Reply Memorandum of Points and Authorities in Support of State Defendants' MOTION to Dismiss First Amended Complaint re [24] filed by Jacob A Appelsmith, Edmund Brown, Jr, William Haraf, Kamala Harris, Traci Stevens, Robert Venchiarutti. (Marcroft, Ryan) (Filed on 3/6/2012) Modified on 3/8/2012 (bw, COURT STAFF).
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Page 1 Case5:11-cv-05496-HRL Document31 Filed03/06/12 Page1 of 20
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KAMALA D. HARRIS
Attorney General of California
PETER SOUTHWORTH
Supervising Deputy Attorney General
RYAN MARCROFT
Deputy Attorney General
State Bar No. 230952
1300 I Street, Suite 125
P.O. Box 944255
Sacramento, CA 94244-2550
Telephone: (916) 323-5313
Fax: (916) 324-8835
E-mail: Ryan.Marcroft@doj.ca.gov
Attorneys for All Defendants
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
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THINK COMPUTER CORPORATION,
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Plaintiff, REPLY MEMORANDUM OF POINTS
AND AUTHORITIES IN SUPPORT OF
v.
THE STATE DEFENDANTS’ MOTION
TO DISMISS THE FIRST AMENDED
ROBERT VENCHIARUTTI, in his official
COMPLAINT
capacity as Deputy Commissioner of the
California Department of Financial
Date:
March 27, 2012
Institutions; WILLIAM HARAF, in his
Time:
10:00 a.m.
official capacity as Commissioner of the
Dept:
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California Department of Financial
Judge:
The Honorable Howard R. Lloyd
Institutions; TRACI STEVENS, in her
Trial Date: None Set
official capacity as Acting Secretary of the
Action Filed: November 14, 2011
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,
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Defendants.
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TABLE OF CONTENTS
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Page
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Introduction ........................................................................................................................
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Argument ........................................................................................................................
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I.
The “As Applied” Challenges to the Licensing Requirements Are Not Ripe
because Plaintiff Never Applied For a License....................................................... 1
II.
The Plaintiff Does Not Have a Due Process or Equal Protection Claim ................ 6
A.
The Plaintiff Does Not Have a Property Right Protected Under the
Due Process Clause ..................................................................................... 6
B.
Discretionary Licensing Standards Are Not Facially Invalid Under
the Due Process Clause ............................................................................... 8
C.
The Plaintiff’s Due Process and Equal Protection Challenges to the
Money Transmission Act’s Licensing Requirements Fail Because
the Requirements Are Rationally Related to a Legitimate State
Purpose ........................................................................................................ 9
III.
The Plaintiff’s Commerce Clause Claims Fail On the Merits because
Congress Has Expressly Authorized the States to License and Regulate
Money Transmission Businesses .......................................................................... 11
Conclusion ........................................................................................................................
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TABLE OF AUTHORITIES
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Page
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CASES
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Bd. of Regents of State Colls. v. Roth 408 U.S. 564 (1972) .................................................................................................................. 6
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City of Chicago v. Atchison, T. & S. F. Ry. Co. 357 U.S. 77 (1958) .................................................................................................................... 3
F.C.C. v. Beach Commc’ns, Inc. 508 U.S. 307 (1993) ............................................................................................................ 9, 10
Freedom to Travel Campaign v. Newcomb 82 F.3d 143 (9th Cir. 1996)......................................................................................... 3, 5, 9, 15
Gary D. Peake Excavating Inc. v. Town Bd. of the Town of Hancock 93 F.3d 68 (2d Cir. 1996) .......................................................................................................... 5
Halverson v. Skagit Cnty. 42 F.3d 1257 (9th Cir. 1994)............................................................................................... 9, 10
Int’l Shoe Co. v. State of Wash. 326 U.S. 310 (1945) ................................................................................................................ 12
Jacobson v. Hannifin 627 F.2d 177 (9th Cir. 1980)............................................................................................. 7, 8, 9
James Clark Distilling Co. v. W. Md. Ry. Co. 242 U.S. 311 (1917) .......................................................................................................... 12, 14
Johnson v. Rancho Santiago Cmty. Coll. Dist. 623 F.3d 1011 (9th Cir. 2010)................................................................................................. 10
Ky. Whip & Collar Co. v. Ill. Cent. R.R. Co. 299 U.S. 334 (1937) ................................................................................................................ 12
Manufactured Home Communities v. City of San Jose 420 F.3d 1022 (9th Cir. 2005)................................................................................................... 7
Mathews v. Eldrige 424 U.S. 319 (1976) .................................................................................................................. 7
Pac. Gas & Elec. Co. v. State Energy Res. Conserv. & Dev. Comm’n 461 U.S. 190 (1983) .................................................................................................................. 4
Pac. Legal Found. v. State Energy Resources Conserv. & Dev. Comm’n 659 F.2d 903 ................................................................................................................. 2, 3, 4, 5
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TABLE OF AUTHORITIES
(continued)
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Page
Pub. Utilities Comm’n v. U.S. 355 U.S. 534 (1958) .................................................................................................................. 3
S.D. Myers, Inc. v. City & Cnty. of S.F. 253 F.3d 461 (9th Cir. 2001)..................................................................................................... 2
Skull Valley Band of Goshute Indians v. Nielson 376 F.3d 1223 (10th Cir. 2004)............................................................................................. 4, 5
Thornton v. City of St. Helens 425 F.3d 1158 (9th Cir. 2005)................................................................................................... 7
Triple G. Landfills, Inc. v. Bd. of Comm’rs of Fountain Cnty. 977 F.2d 287 (7th Cir. 1992)..................................................................................................... 5
U.S. v. Barre 324 F.Supp.2d 1173 (D. Colo. 2004) ................................................................................ 13, 14
U.S. v. Dimitrov 546 F.3d 409 (7th Cir. 2008)............................................................................................. 12, 13
U.S. v. Mazza-Alaluf 621 F.3d 205 (2d Cir. 2010) .................................................................................................... 12
U.S. v. Salerno 481 U.S. 739 (1987) .............................................................................................................. 2, 9
White v. Mass. Council of Constr. Emp’rs, Inc. 460 U.S. 204 (1983) ................................................................................................................ 11
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Zimel v. Rusk 381 U.S. 1 (1965) .................................................................................................................... 15
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STATUTES
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California Financial Code
§ 2002 ........................................................................................................................
