Response and Opposition to State Defendants' Motion to Dismiss (re [24] filed by Think Computer Corporation. (Carroll, Michael) (Filed on 3/3/2012) Modified on 3/5/2012 (bw, COURT STAFF).
No tags have been applied so far. Sign in to add some.
Page 1 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page1 of 32
1
2
3
4
5
6
Michael Brooks Carroll (Bar #54904)
Kevin A. Flautt (Bar #257892)
LAW OFFICES OF MICHAEL BROOKS CARROLL
300 Montgomery Street, Suite 650
San Francisco, California 94104
Telephone: (415) 788-7600
Facsimile: (415) 421-7379
carroll_law@sbcglobal.net
Attorneys for Plaintiff
THINK COMPUTER CORPORATION
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
San Jose Division
7
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
11
12
13
14
15
16
17
18
19
20
THINK COMPUTER CORPORATION,
)
)
Plaintiff,
)
)
v.
)
)
ROBERT VENCHIARUTTI, in his official
)
capacity as Deputy Commissioner of the
)
California Department of Financial
)
Institutions; WILLIAM HARAF, in his official )
capacity as Commissioner of the California
)
Department of Financial Institutions; TRACI )
STEVENS, in her official capacity as Acting )
Secretary of the California Business,
)
Transportation and Housing Agency; JACOB )
A. APPELSMITH, in his official capacity as )
Senior Advisor to the Governor of the STATE )
OF California; EDMUND G. BROWN, JR. in )
his official capacity as Governor of the State of )
California; and KAMALA HARRIS, in her
)
official capacity as Attorney General of the
)
State of California,
)
)
)
Defendants.
Case No. CV11-05496-HRL
ERRATA*
PLAINTIFF’S RESPONSE AND OPPOSITION
TO STATE DEFENDANTS’ MOTION TO
DISMISS
Before the Honorable Howard R. Lloyd
Hearing Date: March 27, 2012
Hearing Time: 10:00 a.m.
Courtroom: 2
Complaint Filed: November 14, 2011
First Amended Complaint Filed: January 31, 2012
Trial Date: None Yet Set
21
22
23
24
25
26
27
28
*
Correcting typographical, word processing, formatting and grammatical errors in Plaintiff’s Response and Opposition to
Defendants’ Motion To Dismiss, filed and served by Plaintiff on 02/28/2012.
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 2 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page2 of 32
TABLE OF CONTENTS
1
2
STATEMENT OF THE CASE AND OPPOSITION TO MOTION TO DISMISS ..................................1
4
MATERIAL FACTS ALLEGED IN THE COMPLAINT THAT ARE DISPOSITIVE OF AND
NEGATE THE STATE DEFENDANTS’ CONTENTIONS THAT PLAINTIFF’S COMPLAINT HAS
FAILED TO STATE A CLAIM.................................................................................................................3
5
ARGUMENT................................................................................................................
6
I.
The Settled Law Governing The Determination Of Motions To Dismiss......................................4
7
II.
Contrary To The State Defendants’ Assertions, This Action Is Currently Ripe For Review Since
This Action Includes Both “Facial” And “As Applied” Challenges To The MTA, Any
Exhaustion Of Administrative Remedies By Plaintiff Would Be Futile, And Any Delay In
Adjudicating Plaintiff’s Challenge To The MTA Would Cause Plaintiff Substantial Hardship....5
3
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
11
A.
Plaintiff’s Challenges To The Facial Unconstitutionality Of The MTA Are Inherently
Ripe For This Court’s Determination .................................................................................6
B.
Plaintiff’s Challenges To The Unconstitutionality Of The MTA As Applied To Plaintiff
Are Ripe Since Controlling Law Establishes That Plaintiff Is Not Required to Exhaust
Administrative Processes Where, As Here, The Challenged Statute (The MTA) Imposes
A Substantial Hardship Or Burden Upon Plaintiff In Even Participating In The
Administrative Processes And Any Attempted Exhaustion Of Administrative Remedies
By Plaintiff Would Be Futile..............................................................................................7
12
13
14
15
i.
Plaintiff’s Challenges To The Unconstitutionality Of The MTA As Applied To
Plaintiff Under the Facts Alleged In This Action Are Concrete And Sufficiently
Focused So As To Permit Judicial Resolution. ......................................................8
ii.
Plaintiff Will Suffer Substantial Hardship If Judicial Review Of This Action Is
Delayed. ................................................................................................................10
16
17
18
19
III.
20
Plaintiff Has Alleged Facts Sufficient To State A Due Process/Equal Protection Claim. ...........13
A.
Plaintiff Has a Vested Property Right Which Has Been Interfered With By The MTA
And The Actions Of The State Defendants. .....................................................................13
B.
The Licensing Requirements Of The MTA Are Not Related to a Legitimate State
Purpose, And Are Applied By The State Defendants In a Completely Arbitrary and
Capricious Manner Designed to Stifle Competition and Chill Interstate Commerce.......14
C.
The MTA As Applied To Plaintiff By The State Defendants Further Violates Plaintiff’s
Procedural Due Process Rights.........................................................................................18
21
22
23
24
25
IV.
26
27
28
The MTA Violates The Dormant Commerce Clause And Is Not “Invulnerable” To A Dormant
Commerce Clause Challenge As The State Defendants Assert....................................................20
i
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 3 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page3 of 32
1
A.
The State Defendants Fail to Cite any Explicit or Implicit Congressional Endorsement of
the Money Transmission Act and its Unconstitutional Requirements for Licensure, Nor
Can They Since The Purported Authorizing Statute, the USA PATRIOT Act, Was Never
Intended To Authorize Or Enable The MTA Regulatory Scheme Enacted By The State
Defendants.
B.
The State Defendants Have Attempted And Plaintiff Has Alleged They Will Continue To
Attempt To Regulate Commerce Occurring Outside Of California In Violation Of The
Commerce Clause. ............................................................................................................24
2
3
4
5
6
7
Settled Federal Law And Procedure Requires That Plaintiff Be Allowed To Amend Even If The
Court Were To Grant The Motion To Dismiss On Any Of The Grounds Being Asserted By The
State Defendants. ........................................................................................................................
DISPOSITION REQUESTED .................................................................................................................26
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
V.
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
ii
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 4 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page4 of 32
TABLE OF AUTHORITIES
1
2
3
4
5
6
7
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
11
12
13
14
15
16
17
18
19
CASES
Abbot Laboratories v. Gardner, 387 U.S. 136, 148-49 (1967) ........................................................................................................5, 6, 8
Atlanta Motel v. United States, 379 U.S. 241 (1964)..................................................................................................................
Beddall v. State Street Bank and Trust Co.,
st 137 F.3d 12, 16-17 (1 Cir. 1998).........................................................................................................5
Bell Atl. Corp v. Twombly, 127 S. Ct. 1955, 1965 (2007)................................................................................................................5
Carpinteria Valley Farms, Ltd. v. County of Santa Barbara, 344 F.3d 822, 831 (9th Cir. 2003) ........................................................................................................7
City of Chicago v. Atchison, Topeka & Santa Fe Ry., 357 U.S. 77, 89 (1958)..................................................................................................................
City of Cleburne v. Cleburne Living Center, Inc., 473 U.S. 432 ........................................................................................................................
Colwell v. Dep’t of Health and Human Servs., 558 F.3d 1112, 1123-1124 (9th Cir. 2009).............................................................................................6
Day v. Fallon Cmty. Health Plan Inc., 917 F. Supp. 72, 75 (D. Mass 1996) .....................................................................................................5
Doe v. United States,
58 F.3d (9th Cir. 1995)...................................................................................................................
Freedom to Travel Campaign v. Newcomb,
82 F.3d ........................................................................................................................
13
20
21
22
23
24
25
26
27
28
Gary D. Peake Excavating Inc. v. Town Bd. of Town of Hancock, 93 F.3d 68, 71-73 (2d Cir. 1996) ..........................................................................................................6
Hotel Employees & Restaurant Employees International Union,
th 984 F.2d 1507, 1513 (9 Cir.1993).....................................................................................................12
Johnson v. Missouri, 142 F.3d 1087, 1090 n. 4 (8th Cir.1998) ..............................................................................................9
Mathews v. Eldridge, 424 U.S. 319 ........................................................................................................................
19
iii
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 5 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page5 of 32
1
2
3
4
Morgan v. McCotter, 365 F.3d 882, 887 (10th Cir. 2004) ......................................................................................................9
Norco Construction, Inc. v. King County, 801 F.2d 1143, 1146 (9th Cir. 1986) ....................................................................................................7
Ohio Forestry Assn., Inc., 523 U.S. 726, 733 (1977)..................................................................................................................
5
6
7
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
11
12
P. Gas and Elec. Co. v. State Energy Resources Conservation & Dev. Commn., 461 U.S. 190 (1983)..................................................................................................................
10, 11
P. Leg. Found. v. State Energy Resources Conservation & Dev. Commn., 659 F.2d 903, 915 (9th Cir. 1981) ........................................................................................................6
Panama Refining Co. v. Ryan, 293 U.S. 388 (1935)..................................................................................................................
Public Utilities Comm'n v. United States, 355 U.S. 534, 540 (1958)..................................................................................................................
Sammon v. New Jersey Bd. of Med. Examiners, 66 F.3d 639, 643 (3d Cir. 1995) ...........................................................................................................5
13
14
15
16
17
18
19
20
21
22
23
Skull Valley Band Of Goshute Indians v. Nielson, 376 F.3d 1223 (10th Cir. 2004) ........................................................................................................8, 9
Soto v. Tu Phuoc Nguyen, 634 F.Supp.2d 1096, 1100 (E.D. Cal. 2009) ......................................................................................23
Spoklie v. Montana, 411 F.3d 1051 (9th Cir. 2005)..............................................................................................................13
Triple G. Landfills, Inc. v. Board of Commissioners of Fountain County, 977 F.2d 287, 288-91 (7th Cir.1992) ................................................................................................7, 8
Warth v. Seldin, 422 U.S. 490, 499 n. 10, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975)..........................................................9
Watterson v. Page,
st 987 F. 2d 1, 3 (1 Cir. 1993) .................................................................................................................5
24
Zemel v. Rusk, 381 U.S. 1, 17 (1965)..................................................................................................................
20
25
STATUTES
26
18 U.S.C. § 1960....................................................................................................................
23
27
28
iv
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 6 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page6 of 32
1
2
3
4
5
31 U.S.C. § 310.....................................................................................................................
USA PATRIOT Act.....................................................................................................................
OTHER AUTHORITIES
Schwarzer, Tashima & Wagstaffe, California Practice Guide: Federal Civil Procedure Before Trial
(The Rutter Group 2010) ....................................................................................................................25
RULES
6 Rule 12(b)(6)................................................................................................................
5
7
9
REGULATIONS
31 C.F.R. § 1010....................................................................................................................
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
v
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 7 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page7 of 32
STATEMENT OF THE CASE AND OPPOSITION TO MOTION TO DISMISS
1
This is an action by a relatively small business entity, Plaintiff Think Computer Corporation,
2
3
which was already in business and had invested more than 1 million dollars to establish itself as a
4
money transmitting business in the payments/e-commerce industry, who has been effectively put out of
5
business by the State of California’s Money Transmission Act (the “MTA”). Plaintiff asserts that the
6
MTA is not only unconstitutional on its face, but further is unconstitutional as it is being applied to the
7
regulations have imposed a disparate impact upon small business entities like Plaintiff to the benefit of
9
large business entities without any rational justification or constitutionally permissible basis for such
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
Plaintiff because such MTA and the actions of the State Defendants enforcing such state statute and
11
12
regulation and disparate impact upon small business entities like Plaintiff, and restrained interstate
commerce in the money transmission industry.
The “State Defendants” (defined at page 1, lines 4-13 of the Motion to Dismiss) have moved to
13
14
dismiss Plaintiff’s First Amended Complaint1 (the “Complaint”) on the erroneously asserted grounds
15
that: 1) the Complaint is barred by the Eleventh Amendment as against the Governor, Defendants
16
Appelsmith, the Attorney General, and Acting Secretary Stevens;2 2) the claims asserted in Plaintiff’s
17
18
Complaint are not ripe for review; 3) the first claim in the Complaint does not identify a protected
property right and the challenged MTA is rationally related to a legitimate government interest; and 4)
19
20
the second and third claims for relief fail to state claims upon which relief can be granted based upon
21
1
22
23
24
25
26
27
28
Plaintiff voluntarily amended his Complaint “of course” pursuant to FRCP 15 following counsel’s appearance on January
31, 2012.
2
Based upon Defendants’ judicial representations regarding the identity of the State Defendants who are in charge of the
enforcement of the MTA and their judicial representations that the Governor, Attorney General and Acting Secretary are not,
and without conceding that the joinder of the Governor, Attorney General and Acting Secretary in either the original
Complaint or First Amended Complaint was in any way improper, Plaintiff does not oppose the dismissal, without prejudice,
of the Governor, Attorney General and Acting Secretary; provided, however, Plaintiff expressly reserves the right to re-file
against such Defendants should further discovery in this action reveal that such Defendants were, contrary to Defendants’
representations, directly involved in the enforcement process. Moreover, as to Defendant Appelsmith, although his name
still appears in the caption (as it was in the Complaint originally filed naming Appelsmith), he was removed from the
charging allegations by Plaintiff’s First Amended Complaint. The Defendants’ motion to dismiss as to Mr. Appelsmith was
unnecessary, and the State Defendants’ assertion that he must be dismissed (again) is therefore moot.
1
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 8 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page8 of 32
1
2
3
business activities.
As will be demonstrated hereinbelow, such motion to dismiss must be denied as to each and
4
every one of the State Defendants’ mistaken, non-compelling and non-conclusive assertions for each of
5
the following reasons:
6
7
8
First, contrary to the State Defendants’ assertions, Plaintiff’s action is currently ripe for review
since this action is a facial challenge to the unconstitutionality of the MTA, any exhaustion of
administrative remedies by Plaintiff would be futile (as alleged by Plaintiff in his Complaint), and any
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
the fact that Congress has purportedly authorized the states to license and regulate the Plaintiff’s
11
delay in adjudicating Plaintiff’s challenge to the MTA would cause Plaintiff further substantial
hardship. Indeed, Plaintiff has already suffered substantial financial hardship and will continue to suffer
12
such hardship as long as the MTA continues to be enforced by the State Defendants, as alleged in the
13
Complaint.
14
15
16
17
Second, Plaintiff has sufficiently alleged facts in its Complaint to state a claim for denial of its
due process rights in that it has identified its vested property rights in the continuation of its money
transmission business which have been interfered with by the MTA and the actions of the State
Defendants. Moreover, as specifically alleged in the Complaint, the MTA further violates Plaintiff’s
18
due process rights in that the licensing requirements of such MTA are not related to a legitimate state
19
20
21
purpose, but rather such MTA imposes arbitrary and prohibitively high prerequisite financial net worth
figures for licensure (thereby effectively forcing Plaintiff out of business and excluding other relatively
22
small business entities) which have no rational relationship to the business being licensed. Further, as
23
specifically alleged in the Complaint, the MTA has been and continues to be applied by the State
24
Defendants against Plaintiff in a completely arbitrary and capricious manner designed to stifle
25
competition and chill interstate commerce.
26
27
28
2
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 9 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page9 of 32
1
2
Congress did not intend to authorize or sanction a regulatory system such as the MTA which in effect
3
gives states carte blanche to criminalize true technological and financial innovation, by permitting
4
states to completely ignore federal regulations promulgated by the Department of the Treasury and
5
allowing such regulatory systems to impose a disparate impact upon small business entities like Plaintiff
6
to the benefit of large business entities financing the enactment of regulations such as the MTA. Rather,
7
8
Congress solely desired to outlaw financing operations which were solely intended to support terrorism.
Fourth, the State Defendants’ bald assertion that their clear, undisputed and continuing violation
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
Third, contrary to the State Defendants’ assertions, in passing the USA PATRIOT Act in 2002,
11
of the dormant commerce clause alleged by Plaintiff (namely, that the State Defendants sought and
continue to seek to enforce the MTA in such a way as to regulate commerce outside of California)
12
essentially has been “fixed” through their voluntary decision to no longer engage in such
13
unconstitutional activity only as against Plaintiff, and only in exchange for Plaintiff’s agreement to not
14
operate in California—even while other businesses continued to operate unlicensed under the MTA in
15
blatant violation of such MTA as alleged in the Complaint—is a classic and ineffective “moving target”
16
17
defense that must fail.
Fifth, even if this Court were to grant the State Defendants’ Motion To Dismiss on any of the
18
grounds being asserted by the State Defendants, Plaintiff respectfully submits that settled federal law
19
20
21
22
23
24
25
and procedure requires that Plaintiff be allowed to amend its Complaint.
MATERIAL FACTS ALLEGED IN THE COMPLAINT THAT ARE DISPOSITIVE OF AND
NEGATE THE STATE DEFENDANTS’ CONTENTIONS THAT PLAINTIFF’S COMPLAINT
HAS FAILED TO STATE A CLAIM
As a preliminary matter, the following factual allegations in Plaintiff’s Complaint, which must
be deemed true for purpose of the motion to dismiss, directly address and negate the erroneous
arguments that Plaintiff has failed to state facts sufficient to state a claim:
26
27
28
3
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 10 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page10 of 32
1
1.
Contrary to the State Defendants’ contention that Plaintiff has failed to allege a claim
ripe for determination by this Court, Plaintiff has alleged in the Complaint not only that
the MTA is facially unconstitutional (FAC, ¶ 75), but also that the MTA and the State
Defendants’ actions in applying such regulatory scheme to Plaintiff have already caused
Plaintiff present and continuing harm and forced him out of the business of money
transmission. (FAC, ¶ 62-69).
