Chino v. N.Y. Dep’t Fin. Servs., 2017 NY Slip Op. 51908 (U) (N.Y. S. Ct. Dec. 21, 2017)

Chino v. N.Y. Dep’t Fin. Servs., 2017 NY Slip Op. 51908 (U) (N.Y. S. Ct. Dec. 21, 2017) [Link]

Summary: Applicant for N.Y. Bitcoin license challenged the constitutionality and enforcement of the state’s licensing law. Suit dismissed for lack of standing.

Facts:

  • [P]ursuant to 23 NYCRR § 200.3 (a), anyone engaged in virtual currency business activity must first obtain a license.
  • [P]etitioner intended to set up a business in New York that was to install Bitcoin processing services in bodegas in New York State.
  • Petitioner applied for a Virtual Currency Business license on behalf of LTD on August 7, 2015. Petitioner annexes a copy of the application as Exhibit IX to his petition. He provided the name but not the address of LTD. He did not provide an authorization as required by 23 NYCRR § 200.3 (a) (3); instead, he wrote on the form that he did not authorize the release of information. He filled out some but not all financial information on the form requested, and he indicated that he had no insurance and kept no financial or accounting books. For his background report certification, he wrote: “[Could] not obtain in time.” He filled out a personal information form but he refused to disclose his employment history for the last fifteen years, and he did not provide the names and addresses of past employers. He did not disclose whether he was employed by, performed services for, or had business connections with any agency or authority of the State of New York, or any institutions subject to DFS supervision. He stated he had no financial interest in any agency or authority in New York or any other state. He provided none of the required references. He stated that his high school, college, and professional or technical school information was not applicable. He refused to disclose his social security number. Along with his application, he submitted a handwritten letter which requested a waiver of the $5,000 application fee based on his characterization of the size of the business, its budget, and its financial status.
  • Petitioner initiated this proceeding, pro se, on October 16, 2015, before he received any response from DFS; he states that he did so because he realized “he would be required to incur expenses beyond his means to comply with the burdensome compliance costs under the Regulation” (Petition, ¶ 91).
  • On January 4, 2016, DFS returned his August 7, 2015 application without processing it. The letter states that DFS could not evaluate the application because it contained “extremely limited” information and, among other things, did not describe the business in which LTD was or would be engaged and did not specify in what respect, if any, the business involved virtual currency (DFS Jan. 4, 2016 letter [Exh. XI to Petition]). The letter explained that because of this DFS could not determine whether LTD was a virtual currency business subject to the regulations.

Issues, Holdings, and Discussion:

  1. Does a petitioner who submitted an incomplete application for a N.Y. Bitcoin license, failed to follow up when DFS stated it was unable to process the application, and could not show losses due to licensing have standing to challenge the licensing regulations? No:

Petitioner did not complete LTD’s application, and did not respond to DFS’ January 2016 letter which notified him of his failure to do so. Petitioner acknowledges that he abandoned the application process because of the pendency of this hybrid action/proceeding challenging the regulation (Chino Aff. in Opp. To Cross-Motion, at ¶ 16). CPLR § 7803 provides a petitioner with a means to challenge “whether a determination was made in violation of lawful procedure, was affected by an error of law or was arbitrary and capricious or an abuse of discretion” (CPLR § 7808 [3]). Moreover, “one who objects to the acts of an administrative agency must exhaust available administrative remedies before being permitted to litigate in a court of law” (DiBlasio v Novello, 28 AD3d 339, 341 [1st Dept 2006] [citations and internal quotation marks omitted]). Courts cannot “interject themselves into ongoing administrative proceedings until final resolution of those proceedings before the agency” (Id.). In the proceeding at hand, DFS did not reach a final decision. Indeed, it did not reach any decision. Accordingly, there is nothing for this Court to review.

The Court notes that an exception exists to the exhaustion requirement when the action “is challenged as either unconstitutional or wholly beyond its grant of power, when resort to an administrative remedy would be futile or when its pursuit would cause irreparable injury” (Martinez 2001 v New York City Campaign Finance Bd.,36 AD3d 544, 548 [1st Dept 2007]). The exception does not apply in this instance. Again, petitioner’s failure to complete his application precludes him from raising this argument. Because of his failure, the agency did not take any action — constitutional or otherwise, and neither within nor exceeding its grant of power. The DFS letter stating more information was necessary is not an action or decision within the meaning of the governing law. Instead, it is the legislation itself that petitioner challenges here. Any irreparable injury petitioner alleges is a result of the underlying law and not of any agency action.

Moreover, even if an ultra vires or unconstitutional action were at issue, petitioner has not shown that DFS has caused it irreparable harm. LTD’s tax returns show three-and-a-half years of losses prior to the initiation of this action, and show comparable losses in 2014 — prior to the existence of the regulation — due to ongoing operation expenses.

. . . .

Next, the Court examines the question of whether petitioner has standing to challenge the constitutionality of the regulation. This presents a much closer issue than that of his Article 78 proceeding. To establish standing, a plaintiff must show injury in fact, which, “[a]s the term itself implies, . . . must be more than conjectural” (Quast v Westchester County Bd. of Elections, 155 AD3d 674, 674 [2nd Dept 2017]). In addition, the plaintiff must establish that he or she falls within the zone of interest which the regulation impacts (See id.). Moreover, “personal disagreement and speculative financial loss are insufficient to confer standing” (Roulan v County of Onandaga, 21 NY3d 902, 905 [2013] [rejecting plaintiff’s standing argument that he sustained financial harm because challenged plan caused him to be assigned fewer criminal cases]; see New York State Psychiatric Assoc., Inc. v Mills, 29 AD3d 1058, 1059 [3rd Dept 2006] [asserted financial harm to psychiatrists was speculative]).

. . . .

[P]etitioner did not apply for certification,[8] and has not shown sufficient economic loss. Any argument as to the $5,000 application fee was waived because petitioner did not pay the fee or pursue the application. His economic loss argument is otherwise insufficient because LTD has never made a profit and petitioner showed proof of only one $279.41 sale. Moreover, its losses in 2016, once petitioner thought LTD was subject to the regulation, are not inconsistent with LTD’s prior financial history.

Comments:

  • Standing and similar doctrines make it difficult to challenge government actions in all areas. Challenges to cryptocurrency regulations are no different and will need to be carefully tailored – with appropriate case “vehicles” – or they will be dismissed.

Author: Michael O'Connor

Michael O'Connor is a Visiting Assistant Professor of Law at Penn State. He teaches in the areas of cyber law, including data security & privacy, cybercrime, and emerging technologies. His scholarship focuses on cryptocurrency and blockchain technology, including securities regulation, money laundering, and other topics. He joined Penn State Law from private practice at the law firm Quinn Emanuel Urquhart & Sullivan LLP, where he was resident in the Washington, D.C., office. Before that, he clerked for the Hon. D. Brooks Smith on the U.S. Court of Appeals for the Third Circuit and worked for another major international law firm. While in private practice, Michael advised clients on legal planning for data breaches, their obligations for safe handling of personally identifiable information, and the legal implications from emerging technologies like Bitcoin, Ethereum, and the blockchain. He applied his technical training to patent cases involving semiconductor design, systems programming, and mobile device architecture. He also worked on multiple cases at the intersection of patent and antitrust law. Michael represented clients in cases before federal courts throughout the country, as well as before the International Trade Commission.​