-09-21
Citations: 423 F.3d 1370
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