2.
Contrary to the State Defendants’ contention that Plaintiff has failed to allege a claim for
violation of its due process rights, Plaintiff has alleged in the Complaint not only a
protected property right, but further that the challenged MTA is not rationally related to a
legitimate government interest by alleging, “Because the MTA effectively extinguishes a
legally valid, vested right to use of property in interstate commerce, the MTA is facially
unconstitutional as a violation of Plaintiff’s rights to due process under the Fourteenth
Amendment to the United States Constitution.” (FAC, ¶ 75, 76).
3.
Contrary to the State Defendants’ assertion that Plaintiff’s second and third claims for
relief fail to state claims upon which relief can be granted based upon the State
Defendants’ factual contention that Congress purportedly has authorized the states to
license and regulate the Plaintiff’s money transmission activities (with a statute and
regulatory scheme imposing substantial financial barriers to obtaining the state’s
permission to conduct such business), Plaintiff has alleged in the Complaint not only that
the State Defendants’ regulatory scheme goes far beyond any intelligible principle for
delegation of authorization set out in the USA PATRIOT Act, but further that the intent
behind such Act was and remains a desire to outlaw financing operations which were
intended to support terrorism. (FAC, ¶ 88, 90, 92, 102, 103).
4.
Contrary to the State Defendants’ contention that Plaintiff’s allegations regarding the
State Defendants’ attempts to use the MTA to regulate commerce occurring entirely
outside of California are “speculation” “wholly unsupported by any factual allegations,”
Plaintiff has pled specific facts and cited specific statements and communications made
by the State Defendants supporting such allegations by alleging, inter alia: “the DFI
issued an ‘Order’ (the ‘October Order’) purporting to exempt Think alone from having to
comply with the provisions of the MTA in providing money transmission services to
consumers, merchants and anyone outside of the State of California, so that Think could
conduct operations in states where it already had valid MTLs, but conditional on Think
not providing money transmission services to persons, consumers, merchants and anyone
located in California and Plaintiff not advertising, soliciting or holding itself out as
providing money transmission services to persons, consumers, merchants and anyone
located in California. Such Order necessarily meant that regardless of Think’s
application status, the California DFI intended and still intends to enforce the MTA
beyond the State of California’s borders on transactions originating and existing in
interstate commerce. The DFI’s and Defendants’ position is that the California law it is
authorized to enforce has supremacy over the laws of any other states under which the
money transmitter may be in compliance.” (FAC, ¶ 56).
2
3
4
5
6
7
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
11
12
13
14
15
16
17
18
19
20
21
22
23
24
ARGUMENT
I.
The Settled Law Governing The Determination Of Motions To Dismiss.
25
26
27
28
In considering a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure,
a court “must accept all well-pleaded facts alleged in the Complaint as true and draw all reasonable
4
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 11 300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page11 of 32
1
inferences in favor of the plaintiff.” Day v. Fallon Cmty. Health Plan Inc. 917 F. Supp. 72, 75 (D.
2
Mass 1996); see also, Watterson v. Page, 987 F. 2d 1, 3 (1st Cir. 1993). The trial court must “neither
3
weigh the evidence nor rule on the merits because the issue is not whether the plaintiffs will ultimately
4
prevail, but whether they are entitled to offer evidence in support of their claims.” Day, 917 F.Supp. at
5
75. Claims in a complaint need not be absolutely conclusive, but merely plausible. Bell Atl. Corp v.
6
Twombly, 127 S. Ct. 1955, 1965 (2007).
7
The trial court may also consider documents outside of the pleadings in certain circumstances
8
when ruling on a motion to dismiss. See, Watterson, 987 F.2d at 3. There is a “narrow exception for
9
documents the authenticity of which are not disputed by the parties; for official public records; for
10
documents central to plaintiff's claim; or for documents sufficiently referred to in the complaint.” Id. 3-
11
4. If “a complaint’s factual allegations are expressly linked to—and admittedly dependent upon—a
12
document the authenticity of which is not challenged, that document effectively merges into the
13
pleadings and the trial court can review it in deciding a motion to dismiss under Rule 12(b)(6).”
14
Beddall v. State Street Bank and Trust Co., 137 F.3d 12, 16-17 (1st Cir. 1998).
15
II.
16
17
Contrary To The State Defendants’ Assertions, This Action Is Currently Ripe For Review
Since This Action Includes Both “Facial” And “As Applied” Challenges To The MTA, Any
Exhaustion Of Administrative Remedies By Plaintiff Would Be Futile, And Any Delay In
Adjudicating Plaintiff’s Challenge To The MTA Would Cause Plaintiff Substantial
Hardship.
18
This action is currently ripe for review as it meets the controlling ripeness doctrine set out by our
19
20
21
Supreme Court in Abbot Laboratories v. Gardner, 387 U.S. 136, 148-49 (1967) and its progeny. Abbot
Laboratories and the successive cases interpreting the ripeness doctrine mandate that this case be found
22
ripe for three concrete reasons: (1) facial challenges to a statute or regulation that even has not yet been
23
applied are generally considered fit for judicial determination because the issue raised is a “purely legal
24
one,” and can be decided by the court without further factual development. Id.; (2) “as-applied”
25
challenges are ripe when the exhaustion of administrative remedies would be futile. Sammon v. New
26
27
28
Jersey Bd. of Med. Examiners, 66 F.3d 639, 643 (3d Cir. 1995); and (3) “as-applied” challenges are also
5
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 12 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page12 of 32
1
2
3
ripe when a hardship would result to one of the parties, such as the continuing hardship resulting to and
specifically alleged by Plaintiff. See, Colwell v. Dep’t of Health and Human Servs., 558 F.3d 1112,
1123-1124 (9th Cir. 2009).
A. Plaintiff’s Challenges To The Facial Unconstitutionality Of The MTA Are Inherently
Ripe For This Court’s Determination.
4
5
The issues presented here are fit for immediate review because the causes of action alleged
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
6
7
involve facial challenges to the MTA under the procedural due process, substantive due process, equal
8
protection, and commerce clause provisions—which challenges are inherently ripe when the issues are
9
sufficiently focused without further substantial factual development. P. Leg. Found. v. State Energy
10
Resources Conservation & Dev. Commn., 659 F.2d 903, 915 (9th Cir. 1981) aff'd sub nom. P. Gas and
11
Elec. Co. v. State Energy Resources Conservation & Dev. Commn., 461 U.S. 190 (1983).3
12
13
Moreover, the judicial review sought now does not threaten “abstract disagreements over
administrative policies,” Abbott, 387 U.S. 136 at 148, as the disagreements here are extremely concrete
14
15
16
and sufficiently focused. It is well-settled that where, as here, a party challenges the statutory or
constitutional authority of the defendants to enact a licensing or regulatory scheme, the party need not
17
“submit to the administrative procedures incident thereto” prior to bringing an action. City of Chicago
18
v. Atchison, Topeka & Santa Fe Ry., 357 U.S. 77, 89 (1958) (constitutional challenge to licensing
19
scheme proper). Indeed, as stated by our Supreme Court in Public Utilities Comm'n v. United States,
20 355 U.S. 534, 540 (1958), as well as elsewhere, “where the only question is whether it is constitutional
21
22
to fasten the administrative procedure onto the litigant, the administrative agency may be defied and
judicial relief sought as the only effective way of protecting the asserted constitutional right.”
23
24
25
26
27
28
3
See also Gary D. Peake Excavating Inc. v. Town Bd. of Town of Hancock, 93 F.3d 68, 71-73 (2d Cir. 1996) (finding ripe a
Commerce Clause challenge to a municipal ordinance imposing permit requirements that were stricter than those of a state
agency).
6
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 13 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page13 of 32
1
2
for lack of licensing standards, the party need not first apply for and be denied a license. Triple G.
3
Landfills, Inc. v. Board of Commissioners of Fountain County, 977 F.2d 287, 288-91 (7th Cir.1992). As
4
this is precisely the case here, Plaintiff’s challenges to the facial unconstitutionality of the MTA are fit
5
for immediate judicial review. Indeed, it would be an inefficient use of judicial resources to adjudicate
6
by piecemeal Plaintiff’s contentions that the State Defendants lack the constitutional and statutory
7
8
authority to regulate money transmission, while at the same time arbitrarily abstaining from considering
Plaintiff’s facial challenge to the regulatory scheme for its lack of standards. Moreover, the latter
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
It is likewise established doctrine that when a party challenges a regulatory scheme on its face
11
12
13
14
15
presents a narrower ground for decision in this action.
B. Plaintiff’s Challenges To The Unconstitutionality Of The MTA As Applied To Plaintiff
Are Ripe Since Controlling Law Establishes That Plaintiff Is Not Required to Exhaust
Administrative Processes Where, As Here, The Challenged Statute (The MTA)
Imposes A Substantial Hardship Or Burden Upon Plaintiff In Even Participating In
The Administrative Processes And Any Attempted Exhaustion Of Administrative
Remedies By Plaintiff Would Be Futile.
Plaintiff is not required to exhaust administrative proceedings before making a claim because
16
Plaintiff is directly challenging the MTA itself in this action “as-applied.” Our Ninth Circuit Court of
17
Appeals has held that administrative exhaustion is only required to make a due process or equal
18
protection claim ripe when it arises in certain narrow categorical circumstances relating to, or arising
19
from, a land-use or takings claim. Norco Construction, Inc. v. King County, 801 F.2d 1143, 1146 (9th
20
Cir. 1986). The flaw in the State Defendants’ overly broad assertion that Plaintiff must categorically
21
22
exhaust all administrative remedies prior to bringing this action is that Plaintiff’s procedural due
process, substantive due process, equal protection claims and commerce clause claims do not involve
23
24
25
land-use or takings claims. Carpinteria Valley Farms, Ltd. v. County of Santa Barbara, 344 F.3d 822,
831 (9th Cir. 2003); see also Triple G Landfills, Inc. v. Board of Commissioners, 977 F.2d 287, 289 (7th
26
27
28
7
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 14 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page14 of 32
1
2
Cir. 1992) (explaining why a final decision is not necessary for challenging permit requirements).4
Rather, for Plaintiff’s “as-applied” claims, the traditional determination of ripeness mandates an
3
analysis of “whether the relevant issues are sufficiently focused so as to permit judicial resolution
4
without further factual development and whether the parties would suffer any hardship by the
5
postponement of judicial action.” Abbott, 387 U.S. 136. Each of these criteria are satisfied in this
6
action.
7
i. Plaintiff’s Challenges To The Unconstitutionality Of The MTA As Applied To
Plaintiff Under the Facts Alleged In This Action Are Concrete And Sufficiently
Focused So As To Permit Judicial Resolution.
9
Here, the relevant issues are sufficiently focused and concrete. The State Defendants’ specious
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
11
assertion that, because the DFI has not made an administrative decision on Plaintiff’s application the
12
issues are impermissibly abstract, simply does not hold water against the strong line of circuit court
13
decisions cited above. In fact, Plaintiff’s Complaint sets out multiple attempts to engage in the DFI’s
14
administrative process, and Plaintiff did in fact start such process by attending the mandatory pre-filing
15
16
17
18
19
20
21
22
23
4
24
25
26
27
28
The Court in Triple G Landfills, Inc. found the challenge ripe the permit applicant had a direct and tangible interest in the
subject matter of the litigation and because ‘[p]ostponing judicial action ... would force an unwarranted dilemma upon [the
applicant]: either scuttle its development plans altogether in deference to a potentially invalid county regulation, or complete
the expensive and time-consuming state permit process, submit an permit application that [the county] is almost certain to
reject, and then, after incurring substantial sunk costs, bring a facial challenge to the ordinance.” 977 F.2d at 291, 289, and
290. See also Skull Valley Band Of Goshute Indians v. Nielson, 376 F.3d 1223 (10th Cir. 2004) (a party seeking a license
from a governmental agency generally is ripe when challenging an allegedly invalid law that either imposes substantial
burdens upon the applicant or flatly prohibits the activity in question).
8
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 15 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page15 of 32
1
2
meeting5, but Plaintiff’s efforts were ultimately frustrated due to DFI’s hostile and uncooperative
interactions with Plaintiff. (FAC, ¶ 47, 51, 53-5, 57-8.) Between the DFI’s October Order, its
3
unwillingness to communicate further with Plaintiff, and the jeopardy of risking a negative outcome
4
nationwide by applying in California, the Complaint demonstrates that Plaintiff had no further recourse
5
except these proceedings.6 (FAC, ¶ 52).
6
7
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
5
The State Defendants have made clear that the MTA regulatory “process” begins well before the paper application is filed.
As acknowledged by the State Defendants and as this Court can verify on the DFI’s web site dedicated to money transmitters
(emphasis added):
“Once the prospective applicant for a new money transmitter license or acquisition of control has become thoroughly
familiar with the laws and regulations that govern this activity, the next step is to arrange for a pre-filing meeting with
the Money Transmitter Division staff. The prospective applicant should contact Mr. Julio Prada at (415) 263-8540 or by
email at jprada@dfi.ca.gov to arrange for an appointment. The successful applicant will be able to demonstrate a
working knowledge of the laws and regulations that govern money transmitters and be ready to present a proposed
business plan. Meetings are conducted in person at the San Francisco Office. All prospective applicants for a new
money transmitter must have a pre-filing meeting with the Money Transmitter Division staff before filing an application;
for acquisition of control applicants, this step is highly recommended, especially if the applicants are not known to the
Money Transmitter Division staff.”
(See, RJN at Exhibit B, p. 1). In this particular case, due process was owed to Plaintiff at least as early as the minute on
April 1, 2011 when Mr. Greenspan initially e-mailed Mr. Prada inquiring as to the status of California’s money transmission
statutes. The pre-filing interview took place more than two months later, well after this point in time.
6
Moreover, other courts of appeal in other circuits have previously encountered almost identical situations involving
licensure and found the challenges to such licensure “processes” to be ripe for review. Thus, in Skull Valley Band Of
Goshute Indians v. Nielson, 376 F.3d 1223, 1234-35 (10th Cir. 2004), the Tenth Circuit Court of Appeal cogently opined:
“PFS’s and the Skull Valley Band’s alleged injury is much more than a generally available grievance about the
government or a tactical disadvantage. Instead, they have alleged that the Utah statutes have affected them concretely.
In particular, PFS has alleged that the statutes impose substantial burdens upon it because of the SNF storage project that
it has proposed (requiring, for example, the payment of a five million dollar nonrefundable application fee, compliance
with complex state regulatory requirements, and the posting of a two billion dollar bond). The Skull Valley Band has
alleged that the Utah statutes infringe upon its ‘inherent tribal sovereignty.’ Aplts' App. at 39. Moreover, according to
PFS and the Skull Valley Band, the extensive obligations created by the Utah statutes are preempted by federal law.
We agree with PFS and the Skull Valley Band that a party seeking a license from a governmental agency generally has
standing to challenge an allegedly invalid law that either imposes substantial burdens upon the applicant or flatly
prohibits the activity in question. Several courts have suggested that conclusion in addressing ripeness challenges, and,
although “standing and ripeness are technically different doctrines, they are closely related in that each focuses on
whether the harm asserted has matured sufficiently to warrant judicial intervention.” Johnson v. Missouri, 142 F.3d
1087, 1090 n. 4 (8th Cir.1998) (quoting Warth v. Seldin, 422 U.S. 490, 499 n. 10, 95 S.Ct. 2197, 45 L.Ed.2d 343
(1975)); see also Morgan v. McCotter, 365 F.3d 882, 887 (10th Cir. 2004) (finding issues of standing and ripeness
‘particularly difficult to divorce’).” Id. at 47-48 (emphasis added).
Plaintiff here faces the very same dilemma: Plaintiff’s plans have already been scuttled, but even applying now anyway,
ignoring concerns about prerequisites, would likely require waiting for a year or more for a license, and a denial in California
will prejudice Plaintiff’s status in other states where the denial of a license in California would have to be disclosed. .
(Plaintiff’s application for a license in Louisiana, where there are no known issues, has been pending since August, 2011,
when the State of Louisiana informed Plaintiff that its application was complete.) It is thus exceedingly clear that Plaintiff’s
situation is ripe for review.
9
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 16 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page16 of 32
1
2
further administrative action because the State has not indicated that it has any plans to take any further
3
action, and the State has in fact indicated just the opposite. (FAC, ¶ 57). Indeed, the State has no
4
interest in further engaging Plaintiff, to the point where Mr. Greenspan cannot even get the DFI to take
5
his phone calls. Id. In completely shutting down an enterprise based upon Defendant Venchiarutti’s
6
ultimatum, Plaintiff has clearly had to “modify its behavior in order to avoid future adverse
7
8
consequences,” Ohio Forestry Assn., Inc., 523 U.S. 726, 733 (1977). These prior interactions with the
DFI clearly indicate that Plaintiff’s efforts to proceed with the application process would be in vain.
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
Moreover, the adjudication of these issues by this Court would not inappropriately interfere with
11
12
13
Based on these facts, Plaintiff is not required to make the futile gesture of applying on paper, merely to
subject itself to the DFI’s arbitrary and discriminatory process in order for its claims to be ripe.
ii. Plaintiff Will Suffer Substantial Hardship If Judicial Review Of This Action Is
Delayed.
Plaintiff will unquestionably be harmed if the Court fails to act or delays its review. In Freedom
14
15
16
17
18
to Travel Campaign v. Newcomb, 82 F.3d 1431, 1436 (9th Cir. 1996), the Ninth Circuit Court of
Appeals held that:
If it is ‘inevitable’ that the challenged rule will ‘operat[e]’ to the plaintiff's disadvantage-if the
court can make a firm prediction that the plaintiff will apply for the benefit, and that the agency
will deny the application by virtue of the rule-then there may be a justiciable controversy that
the court may find prudent to resolve.