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§ 2033 ........................................................................................................................
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§ 2033(b)(1) ........................................................................................................................
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§ 2036 ........................................................................................................................
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§ 2040 ........................................................................................................................
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§ 2040(a) ........................................................................................................................
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TABLE OF AUTHORITIES
(continued)
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STATUTES (CONT.)
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United States Code
18 U.S.C. § 1960 .............................................................................................................. passim
18 U.S.C. § 1960(b) ................................................................................................................ 12
18 U.S.C. § 1960(b)(1)(A) ................................................................................................ 13, 14
18 U.S.C. § 1960(b)(1)(B) ................................................................................................ 13, 14
31 U.S.C. § 5330 ..................................................................................................................... 13
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INTRODUCTION
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The State Defendants’ motion to dismiss the instant action demonstrated that the Plaintiff
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cannot simply skip applying for a state license to operate as a money transmission business by
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suing in federal court. In opposing the motion to dismiss, the Plaintiff has asserted that it raises
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various ill-defined facial and “as applied” challenges, and that prudential reasons support judicial
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review at this time. Even the law cited by Plaintiff, however, shows that none of its “as applied”
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challenges are ripe. To the extent that Plaintiff is actually making a very narrow facial challenge
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(that the law in question can never be applied in a constitutional manner under any
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circumstances), that contention fails on the merits. No matter how Plaintiff labels the claim, it
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does not have an interest defined under state law and hence protected under the Due Process
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Clause. Moreover, its legal assertion that state licensing laws, like the Money Transmission Act,
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are constitutionally infirm simply because they vest discretionary decision-making authority in a
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licensing agency is meritless. Further, both Plaintiff’s Due Process and Equal Protection claims
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fail because the minimum statutory licensure requirements are rationally related to legitimate
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state interests. The dormant Commerce Clause claim has no basis, because Congress expressly
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authorized states to license money transmission businesses. All of the Plaintiff’s unripe and
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invalid claims should be dismissed without leave to amend.
The Plaintiff did not oppose the State Defendants’ motion to dismiss the Governor, Senior
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Advisor Appelsmith, Attorney General, and Acting Secretary Stevens from this case. (Opp. to
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MTD at 1 n. 2.)1
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ARGUMENT
I.
THE “AS APPLIED” CHALLENGES TO THE LICENSING REQUIREMENTS
ARE NOT RIPE BECAUSE PLAINTIFF NEVER APPLIED FOR A LICENSE
Think Computer Corporation contends that it does not have to ripen its claims by actually
filing an application for, and obtaining a decision on, a money transmission license before
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The State Defendants’ Motion to Dismiss (Docket No. 24) is hereafter designated
“MTD,” and the Plaintiff’s Opposition To State Defendants’ Motion To Dismiss and Errata
(Docket No. 30) is hereafter designated “Opp. to MTD.”
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seeking federal court review because: (1) it is making “facial challenges” and (2) it is suffering
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harm without a license or the legal ability to conduct a money transmission business. (Opp. to
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MTD at 5-11.) According to the Plaintiff, facial challenges “are inherently ripe when the issues
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are sufficiently focused without further substantial factual development.” (Opp. to MTD at 5.)
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The Plaintiff, however, never actually identifies its specific “facial challenge” (as opposed to its
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“as applied” challenges) or acknowledges the extraordinarily narrow scope of a facial challenge.
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Moreover, the authorities cited by the Plaintiff confirm that it cannot simply forgo a state
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application process and file suit in federal court.
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“A facial challenge to a legislative Act is, of course, the most difficult challenge to mount
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successfully, since the challenger must establish that no set of circumstances exists under which
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the Act would be valid. The fact that the [legislative act] might operate unconstitutionally under
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some conceivable set of circumstances is insufficient to render it wholly invalid.” U.S. v.
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Salerno, 481 U.S. 739, 745 (1987); S.D. Myers, Inc. v. City & Cnty. of S.F., 253 F.3d 461,
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469 n. 1 (9th Cir. 2001) (a statute “is facially constitutional if there is at least one set of
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circumstances under which it could be valid”). To the extent that the Plaintiff is really making a
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facial challenge here, it is (so far as defendants can discern) that the State can never, under any
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circumstances, enforce legislation requiring minimum funding for a money transmitter or apply a
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statute not specifying in advance (prior to the application and any hearing) what the requirements
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will be in particular case. As shown elsewhere in defendants’ memoranda, these constitutional
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claims fail on the merits. All of the Plaintiff’s other sweeping accusations are not “facial
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challenges” and are not ripe as “as applied” arguments.
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All of Plaintiff’s authorities on ripeness acknowledge the ripeness distinctions between
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facial and “as applied” challenges. (Opp. To MTD at 5-6.) In Pac. Legal Found. v. State Energy
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Resources Conserv. & Dev. Comm’n, the Ninth Circuit stated that “[a] case or controversy is not
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presented simply because a party is subject to a general regulatory process which, when applied
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to the specific facts developed in some future administrative proceeding, might cause a state
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agency to take a particular action which some court might thereafter determine to be
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unconstitutional.” 659 F.2d 903, 916 (9th Cir. 1982). Thus, in Pac. Legal Found., only a facial
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challenge to one statutory requirement (that any applicant identify three alternative sites) was
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ripe, where it applied unequivocally to all applicants and its validity was not dependent on a
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factual setting. Id. at 917. Plaintiff’s other authorities are in accord. City of Chicago v. Atchison,
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T. & S. F. Ry. Co. 357 U.S. 77, 89 (1958) (no requirement to apply for permit where licensing
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ordinance could never be applied validly); Pub. Utilities Comm’n v. U.S., 355 U.S. 534, 540
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(1958) (where “an administrative proceeding might leave no remnant of the constitutional
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question, the administrative remedy plainly should be pursued,” but action was ripe where United
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States was completely immune from state regulations). These facial ripeness authorities do not
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apply where (as here) a statute can be applied in a constitutional manner, but a plaintiff claims it
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has been or will be applied invalidly.
