Texas State Bank v. United States

Opinion for the court filed by Circuit Judge DYK.

Opinion filed by Circuit Judge NEWMAN concurring in part, dissenting in part.

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, 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, *1373but 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 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.” PI. Contentions Together with Defendant’s Responses at ¶65. 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 reserves pursuant to the Monetary Control Act, nor allege that such a requirement constituted a taking.4 Rather, *1374in its complaint, Texas State asserted that “[ijncome 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 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, 101 S.Ct. 446, 66 L.Ed.2d 358 (1980), and Phillips v. Washington Legal Foundation, 524 U.S. 156, 118 S.Ct. 1925, 141 L.Ed.2d 174 (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 plaintiffs funds are placed in the type of separate, interest bearing ... account at issue in” potentially analogous cases. Id. The court also denied the plaintiffs partial summary judgment motion. The case was then stayed, pending the outcome *1375of the Supreme Court’s decision in Brown v. Legal Foundation of Washington, 538 U.S. 216, 123 S.Ct. 1406, 155 L.Ed.2d 376 (2003), where certiorari had been 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 Broum 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, 123 S.Ct. 1406. 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 “[wjhether 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 v. United States, 992 F.2d 1195, 1195 (Fed.Cir.1993); see also AINS, 365 F.3d at 1336; Core Concepts of Flo., 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, 62 S.Ct. 1168, 86 L.Ed. 1611 (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 *1376at 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 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, 96 S.Ct. 2508, 49 L.Ed.2d 361 (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 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 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.” PI. Contentions Together with Defendant’s Responses at ¶ 1.7. 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 govern*1377ment, then the government can be held liable for the taking. For example, in International Paper Co. v. United States, 282 U.S. 399, 51 S.Ct. 176, 75 L.Ed. 410 (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” ánd 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 company’s] productive capacity.” Id. at 405-06, 51 S.Ct. 176. 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, 51 S.Ct. 176.

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 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.

Ill

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.

*1378The 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, 101 S.Ct. 446; 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, 213 Ct.Cl. 129, 550 F.2d 639, 649 (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, 58 S.Ct. 154, 82 L.Ed. 224 (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 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, 101 S.Ct. 446; Phillips, 524 U.S. at 164, 118 S.Ct. 1925; Brown, 538 U.S. at 235, 123 S.Ct. 1406. 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, 101 S.Ct. 446. 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, 101 S.Ct. 446. 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, 101 S.Ct. 446. 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, 101 S.Ct. 446. The Court applied the “usual and general rule ... that any interest on an interplead-ed and deposited fund follows the principal and is to be allocated to those who are ultimately to be the owners of the princi*1379pal,” and held that the county’s taking of the earned interest implicated the Takings Clause. Id. at 162, 165, 101 S.Ct. 446.

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, 118 S.Ct. 1925, 141 L.Ed.2d 174. 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. “All agree[d] that under Texas law the principal held in IOLTA trust accounts [was] .the ‘private property’ of the client.” Id. at 164, 118 S.Ct. 1925. 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, 101 S.Ct. 446. 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, 123 S.Ct. 1406. 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, 123 S.Ct. 1406, and the value of compensation qwed “must be measured by [the Plaintiffs] net losses rather than the public’s gain,” id. at 237, 123 S.Ct. 1406. 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 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, 25 S.Ct. 243, 49 L.Ed. 482 (1905) (internal quotations omitted); see also City of Douglas v. Fed. Reserve Bank of Dallas, 271 U.S. 489, 492-94, 46 S.Ct. 554, 70 L.Ed. 1051 (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 *1380that 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, expor