19
Furthermore, the Supreme Court has held that “one does not have to await the consummation of
20
21
22
23
threatened injury to obtain preventive relief. If the injury is certainly impending that is enough.” P.
Gas & Elec. Co., supra, at 201-202 (1983).
In P. Gas & Elec. Co., the Court rejected a ripeness objection to an action challenging a state
24
statute imposing a moratorium on nuclear plant construction, noting the hardship that would be imposed
25
if a judicial decision were delayed: the utilities who had challenged the state law would be required to
26
expend a substantial amount of time and money over a number of years without knowing whether that
27
28
10
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 17 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page17 of 32
1
2
3
expenditure was entirely futile. “To require the industry to proceed without knowing whether the
moratorium is valid would impose a palpable and considerable hardship on the utilities, and may
ultimately work harm on the citizens of California.” Id.
Here, the facts make it clear that the Plaintiff could not and cannot now apply for a license in
4
5
California on paper, because without first knowing the absolute requirements of the licensure process
6
and without those requirements being subject to being changed by the State Defendants, the risk of
7
Even in other states where Plaintiff easily meets those states’ application requirements, Plaintiff’s denial
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
denial, even with a hearing, would mean the subsequent denial of similar applications in other states.
11
of a license in California must be affirmatively disclosed to the other states and can be used by those
states to deny Plaintiff’s application or revoke Plaintiff’s licenses there. (FAC, ¶ 52). This specter of
12
adverse consequences is substantiated by the actual content and layout of various states’ application
13
forms, which inquire as to whether or not an applicant has been rejected in any other state, directly
14
adjacent to questions regarding principals’ criminal records. (FAC, ¶ 52). More egregious, the cost of
15
compliance of the MTA would be considerably great to a relatively small business entity such as
16
17
Plaintiff, but the penalty for noncompliance would subject Plaintiff to disqualification and possibly
criminal and civil penalties. (FAC, ¶ 49, 69). Indeed, this threat of criminal penalty is considered
18
sufficient hardship to make the claim ripe. Freedom to Travel Campaign v. Newcomb, 82 F.3d at 1436.
19
20
21
Where the agency has threatened enforcement, the actual commencement of administrative enforcement
proceedings is not necessary. P. Gas & Elec. Co., supra, at 201.
7
22
23
7
24
25
26
27
28
Already, Plaintiff has invested more than one million dollars in its proprietary intellectual property and is at increasing risk
of its technology becoming obsolete the longer the State interferes. (FAC, ¶ 66). Plaintiff’s investment of time, energy,
money and property is all for naught without the legal right to operate as a money transmitter, as Plaintiff did lawfully and
without any formal complaint prior to July 1, 2011. Indeed, given the State’s apparent lack of interest in enforcing the MTA
on any of the unlicensed money transmitters disclosed to the DFI by Plaintiff, a lack of judicial review in these
circumstances would effectively grant Plaintiff’s unlicensed competitors the effective right to continue operating unlawfully
without fear of any repercussions. (FAC, ¶ 60, 61, 70). As such, a delay in the judicial review of this action would cause
Plaintiff to lose its competitive edge in the payments industry/money transmission market. (FAC, ¶ 11). In contrast, hearing
11
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 18 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page18 of 32
1
2
Employees & Restaurant Employees International Union, the Ninth Circuit held that the impact of a
3
regulation is sufficiently direct and immediate as to render the issue ripe for judicial review when: “The
4
cost of compliance with the [regulation] is not particularly great, but the penalty for noncompliance is
5
disqualification, and the union itself may be penalized if it allows disqualified employees to continue to
6
perform their union duties.” 984 F.2d 1507, 1513 (9th Cir.1993).
7
8
Here, the facts are even more compelling since the cost of compliance was never made clear to
Plaintiff. (FAC, ¶ 49, subd. (a), (c)). After expending substantial amounts of money (amounting to one
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
When the plaintiffs were presented with such an equivalent Hobson’s choice in Hotel
11
million dollars) prior to the effective date of the MTA, Plaintiff’s business plans were scuttled by the
DFI’s refusal to so much as clearly define its “unwritten policy” to Plaintiff concerning the
12
requirements of approval monetary and otherwise—forcing Plaintiff to shut down its enterprise to avoid
13
administrative action and criminal prosecution. (FAC, ¶ 49, 50, 51, 52). Even if Plaintiff applied now
14
without knowing the unwritten requirements, Plaintiff risks substantial hardship in the collateral effects
15
of the almost certain denial of its California application on other pending or future state applications.
16
17
(FAC, at ¶ 52.) As such, Plaintiff’s action, and the continuing harm inflicted upon it by the State
Defendants as alleged therein, is ripe for review.
18
At a minimum, Plaintiff has pled facts sufficient to state a claim against the State Defendants
19
20
21
and to establish the ripeness of Plaintiff’s claims and continuing damages incurred as a direct result of
the MTA, and as such the State Defendants’ Motion to Dismiss must be denied.
22
23
24
25
26
27
28
the matter would open the possibility that, in the event the MTA is found to be unconstitutional, all aspiring or current
money transmitters, including Plaintiff, would once again have a true legal right to operate.
12
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 19 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page19 of 32
1
III.
Plaintiff Has Alleged Facts Sufficient To State A Due Process/Equal Protection Claim.
A. Plaintiff Has a Vested Property Right Which Has Been Interfered With By The MTA
And The Actions Of The State Defendants.
2
3
In their Memorandum, the State Defendants make the misleading assertion that Plaintiff does
4
not have a protected property right (specifically alleged at FAC ¶ 75) sufficient to support a due process
5
6
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
7
claim, stating that, “There is certainly no California statute or case law stating ‘in mandatory terms’ that
the plaintiff be allowed to continue engaging in this business activity without regulation.” In fact,
8
Plaintiff never argued that “in mandatory terms” it should be allowed to continue operating as a money
9
transmitter without regulation, so the point and ensuing discussion are moot.8 Regulation may very well
10
be appropriate, so long as it has an “intelligible principle” to guide it, but the State Defendants argue no
11
such principle. Rather, they belabor the “invulnerability” of the MTA without acknowledging the fact
12
13
that the genesis and intent of the purportedly authorizing law lies solely in protecting the nation from
terrorism, as demonstrated below.9
14
Indeed, the State Defendants’ assertion misses the point. Plaintiff has argued that it should be
15
16
17
allowed to continue operating as a money transmitter either under a federal regulatory regime that has a
legitimate right to regulate interstate commerce, or that in the event Congress is found to have delegated
18
19
20
21
22
23
24
25
26
27
28
8
In support of their erroneous argument that Plaintiff purportedly does not have a vested property right the divesting of
th
which would constitute a due process claim, the State Defendants cite to Spoklie v. Montana, 411 F.3d 1051 (9 Cir. 2005)
for the proposition that a “state may outlaw a formerly legal business even if it causes hardship to those who relied on the
earlier law.” State Defendants’ Memorandum, at p. 15. However, Spoklie is conclusively distinguishable on its facts, as it
dealt with and only expressly addressed issues of the constitutionality of the retroactivity of a statute in the context of a
takings claim. Here, as set forth above and in the Complaint, Plaintiff is challenging the unconstitutionality of the MTA
facially and as it has been applied to Plaintiff, in a manner which is arbitrary and irrational and further interferes with and
applies to his prospective commerce in other states. Indeed, as directly asserted in ¶ 52 of Plaintiff’s Complaint, the
cascading effect of the threatened denial of Plaintiff’s application in California would preclude its successful applications in
other states. As such, Plaintiff’s property rights have been and continue to be interfered with by the State Defendants.
9
Congress’s prerogative to grant authorization to regulate interstate commerce, or infringe upon interstate commerce to the
states is not without limit, but rather is guided by the “intelligible principle” doctrine. Under the intelligible principle
doctrine, the delegation of Congress’s authority must not grant the delegate “unrestrained freedom of choice.” Zemel v.
Rusk, 381 U.S. 1, 17 (1965). Rather, the delegation must have an “intelligible principle” to direct the delegated authority
with a guiding principle of how or to what extent it can frustrate interstate commerce. Freedom to Travel Campaign v.
Newcomb, 82 F.3d 1431, 1437 (9th Cir. 1996). Additionally, the level of delegation must meet the “public interest”
standard. Id. See also Panama Refining Co. v. Ryan, 293 U.S. 388 (1935) (striking down delegation to the President to
criminalize the interstate transport of petroleum without limiting his power at all).
13
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 20 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page20 of 32
1
2
on a Constitutionally consistent basis involving due process, to the nominal goal of consumer
3
protection, or indeed at a minimum to the policies and principles embodied by the Act purportedly
4
rendering the MTA invulnerable to constitutional challenge. Bluntly stated, the MTA as enacted and
5
specifically as applied by the State Defendants goes too far, and certainly well past any permissible
6
congressional delegation of authority that arguably, if at all, could be found in the USA PATRIOT Act.
7
8
The present patchwork of state laws further fails to further the underlying congressional policy of such
Act, and in particular, the MTA’s convoluted and unlawful application process (especially in the
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
that right to the respective states, that such a process for regulatory approval must be rationally related,
11
12
context of the forty-six other state money transmission laws with different requirements and different
processes) has wrongfully denied Plaintiff the use of its tangible and intellectual property as set forth
herein and alleged in the Complaint. (See, e.g. FAC, and specifically at ¶ 61, 63, 64, 66, 67, 69, 70).
14
B. The Licensing Requirements Of The MTA Are Not Related to a Legitimate State
Purpose, And Are Applied By The State Defendants In a Completely Arbitrary and
Capricious Manner Designed to Stifle Competition and Chill Interstate Commerce.
15
The DFI openly acknowledges the confusing and arbitrary nature of its application procedures
13
16
17
by having posted a new official “Frequently Asked Questions” page on its web site10 that was published
only after the instigation of these proceedings, and was therefore unavailable and/or unknown to
18
Plaintiff at the time that Plaintiff filed its initial Complaint and First Amended Complaint. This web
19
20
21
page confirms Plaintiff’s allegations that the DFI has operated and continues to operate according to an
arbitrary rule that up until the creation of this (undated) web page, was completely unwritten and
22
unavailable to the public. (FAC, ¶ 49). In response to the question, “What is the capital requirement?”
23
this official California government web page states: “The capital requirement varies based on the
24
licensee’s plan of operation and risk profile. The amount of tangible net worth stated in the Financial
25
26
27
28
10
See http://www.dfi.ca.gov/resources/faqs/faqs_tms.asp, a copy of which is attached and submitted herewith as Exhibit B to
the concurrently filed Request for Judicial Notice.
14
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 21 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page21 of 32
1
2
licensees. A new licensee would typically be required to have more tangible net worth, at least $1
3
million, to offset the expected losses of a new transmitter and support its operational needs at all times”
4
(emphasis added). From a due process standpoint, this statement (“the Policy”) is so problematic that it
5
is frankly shocking that the DFI ultimately (and presumably due to these proceedings) decided to post it
6
publicly.
7
8
The Policy appears to vary according to two completely subjective variables: the licensee’s
“plan of operation” and so-called “risk profile.” How a licensee’s risk profile is determined, or who
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
Code, $500,000, is not the amount required for licensing, but rather the minimum allowed for existing
11
should prepare such a risk profile, is not specified anywhere, let alone who examines the profile and
what credentials the examiner has for doing so. The Policy then notes that the DFI does not actually
12
pay any attention to the $500,000 minimum tangible shareholder equity figure contained within § 2037
13
of the MTA, but instead makes up its own rules as it goes along, free from the burden of a notice and
14
comment period explicitly required by 1 CCR § 44. The Policy then hedges further, indicating that
15
“typically” applicants need additional net worth, but without specifying the particular circumstances
16
17
that would lead to an exception from the “typical” case. (Given how few licensees and applicants there
are in the first place, it is hard to even imagine what the word “typical” might mean—perhaps “a
18
corporation with a net worth of greater than one billion dollars?”) A new minimum figure of $1 million
19
20
21
22
in net worth is then put forth without any justification for that particular number, leaving applicants to
wonder if perhaps the DFI really believes that doubling an arbitrary value in an arbitrary statute will
keep consumers’ funds safe.
23
Were there truly an underlying rationale for this number, it would not vary by hundreds of
24
thousands of dollars from state to state. The State Defendants therefore promote the interests of a select
25
group of extremely wealthy and entrenched corporations, by asserting an illogical and irrational basis
26
27
28
for consumer protection in truth premised upon an impermissible presumption that “big companies with
15
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 22 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page22 of 32
1
2
3
big money” are less likely to harm consumers than “small companies with small money,” when they
incorrectly assert that a rational relationship exists between the MTA’s requirements and the state’s
interest in protecting consumers.
The State Defendants’ faulty argument is presumably premised on the wholly incorrect belief
4
5
that adding equity to an enterprise makes it more stable and trustworthy. The recent and well-
6
publicized catastrophic implosions of MF Global, Inc. (“MF Global”) and the Bernard L. Madoff
7
reportedly worth $42.46 billion as of 2010, and though it was not specifically classified or marketed as a
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
Investment Securities LLC Scandal should conclusively disprove this absurd theory. MF Global was
11
“money services businesses,” it generally operated from a theoretical accounting standpoint in the same
way that a money services business does, holding funds on behalf of consumers. Somehow, despite its
12
enormous amount of net worth, MF Global still managed to “lose” almost a billion dollars of consumer
13
funds for reasons that have yet to be determined conclusively, and which are at issue in pending
14
bankruptcy litigation. It should be noted that MF Global’s principals, including the former Governor of
15
New Jersey, were also exceedingly wealthy, and even without corporate backing more than able to meet
16
any state’s minimum net worth requirements for money transmission.
17
The fanciful notion that $500,000, or $1 million, or even any amount of minimum capital
18
actually protects consumers is consequently demonstrably false. Minimum capital requirements do
19
20
21
nothing to protect consumers who deposit money in financial institutions so long as those institutions do
not make loans or issue credit. As the MF Global, Madoff Scandal and other recent scandals indicate,
22
what matters is the honesty and integrity of the principals involved, and the rigor of their auditors in
23
highlighting potential operational defects—not the amount of capital ascribed to the firms or their
24
principals.
11
25
26
27
28
11
Though the efficacy of financial regulation continues to be the subject of national debate, it is the opinion of Plaintiff that
the best solution to the real problem of ensuring the security of consumer deposits involved in money transmission is not an
16
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 23 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page23 of 32
1
2
the discriminatory, anti-competitive and protectionist desires of the MTA’s sponsors, puts the MTA in a
3
rarefied class of laws that fail the rational review test. In City of Cleburne v. Cleburne Living Center,
4
Inc., 473 U.S. 432, the Court opined: “The mentally retarded, as a group, are indeed different from
5
others not sharing their misfortune, and in this respect they may be different from those who would
6
occupy other facilities that would be permitted in an R-3 zone without a special permit. But this
7
8
difference is largely irrelevant unless the Featherston home and those who would occupy it would
threaten legitimate interests of the city in a way that other permitted uses such as boarding houses and
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
The utter lack of substantive support for the MTA’s financial capital prerequisites, aside from
11
12
hospitals would not. Because, in our view, the record does not reveal any rational basis for believing
that the Featherston home would pose any special threat to the city's legitimate interests, we affirm the
judgment below insofar as it holds the ordinance invalid as applied in this case.”
13
Here, as in Cleburne, it is evident from the lack of complaints about and subsequent prosecution
14
of small money transmitters that the special threat posed to California consumers by money transmitters
15
with net worth between $0 and $500,000 (or $1 million, or some other figure that State Defendants may
16
17
wish to invent) is no greater than the threat posed by larger entities. Given the competitive drive of new
market entrants that can lead to fewer, lower fees and better service, the threat may even be less. After
18
the 2008 financial crisis, there is considerably greater public outrage at large financial institutions than
19
20
21
small ones. Literally all of the capital in the world was not enough to save some of the largest banks in
the nation from collapse and mismanagement of client funds—and yet the State of California still heeds
22
23
24
25
26
27
28
arbitrary threshold that restricts entry into the market (accomplishing nothing thereafter), but rather a mechanism to ensure
real-time data transparency. The technology necessary to facilitate such transparency has existed for more than a decade.
Simply requiring licensees to disclose balance sheet data in a standardized, digital format on a regular basis, requiring little
to no manual intervention (perhaps with frequency of disclosure dependent upon company size) would both tell the
Government what it needs to know, and eliminate unnecessary burdens to industry. Such approach would of course level the
playing field for both the relatively small money transmitters and the mega-businesses which the current MTA favors.
17
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 24 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page24 of 32
1
2
to the same antiquated and completely discredited system of risk management that was in use before the
crisis as demonstrated by the arbitrarily applied and irrational Policy.
For all of these reasons, it is not meritorious, but specious, for Defendants to argue that the
3
4
financial requirements of the MTA are “rationally related” to the purpose of consumer protection even
5
if such requirements were evenly applied—which they are not. (FAC, ¶ 60, 61, 70). For now, the
6
minimum requirements are certainly present, and these proceedings continue due to their onerous
7
the $1 million figure (finally) stated on the DFI web site; c) the DFI’s practice of ignoring both of these
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
nature, but nowhere in the MTA is there a stated rationale for a) the $500,000 figure in the statute; b)
11
figures in certain, unspecified situations where a “plan of operation” or “risk profile” might override
them; d) the DFI’s demonstrably false belief that all new applicants must suffer “expected losses;” or e)
12
that such expected losses will, on average, by definition, or otherwise reach $500,000. Each instance of
13
uncertainty in a procedure such as this one introduces the possibility of subjective human error or bias.