Moreover, no matter how Plaintiff labels its claims, its own citations refute its argument
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that Think Computer Corporation does not have to apply for a money transmission license before
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seeking federal judicial review. (Opp. to MTD at 9-11.) Plaintiff cannot meet the standards
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contained in those opinions -- that denial of any application by Think Computer Corporation for a
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license is objectively inevitable and imposes undue hardship on the Plaintiff. In Freedom to
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Travel Campaign v. Newcomb, 82 F.3d 143, 1435 (9th Cir. 1996), the court recognized the
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general rule that applicants must actually apply for a permit -- even in the context of pure
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questions of law that require no factual development. The court adopted a narrow exception: “if
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the court can make a firm prediction that the plaintiff will apply for the benefit, and that the
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agency will deny the application by virtue of the rule-then there may be a justiciable controversy
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that the court may find prudent to resolve.” Id. at 1436. In Freedom to Travel, the plaintiffs
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challenged the facial validity of federal regulations requiring individuals to obtain a specific
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license to travel to Cuba. Id. at 1434. The court noted that to obtain a license, applicants had to
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show a compelling need to travel to Cuba for certain specified reasons, such as educational
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activities. Id. at 1434, 1436. The regulations expressly defined what activities would qualify as
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educational activities. Id. The plaintiffs did not plan to engage in such activities, and for this
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reason, the court concluded that it could “firmly predict” that the plaintiffs’ applications would be
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“summarily rejected” under the regulation in these circumstances. Id. at 1436.
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Here, however, Think Computer Corporation can apply for, and could be granted, a license
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under the applicable legal standards. Plaintiff’s chief complaint about the Money Transmission
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Act appears to be the $500,000 minimum statutory capital requirement. Cal. Fin. Code,
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§§ 2033(b)(1), 2040(a). But the Plaintiff has specifically alleged that it satisfies that minimum
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requirement for licensure. (FAC, ¶ 50 [“Think had raised approximately $500,000 in additional
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funding from family members . . ., placing Plaintiff’s tangible shareholder equity well above the
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written statutory minimum of $500,000 established by the MTA”].) Ignoring this objective
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standard, Plaintiff claims instead that the State Defendants will deny a license based on a
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subjective belief that defendants have been “hostile and uncooperative.” (Opp. to MTD at 7-8.)
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Plaintiff can point to no legal standards that would render denial of Think Computer
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Corporation’s application “inevitable.”
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Nor does Plaintiff’s alleged hardship (fear of denial and loss of income) excuse it from
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applying for a license. As already noted, the risks inherent in a not-yet-applied permitting scheme
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generally do not qualify as a present injury for ripeness purposes. Pac. Legal Found. v. State
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Energy Resources Conserv. & Dev. Comm’n 659 F.2d 903, 916 (“(a) case or controversy is not
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presented simply because a party is subject to a general regulatory process which, when applied
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to the specific facts developed in some future administrative proceeding, might cause a state
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agency to take a particular action which some court might thereafter determine to be
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unconstitutional”). Only where a challenge is purely legal will a court accept such arguments
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and, in those cases, the hardship imposed on a plaintiff must be much higher than Plaintiff’s
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purported harm. Pac. Gas & Elec. Co. v. State Energy Res. Conserv. & Dev. Comm’n,
22 461 U.S. 190, 201-202 (1983) (challenge to moratorium on nuclear energy ripe where issue was
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purely legal and ultimate decision on power plants would take 12-14 years and millions of dollars
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to obtain). For instance, in Skull Valley Band of Goshute Indians v. Nielson, 376 F.3d 1223, 1228
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(10th Cir. 2004), after utility companies seeking to construct a nuclear waste facility on tribal land
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in Utah applied for a federal license to do so, the State of Utah imposed a “sweeping prohibition”
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on the transfer, storage, treatment, and disposal of nuclear waste in Utah. Id. at 1237. Plaintiffs
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argued that the ban was completely pre-empted by federal law and, until that issue could be
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decided, they faced, inter alia, payment of a five million dollar non-refundable application fee.
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Id. at 1234-35. Similarly, in Triple G. Landfills, Inc. v. Bd. of Comm’rs of Fountain Cnty., 977 3
F.2d 287, 288 (7th Cir. 1992), after a county “caught wind” of the plaintiff’s plan to build a
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landfill in the county, the county enacted an ordinance banning all landfills in the county. The
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legal issue there was a narrow and facial one: whether a county could even adopt such an
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ordinance. Id. at 291. Finally, in Gary D. Peake Excavating Inc. v. Town Bd. of the Town of
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Hancock, 93 F.3d 68, 70 (2d Cir. 1996), a month after the plaintiff applied to the state for a
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permit to construct a landfill on his property, the town where the property was located adopted an
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ordinance completely banning landfills. Unlike each of these cases, the State of California has
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not banned (but rather has long permitted) various money transmission activities in the state and
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plaintiff can apply for a license under the applicable standards. Moreover, Plaintiff’s hardship in
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applying for such a license is significantly less than in this line of authorities.2
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The Plaintiff’s main hardship argument that its claims are ripe under prudential ripeness
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standards is predicated on the outcome of a licensing proceeding that never occurred. The
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Plaintiff asserts it “could not and cannot now apply for a license in California on paper, because
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without first knowing the absolute requirements of the licensure process and without those
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requirements being subject to being changed by the State Defendants the risk of denial, even with
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a hearing, would mean the subsequent denial of similar applications in other states.” (Opp. to
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MTD at 11.) In other words, the Department of Financial Institutions should never have an
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opportunity to consider the Plaintiff’s license application because it might deny the license
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application, which then might prompt other states to also deny or revoke the Plaintiff’s license
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applications. This hypothetical situation cannot amount to a direct and immediate hardship
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sufficient to make this case ripe for review. Pac. Legal Found., 659 F.2d at 916. Finally, the
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Plaintiff suggests that it is under a threat of criminal penalty. (Opp. to MTD at 10.) It is true that
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in some circumstances, the threat of criminal penalty is considered a hardship. Freedom to Travel
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Campaign, 82 F.3d at 1435. But the Plaintiff opted to discontinue its business activity, not apply
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The Plaintiff also points to some of these same cases in support of its “as-applied”
claims (Opp. to MTD at 8), but as noted, they involved facial or purely legal challenges.