14
Whether intentional or not, such subjectivity is the opposite of rationality. The State cannot provide any
15
rationale for its subjective assumptions, and therefore its arguments must fail.
16
17
Indeed, at a minimum, Plaintiff has pled facts sufficient to state a claim against the State
Defendants for their violations of Plaintiff’s due process rights in that the MTA does not have a rational
18
basis related to a legitimate state interest, and as such the State Defendants’ Motion to Dismiss must be
19
20
21
22
denied.
C. The MTA As Applied To Plaintiff By The State Defendants Further Violates Plaintiff’s
Procedural Due Process Rights.
Finally, Plaintiff’s procedural due process rights have also been violated by the State
23
Defendants’ arbitrary and capricious application of the MTA to Plaintiff. As stated by the Court in
24
25
26
27
28
Mathews v. Eldridge, 424 U.S. 319:
“Although respondent concededly did not exhaust the Secretary's internal review procedures,
and ordinarily only the Secretary has the power to waive exhaustion, this is a case where the
claimant’s interest in having a particular issue promptly resolved is so great that deference to
18
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 25 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page25 of 32
1
2
3
4
the Secretary’s judgment is inappropriate. The facts that respondent’s constitutional challenge
was collateral to his substantive claim of entitlement, and that (contrary to the situation in Salfi)
he colorably claimed that an erroneous termination would damage him in a way not
compensable through retroactive payments warrant the conclusion that the denial of his claim to
continued benefits was a sufficiently ‘final decision’ with respect to his constitutional claim to
satisfy the statutory exhaustion requirement.” (emphasis added)
Mathews further established a three-part test for determining “the constitutional sufficiency of
5
6
by the official action;” the second, “the risk of an erroneous deprivation of such interest through the
8
procedures used, and probable value, if any, of additional procedural safeguards;” and the third, “the
9
Government's interest, including the fiscal and administrative burdens that the additional or substitute
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
7
administrative procedures.” The first part of this test assesses “the private interest that will be affected
11
12
13
procedures would entail.” Id.
The private interest affected by official action here is obvious and substantial. Plaintiff has been
required, as a direct result of the process adopted by the DFI, to completely cease operating the mobile
payment system in which it invested significant resources, and which constitutes its primary product
14
offering. (FAC, ¶ 62-69).
15
16
17
The risk of erroneous deprivation of such interest, through the inherently subjective and
confusing process that includes a mandatory “pre-filing interview,” combined with the additionally
18
vague and subjective monetary pre-requisites for filing, is enormous. It is easy to conceive of presently
19
lacking procedural safeguards that would offset such risk, including but not limited to more definite
20
written pre-requisites, and the requirement that pre-filing interviews be recorded, if such meetings are
21
even truly necessary.
22
23
Such additional safeguards would actually benefit the Government. Considerable taxpayer
resources have been invested in the slow (and pointlessly subjective) process of evaluating money
24
25
26
27
28
transmission applications, allowing the Government to discriminate against those businesses it does not
“like” without any stated criteria. Eliminating the licensure process completely or allowing recordings
19
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 26 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page26 of 32
1
2
As such, at a minimum Plaintiff has alleged facts sufficient to support its claim for violation of
4
its rights to procedural due process, and accordingly, the State Defendants’ Motion to Dismiss must be
5
denied.
6
IV.
8
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
of money (which it desperately needs), or cost the State virtually nothing.
3
7
LAW OFFICES OF MICHAEL BROOKS CARROLL
to be made with off-the-shelf equipment would either save the State of California an enormous amount
11
12
The MTA Violates The Dormant Commerce Clause And Is Not “Invulnerable” To A
Dormant Commerce Clause Challenge As The State Defendants Assert.
A. The State Defendants Fail to Cite any Explicit or Implicit Congressional Endorsement
of the Money Transmission Act and its Unconstitutional Requirements for Licensure,
Nor Can They Since The Purported Authorizing Statute, the USA PATRIOT Act, Was
Never Intended To Authorize Or Enable The MTA Regulatory Scheme Enacted By
The State Defendants.
In its Memorandum, the State Defendants boldly label the MTA “invulnerable” to a dormant
Commerce Clause challenge, citing 18 U.S.C. § 1960 as purported proof that Congress implicitly
13
endorses every requirement in the MTA. However, Congress clearly did not intend to give the states
14
15
16
carte blanche to enforce a regulatory scheme in the manner that the State Defendants have done here,
and indeed such a grant of power as the State Defendants argue that the State of California has
17
received—which would render the MTA “invulnerable” to constitutional challenge—would itself be
18
unconstitutional as set forth above. See, Zemel, supra, 381 U.S. at 17. The State Defendants’ reasoning
19
that the MTA is authorized by 18 U.S.C. § 1960 fails to withstand even a cursory level of scrutiny when
20
evidence of the congressional intent and motivations behind such regulation, adopted in the wake of and
21
22
in reaction to the terrorist attacks of September 11, 2001, is more closely examined.
Congress amended 18 U.S.C. § 1960 in 2002 as part of the USA PATRIOT Act, a sweeping law
23
designed to counter terrorism in the wake of the September 11, 2001 terrorist attacks. Far from
24
25
26
27
28
intending to describe a financial regulatory regime for the future of commerce, Congress was primarily
interested in outlawing the use of traditional Islamic hawala financial networks as vehicles to fund
20
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 27 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page27 of 32
1
2
terrorism, and so it designated the operation of an unlicensed money transmission service to be a federal
crime. Congress’s intent in this regard, and the federal government’s motivations in enacting such
3
provision are described in a report submitted to Congress by the United States Department of the
4
Treasury in November, 2002 in accordance with Section 359 of the USA PATRIOT Act (the
5
“Report”).12 The Report focuses in great detail on terrorist financing (not once referring to new payment
6
technologies) and explains:
7
“Informal Value Transfer Systems (IVTS) is a term used to describe those money or value
transfer systems that operate informally to transfer money as a business. In the past, some of
these informal networks have been labeled by various terms including ‘alternative remittance
systems’ and ‘underground banks.’ Within the broad realm of informal institutions there exist
more detailed descriptors for specific value transfer mechanisms, such as hawala, hundi, fei
ch’ien, hoe kuan, hui k’aun, and many others. For the purpose of consistency and inclusiveness,
IVTS is the primary term of art used in this report…
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
11
In order to better understand this issue, FinCEN looked closely at the workings of the hawala
system, a widely used form of IVTS. Hawala means “transfer” in Arabic and the system works
by transferring money without actually moving it. The basic hawala transaction involves a
sender, two trusted intermediaries, and a recipient. For example, a U.S. resident who wants to
send money to a friend in another jurisdiction (Country B) would give it to a U.S. hawaladar,
who typically gives the sender a code or identification mechanism. The U.S. hawaladar then
contacts a local hawaladar in Country B by telephone, fax, or e-mail, and the sender contacts the
intended recipient to convey the code. The local hawaladar in Country B then delivers the
specified funds to the recipient upon presentation of the code. The hawaladar charges a flat fee,
a commission, or may alternatively or in addition, profit from the exchange rate differential
between the official and black market price of U.S. dollars in Country B. The accounts between
the two operators may be settled various ways including through compensatory payments (i.e.,
when someone from Country B sends money to the U.S.), conventional wire transfers or checks,
physical movement of money (by courier), invoice manipulation or other trade- based
mechanisms, and the trade/smuggling of gold and precious gems…
12
13
14
15
16
17
18
19
20
Section 359(a) of the Patriot Act amended the definition of money transmitter to encompass
‘any person who engages as a business in an informal money transfer system or any network of
people who engage as a business in facilitating the transfer of money domestically or
internationally outside of the conventional financial institution system.’ These amendments
make clear that under U.S. law all money transfer remitters, including those that operate on an
informal basis, or outside the scope of the conventional financial sector, are subject to the BSA.”
21
22
23
24
25
26
27
28
12
See http://www.fincen.gov/news_room/rp/files/hawalarptfinal11222002.pdf. The full text of the Report is also attached as
Exhibit C to the Request for Judicial Notice submitted herewith.
21
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 28 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page28 of 32
1
2
involves the “Use of Cash Intensive Businesses In Ethnic Communities to Facilitate IVTS Activities.”
4
In the section entitled “Recommendations,” the Report states:
6
7
8
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
devoted to diagrams of hawala networks involving fictitious actors with Muslim names. Appendix C
3
5
LAW OFFICES OF MICHAEL BROOKS CARROLL
In the Report, the entirety of Appendix B, “Basic Hawala and Sample Account Settling,” is
11
12
13
14
“The U.S. approach of regulating informal value transfer activity is preferable to outlawing the
activity altogether, a course chosen by some nations. Attempting to outlaw IVTS ultimately
deprives law enforcement of potentially valuable information and drives the informal remittance
providers further “underground.” Outlawing the activity also deprives the mostly law-abiding
IVTS customers of the primary channel through which they transfer funds.
In addition, the U.S. approach to regulation is consistent with emerging international standards
such as the Special Recommendations on Terrorist Financing, issued in November 2001, by the
Financial Action Task Force (FATF) on Money Laundering. The FATF’s Special
Recommendation VI on Alternative Remittance calls on nations to ‘take measures to ensure that
persons or legal entities, including agents, that provide a service for the transmission of money
or value, including transmission through an informal value transfer system or network, should be
licensed or registered and subject to all the FATF Recommendations that apply to banks and
non-bank financial institutions.’”
To baldly state, as the State Defendants boldly contend here, that Congress intended to halt the
creation of new payment technologies in the United States by passing the USA PATRIOT Act is
15
16
17
18
19
therefore a gross mischaracterization of the legislative record. It is clear that the present situation is one
that Congress did not intend nor authorize, and in fact is simply one in which the State Defendants seek
to stretch federal law to defend an unconstitutional money-transmission regulatory scheme.
Even were it not abundantly clear what Congress sought to accomplish by strengthening the
20
penalties for unlawful money transmission—namely, the prevention of another terrorist attack
21
facilitated by United States financial systems—enormous changes in computer technology have
22
23
completely transformed the landscape of interstate commerce since 2002. In 2007, the advent of the
iPhone, a device manufactured by Apple, Inc., completely changed the way that many Americans
24
communicate by making “smartphones” capable of myriad tasks commonplace. Smartphones also
25
26
27
28
provided a new platform for mobile commerce that has little regard for state boundaries.
22
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 29 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page29 of 32
1
2
3
4
5
6
7
Dwight D. Eisenhower National System of Interstate and Defense Highways in the 1950s. Regarding
that particular development, the Court stated in Atlanta Motel v. United States, 379 U.S. 241 (1964):
“Our populace had not reached its present mobility, nor were facilities, goods and services
circulating as readily in interstate commerce as they are today. Although the principles which
we apply today are those first formulated by Chief Justice Marshall in Gibbons v. Ogden, 9
Wheat. 1 (1824), the conditions of transportation and commerce have changed dramatically, and
we must apply those principles to the present state of commerce. The sheer increase in volume
of interstate traffic alone would give discriminatory practices which inhibit travel a far larger
impact upon the Nation's commerce than such practices had on the economy of another day.”
The same language applies almost verbatim to the changes that have occurred in the United
9
States over the past five years—long after Congress passed the PATRIOT Act. There is simply no way
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
Such rapid change has swept across the country in the past, such as with the advent of the
11
12
that Congress could have foreseen the future of mobile commerce, let alone mobile payments, in 2002,
and as such it is impossible that the criminal penalties stipulated by 18 U.S.C. § 1960 even come close
13
to “expressly endorsing state-by-state licensing requirements” determined by California in 2010, or that
14
the “regulation of money transmission activities by enforcing state licensing provisions through that
15
federal law” makes sense in a new and different era of commerce.
16
17
18
The State Defendants cite Soto v. Tu Phuoc Nguyen, 634 F.Supp.2d 1096, 1100 (E.D. Cal. 2009)
as evidence that Congress can delegate power to states, but this case is not analogous to the present
situation. As the State Defendants point out, “there were no federal safety standards governing
19
20
21
passenger seat belts on busses.” In the case of money transmission, there are ample federal standards
designed to keep consumers safe—but the State of California, and Defendant Venchiarutti in
22
particular—knowingly ignores them. Thus, for example, 31 C.F.R. § 1010, a federal standard, covers
23
general provisions related to the Financial Crimes Enforcement Network (FinCEN), a division of the
24
United States Department of the Treasury. FinCEN has issued several regulations and rulings directly
25
relevant to money transmission over the years, such as FinCEN ruling FIN-2009-R001 (“on Whether
26
Certain Operations of a Service Provider to Prepaid Stored Value Program Participants is a Money
27
28
23
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 30 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page30 of 32
1
2
FIN-2008-R005 (“on Whether Certain Reloadable Card Operations are Money Services Businesses”)
3
(Exhibit E to the Request for Judicial Notices submitted herewith), and 2003-8 (“Definition of Money
4
Transmitter (Merchant Payment Processor)”) (Exhibit F to the Request for Judicial Notices submitted
5
herewith), but while some states have honored these standards, others, such as the State of California,
6
have not. Congress expressly delegated authority to the United States Department of the Treasury to
7
8
handle matters relating to money transmission in 31 U.S.C. § 310 (concerning the powers delegated to
FinCEN). As alleged in the Complaint, the State Defendants have stretched whatever congressional
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
Services Business”), (attached as Exhibit D to the Request for Judicial Notices submitted herewith)
11
authority was given to them under the USA PATRIOT Act far past the scope of congressional
authorization in enacting their regulatory scheme under the MTA, and as such Plaintiff has pled facts
12
sufficient to state a claim against the State Defendants for their violations of the dormant commerce
13
clause, and the State Defendants’ Motion to Dismiss must be denied.
14
B. The State Defendants Have Attempted And Plaintiff Has Alleged They Will Continue
To Attempt To Regulate Commerce Occurring Outside Of California In Violation Of
The Commerce Clause.
15
16
17
The State Defendants’ Memorandum further fails to address the behavior of the DFI prior to the
October Order, when Plaintiff was uncertain as to whether or not it could operate in Alabama and
18
Idaho—jurisdictions where Plaintiff possessed valid money transmission licenses—because of
19
20
21
California law. The October Order resolved this particular dilemma for Plaintiff, but not for any other
potential applicant for licensure under the MTA, and so it remains at issue.
13
Indeed, even if Congress’s
22
delegation of authority to the states over money transmission and interstate were explicit and
23
complete—which is certainly not the case—such a grant would still not permit the states to pass
24
25
26
27
28
13
In this regard the State Defendants’ argument that the Court should not consider this blatant violation of the commerce
clause because they have ceased to engage in such acts against the Plaintiff only (at the price of Plaintiff’s activity in
California) essentially amounts to a “moving target” defense, and completely ignores the plain factual allegations of the
24
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 31 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page31 of 32
1
2
procedures that infringed on the sovereignty of other states. Accordingly, Plaintiff has pled facts
3
sufficient to state a claim against the State Defendants for their violations of the dormant commerce
4
clause, and the State Defendants’ Motion to Dismiss must be denied.
5
V.
6
7
8
Settled Federal Law And Procedure Requires That Plaintiff Be Allowed To Amend Even If
The Court Were To Grant The Motion To Dismiss On Any Of The Grounds Being
Asserted By The State Defendants.
Even if this Court were to grant the State Defendants’ Motion to Dismiss on any of the grounds
asserted by the State Defendants, Plaintiff respectfully submits that well settled federal law and
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
arbitrary, capricious and discriminatory laws such as the MTA employing subjective and vague
11
procedure require that Plaintiff be granted leave to amend its Complaint. See, Schwarzer, Tashima &
Wagstaffe, California Practice Guide: Federal Civil Procedure Before Trial (The Rutter Group 2010) §
12
9:286 (“As a practical matter, leave to amend his almost always granted by the court.”); and see also
13
id., at § 9:287 (“Where a more carefully drafted complaint might state a claim, a plaintiff must be given
14
at least one more chance to amend the complaint before the district court dismisses the action with
15
prejudice.”) (emphasis in original).14
16
17
As such, should this Court grant the State Defendants’ Motion to Dismiss, Plaintiff respectfully
requests leave to amend its Complaint.
18
19
20
21
22
23
24
25
26
27
28
DFI’s intentions, actions and violations of the commerce clause as fully alleged in ¶ 56 of the Complaint with regard to, inter
alia, the October Order, Plaintiff’s communications with the State Defendants and the State Defendants’ statements.
14
Indeed, this rule applies even in cases involving affirmative bars to relief such as sovereign immunity. See Doe v. United
th
States, 58 F.3d 494, 497 (9 Cir. 1995) (“We are unwilling to anticipate what theory an ingenious but fair pleader might
produce and what constellation of facts might be alleged that might overcome the bar [of sovereign immunity]…a district
court should grant leave to amend even if no request to amend the pleading was made, unless it determines that the
pleading could not possibly be cured by the allegation of other facts.”)
25
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRLPage 32 Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page32 of 32
DISPOSITION REQUESTED
1
2
Plaintiff respectfully requests this Court deny the Motion to Dismiss filed by all Defendants.
3
4
5
6
7
9
Respectfully submitted,
LAW OFFICES OF MICHAEL BROOKS
CARROLL
By: /s/ Kevin A. Flautt__________
Kevin A. Flautt, Esq.
Attorneys for Plaintiff THINK COMPUTER
CORPORATION
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
Dated: March 3, 2012
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
26
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 1
PlainSite Cover Page
PDF Page 2
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page1 of 32
1
2
3
4
5
6
Michael Brooks Carroll (Bar #54904)
Kevin A. Flautt (Bar #257892)
LAW OFFICES OF MICHAEL BROOKS CARROLL
300 Montgomery Street, Suite 650
San Francisco, California 94104
Telephone: (415) 788-7600
Facsimile: (415) 421-7379
carroll_law@sbcglobal.net
Attorneys for Plaintiff
THINK COMPUTER CORPORATION
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
San Jose Division
7
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
11
12
13
14
15
16
17
18
19
20
THINK COMPUTER CORPORATION,
)
)
Plaintiff,
)
)
v.
)
)
ROBERT VENCHIARUTTI, in his official
)
capacity as Deputy Commissioner of the
)
California Department of Financial
)
Institutions; WILLIAM HARAF, in his official )
capacity as Commissioner of the California
)
Department of Financial Institutions; TRACI )
STEVENS, in her official capacity as Acting )
Secretary of the California Business,
)
Transportation and Housing Agency; JACOB )
A. APPELSMITH, in his official capacity as )
Senior Advisor to the Governor of the STATE )
OF California; EDMUND G. BROWN, JR. in )
his official capacity as Governor of the State of )
California; and KAMALA HARRIS, in her
)
official capacity as Attorney General of the
)
State of California,
)
)
)
Defendants.
Case No. CV11-05496-HRL
ERRATA*
PLAINTIFF’S RESPONSE AND OPPOSITION
TO STATE DEFENDANTS’ MOTION TO
DISMISS
Before the Honorable Howard R. Lloyd
Hearing Date: March 27, 2012
Hearing Time: 10:00 a.m.
Courtroom: 2
Complaint Filed: November 14, 2011
First Amended Complaint Filed: January 31, 2012
Trial Date: None Yet Set
21
22
23
24
25
26
27
28
*
Correcting typographical, word processing, formatting and grammatical errors in Plaintiff’s Response and Opposition to
Defendants’ Motion To Dismiss, filed and served by Plaintiff on 02/28/2012.
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 3
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page2 of 32
TABLE OF CONTENTS
1
2
STATEMENT OF THE CASE AND OPPOSITION TO MOTION TO DISMISS ..................................1
4
MATERIAL FACTS ALLEGED IN THE COMPLAINT THAT ARE DISPOSITIVE OF AND
NEGATE THE STATE DEFENDANTS’ CONTENTIONS THAT PLAINTIFF’S COMPLAINT HAS
FAILED TO STATE A CLAIM.................................................................................................................3
5
ARGUMENT..............................................................................................................................................4
6
I.
The Settled Law Governing The Determination Of Motions To Dismiss......................................4
7
II.
Contrary To The State Defendants’ Assertions, This Action Is Currently Ripe For Review Since
This Action Includes Both “Facial” And “As Applied” Challenges To The MTA, Any
Exhaustion Of Administrative Remedies By Plaintiff Would Be Futile, And Any Delay In
Adjudicating Plaintiff’s Challenge To The MTA Would Cause Plaintiff Substantial Hardship....5
3
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
11
A.
Plaintiff’s Challenges To The Facial Unconstitutionality Of The MTA Are Inherently
Ripe For This Court’s Determination .................................................................................6
B.
Plaintiff’s Challenges To The Unconstitutionality Of The MTA As Applied To Plaintiff
Are Ripe Since Controlling Law Establishes That Plaintiff Is Not Required to Exhaust
Administrative Processes Where, As Here, The Challenged Statute (The MTA) Imposes
A Substantial Hardship Or Burden Upon Plaintiff In Even Participating In The
Administrative Processes And Any Attempted Exhaustion Of Administrative Remedies
By Plaintiff Would Be Futile..............................................................................................7
12
13
14
15
i.
Plaintiff’s Challenges To The Unconstitutionality Of The MTA As Applied To
Plaintiff Under the Facts Alleged In This Action Are Concrete And Sufficiently
Focused So As To Permit Judicial Resolution. ......................................................8
ii.
Plaintiff Will Suffer Substantial Hardship If Judicial Review Of This Action Is
Delayed. ................................................................................................................10
16
17
18
19
III.
20
Plaintiff Has Alleged Facts Sufficient To State A Due Process/Equal Protection Claim. ...........13
A.
Plaintiff Has a Vested Property Right Which Has Been Interfered With By The MTA
And The Actions Of The State Defendants. .....................................................................13
B.
The Licensing Requirements Of The MTA Are Not Related to a Legitimate State
Purpose, And Are Applied By The State Defendants In a Completely Arbitrary and
Capricious Manner Designed to Stifle Competition and Chill Interstate Commerce.......14
C.
The MTA As Applied To Plaintiff By The State Defendants Further Violates Plaintiff’s
Procedural Due Process Rights.........................................................................................18
21
22
23
24
25
IV.
26
27
28
The MTA Violates The Dormant Commerce Clause And Is Not “Invulnerable” To A Dormant
Commerce Clause Challenge As The State Defendants Assert....................................................20
i
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 4
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page3 of 32
1
A.
The State Defendants Fail to Cite any Explicit or Implicit Congressional Endorsement of
the Money Transmission Act and its Unconstitutional Requirements for Licensure, Nor
Can They Since The Purported Authorizing Statute, the USA PATRIOT Act, Was Never
Intended To Authorize Or Enable The MTA Regulatory Scheme Enacted By The State
Defendants. .......................................................................................................................20
B.
The State Defendants Have Attempted And Plaintiff Has Alleged They Will Continue To
Attempt To Regulate Commerce Occurring Outside Of California In Violation Of The
Commerce Clause. ............................................................................................................24
2
3
4
5
6
7
Settled Federal Law And Procedure Requires That Plaintiff Be Allowed To Amend Even If The
Court Were To Grant The Motion To Dismiss On Any Of The Grounds Being Asserted By The
State Defendants. ..........................................................................................................................25
DISPOSITION REQUESTED .................................................................................................................26
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
V.
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
ii
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 5
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page4 of 32
TABLE OF AUTHORITIES
1
2
3
4
5
6
7
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
11
12
13
14
15
16
17
18
19
CASES
Abbot Laboratories v. Gardner,
387 U.S. 136, 148-49 (1967) ........................................................................................................5, 6, 8
Atlanta Motel v. United States,
379 U.S. 241 (1964)............................................................................................................................23
Beddall v. State Street Bank and Trust Co.,
st
137 F.3d 12, 16-17 (1 Cir. 1998).........................................................................................................5
Bell Atl. Corp v. Twombly,
127 S. Ct. 1955, 1965 (2007)................................................................................................................5
Carpinteria Valley Farms, Ltd. v. County of Santa Barbara,
344 F.3d 822, 831 (9th Cir. 2003) ........................................................................................................7
City of Chicago v. Atchison, Topeka & Santa Fe Ry.,
357 U.S. 77, 89 (1958)..........................................................................................................................6
City of Cleburne v. Cleburne Living Center, Inc.,
473 U.S. 432 .......................................................................................................................................17
Colwell v. Dep’t of Health and Human Servs.,
558 F.3d 1112, 1123-1124 (9th Cir. 2009).............................................................................................6
Day v. Fallon Cmty. Health Plan Inc.,
917 F. Supp. 72, 75 (D. Mass 1996) .....................................................................................................5
Doe v. United States,
58 F.3d (9th Cir. 1995).........................................................................................................................25
Freedom to Travel Campaign v. Newcomb,
82 F.3d ..........................................................................................................................................11, 13
20
21
22
23
24
25
26
27
28
Gary D. Peake Excavating Inc. v. Town Bd. of Town of Hancock,
93 F.3d 68, 71-73 (2d Cir. 1996) ..........................................................................................................6
Hotel Employees & Restaurant Employees International Union,
th
984 F.2d 1507, 1513 (9 Cir.1993).....................................................................................................12
Johnson v. Missouri,
142 F.3d 1087, 1090 n. 4 (8th Cir.1998) ..............................................................................................9
Mathews v. Eldridge,
424 U.S. 319 .................................................................................................................................18, 19
iii
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 6
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page5 of 32
1
2
3
4
Morgan v. McCotter,
365 F.3d 882, 887 (10th Cir. 2004) ......................................................................................................9
Norco Construction, Inc. v. King County,
801 F.2d 1143, 1146 (9th Cir. 1986) ....................................................................................................7
Ohio Forestry Assn., Inc.,
523 U.S. 726, 733 (1977)....................................................................................................................10
5
6
7
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
11
12
P. Gas and Elec. Co. v. State Energy Resources Conservation & Dev. Commn.,
461 U.S. 190 (1983)..................................................................................................................6, 10, 11
P. Leg. Found. v. State Energy Resources Conservation & Dev. Commn.,
659 F.2d 903, 915 (9th Cir. 1981) ........................................................................................................6
Panama Refining Co. v. Ryan,
293 U.S. 388 (1935)............................................................................................................................13
Public Utilities Comm'n v. United States,
355 U.S. 534, 540 (1958)......................................................................................................................6
Sammon v. New Jersey Bd. of Med. Examiners,
66 F.3d 639, 643 (3d Cir. 1995) ...........................................................................................................5
13
14
15
16
17
18
19
20
21
22
23
Skull Valley Band Of Goshute Indians v. Nielson,
376 F.3d 1223 (10th Cir. 2004) ........................................................................................................8, 9
Soto v. Tu Phuoc Nguyen,
634 F.Supp.2d 1096, 1100 (E.D. Cal. 2009) ......................................................................................23
Spoklie v. Montana,
411 F.3d 1051 (9th Cir. 2005)..............................................................................................................13
Triple G. Landfills, Inc. v. Board of Commissioners of Fountain County,
977 F.2d 287, 288-91 (7th Cir.1992) ................................................................................................7, 8
Warth v. Seldin,
422 U.S. 490, 499 n. 10, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975)..........................................................9
Watterson v. Page,
st
987 F. 2d 1, 3 (1 Cir. 1993) .................................................................................................................5
24
Zemel v. Rusk,
381 U.S. 1, 17 (1965)....................................................................................................................13, 20
25
STATUTES
26
18 U.S.C. § 1960.................................................................................................................................20, 23
27
28
iv
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 7
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page6 of 32
1
2
3
4
5
31 U.S.C. § 310.........................................................................................................................................24
USA PATRIOT Act...........................................................................................................................passim
OTHER AUTHORITIES
Schwarzer, Tashima & Wagstaffe, California Practice Guide: Federal Civil Procedure Before Trial
(The Rutter Group 2010) ....................................................................................................................25
RULES
6
Rule 12(b)(6)...........................................................................................................................................4, 5
7
9
REGULATIONS
31 C.F.R. § 1010.......................................................................................................................................23
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
v
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 8
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page7 of 32
STATEMENT OF THE CASE AND OPPOSITION TO MOTION TO DISMISS
1
This is an action by a relatively small business entity, Plaintiff Think Computer Corporation,
2
3
which was already in business and had invested more than 1 million dollars to establish itself as a
4
money transmitting business in the payments/e-commerce industry, who has been effectively put out of
5
business by the State of California’s Money Transmission Act (the “MTA”). Plaintiff asserts that the
6
MTA is not only unconstitutional on its face, but further is unconstitutional as it is being applied to the
7
regulations have imposed a disparate impact upon small business entities like Plaintiff to the benefit of
9
large business entities without any rational justification or constitutionally permissible basis for such
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
Plaintiff because such MTA and the actions of the State Defendants enforcing such state statute and
11
12
regulation and disparate impact upon small business entities like Plaintiff, and restrained interstate
commerce in the money transmission industry.
The “State Defendants” (defined at page 1, lines 4-13 of the Motion to Dismiss) have moved to
13
14
dismiss Plaintiff’s First Amended Complaint1 (the “Complaint”) on the erroneously asserted grounds
15
that: 1) the Complaint is barred by the Eleventh Amendment as against the Governor, Defendants
16
Appelsmith, the Attorney General, and Acting Secretary Stevens;2 2) the claims asserted in Plaintiff’s
17
18
Complaint are not ripe for review; 3) the first claim in the Complaint does not identify a protected
property right and the challenged MTA is rationally related to a legitimate government interest; and 4)
19
20
the second and third claims for relief fail to state claims upon which relief can be granted based upon
21
1
22
23
24
25
26
27
28
Plaintiff voluntarily amended his Complaint “of course” pursuant to FRCP 15 following counsel’s appearance on January
31, 2012.
2
Based upon Defendants’ judicial representations regarding the identity of the State Defendants who are in charge of the
enforcement of the MTA and their judicial representations that the Governor, Attorney General and Acting Secretary are not,
and without conceding that the joinder of the Governor, Attorney General and Acting Secretary in either the original
Complaint or First Amended Complaint was in any way improper, Plaintiff does not oppose the dismissal, without prejudice,
of the Governor, Attorney General and Acting Secretary; provided, however, Plaintiff expressly reserves the right to re-file
against such Defendants should further discovery in this action reveal that such Defendants were, contrary to Defendants’
representations, directly involved in the enforcement process. Moreover, as to Defendant Appelsmith, although his name
still appears in the caption (as it was in the Complaint originally filed naming Appelsmith), he was removed from the
charging allegations by Plaintiff’s First Amended Complaint. The Defendants’ motion to dismiss as to Mr. Appelsmith was
unnecessary, and the State Defendants’ assertion that he must be dismissed (again) is therefore moot.
1
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 9
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page8 of 32
1
2
3
business activities.
As will be demonstrated hereinbelow, such motion to dismiss must be denied as to each and
4
every one of the State Defendants’ mistaken, non-compelling and non-conclusive assertions for each of
5
the following reasons:
6
7
8
First, contrary to the State Defendants’ assertions, Plaintiff’s action is currently ripe for review
since this action is a facial challenge to the unconstitutionality of the MTA, any exhaustion of
administrative remedies by Plaintiff would be futile (as alleged by Plaintiff in his Complaint), and any
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
the fact that Congress has purportedly authorized the states to license and regulate the Plaintiff’s
11
delay in adjudicating Plaintiff’s challenge to the MTA would cause Plaintiff further substantial
hardship. Indeed, Plaintiff has already suffered substantial financial hardship and will continue to suffer
12
such hardship as long as the MTA continues to be enforced by the State Defendants, as alleged in the
13
Complaint.
14
15
16
17
Second, Plaintiff has sufficiently alleged facts in its Complaint to state a claim for denial of its
due process rights in that it has identified its vested property rights in the continuation of its money
transmission business which have been interfered with by the MTA and the actions of the State
Defendants. Moreover, as specifically alleged in the Complaint, the MTA further violates Plaintiff’s
18
due process rights in that the licensing requirements of such MTA are not related to a legitimate state
19
20
21
purpose, but rather such MTA imposes arbitrary and prohibitively high prerequisite financial net worth
figures for licensure (thereby effectively forcing Plaintiff out of business and excluding other relatively
22
small business entities) which have no rational relationship to the business being licensed. Further, as
23
specifically alleged in the Complaint, the MTA has been and continues to be applied by the State
24
Defendants against Plaintiff in a completely arbitrary and capricious manner designed to stifle
25
competition and chill interstate commerce.
26
27
28
2
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 10
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page9 of 32
1
2
Congress did not intend to authorize or sanction a regulatory system such as the MTA which in effect
3
gives states carte blanche to criminalize true technological and financial innovation, by permitting
4
states to completely ignore federal regulations promulgated by the Department of the Treasury and
5
allowing such regulatory systems to impose a disparate impact upon small business entities like Plaintiff
6
to the benefit of large business entities financing the enactment of regulations such as the MTA. Rather,
7
8
Congress solely desired to outlaw financing operations which were solely intended to support terrorism.
Fourth, the State Defendants’ bald assertion that their clear, undisputed and continuing violation
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
Third, contrary to the State Defendants’ assertions, in passing the USA PATRIOT Act in 2002,
11
of the dormant commerce clause alleged by Plaintiff (namely, that the State Defendants sought and
continue to seek to enforce the MTA in such a way as to regulate commerce outside of California)
12
essentially has been “fixed” through their voluntary decision to no longer engage in such
13
unconstitutional activity only as against Plaintiff, and only in exchange for Plaintiff’s agreement to not
14
operate in California—even while other businesses continued to operate unlicensed under the MTA in
15
blatant violation of such MTA as alleged in the Complaint—is a classic and ineffective “moving target”
16
17
defense that must fail.
Fifth, even if this Court were to grant the State Defendants’ Motion To Dismiss on any of the
18
grounds being asserted by the State Defendants, Plaintiff respectfully submits that settled federal law
19
20
21
22
23
24
25
and procedure requires that Plaintiff be allowed to amend its Complaint.
MATERIAL FACTS ALLEGED IN THE COMPLAINT THAT ARE DISPOSITIVE OF AND
NEGATE THE STATE DEFENDANTS’ CONTENTIONS THAT PLAINTIFF’S COMPLAINT
HAS FAILED TO STATE A CLAIM
As a preliminary matter, the following factual allegations in Plaintiff’s Complaint, which must
be deemed true for purpose of the motion to dismiss, directly address and negate the erroneous
arguments that Plaintiff has failed to state facts sufficient to state a claim:
26
27
28
3
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 11
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page10 of 32
1
1.
Contrary to the State Defendants’ contention that Plaintiff has failed to allege a claim
ripe for determination by this Court, Plaintiff has alleged in the Complaint not only that
the MTA is facially unconstitutional (FAC, ¶ 75), but also that the MTA and the State
Defendants’ actions in applying such regulatory scheme to Plaintiff have already caused
Plaintiff present and continuing harm and forced him out of the business of money
transmission. (FAC, ¶ 62-69).
2.