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for a license, and it is not subject to criminal penalty so long as it does not operate an illegal
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business. These actions, entirely within the Plaintiff’s control, should not operate to find this
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action ripe for review.
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At most, Plaintiff’s purely legal challenges might be ripe for review, but even in those
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circumstances, the law has required applicants to apply for a license unless it is objectively
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inevitable that the license will be denied. In any case, as discussed below, those facial claims fail
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on the merits. Beyond that, all of the Plaintiff’s so-called as-applied arguments are not ripe due to
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the Plaintiff's failure to apply for a license. In these circumstances, this action should be
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dismissed without leave to amend.
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II.
THE PLAINTIFF DOES NOT HAVE A DUE PROCESS OR EQUAL PROTECTION CLAIM
A.
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The Plaintiff Does Not Have a Property Right Protected Under the Due
Process Clause
The State Defendants argued in their opening brief that, in order to assert any violation of
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substantive or procedural due process based on an alleged deprivation of a property right, the
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plaintiff must first establish the existence of a protected property interest. Such rights “are
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created and their dimensions are defined by existing rules or understandings that stem from an
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independent source such as state law-rules or understandings that secure certain benefits.” Bd. of
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Regents of State Colls. v. Roth, 408 U.S. 564, 577 (1972). Without citation to any authority, the
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Plaintiff simply asserts that it “has identified its vested property rights in the continuation of its
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money transmission business.” (Opp. to MTD at 2, 13 (emphasis in original).) In other words,
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the Plaintiff has identified a property right, protected under the Due Process Clause, because it
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says so. That is not the law.
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State law creates protected property rights. The Plaintiff, however, points to no state law
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that protected its asserted right to continue operating as a money transmitting business once the
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Legislature enacted the Money Transmission Act and required that the Plaintiff obtain licensure
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for its business activities.3 And the Plaintiff points to no state law that protects its asserted right
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The Plaintiff does not address the State Defendants’ related argument that it has no
possible procedural due process challenge to the legislative adoption of the Money Transmission
(continued…)
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to operate as an illegal money transmitting business now. Where a licensing body has discretion
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to deny the license or to impose licensing criteria of its own creation -- like the Department of
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Financial Institutions has concerning money transmitting licenses (Cal. Fin. Code, §§ 2033, 2036)
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-- the Ninth Circuit has held that a licensure applicant does not have a protected property interest
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in the license. Thornton v. City of St. Helens, 425 F.3d 1158, 1164-1165 (9th Cir. 2005);
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Jacobson v. Hannifin, 627 F.2d 177 (9th Cir. 1980).
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The Plaintiff does not directly dispute this authority. Instead, it cites Mathews v. Eldrige,
8 424 U.S. 319 (1976).4 (Opp. to MTD at 18.) Mathews involved the question of whether the Due
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Process Clause required a pre-deprivation hearing before a person’s social security disability
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benefit payments could be terminated. Mathews, 424 U.S. at 323. There, however, it was already
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established that “the interest of an individual in continued receipt of these benefits is a statutorily
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created ‘property’ interest protected by the Fifth Amendment.” Id. at 332 (emphasis added).
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Here, as noted, the Plaintiff has not identified a statutorily-created property right protected under
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the Due Process Clause. Rather, the Ninth Circuit’s decision in Jacobson v. Hannifin is
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instructive.5 There, a first-time license applicant (like the Plaintiff here, if it ever applies for a
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license) formally sought licensure from the State of Nevada as the landlord of a hotel-casino.
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Jacobson, 627 F.2d at 178-179. After a hearing, Nevada’s Gaming Control Board recommended
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that the plaintiff be found suitable for licensure, subject to several conditions. Id. at 179. Plaintiff
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objected to the conditions and proposed four alternatives, including licensure without any
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conditions, and the outright sale of the plaintiff’s gaming establishment. Id. The Gaming
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(…continued)
Act. (MTD at 15 n. 7.) Thus, to the extent the Plaintiff asserts this procedural claim, it should be
dismissed.
4
The cited excerpt from Mathews in the Plaintiff’s brief, found on page 321 of that case,
is actually a part of the case syllabus, rather than the court’s opinion. Moreover, this excerpt was
compiled from a portion of the court’s opinion discussing whether the court would waive an
exhaustion requirement under a federal statute. This was not a part of the court’s due process
analysis, and the Plaintiff’s citation to it is unclear. Mathews, 424 U.S. at 330.
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To reiterate, this Due Process claim is not ripe because the Plaintiff did not pursue the
procedural hearing process prescribed under the Money Transmission Act. (MTD at 16 n. 8.)
Manufactured Home Communities v. City of San Jose, 420 F.3d 1022, 1033 (9th Cir. 2005) (due
process challenge not ripe where plaintiff never engaged in administrative hearing process: “Due
process has not been denied because no process was pursued”).
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Commission adopted the plaintiff’s proposal to sell the establishment, without ruling on the other
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alternatives, and the plaintiff filed suit, claiming that the manner in which the State rejected the
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plaintiff’s request for licensure violated due process. Id. The court stated that the issue to be
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resolved was whether the plaintiff, “in the position of a first-time applicant for a license, had a
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property interest protected by the due process clause.” Id. Because Nevada’s licensing statute
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gave the state discretion to deny an application for licensure, the court held that the plaintiff had
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no protectable property interest in the license. Id. at 180. “Because we find that [the plaintiff]
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has no protectable property interest in a new gaming license, . . . [the plaintiff] failed to state a
9
claim for denial of due process.” Id. at 179.