Contrary to the State Defendants’ contention that Plaintiff has failed to allege a claim for
violation of its due process rights, Plaintiff has alleged in the Complaint not only a
protected property right, but further that the challenged MTA is not rationally related to a
legitimate government interest by alleging, “Because the MTA effectively extinguishes a
legally valid, vested right to use of property in interstate commerce, the MTA is facially
unconstitutional as a violation of Plaintiff’s rights to due process under the Fourteenth
Amendment to the United States Constitution.” (FAC, ¶ 75, 76).
3.
Contrary to the State Defendants’ assertion that Plaintiff’s second and third claims for
relief fail to state claims upon which relief can be granted based upon the State
Defendants’ factual contention that Congress purportedly has authorized the states to
license and regulate the Plaintiff’s money transmission activities (with a statute and
regulatory scheme imposing substantial financial barriers to obtaining the state’s
permission to conduct such business), Plaintiff has alleged in the Complaint not only that
the State Defendants’ regulatory scheme goes far beyond any intelligible principle for
delegation of authorization set out in the USA PATRIOT Act, but further that the intent
behind such Act was and remains a desire to outlaw financing operations which were
intended to support terrorism. (FAC, ¶ 88, 90, 92, 102, 103).
4.
Contrary to the State Defendants’ contention that Plaintiff’s allegations regarding the
State Defendants’ attempts to use the MTA to regulate commerce occurring entirely
outside of California are “speculation” “wholly unsupported by any factual allegations,”
Plaintiff has pled specific facts and cited specific statements and communications made
by the State Defendants supporting such allegations by alleging, inter alia: “the DFI
issued an ‘Order’ (the ‘October Order’) purporting to exempt Think alone from having to
comply with the provisions of the MTA in providing money transmission services to
consumers, merchants and anyone outside of the State of California, so that Think could
conduct operations in states where it already had valid MTLs, but conditional on Think
not providing money transmission services to persons, consumers, merchants and anyone
located in California and Plaintiff not advertising, soliciting or holding itself out as
providing money transmission services to persons, consumers, merchants and anyone
located in California. Such Order necessarily meant that regardless of Think’s
application status, the California DFI intended and still intends to enforce the MTA
beyond the State of California’s borders on transactions originating and existing in
interstate commerce. The DFI’s and Defendants’ position is that the California law it is
authorized to enforce has supremacy over the laws of any other states under which the
money transmitter may be in compliance.” (FAC, ¶ 56).
2
3
4
5
6
7
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
11
12
13
14
15
16
17
18
19
20
21
22
23
24
ARGUMENT
I.
The Settled Law Governing The Determination Of Motions To Dismiss.
25
26
27
28
In considering a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure,
a court “must accept all well-pleaded facts alleged in the Complaint as true and draw all reasonable
4
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 12
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page11 of 32
1
inferences in favor of the plaintiff.” Day v. Fallon Cmty. Health Plan Inc. 917 F. Supp. 72, 75 (D.
2
Mass 1996); see also, Watterson v. Page, 987 F. 2d 1, 3 (1st Cir. 1993). The trial court must “neither
3
weigh the evidence nor rule on the merits because the issue is not whether the plaintiffs will ultimately
4
prevail, but whether they are entitled to offer evidence in support of their claims.” Day, 917 F.Supp. at
5
75. Claims in a complaint need not be absolutely conclusive, but merely plausible. Bell Atl. Corp v.
6
Twombly, 127 S. Ct. 1955, 1965 (2007).
7
The trial court may also consider documents outside of the pleadings in certain circumstances
8
when ruling on a motion to dismiss. See, Watterson, 987 F.2d at 3. There is a “narrow exception for
9
documents the authenticity of which are not disputed by the parties; for official public records; for
10
documents central to plaintiff's claim; or for documents sufficiently referred to in the complaint.” Id. 3-
11
4. If “a complaint’s factual allegations are expressly linked to—and admittedly dependent upon—a
12
document the authenticity of which is not challenged, that document effectively merges into the
13
pleadings and the trial court can review it in deciding a motion to dismiss under Rule 12(b)(6).”
14
Beddall v. State Street Bank and Trust Co., 137 F.3d 12, 16-17 (1st Cir. 1998).
15
II.
16
17
Contrary To The State Defendants’ Assertions, This Action Is Currently Ripe For Review
Since This Action Includes Both “Facial” And “As Applied” Challenges To The MTA, Any
Exhaustion Of Administrative Remedies By Plaintiff Would Be Futile, And Any Delay In
Adjudicating Plaintiff’s Challenge To The MTA Would Cause Plaintiff Substantial
Hardship.
18
This action is currently ripe for review as it meets the controlling ripeness doctrine set out by our
19
20
21
Supreme Court in Abbot Laboratories v. Gardner, 387 U.S. 136, 148-49 (1967) and its progeny. Abbot
Laboratories and the successive cases interpreting the ripeness doctrine mandate that this case be found
22
ripe for three concrete reasons: (1) facial challenges to a statute or regulation that even has not yet been
23
applied are generally considered fit for judicial determination because the issue raised is a “purely legal
24
one,” and can be decided by the court without further factual development. Id.; (2) “as-applied”
25
challenges are ripe when the exhaustion of administrative remedies would be futile. Sammon v. New
26
27
28
Jersey Bd. of Med. Examiners, 66 F.3d 639, 643 (3d Cir. 1995); and (3) “as-applied” challenges are also
5
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 13
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page12 of 32
1
2
3
ripe when a hardship would result to one of the parties, such as the continuing hardship resulting to and
specifically alleged by Plaintiff. See, Colwell v. Dep’t of Health and Human Servs., 558 F.3d 1112,
1123-1124 (9th Cir. 2009).
A. Plaintiff’s Challenges To The Facial Unconstitutionality Of The MTA Are Inherently
Ripe For This Court’s Determination.
4
5
The issues presented here are fit for immediate review because the causes of action alleged
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
6
7
involve facial challenges to the MTA under the procedural due process, substantive due process, equal
8
protection, and commerce clause provisions—which challenges are inherently ripe when the issues are
9
sufficiently focused without further substantial factual development. P. Leg. Found. v. State Energy
10
Resources Conservation & Dev. Commn., 659 F.2d 903, 915 (9th Cir. 1981) aff'd sub nom. P. Gas and
11
Elec. Co. v. State Energy Resources Conservation & Dev. Commn., 461 U.S. 190 (1983).3
12
13
Moreover, the judicial review sought now does not threaten “abstract disagreements over
administrative policies,” Abbott, 387 U.S. 136 at 148, as the disagreements here are extremely concrete
14
15
16
and sufficiently focused. It is well-settled that where, as here, a party challenges the statutory or
constitutional authority of the defendants to enact a licensing or regulatory scheme, the party need not
17
“submit to the administrative procedures incident thereto” prior to bringing an action. City of Chicago
18
v. Atchison, Topeka & Santa Fe Ry., 357 U.S. 77, 89 (1958) (constitutional challenge to licensing
19
scheme proper). Indeed, as stated by our Supreme Court in Public Utilities Comm'n v. United States,
20
355 U.S. 534, 540 (1958), as well as elsewhere, “where the only question is whether it is constitutional
21
22
to fasten the administrative procedure onto the litigant, the administrative agency may be defied and
judicial relief sought as the only effective way of protecting the asserted constitutional right.”
23
24
25
26
27
28
3
See also Gary D. Peake Excavating Inc. v. Town Bd. of Town of Hancock, 93 F.3d 68, 71-73 (2d Cir. 1996) (finding ripe a
Commerce Clause challenge to a municipal ordinance imposing permit requirements that were stricter than those of a state
agency).
6
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 14
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page13 of 32
1
2
for lack of licensing standards, the party need not first apply for and be denied a license. Triple G.
3
Landfills, Inc. v. Board of Commissioners of Fountain County, 977 F.2d 287, 288-91 (7th Cir.1992). As
4
this is precisely the case here, Plaintiff’s challenges to the facial unconstitutionality of the MTA are fit
5
for immediate judicial review. Indeed, it would be an inefficient use of judicial resources to adjudicate
6
by piecemeal Plaintiff’s contentions that the State Defendants lack the constitutional and statutory
7
8
authority to regulate money transmission, while at the same time arbitrarily abstaining from considering
Plaintiff’s facial challenge to the regulatory scheme for its lack of standards. Moreover, the latter
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
It is likewise established doctrine that when a party challenges a regulatory scheme on its face
11
12
13
14
15
presents a narrower ground for decision in this action.
B. Plaintiff’s Challenges To The Unconstitutionality Of The MTA As Applied To Plaintiff
Are Ripe Since Controlling Law Establishes That Plaintiff Is Not Required to Exhaust
Administrative Processes Where, As Here, The Challenged Statute (The MTA)
Imposes A Substantial Hardship Or Burden Upon Plaintiff In Even Participating In
The Administrative Processes And Any Attempted Exhaustion Of Administrative
Remedies By Plaintiff Would Be Futile.
Plaintiff is not required to exhaust administrative proceedings before making a claim because
16
Plaintiff is directly challenging the MTA itself in this action “as-applied.” Our Ninth Circuit Court of
17
Appeals has held that administrative exhaustion is only required to make a due process or equal
18
protection claim ripe when it arises in certain narrow categorical circumstances relating to, or arising
19
from, a land-use or takings claim. Norco Construction, Inc. v. King County, 801 F.2d 1143, 1146 (9th
20
Cir. 1986). The flaw in the State Defendants’ overly broad assertion that Plaintiff must categorically
21
22
exhaust all administrative remedies prior to bringing this action is that Plaintiff’s procedural due
process, substantive due process, equal protection claims and commerce clause claims do not involve
23
24
25
land-use or takings claims. Carpinteria Valley Farms, Ltd. v. County of Santa Barbara, 344 F.3d 822,
831 (9th Cir. 2003); see also Triple G Landfills, Inc. v. Board of Commissioners, 977 F.2d 287, 289 (7th
26
27
28
7
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 15
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page14 of 32
1
2
Cir. 1992) (explaining why a final decision is not necessary for challenging permit requirements).4
Rather, for Plaintiff’s “as-applied” claims, the traditional determination of ripeness mandates an
3
analysis of “whether the relevant issues are sufficiently focused so as to permit judicial resolution
4
without further factual development and whether the parties would suffer any hardship by the
5
postponement of judicial action.” Abbott, 387 U.S. 136. Each of these criteria are satisfied in this
6
action.
7
i. Plaintiff’s Challenges To The Unconstitutionality Of The MTA As Applied To
Plaintiff Under the Facts Alleged In This Action Are Concrete And Sufficiently
Focused So As To Permit Judicial Resolution.
9
Here, the relevant issues are sufficiently focused and concrete. The State Defendants’ specious
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
11
assertion that, because the DFI has not made an administrative decision on Plaintiff’s application the
12
issues are impermissibly abstract, simply does not hold water against the strong line of circuit court
13
decisions cited above. In fact, Plaintiff’s Complaint sets out multiple attempts to engage in the DFI’s
14
administrative process, and Plaintiff did in fact start such process by attending the mandatory pre-filing
15
16
17
18
19
20
21
22
23
4
24
25
26
27
28
The Court in Triple G Landfills, Inc. found the challenge ripe the permit applicant had a direct and tangible interest in the
subject matter of the litigation and because ‘[p]ostponing judicial action ... would force an unwarranted dilemma upon [the
applicant]: either scuttle its development plans altogether in deference to a potentially invalid county regulation, or complete
the expensive and time-consuming state permit process, submit an permit application that [the county] is almost certain to
reject, and then, after incurring substantial sunk costs, bring a facial challenge to the ordinance.” 977 F.2d at 291, 289, and
290. See also Skull Valley Band Of Goshute Indians v. Nielson, 376 F.3d 1223 (10th Cir. 2004) (a party seeking a license
from a governmental agency generally is ripe when challenging an allegedly invalid law that either imposes substantial
burdens upon the applicant or flatly prohibits the activity in question).
8
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 16
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page15 of 32
1
2
meeting5, but Plaintiff’s efforts were ultimately frustrated due to DFI’s hostile and uncooperative
interactions with Plaintiff. (FAC, ¶ 47, 51, 53-5, 57-8.) Between the DFI’s October Order, its
3
unwillingness to communicate further with Plaintiff, and the jeopardy of risking a negative outcome
4
nationwide by applying in California, the Complaint demonstrates that Plaintiff had no further recourse
5
except these proceedings.6 (FAC, ¶ 52).
6
7
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
5
The State Defendants have made clear that the MTA regulatory “process” begins well before the paper application is filed.
As acknowledged by the State Defendants and as this Court can verify on the DFI’s web site dedicated to money transmitters
(emphasis added):
“Once the prospective applicant for a new money transmitter license or acquisition of control has become thoroughly
familiar with the laws and regulations that govern this activity, the next step is to arrange for a pre-filing meeting with
the Money Transmitter Division staff. The prospective applicant should contact Mr. Julio Prada at (415) 263-8540 or by
email at jprada@dfi.ca.gov to arrange for an appointment. The successful applicant will be able to demonstrate a
working knowledge of the laws and regulations that govern money transmitters and be ready to present a proposed
business plan. Meetings are conducted in person at the San Francisco Office. All prospective applicants for a new
money transmitter must have a pre-filing meeting with the Money Transmitter Division staff before filing an application;
for acquisition of control applicants, this step is highly recommended, especially if the applicants are not known to the
Money Transmitter Division staff.”
(See, RJN at Exhibit B, p. 1). In this particular case, due process was owed to Plaintiff at least as early as the minute on
April 1, 2011 when Mr. Greenspan initially e-mailed Mr. Prada inquiring as to the status of California’s money transmission
statutes. The pre-filing interview took place more than two months later, well after this point in time.
6
Moreover, other courts of appeal in other circuits have previously encountered almost identical situations involving
licensure and found the challenges to such licensure “processes” to be ripe for review. Thus, in Skull Valley Band Of
Goshute Indians v. Nielson, 376 F.3d 1223, 1234-35 (10th Cir. 2004), the Tenth Circuit Court of Appeal cogently opined:
“PFS’s and the Skull Valley Band’s alleged injury is much more than a generally available grievance about the
government or a tactical disadvantage. Instead, they have alleged that the Utah statutes have affected them concretely.
In particular, PFS has alleged that the statutes impose substantial burdens upon it because of the SNF storage project that
it has proposed (requiring, for example, the payment of a five million dollar nonrefundable application fee, compliance
with complex state regulatory requirements, and the posting of a two billion dollar bond). The Skull Valley Band has
alleged that the Utah statutes infringe upon its ‘inherent tribal sovereignty.’ Aplts' App. at 39. Moreover, according to
PFS and the Skull Valley Band, the extensive obligations created by the Utah statutes are preempted by federal law.
We agree with PFS and the Skull Valley Band that a party seeking a license from a governmental agency generally has
standing to challenge an allegedly invalid law that either imposes substantial burdens upon the applicant or flatly
prohibits the activity in question. Several courts have suggested that conclusion in addressing ripeness challenges, and,
although “standing and ripeness are technically different doctrines, they are closely related in that each focuses on
whether the harm asserted has matured sufficiently to warrant judicial intervention.” Johnson v. Missouri, 142 F.3d
1087, 1090 n. 4 (8th Cir.1998) (quoting Warth v. Seldin, 422 U.S. 490, 499 n. 10, 95 S.Ct. 2197, 45 L.Ed.2d 343
(1975)); see also Morgan v. McCotter, 365 F.3d 882, 887 (10th Cir. 2004) (finding issues of standing and ripeness
‘particularly difficult to divorce’).” Id. at 47-48 (emphasis added).
Plaintiff here faces the very same dilemma: Plaintiff’s plans have already been scuttled, but even applying now anyway,
ignoring concerns about prerequisites, would likely require waiting for a year or more for a license, and a denial in California
will prejudice Plaintiff’s status in other states where the denial of a license in California would have to be disclosed. .
(Plaintiff’s application for a license in Louisiana, where there are no known issues, has been pending since August, 2011,
when the State of Louisiana informed Plaintiff that its application was complete.) It is thus exceedingly clear that Plaintiff’s
situation is ripe for review.
9
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 17
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page16 of 32
1
2
further administrative action because the State has not indicated that it has any plans to take any further
3
action, and the State has in fact indicated just the opposite. (FAC, ¶ 57). Indeed, the State has no
4
interest in further engaging Plaintiff, to the point where Mr. Greenspan cannot even get the DFI to take
5
his phone calls. Id. In completely shutting down an enterprise based upon Defendant Venchiarutti’s
6
ultimatum, Plaintiff has clearly had to “modify its behavior in order to avoid future adverse
7
8
consequences,” Ohio Forestry Assn., Inc., 523 U.S. 726, 733 (1977). These prior interactions with the
DFI clearly indicate that Plaintiff’s efforts to proceed with the application process would be in vain.
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
Moreover, the adjudication of these issues by this Court would not inappropriately interfere with
11
12
13
Based on these facts, Plaintiff is not required to make the futile gesture of applying on paper, merely to
subject itself to the DFI’s arbitrary and discriminatory process in order for its claims to be ripe.
ii. Plaintiff Will Suffer Substantial Hardship If Judicial Review Of This Action Is
Delayed.
Plaintiff will unquestionably be harmed if the Court fails to act or delays its review. In Freedom
14
15
16
17
18
to Travel Campaign v. Newcomb, 82 F.3d 1431, 1436 (9th Cir. 1996), the Ninth Circuit Court of
Appeals held that:
If it is ‘inevitable’ that the challenged rule will ‘operat[e]’ to the plaintiff's disadvantage-if the
court can make a firm prediction that the plaintiff will apply for the benefit, and that the agency
will deny the application by virtue of the rule-then there may be a justiciable controversy that
the court may find prudent to resolve.
19
Furthermore, the Supreme Court has held that “one does not have to await the consummation of
20
21
22
23
threatened injury to obtain preventive relief. If the injury is certainly impending that is enough.” P.
Gas & Elec. Co., supra, at 201-202 (1983).
In P. Gas & Elec. Co., the Court rejected a ripeness objection to an action challenging a state
24
statute imposing a moratorium on nuclear plant construction, noting the hardship that would be imposed
25
if a judicial decision were delayed: the utilities who had challenged the state law would be required to
26
expend a substantial amount of time and money over a number of years without knowing whether that
27
28
10
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 18
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page17 of 32
1
2
3
expenditure was entirely futile. “To require the industry to proceed without knowing whether the
moratorium is valid would impose a palpable and considerable hardship on the utilities, and may
ultimately work harm on the citizens of California.” Id.
Here, the facts make it clear that the Plaintiff could not and cannot now apply for a license in
4
5
California on paper, because without first knowing the absolute requirements of the licensure process
6
and without those requirements being subject to being changed by the State Defendants, the risk of
7
Even in other states where Plaintiff easily meets those states’ application requirements, Plaintiff’s denial
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
denial, even with a hearing, would mean the subsequent denial of similar applications in other states.
11
of a license in California must be affirmatively disclosed to the other states and can be used by those
states to deny Plaintiff’s application or revoke Plaintiff’s licenses there. (FAC, ¶ 52). This specter of
12
adverse consequences is substantiated by the actual content and layout of various states’ application
13
forms, which inquire as to whether or not an applicant has been rejected in any other state, directly
14
adjacent to questions regarding principals’ criminal records. (FAC, ¶ 52). More egregious, the cost of
15
compliance of the MTA would be considerably great to a relatively small business entity such as
16
17
Plaintiff, but the penalty for noncompliance would subject Plaintiff to disqualification and possibly
criminal and civil penalties. (FAC, ¶ 49, 69). Indeed, this threat of criminal penalty is considered
18
sufficient hardship to make the claim ripe. Freedom to Travel Campaign v. Newcomb, 82 F.3d at 1436.
19
20
21
Where the agency has threatened enforcement, the actual commencement of administrative enforcement
proceedings is not necessary. P. Gas & Elec. Co., supra, at 201.
7
22
23
7
24
25
26
27
28
Already, Plaintiff has invested more than one million dollars in its proprietary intellectual property and is at increasing risk
of its technology becoming obsolete the longer the State interferes. (FAC, ¶ 66). Plaintiff’s investment of time, energy,
money and property is all for naught without the legal right to operate as a money transmitter, as Plaintiff did lawfully and
without any formal complaint prior to July 1, 2011. Indeed, given the State’s apparent lack of interest in enforcing the MTA
on any of the unlicensed money transmitters disclosed to the DFI by Plaintiff, a lack of judicial review in these
circumstances would effectively grant Plaintiff’s unlicensed competitors the effective right to continue operating unlawfully
without fear of any repercussions. (FAC, ¶ 60, 61, 70). As such, a delay in the judicial review of this action would cause
Plaintiff to lose its competitive edge in the payments industry/money transmission market. (FAC, ¶ 11). In contrast, hearing
11
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 19
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page18 of 32
1
2
Employees & Restaurant Employees International Union, the Ninth Circuit held that the impact of a
3
regulation is sufficiently direct and immediate as to render the issue ripe for judicial review when: “The
4
cost of compliance with the [regulation] is not particularly great, but the penalty for noncompliance is
5
disqualification, and the union itself may be penalized if it allows disqualified employees to continue to
6
perform their union duties.” 984 F.2d 1507, 1513 (9th Cir.1993).
7
8
Here, the facts are even more compelling since the cost of compliance was never made clear to
Plaintiff. (FAC, ¶ 49, subd. (a), (c)). After expending substantial amounts of money (amounting to one
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
When the plaintiffs were presented with such an equivalent Hobson’s choice in Hotel
11
million dollars) prior to the effective date of the MTA, Plaintiff’s business plans were scuttled by the
DFI’s refusal to so much as clearly define its “unwritten policy” to Plaintiff concerning the
12
requirements of approval monetary and otherwise—forcing Plaintiff to shut down its enterprise to avoid
13
administrative action and criminal prosecution. (FAC, ¶ 49, 50, 51, 52). Even if Plaintiff applied now
14
without knowing the unwritten requirements, Plaintiff risks substantial hardship in the collateral effects
15
of the almost certain denial of its California application on other pending or future state applications.
16
17
(FAC, at ¶ 52.) As such, Plaintiff’s action, and the continuing harm inflicted upon it by the State
Defendants as alleged therein, is ripe for review.
18
At a minimum, Plaintiff has pled facts sufficient to state a claim against the State Defendants
19
20
21
and to establish the ripeness of Plaintiff’s claims and continuing damages incurred as a direct result of
the MTA, and as such the State Defendants’ Motion to Dismiss must be denied.
22
23
24
25
26
27
28
the matter would open the possibility that, in the event the MTA is found to be unconstitutional, all aspiring or current
money transmitters, including Plaintiff, would once again have a true legal right to operate.
12
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 20
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page19 of 32
1
III.
Plaintiff Has Alleged Facts Sufficient To State A Due Process/Equal Protection Claim.
A. Plaintiff Has a Vested Property Right Which Has Been Interfered With By The MTA
And The Actions Of The State Defendants.
2
3
In their Memorandum, the State Defendants make the misleading assertion that Plaintiff does
4
not have a protected property right (specifically alleged at FAC ¶ 75) sufficient to support a due process
5
6
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
7
claim, stating that, “There is certainly no California statute or case law stating ‘in mandatory terms’ that
the plaintiff be allowed to continue engaging in this business activity without regulation.” In fact,
8
Plaintiff never argued that “in mandatory terms” it should be allowed to continue operating as a money
9
transmitter without regulation, so the point and ensuing discussion are moot.8 Regulation may very well
10
be appropriate, so long as it has an “intelligible principle” to guide it, but the State Defendants argue no
11
such principle. Rather, they belabor the “invulnerability” of the MTA without acknowledging the fact
12
13
that the genesis and intent of the purportedly authorizing law lies solely in protecting the nation from
terrorism, as demonstrated below.9
14
Indeed, the State Defendants’ assertion misses the point. Plaintiff has argued that it should be
15
16
17
allowed to continue operating as a money transmitter either under a federal regulatory regime that has a
legitimate right to regulate interstate commerce, or that in the event Congress is found to have delegated
18
19
20
21
22
23
24
25
26
27
28
8
In support of their erroneous argument that Plaintiff purportedly does not have a vested property right the divesting of
th
which would constitute a due process claim, the State Defendants cite to Spoklie v. Montana, 411 F.3d 1051 (9 Cir. 2005)
for the proposition that a “state may outlaw a formerly legal business even if it causes hardship to those who relied on the
earlier law.” State Defendants’ Memorandum, at p. 15. However, Spoklie is conclusively distinguishable on its facts, as it
dealt with and only expressly addressed issues of the constitutionality of the retroactivity of a statute in the context of a
takings claim. Here, as set forth above and in the Complaint, Plaintiff is challenging the unconstitutionality of the MTA
facially and as it has been applied to Plaintiff, in a manner which is arbitrary and irrational and further interferes with and
applies to his prospective commerce in other states. Indeed, as directly asserted in ¶ 52 of Plaintiff’s Complaint, the
cascading effect of the threatened denial of Plaintiff’s application in California would preclude its successful applications in
other states. As such, Plaintiff’s property rights have been and continue to be interfered with by the State Defendants.
9
Congress’s prerogative to grant authorization to regulate interstate commerce, or infringe upon interstate commerce to the
states is not without limit, but rather is guided by the “intelligible principle” doctrine. Under the intelligible principle
doctrine, the delegation of Congress’s authority must not grant the delegate “unrestrained freedom of choice.” Zemel v.
Rusk, 381 U.S. 1, 17 (1965). Rather, the delegation must have an “intelligible principle” to direct the delegated authority
with a guiding principle of how or to what extent it can frustrate interstate commerce. Freedom to Travel Campaign v.
Newcomb, 82 F.3d 1431, 1437 (9th Cir. 1996). Additionally, the level of delegation must meet the “public interest”
standard. Id. See also Panama Refining Co. v. Ryan, 293 U.S. 388 (1935) (striking down delegation to the President to
criminalize the interstate transport of petroleum without limiting his power at all).
13
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 21
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page20 of 32
1
2
on a Constitutionally consistent basis involving due process, to the nominal goal of consumer
3
protection, or indeed at a minimum to the policies and principles embodied by the Act purportedly
4
rendering the MTA invulnerable to constitutional challenge. Bluntly stated, the MTA as enacted and
5
specifically as applied by the State Defendants goes too far, and certainly well past any permissible
6
congressional delegation of authority that arguably, if at all, could be found in the USA PATRIOT Act.
7
8
The present patchwork of state laws further fails to further the underlying congressional policy of such
Act, and in particular, the MTA’s convoluted and unlawful application process (especially in the
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
that right to the respective states, that such a process for regulatory approval must be rationally related,
11
12
context of the forty-six other state money transmission laws with different requirements and different
processes) has wrongfully denied Plaintiff the use of its tangible and intellectual property as set forth
herein and alleged in the Complaint. (See, e.g. FAC, and specifically at ¶ 61, 63, 64, 66, 67, 69, 70).
14
B. The Licensing Requirements Of The MTA Are Not Related to a Legitimate State
Purpose, And Are Applied By The State Defendants In a Completely Arbitrary and
Capricious Manner Designed to Stifle Competition and Chill Interstate Commerce.
15
The DFI openly acknowledges the confusing and arbitrary nature of its application procedures
13
16
17
by having posted a new official “Frequently Asked Questions” page on its web site10 that was published
only after the instigation of these proceedings, and was therefore unavailable and/or unknown to
18
Plaintiff at the time that Plaintiff filed its initial Complaint and First Amended Complaint. This web
19
20
21
page confirms Plaintiff’s allegations that the DFI has operated and continues to operate according to an
arbitrary rule that up until the creation of this (undated) web page, was completely unwritten and
22
unavailable to the public. (FAC, ¶ 49). In response to the question, “What is the capital requirement?”
23
this official California government web page states: “The capital requirement varies based on the
24
licensee’s plan of operation and risk profile. The amount of tangible net worth stated in the Financial
25
26
27
28
10
See http://www.dfi.ca.gov/resources/faqs/faqs_tms.asp, a copy of which is attached and submitted herewith as Exhibit B to
the concurrently filed Request for Judicial Notice.
14
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 22
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page21 of 32
1
2
licensees. A new licensee would typically be required to have more tangible net worth, at least $1
3
million, to offset the expected losses of a new transmitter and support its operational needs at all times”
4
(emphasis added). From a due process standpoint, this statement (“the Policy”) is so problematic that it
5
is frankly shocking that the DFI ultimately (and presumably due to these proceedings) decided to post it
6
publicly.
7
8
The Policy appears to vary according to two completely subjective variables: the licensee’s
“plan of operation” and so-called “risk profile.” How a licensee’s risk profile is determined, or who
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
Code, $500,000, is not the amount required for licensing, but rather the minimum allowed for existing
11
should prepare such a risk profile, is not specified anywhere, let alone who examines the profile and
what credentials the examiner has for doing so. The Policy then notes that the DFI does not actually
12
pay any attention to the $500,000 minimum tangible shareholder equity figure contained within § 2037
13
of the MTA, but instead makes up its own rules as it goes along, free from the burden of a notice and
14
comment period explicitly required by 1 CCR § 44. The Policy then hedges further, indicating that
15
“typically” applicants need additional net worth, but without specifying the particular circumstances
16
17
that would lead to an exception from the “typical” case. (Given how few licensees and applicants there
are in the first place, it is hard to even imagine what the word “typical” might mean—perhaps “a
18
corporation with a net worth of greater than one billion dollars?”) A new minimum figure of $1 million
19
20
21
22
in net worth is then put forth without any justification for that particular number, leaving applicants to
wonder if perhaps the DFI really believes that doubling an arbitrary value in an arbitrary statute will
keep consumers’ funds safe.
23
Were there truly an underlying rationale for this number, it would not vary by hundreds of
24
thousands of dollars from state to state. The State Defendants therefore promote the interests of a select
25
group of extremely wealthy and entrenched corporations, by asserting an illogical and irrational basis
26
27
28
for consumer protection in truth premised upon an impermissible presumption that “big companies with
15
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 23
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page22 of 32
1
2
3
big money” are less likely to harm consumers than “small companies with small money,” when they
incorrectly assert that a rational relationship exists between the MTA’s requirements and the state’s
interest in protecting consumers.
The State Defendants’ faulty argument is presumably premised on the wholly incorrect belief
4
5
that adding equity to an enterprise makes it more stable and trustworthy. The recent and well-
6
publicized catastrophic implosions of MF Global, Inc. (“MF Global”) and the Bernard L. Madoff
7
reportedly worth $42.46 billion as of 2010, and though it was not specifically classified or marketed as a
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
Investment Securities LLC Scandal should conclusively disprove this absurd theory. MF Global was
11
“money services businesses,” it generally operated from a theoretical accounting standpoint in the same
way that a money services business does, holding funds on behalf of consumers. Somehow, despite its
12
enormous amount of net worth, MF Global still managed to “lose” almost a billion dollars of consumer
13
funds for reasons that have yet to be determined conclusively, and which are at issue in pending
14
bankruptcy litigation. It should be noted that MF Global’s principals, including the former Governor of
15
New Jersey, were also exceedingly wealthy, and even without corporate backing more than able to meet
16
any state’s minimum net worth requirements for money transmission.
17
The fanciful notion that $500,000, or $1 million, or even any amount of minimum capital
18
actually protects consumers is consequently demonstrably false. Minimum capital requirements do
19
20
21
nothing to protect consumers who deposit money in financial institutions so long as those institutions do
not make loans or issue credit. As the MF Global, Madoff Scandal and other recent scandals indicate,
22
what matters is the honesty and integrity of the principals involved, and the rigor of their auditors in
23
highlighting potential operational defects—not the amount of capital ascribed to the firms or their
24
principals.
11
25
26
27
28
11
Though the efficacy of financial regulation continues to be the subject of national debate, it is the opinion of Plaintiff that
the best solution to the real problem of ensuring the security of consumer deposits involved in money transmission is not an
16
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 24
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page23 of 32
1
2
the discriminatory, anti-competitive and protectionist desires of the MTA’s sponsors, puts the MTA in a
3
rarefied class of laws that fail the rational review test. In City of Cleburne v. Cleburne Living Center,
4
Inc., 473 U.S. 432, the Court opined: “The mentally retarded, as a group, are indeed different from
5
others not sharing their misfortune, and in this respect they may be different from those who would
6
occupy other facilities that would be permitted in an R-3 zone without a special permit. But this
7
8
difference is largely irrelevant unless the Featherston home and those who would occupy it would
threaten legitimate interests of the city in a way that other permitted uses such as boarding houses and
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
The utter lack of substantive support for the MTA’s financial capital prerequisites, aside from
11
12
hospitals would not. Because, in our view, the record does not reveal any rational basis for believing
that the Featherston home would pose any special threat to the city's legitimate interests, we affirm the
judgment below insofar as it holds the ordinance invalid as applied in this case.”
13
Here, as in Cleburne, it is evident from the lack of complaints about and subsequent prosecution
14
of small money transmitters that the special threat posed to California consumers by money transmitters
15
with net worth between $0 and $500,000 (or $1 million, or some other figure that State Defendants may
16
17
wish to invent) is no greater than the threat posed by larger entities. Given the competitive drive of new
market entrants that can lead to fewer, lower fees and better service, the threat may even be less. After
18
the 2008 financial crisis, there is considerably greater public outrage at large financial institutions than
19
20
21
small ones. Literally all of the capital in the world was not enough to save some of the largest banks in
the nation from collapse and mismanagement of client funds—and yet the State of California still heeds
22
23
24
25
26
27
28
arbitrary threshold that restricts entry into the market (accomplishing nothing thereafter), but rather a mechanism to ensure
real-time data transparency. The technology necessary to facilitate such transparency has existed for more than a decade.
Simply requiring licensees to disclose balance sheet data in a standardized, digital format on a regular basis, requiring little
to no manual intervention (perhaps with frequency of disclosure dependent upon company size) would both tell the
Government what it needs to know, and eliminate unnecessary burdens to industry. Such approach would of course level the
playing field for both the relatively small money transmitters and the mega-businesses which the current MTA favors.
17
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 25
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page24 of 32
1
2
to the same antiquated and completely discredited system of risk management that was in use before the
crisis as demonstrated by the arbitrarily applied and irrational Policy.
For all of these reasons, it is not meritorious, but specious, for Defendants to argue that the
3
4
financial requirements of the MTA are “rationally related” to the purpose of consumer protection even
5
if such requirements were evenly applied—which they are not. (FAC, ¶ 60, 61, 70). For now, the
6
minimum requirements are certainly present, and these proceedings continue due to their onerous
7
the $1 million figure (finally) stated on the DFI web site; c) the DFI’s practice of ignoring both of these
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
nature, but nowhere in the MTA is there a stated rationale for a) the $500,000 figure in the statute; b)
11
figures in certain, unspecified situations where a “plan of operation” or “risk profile” might override
them; d) the DFI’s demonstrably false belief that all new applicants must suffer “expected losses;” or e)
12
that such expected losses will, on average, by definition, or otherwise reach $500,000. Each instance of
13
uncertainty in a procedure such as this one introduces the possibility of subjective human error or bias.
14
Whether intentional or not, such subjectivity is the opposite of rationality. The State cannot provide any
15
rationale for its subjective assumptions, and therefore its arguments must fail.