10
The Plaintiff has not, and cannot, establish any property interest protected under the Due
11
Process Clause. Absent such a protected property interest, it has no Due Process claim. Nor has
12
the Plaintiff suggested any facts that might allow it to establish a Due Process claim.
13
Accordingly, the claim should be dismissed without leave to amend.
14
15
16
B.
Discretionary Licensing Standards Are Not Facially Invalid Under the Due
Process Clause
In a related argument, the Plaintiff asserts that, because the Money Transmission Act’s
17
statutory requirement for minimum adequate shareholder equity vests discretion in the
18
Department of Financial Institutions, it is invalid both facially and as applied for lack of clear
19
standards. (Opp. to MTD at 14-15.) The Plaintiff cites no authority for this proposition because
20
it is not the law.
21
The Plaintiff argues that the Department of Financial Institutions somehow violated its Due
22
Process rights by not informing it about the minimum equity required to apply for a license. (See,
23
e.g., FAC, ¶ 51 [“Mr. Greenspan . . . continued to have difficulty establishing the true minimum
24
net worth required by the DFI in order to apply for a license under the MTA”].) Section
25
2033(b)(1) of the California Financial Code requires license applicants to have “adequate tangible
26
shareholders’ equity, as specified in Section 2040 to engage in the business of money
27
transmission.” Cal. Fin. Code, § 2033(b)(1). Section 2040(a) of the California Financial Code
28
requires that license applicants have a minimum of $500,000 in tangible shareholders’ equity.
8
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Together, these statutes authorize the Department of Financial Institutions to determine whether a
2
license applicant has “adequate tangible shareholders’ equity” of an amount not less than
3
$500,000. In arguing that the Department denied the Plaintiff’s Due Process rights by not
4
clarifying this discretionary standard before the Plaintiff actually applied for a license, the
5
Plaintiff essentially argues that the discretionary standard is itself unlawful. However, a statute is
6
not constitutionally infirm simply because it vests decision-making discretion in a government
7
body such as the Department. See Jacobson, 627 F.2d at 180 (upholding a decision denying a
8
license against a procedural due process challenge where the licensing statute permitted denial of
9
an application “for any cause deemed reasonable”); Freedom to Travel Campaign, 82 F.3d at
10
1441 (vagueness claim not ripe because court had “no idea how [the government] will exercise its
11
discretion or if it ever will”). This procedural claim has no merit.
12
13
14
C.
The Plaintiff’s Due Process and Equal Protection Challenges to the Money
Transmission Act’s Licensing Requirements Fail Because the
Requirements Are Rationally Related to a Legitimate State Purpose
The Plaintiff also challenges the Money Transmission Act’s statutory licensure
15
requirements, particularly the $500,000 minimum tangible shareholder equity requirement (an
16
amount that the Plaintiff admits it could have satisfied). (FAC, ¶ 50.) The Plaintiff has
17
characterized this as a facial challenge. (FAC, ¶ 75; Opp. to MTD at 4.) As noted, facial
18
challenges are “the most difficult challenge[s] to mount successfully, since the challenger must
19
establish that no set of circumstances exists under which the Act would be valid. The fact that the
20
[legislative act] might operate unconstitutionally under some conceivable set of circumstances is
21
insufficient to render it wholly invalid.” U.S. v. Salerno, 481 U.S. 739, 745 (1987). Plaintiff
22
concedes that its Due Process and Equal Protection claims are subject only to rational level
23
review. (Opp. to MTD at 2, 17.) Under that standard, any conceivable legitimate government
24
purpose will do, and “[i]f it is ‘at least fairly debatable’ that the [government’s] conduct is
25
rationally related to a legitimate governmental interest, there has been no violation of substantive
26
due process.” Halverson v. Skagit Cnty., 42 F.3d 1257, 1262 (9th Cir. 1994). Even “rational
27
speculation unsupported by evidence or empirical data” will pass muster, F.C.C. v. Beach
28
Commc’ns, Inc., 508 U.S. 307, 315 (1993), and the law “need not actually further a legitimate
9
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interest; it is enough that the governing body could have rationally decided that the action would
2
further that interest,” Johnson v. Rancho Santiago Cmty. Coll. Dist., 623 F.3d 1011, 1031 (9th
3
Cir. 2010) (internal quotations and emphasis omitted).
4
With these extraordinarily deferential standards in mind, the Plaintiff cannot sustain its
5
challenge to the licensing requirements. The Plaintiff has not challenged the legitimacy of the
6
stated legislative purposes supporting the Money Transmission Act, including protecting those
7
who utilize money transmission services, maintaining public confidence in financial institutions
8
and ensuring that licensed institutions provide safe and sound business practices. Cal. Fin. Code,
9
§ 2002. Instead, in a wide-ranging discussion about economic policy, including the downfall of
10
Bernard Madoff and the 2008 financial crisis, the Plaintiff simply disagrees with the Legislature
11
that the Money Transmission Act’s minimum capital requirements protects consumers. (Opp. to
12
MTD at 14-16.) This fails to address the other legitimate purposes of the act -- that the public
13
actually wants shareholders who are invested in their own financial institutions and to ensure that
14
licensed businesses provide safe and sound business practices. It is also nothing more than a
15
disagreement about legislative judgment, an argument that has no place in rational basis review.
16
F.C.C., 508 U.S. at 313 (courts do not judge the “wisdom, fairness, or logic of legislative
17
choices”). Even Plaintiff admits, in sharing its own thoughts on how to best regulate, that “the
18
efficacy of financial regulation continues to be the subject of national debate.” (Opp. to MTD at
19
n. 11.) This is precisely the question asked of the Legislature in reviewing its decisions for a
20
rational basis: is its purpose “at least fairly debatable”? Halverson, 42 F.3d 1257, 1262; Johnson,
21
623 F.3d at 1031 (legislative choice does not “need to actually further a legitimate interest; it is
22
enough that the governing body could have rationally decided that the action would further that
23
interest.” [internal quotations and emphasis omitted]). Where the Plaintiff seeks to establish itself
24
as a non-bank financial institution, and to hold and transmit the money of state citizens, it is
25
entirely rational for the State to require some minimum levels of equity and security to ensure that
26
such businesses are financially stable and reliable for the benefit of its citizens. For these reasons,
27
the Plaintiff does not have a substantive due process or equal protection claim, and the first claim
28
for relief has no merit. It should be dismissed without leave to amend.
10
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1
2
III. THE PLAINTIFF’S COMMERCE CLAUSE CLAIMS FAIL ON THE MERITS BECAUSE
CONGRESS HAS EXPRESSLY AUTHORIZED THE STATES TO LICENSE AND REGULATE
MONEY TRANSMISSION BUSINESSES
3
The State Defendants explained in their initial memorandum that Congress may (and often
4
does) authorize the states to regulate in ways that interfere with and burden interstate commerce.
5
(MTD at 18; White v. Mass. Council of Constr. Emp’rs, Inc., 460 U.S. 204, 213 (1983) (“Where
6
state or local government action is specifically authorized by Congress, it is not subject to the
7
Commerce Clause, even if it interferes with interstate commerce.”) The State Defendants also
8
pointed out that Congress, in section 1960 of title 18 of the United States Code, authorized the
9
various states to license and regulate money transmission businesses like the Plaintiff. (MTD at
10
19-21.) In response, the Plaintiff argues that: (1) Congress did not intend to authorize the states to
11
license and regulate money transmission activities in the USA PATRIOT Act; (2) Congress
12
delegated to the Department of the Treasury authority to “handle” money transmission matters;
13
and (3) any such Congressional authorization would be itself unconstitutional. (Opp. to MTD at
14
20-24.) None of these arguments has merit. First, Congress expressly authorized states to license
15
money transmission businesses before the USA PATRIOT Act. Second, the Department of the
16
Treasury’s authority relates to federal registration and reporting requirements, not to the state
17
licensure of money transmission businesses. Lastly, an unbroken line of Supreme Court authority
18
endorses Congress’ power to incorporate state laws as a proper exercise of its own commerce
19
power.
20
The Plaintiff claims that Congress did not intend to “implicitly endorse every requirement
21
in the MTA,” and “did not intend to give the states carte blanche to enforce a regulatory scheme
22
in the manner that the State Defendants have done here.” (Opp. to MTD at 20.) Plaintiff cites to
23
a report from the Department of Treasury on the USA PATRIOT Act for the proposition that
24
Congress intended to outlaw certain types of unlicensed money transmission services --
25
“traditional Islamic hawala financial networks” -- in order to deter terrorist financing, but not to
26
regulate businesses like the Plaintiff.6 (Id. at 21.) The Plaintiff does not, however, even attempt
27
28
6
But the Plaintiff points to no authority in support of its claim that a report created by the
executive branch a full year after the enactment of the USA PATRIOT Act is somehow
(continued…)
11
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to refute the express language of section 1960, and the Plaintiff is wrong on the legislative history
2
of that law.
3
As Congress has done many times before as an appropriate exercise of its commerce power
4
(see, e.g., Ky. Whip & Collar Co. v. Ill. Cent. R.R. Co., 299 U.S. 334 (1937)), section 1960
5
expressly incorporates state money transmission licensing laws into federal law:
7
(a) Whoever knowingly conducts, controls, manages, supervises, directs, or owns all
or part of an unlicensed money transmitting business shall be fined in accordance
with this title or imprisoned not more than 5 years, or both.
8
(b) As used in this section—
9
(1) the term “unlicensed money transmitting business” means a money transmitting
business which affects interstate or foreign commerce in any manner or degree and—
6
10
13
(A) is operated without an appropriate money transmitting license in a State where
such operation is punishable as a misdemeanor or a felony under State law . . . .
…
(2) the term “money transmitting” includes transferring funds on behalf of the public
by any and all means including but not limited to transfers within this country or to
locations abroad by wire, check, draft, facsimile, or courier; and
14
(3) the term “State” means any State of the United States . . . .
11
12
15
18 U.S.C. § 1960 (emphasis added).
16
For decades, it has been clear that a “dormant” commerce clause issue is negated when
17
Congress affirmatively authorizes state regulation. James Clark Distilling Co. v. W. Md. Ry. Co.,
18 242 U.S. 311, 325 (1917); Int’l Shoe Co. v. State of Wash., 326 U.S. 310, 315 (1945). Here,
19
Congress expressly acknowledged that money transmitting business “affects interstate or foreign
20
commerce” and imposed a penalty against any person who operates in violation of state money
21
transmission licensing laws. In construing this requirement, the courts have looked to state
22
licensing laws to define whether a violation of section 1960 has occurred. See U.S. v. Mazza-
23
Alaluf, 621 F.3d 205, 212 (2d Cir. 2010). A money transmitting business “is defined by reference
24
to state law,” and “[t]he reference to ‘State law’ in § 1960(b) makes it plain that an appropriate
25
license is whatever is required under state law.” U.S. v. Dimitrov, 546 F.3d 409, 411, 415
26
27
28
(…continued)
cognizable as demonstrating Congressional intent.
12
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(7th Cir. 2008). The Plaintiff cannot escape the plain text of section 1960, which evinces
2
Congress’ intent to endorse state licensing laws by enforcing those laws through federal law.
3
The Plaintiff argues at length that a Department of Treasury report on the USA PATRIOT
4
Act shows Congress’ interest in outlawing certain money transmission activities -- that is,
5
“traditional Islamic hawala financial networks” -- and not an intent to more broadly authorize
6
state regulation of money transmitting businesses. This is incorrect. Before Congress enacted the
7
USA PATRIOT Act, it had already authorized state money transmission licensing by enforcing
8
those laws through a prior version of section 1960. U.S. v. Dimitrov, 546 F.3d at 413 (comparing
9
the pre- and post-PATRIOT Act versions of section 1960 and noting that the pre-PATRIOT Act
10
version defined an illegal money transmitting business as one “intentionally operated without an
11
appropriate money transmitting license in a State where such operation is punishable as a
12
misdemeanor or felony under State law”) (original emphasis altered)).