16
17
Indeed, at a minimum, Plaintiff has pled facts sufficient to state a claim against the State
Defendants for their violations of Plaintiff’s due process rights in that the MTA does not have a rational
18
basis related to a legitimate state interest, and as such the State Defendants’ Motion to Dismiss must be
19
20
21
22
denied.
C. The MTA As Applied To Plaintiff By The State Defendants Further Violates Plaintiff’s
Procedural Due Process Rights.
Finally, Plaintiff’s procedural due process rights have also been violated by the State
23
Defendants’ arbitrary and capricious application of the MTA to Plaintiff. As stated by the Court in
24
25
26
27
28
Mathews v. Eldridge, 424 U.S. 319:
“Although respondent concededly did not exhaust the Secretary's internal review procedures,
and ordinarily only the Secretary has the power to waive exhaustion, this is a case where the
claimant’s interest in having a particular issue promptly resolved is so great that deference to
18
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 26
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page25 of 32
1
2
3
4
the Secretary’s judgment is inappropriate. The facts that respondent’s constitutional challenge
was collateral to his substantive claim of entitlement, and that (contrary to the situation in Salfi)
he colorably claimed that an erroneous termination would damage him in a way not
compensable through retroactive payments warrant the conclusion that the denial of his claim to
continued benefits was a sufficiently ‘final decision’ with respect to his constitutional claim to
satisfy the statutory exhaustion requirement.” (emphasis added)
Mathews further established a three-part test for determining “the constitutional sufficiency of
5
6
by the official action;” the second, “the risk of an erroneous deprivation of such interest through the
8
procedures used, and probable value, if any, of additional procedural safeguards;” and the third, “the
9
Government's interest, including the fiscal and administrative burdens that the additional or substitute
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
7
administrative procedures.” The first part of this test assesses “the private interest that will be affected
11
12
13
procedures would entail.” Id.
The private interest affected by official action here is obvious and substantial. Plaintiff has been
required, as a direct result of the process adopted by the DFI, to completely cease operating the mobile
payment system in which it invested significant resources, and which constitutes its primary product
14
offering. (FAC, ¶ 62-69).
15
16
17
The risk of erroneous deprivation of such interest, through the inherently subjective and
confusing process that includes a mandatory “pre-filing interview,” combined with the additionally
18
vague and subjective monetary pre-requisites for filing, is enormous. It is easy to conceive of presently
19
lacking procedural safeguards that would offset such risk, including but not limited to more definite
20
written pre-requisites, and the requirement that pre-filing interviews be recorded, if such meetings are
21
even truly necessary.
22
23
Such additional safeguards would actually benefit the Government. Considerable taxpayer
resources have been invested in the slow (and pointlessly subjective) process of evaluating money
24
25
26
27
28
transmission applications, allowing the Government to discriminate against those businesses it does not
“like” without any stated criteria. Eliminating the licensure process completely or allowing recordings
19
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 27
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page26 of 32
1
2
As such, at a minimum Plaintiff has alleged facts sufficient to support its claim for violation of
4
its rights to procedural due process, and accordingly, the State Defendants’ Motion to Dismiss must be
5
denied.
6
IV.
8
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
of money (which it desperately needs), or cost the State virtually nothing.
3
7
LAW OFFICES OF MICHAEL BROOKS CARROLL
to be made with off-the-shelf equipment would either save the State of California an enormous amount
11
12
The MTA Violates The Dormant Commerce Clause And Is Not “Invulnerable” To A
Dormant Commerce Clause Challenge As The State Defendants Assert.
A. The State Defendants Fail to Cite any Explicit or Implicit Congressional Endorsement
of the Money Transmission Act and its Unconstitutional Requirements for Licensure,
Nor Can They Since The Purported Authorizing Statute, the USA PATRIOT Act, Was
Never Intended To Authorize Or Enable The MTA Regulatory Scheme Enacted By
The State Defendants.
In its Memorandum, the State Defendants boldly label the MTA “invulnerable” to a dormant
Commerce Clause challenge, citing 18 U.S.C. § 1960 as purported proof that Congress implicitly
13
endorses every requirement in the MTA. However, Congress clearly did not intend to give the states
14
15
16
carte blanche to enforce a regulatory scheme in the manner that the State Defendants have done here,
and indeed such a grant of power as the State Defendants argue that the State of California has
17
received—which would render the MTA “invulnerable” to constitutional challenge—would itself be
18
unconstitutional as set forth above. See, Zemel, supra, 381 U.S. at 17. The State Defendants’ reasoning
19
that the MTA is authorized by 18 U.S.C. § 1960 fails to withstand even a cursory level of scrutiny when
20
evidence of the congressional intent and motivations behind such regulation, adopted in the wake of and
21
22
in reaction to the terrorist attacks of September 11, 2001, is more closely examined.
Congress amended 18 U.S.C. § 1960 in 2002 as part of the USA PATRIOT Act, a sweeping law
23
designed to counter terrorism in the wake of the September 11, 2001 terrorist attacks. Far from
24
25
26
27
28
intending to describe a financial regulatory regime for the future of commerce, Congress was primarily
interested in outlawing the use of traditional Islamic hawala financial networks as vehicles to fund
20
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 28
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page27 of 32
1
2
terrorism, and so it designated the operation of an unlicensed money transmission service to be a federal
crime. Congress’s intent in this regard, and the federal government’s motivations in enacting such
3
provision are described in a report submitted to Congress by the United States Department of the
4
Treasury in November, 2002 in accordance with Section 359 of the USA PATRIOT Act (the
5
“Report”).12 The Report focuses in great detail on terrorist financing (not once referring to new payment
6
technologies) and explains:
7
“Informal Value Transfer Systems (IVTS) is a term used to describe those money or value
transfer systems that operate informally to transfer money as a business. In the past, some of
these informal networks have been labeled by various terms including ‘alternative remittance
systems’ and ‘underground banks.’ Within the broad realm of informal institutions there exist
more detailed descriptors for specific value transfer mechanisms, such as hawala, hundi, fei
ch’ien, hoe kuan, hui k’aun, and many others. For the purpose of consistency and inclusiveness,
IVTS is the primary term of art used in this report…
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
11
In order to better understand this issue, FinCEN looked closely at the workings of the hawala
system, a widely used form of IVTS. Hawala means “transfer” in Arabic and the system works
by transferring money without actually moving it. The basic hawala transaction involves a
sender, two trusted intermediaries, and a recipient. For example, a U.S. resident who wants to
send money to a friend in another jurisdiction (Country B) would give it to a U.S. hawaladar,
who typically gives the sender a code or identification mechanism. The U.S. hawaladar then
contacts a local hawaladar in Country B by telephone, fax, or e-mail, and the sender contacts the
intended recipient to convey the code. The local hawaladar in Country B then delivers the
specified funds to the recipient upon presentation of the code. The hawaladar charges a flat fee,
a commission, or may alternatively or in addition, profit from the exchange rate differential
between the official and black market price of U.S. dollars in Country B. The accounts between
the two operators may be settled various ways including through compensatory payments (i.e.,
when someone from Country B sends money to the U.S.), conventional wire transfers or checks,
physical movement of money (by courier), invoice manipulation or other trade- based
mechanisms, and the trade/smuggling of gold and precious gems…
12
13
14
15
16
17
18
19
20
Section 359(a) of the Patriot Act amended the definition of money transmitter to encompass
‘any person who engages as a business in an informal money transfer system or any network of
people who engage as a business in facilitating the transfer of money domestically or
internationally outside of the conventional financial institution system.’ These amendments
make clear that under U.S. law all money transfer remitters, including those that operate on an
informal basis, or outside the scope of the conventional financial sector, are subject to the BSA.”
21
22
23
24
25
26
27
28
12
See http://www.fincen.gov/news_room/rp/files/hawalarptfinal11222002.pdf. The full text of the Report is also attached as
Exhibit C to the Request for Judicial Notice submitted herewith.
21
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 29
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page28 of 32
1
2
involves the “Use of Cash Intensive Businesses In Ethnic Communities to Facilitate IVTS Activities.”
4
In the section entitled “Recommendations,” the Report states:
6
7
8
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
devoted to diagrams of hawala networks involving fictitious actors with Muslim names. Appendix C
3
5
LAW OFFICES OF MICHAEL BROOKS CARROLL
In the Report, the entirety of Appendix B, “Basic Hawala and Sample Account Settling,” is
11
12
13
14
“The U.S. approach of regulating informal value transfer activity is preferable to outlawing the
activity altogether, a course chosen by some nations. Attempting to outlaw IVTS ultimately
deprives law enforcement of potentially valuable information and drives the informal remittance
providers further “underground.” Outlawing the activity also deprives the mostly law-abiding
IVTS customers of the primary channel through which they transfer funds.
In addition, the U.S. approach to regulation is consistent with emerging international standards
such as the Special Recommendations on Terrorist Financing, issued in November 2001, by the
Financial Action Task Force (FATF) on Money Laundering. The FATF’s Special
Recommendation VI on Alternative Remittance calls on nations to ‘take measures to ensure that
persons or legal entities, including agents, that provide a service for the transmission of money
or value, including transmission through an informal value transfer system or network, should be
licensed or registered and subject to all the FATF Recommendations that apply to banks and
non-bank financial institutions.’”
To baldly state, as the State Defendants boldly contend here, that Congress intended to halt the
creation of new payment technologies in the United States by passing the USA PATRIOT Act is
15
16
17
18
19
therefore a gross mischaracterization of the legislative record. It is clear that the present situation is one
that Congress did not intend nor authorize, and in fact is simply one in which the State Defendants seek
to stretch federal law to defend an unconstitutional money-transmission regulatory scheme.
Even were it not abundantly clear what Congress sought to accomplish by strengthening the
20
penalties for unlawful money transmission—namely, the prevention of another terrorist attack
21
facilitated by United States financial systems—enormous changes in computer technology have
22
23
completely transformed the landscape of interstate commerce since 2002. In 2007, the advent of the
iPhone, a device manufactured by Apple, Inc., completely changed the way that many Americans
24
communicate by making “smartphones” capable of myriad tasks commonplace. Smartphones also
25
26
27
28
provided a new platform for mobile commerce that has little regard for state boundaries.
22
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 30
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page29 of 32
1
2
3
4
5
6
7
Dwight D. Eisenhower National System of Interstate and Defense Highways in the 1950s. Regarding
that particular development, the Court stated in Atlanta Motel v. United States, 379 U.S. 241 (1964):
“Our populace had not reached its present mobility, nor were facilities, goods and services
circulating as readily in interstate commerce as they are today. Although the principles which
we apply today are those first formulated by Chief Justice Marshall in Gibbons v. Ogden, 9
Wheat. 1 (1824), the conditions of transportation and commerce have changed dramatically, and
we must apply those principles to the present state of commerce. The sheer increase in volume
of interstate traffic alone would give discriminatory practices which inhibit travel a far larger
impact upon the Nation's commerce than such practices had on the economy of another day.”
The same language applies almost verbatim to the changes that have occurred in the United
9
States over the past five years—long after Congress passed the PATRIOT Act. There is simply no way
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
Such rapid change has swept across the country in the past, such as with the advent of the
11
12
that Congress could have foreseen the future of mobile commerce, let alone mobile payments, in 2002,
and as such it is impossible that the criminal penalties stipulated by 18 U.S.C. § 1960 even come close
13
to “expressly endorsing state-by-state licensing requirements” determined by California in 2010, or that
14
the “regulation of money transmission activities by enforcing state licensing provisions through that
15
federal law” makes sense in a new and different era of commerce.
16
17
18
The State Defendants cite Soto v. Tu Phuoc Nguyen, 634 F.Supp.2d 1096, 1100 (E.D. Cal. 2009)
as evidence that Congress can delegate power to states, but this case is not analogous to the present
situation. As the State Defendants point out, “there were no federal safety standards governing
19
20
21
passenger seat belts on busses.” In the case of money transmission, there are ample federal standards
designed to keep consumers safe—but the State of California, and Defendant Venchiarutti in
22
particular—knowingly ignores them. Thus, for example, 31 C.F.R. § 1010, a federal standard, covers
23
general provisions related to the Financial Crimes Enforcement Network (FinCEN), a division of the
24
United States Department of the Treasury. FinCEN has issued several regulations and rulings directly
25
relevant to money transmission over the years, such as FinCEN ruling FIN-2009-R001 (“on Whether
26
Certain Operations of a Service Provider to Prepaid Stored Value Program Participants is a Money
27
28
23
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 31
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page30 of 32
1
2
FIN-2008-R005 (“on Whether Certain Reloadable Card Operations are Money Services Businesses”)
3
(Exhibit E to the Request for Judicial Notices submitted herewith), and 2003-8 (“Definition of Money
4
Transmitter (Merchant Payment Processor)”) (Exhibit F to the Request for Judicial Notices submitted
5
herewith), but while some states have honored these standards, others, such as the State of California,
6
have not. Congress expressly delegated authority to the United States Department of the Treasury to
7
8
handle matters relating to money transmission in 31 U.S.C. § 310 (concerning the powers delegated to
FinCEN). As alleged in the Complaint, the State Defendants have stretched whatever congressional
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
Services Business”), (attached as Exhibit D to the Request for Judicial Notices submitted herewith)
11
authority was given to them under the USA PATRIOT Act far past the scope of congressional
authorization in enacting their regulatory scheme under the MTA, and as such Plaintiff has pled facts
12
sufficient to state a claim against the State Defendants for their violations of the dormant commerce
13
clause, and the State Defendants’ Motion to Dismiss must be denied.
14
B. The State Defendants Have Attempted And Plaintiff Has Alleged They Will Continue
To Attempt To Regulate Commerce Occurring Outside Of California In Violation Of
The Commerce Clause.
15
16
17
The State Defendants’ Memorandum further fails to address the behavior of the DFI prior to the
October Order, when Plaintiff was uncertain as to whether or not it could operate in Alabama and
18
Idaho—jurisdictions where Plaintiff possessed valid money transmission licenses—because of
19
20
21
California law. The October Order resolved this particular dilemma for Plaintiff, but not for any other
potential applicant for licensure under the MTA, and so it remains at issue.
13
Indeed, even if Congress’s
22
delegation of authority to the states over money transmission and interstate were explicit and
23
complete—which is certainly not the case—such a grant would still not permit the states to pass
24
25
26
27
28
13
In this regard the State Defendants’ argument that the Court should not consider this blatant violation of the commerce
clause because they have ceased to engage in such acts against the Plaintiff only (at the price of Plaintiff’s activity in
California) essentially amounts to a “moving target” defense, and completely ignores the plain factual allegations of the
24
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 32
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page31 of 32
1
2
procedures that infringed on the sovereignty of other states. Accordingly, Plaintiff has pled facts
3
sufficient to state a claim against the State Defendants for their violations of the dormant commerce
4
clause, and the State Defendants’ Motion to Dismiss must be denied.
5
V.
6
7
8
Settled Federal Law And Procedure Requires That Plaintiff Be Allowed To Amend Even If
The Court Were To Grant The Motion To Dismiss On Any Of The Grounds Being
Asserted By The State Defendants.
Even if this Court were to grant the State Defendants’ Motion to Dismiss on any of the grounds
asserted by the State Defendants, Plaintiff respectfully submits that well settled federal law and
9
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
arbitrary, capricious and discriminatory laws such as the MTA employing subjective and vague
11
procedure require that Plaintiff be granted leave to amend its Complaint. See, Schwarzer, Tashima &
Wagstaffe, California Practice Guide: Federal Civil Procedure Before Trial (The Rutter Group 2010) §
12
9:286 (“As a practical matter, leave to amend his almost always granted by the court.”); and see also
13
id., at § 9:287 (“Where a more carefully drafted complaint might state a claim, a plaintiff must be given
14
at least one more chance to amend the complaint before the district court dismisses the action with
15
prejudice.”) (emphasis in original).14
16
17
As such, should this Court grant the State Defendants’ Motion to Dismiss, Plaintiff respectfully
requests leave to amend its Complaint.
18
19
20
21
22
23
24
25
26
27
28
DFI’s intentions, actions and violations of the commerce clause as fully alleged in ¶ 56 of the Complaint with regard to, inter
alia, the October Order, Plaintiff’s communications with the State Defendants and the State Defendants’ statements.
14
Indeed, this rule applies even in cases involving affirmative bars to relief such as sovereign immunity. See Doe v. United
th
States, 58 F.3d 494, 497 (9 Cir. 1995) (“We are unwilling to anticipate what theory an ingenious but fair pleader might
produce and what constellation of facts might be alleged that might overcome the bar [of sovereign immunity]…a district
court should grant leave to amend even if no request to amend the pleading was made, unless it determines that the
pleading could not possibly be cured by the allegation of other facts.”)
25
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
PDF Page 33
Case5:11-cv-05496-HRL Document30 Filed03/03/12 Page32 of 32
DISPOSITION REQUESTED
1
2
Plaintiff respectfully requests this Court deny the Motion to Dismiss filed by all Defendants.
3
4
5
6
7
9
Respectfully submitted,
LAW OFFICES OF MICHAEL BROOKS
CARROLL
By: /s/ Kevin A. Flautt__________
Kevin A. Flautt, Esq.
Attorneys for Plaintiff THINK COMPUTER
CORPORATION
10
300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
8
Dated: March 3, 2012
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
26
RESPONSE AND OPPOSITION TO MOTION TO DISMISS - Case No. CV11-05496-HRL
Third party AI contribution in government documents
Possible
Document content is reproduced directly from government sources. Think Computer Corporation does not generate, alter, annotate, or summarize documents using artificial intelligence. Some filings in our database may themselves contain AI-generated content submitted by third parties to government agencies.
Back to 