13
The Plaintiff’s USA PATRIOT Act argument is only possibly relevant to section
14
1960(b)(1)(B), a provision requiring certain federally-designated financial institutions --
15
institutions that the Department of the Treasury separately defines as money transmitting
16
businesses -- to register with the Department of the Treasury pursuant to section 5330 of title 31
17
of the United States Code. Sections 1960(b)(1)(A) and (B) are completely separate provisions,
18
and have been treated as such by the courts. See U.S. v. Barre, 324 F.Supp.2d 1173, 1177 (D.
19
Colo. 2004). The Plaintiff’s own submissions show that such federally-designated businesses
20
must, “[p]ursuant to the current MSB regulations, . . . register with the Financial Crimes
21
Enforcement Network, conduct customer identification procedures for certain transactions, and
22
maintain financial records. They are also required to file Currency Transaction Reports (CTRs)
23
and Suspicious Activity Reports (SARs).” (Docket No. 27, Ex. C, p. 4.) But these specific
24
requirements have nothing to do with state licensure, and the Plaintiff’s purported Congressional
25
intent argument is simply inapplicable.
26
In summary, as the court in U.S. v. Barre noted, “the Federal government has left regulation
27
of [money transmitting] businesses to the States,” and section 1960 “does not preempt State laws.
28
Instead, it provides for an expanded Federal role in a way that enhances and supplements State
13
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regulation.” U.S. v. Barre, 324 F.Supp.2d at 1176 (quoting S. Rep. 101-460, Sept. 12, 1990
2
(emphasis omitted)).
3
Here, Congress has exercised its commerce power by incorporating state licensing laws into
4
federal law. The inescapable conclusion from both the express terms of section 1960 and its
5
history is that Congress expressly authorized the states to license and regulate money transmitting
6
businesses. In this circumstance, where Congress has exercised its commerce power, there can be
7
no dormant commerce clause challenge to California’s money transmission licensing statutes.7
8
In a related argument, the Plaintiff attempts to muddy the waters further by asserting that
9
“Congress expressly delegated authority to the United States Department of the Treasury to
10
handle matters relating to money transmission.” (Opp. to MTD at 24.) True, but as the Plaintiff’s
11
own complaint acknowledges, that agency has a limited role, distinct from the states. As the
12
Plaintiff states, the Financial Crimes Enforcement Network’s (FinCEN) role in money
13
transmission matters is to “coordinate the registration of” designated money services businesses
14
“as a data collection mechanism to prevent fraud due to the requirements of the federal Bank
15
Secrecy Act (‘BSA’).” (FAC, ¶ 31.) As detailed above, the roles of the states and federal
16
government are distinct: the states issue licenses to money transmission businesses (see
17
18 USC § 1960 (b)(1)(A)); FinCEN registers designated money transmission businesses,
18
irrespective of state licensure. See 18 U.S.C. § 1960(b)(1)(B); 31 U.S.C. § 5330. Thus, while the
19
Plaintiff’s judicially-noticeable exhibits related to FinCEN regulations might be relevant to the
20
Plaintiff’s obligation to register with FinCEN, they have no bearing on the Plaintiff’s obligation
21
to obtain a state license. The Plaintiff’s attempt to confuse the issue should fail.
22
23
24
25
26
27
28
The Plaintiff finally argues that such a Congressional authorization to the states, which
renders the Money Transmission Act invulnerable “to constitutional challenge[,] . . . would itself
7
The Plaintiff also asserts that times have changed in the last five years, and that Congress
could not have intended to permit state licensure of the Plaintiff’s business in “a new and
different era of commerce.” (Opp. to MTD at 23.) In the context of the dormant Commerce
Clause, the Supreme Court disposed of this argument almost 100 years ago when it noted that
Congress can subject interstate commerce to the present and future prohibitions of the states.
James Clark Distilling, 242 U.S. at 326. “[T]he will which causes the [state law] prohibitions to
be applicable is that of Congress, since the application of state prohibitions would cease the
instant the act of Congress ceased to apply.” Id.
14
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be unconstitutional.” (Opp. to MTD at 20.) The Plaintiff cites to Zimel v. Rusk, 381 U.S. 1
2
(1965) in support of this proposition. As a preliminary matter, the State Defendants never
3
claimed that Congressional authorization renders the Money Transmission Act invulnerable to
4
any constitutional challenge, only to a “dormant” Commerce Clause attack. Moreover, Zimel
5
does not involve the Commerce Clause, but rather delegation of authority to administrative
6
agencies. See Freedom to Travel Campaign, 82 F.3d at 1438 (noting that Zimel found proper a
7
delegation to the Secretary of State even where it provided “no standards to guide the use of his
8
discretion”) (emphasis in original).
9
At bottom, Congress has authorized the states to license money transmission businesses
10
through its express incorporation of state laws in section 1960. This authorization is also amply
11
supported in the history of that statute. Because Congress has spoken in this area of commerce,
12
there is no dormancy and the Plaintiff’s Commerce Clause claims must fail.8
13
14
CONCLUSION
The Plaintiff’s claims are not ripe, and even if they were, the Plaintiff is without any
15
legitimate claim for relief. Accordingly, its claims must be dismissed without leave to amend.
16
Dated: March 6, 2012
Respectfully Submitted,
17
KAMALA D. HARRIS
Attorney General of California
PETER SOUTHWORTH
Supervising Deputy Attorney General
18
19
20
/ S/
RYAN MARCROFT
Deputy Attorney General
Attorneys for All Defendants
21
22
23
24
25
26
27
28
8
This argument also disposes of the Plaintiff’s related, but separately argued, claim that
the Money Transmission Act violates the dormant Commerce Clause by regulating activity out of
state. (Opp. to MTD at 24-25.) Nonetheless, the State Defendants also noted in their opening
brief that this claim was not ripe for review because the State Defendants do not (as to the
Plaintiff), and have not (as to some other unidentified money transmission business), applied the
Money Transmission Act in that hypothetical way.
15
Reply Memorandum in Support of Motion to Dismiss (5:11-cv-05496-HRL)
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KAMALA D. HARRIS
Attorney General of California
PETER SOUTHWORTH
Supervising Deputy Attorney General
RYAN MARCROFT
Deputy Attorney General
State Bar No. 230952
1300 I Street, Suite 125
P.O. Box 944255
Sacramento, CA 94244-2550
Telephone: (916) 323-5313
Fax: (916) 324-8835
E-mail: Ryan.Marcroft@doj.ca.gov
Attorneys for All Defendants
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
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THINK COMPUTER CORPORATION,
14
Plaintiff, REPLY MEMORANDUM OF POINTS
AND AUTHORITIES IN SUPPORT OF
v.
THE STATE DEFENDANTS’ MOTION
TO DISMISS THE FIRST AMENDED
ROBERT VENCHIARUTTI, in his official
COMPLAINT
capacity as Deputy Commissioner of the
California Department of Financial
Date:
March 27, 2012
Institutions; WILLIAM HARAF, in his
Time:
10:00 a.m.
official capacity as Commissioner of the
Dept:
2
California Department of Financial
Judge:
The Honorable Howard R. Lloyd
Institutions; TRACI STEVENS, in her
Trial Date: None Set
official capacity as Acting Secretary of the
Action Filed: November 14, 2011
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,
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5:11-cv-05496-HRL
Defendants.
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TABLE OF CONTENTS
2
Page
3
Introduction ..................................................................................................................................... 1
Argument ........................................................................................................................................ 1
I.
The “As Applied” Challenges to the Licensing Requirements Are Not Ripe
because Plaintiff Never Applied For a License....................................................... 1
II.
The Plaintiff Does Not Have a Due Process or Equal Protection Claim ................ 6
A.
The Plaintiff Does Not Have a Property Right Protected Under the
Due Process Clause ..................................................................................... 6
B.
Discretionary Licensing Standards Are Not Facially Invalid Under
the Due Process Clause ............................................................................... 8
C.
The Plaintiff’s Due Process and Equal Protection Challenges to the
Money Transmission Act’s Licensing Requirements Fail Because
the Requirements Are Rationally Related to a Legitimate State
Purpose ........................................................................................................ 9
III.
The Plaintiff’s Commerce Clause Claims Fail On the Merits because
Congress Has Expressly Authorized the States to License and Regulate
Money Transmission Businesses .......................................................................... 11
Conclusion .................................................................................................................................... 15
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5
6
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TABLE OF AUTHORITIES
2
Page
3
CASES
4
Bd. of Regents of State Colls. v. Roth
408 U.S. 564 (1972) .................................................................................................................. 6
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
City of Chicago v. Atchison, T. & S. F. Ry. Co.
357 U.S. 77 (1958) .................................................................................................................... 3
F.C.C. v. Beach Commc’ns, Inc.
508 U.S. 307 (1993) ............................................................................................................ 9, 10
Freedom to Travel Campaign v. Newcomb
82 F.3d 143 (9th Cir. 1996)......................................................................................... 3, 5, 9, 15
Gary D. Peake Excavating Inc. v. Town Bd. of the Town of Hancock
93 F.3d 68 (2d Cir. 1996) .......................................................................................................... 5
Halverson v. Skagit Cnty.
42 F.3d 1257 (9th Cir. 1994)............................................................................................... 9, 10
Int’l Shoe Co. v. State of Wash.
326 U.S. 310 (1945) ................................................................................................................ 12
Jacobson v. Hannifin
627 F.2d 177 (9th Cir. 1980)............................................................................................. 7, 8, 9
James Clark Distilling Co. v. W. Md. Ry. Co.
242 U.S. 311 (1917) .......................................................................................................... 12, 14
Johnson v. Rancho Santiago Cmty. Coll. Dist.
623 F.3d 1011 (9th Cir. 2010)................................................................................................. 10
Ky. Whip & Collar Co. v. Ill. Cent. R.R. Co.
299 U.S. 334 (1937) ................................................................................................................ 12
Manufactured Home Communities v. City of San Jose
420 F.3d 1022 (9th Cir. 2005)................................................................................................... 7
Mathews v. Eldrige
424 U.S. 319 (1976) .................................................................................................................. 7
Pac. Gas & Elec. Co. v. State Energy Res. Conserv. & Dev. Comm’n
461 U.S. 190 (1983) .................................................................................................................. 4
Pac. Legal Found. v. State Energy Resources Conserv. & Dev. Comm’n
659 F.2d 903 ................................................................................................................. 2, 3, 4, 5
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TABLE OF AUTHORITIES
(continued)
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8
9
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11
12
13
14
15
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17
18
19
Page
Pub. Utilities Comm’n v. U.S.
355 U.S. 534 (1958) .................................................................................................................. 3
S.D. Myers, Inc. v. City & Cnty. of S.F.
253 F.3d 461 (9th Cir. 2001)..................................................................................................... 2
Skull Valley Band of Goshute Indians v. Nielson
376 F.3d 1223 (10th Cir. 2004)............................................................................................. 4, 5
Thornton v. City of St. Helens
425 F.3d 1158 (9th Cir. 2005)................................................................................................... 7
Triple G. Landfills, Inc. v. Bd. of Comm’rs of Fountain Cnty.
977 F.2d 287 (7th Cir. 1992)..................................................................................................... 5
U.S. v. Barre
324 F.Supp.2d 1173 (D. Colo. 2004) ................................................................................ 13, 14
U.S. v. Dimitrov
546 F.3d 409 (7th Cir. 2008)............................................................................................. 12, 13
U.S. v. Mazza-Alaluf
621 F.3d 205 (2d Cir. 2010) .................................................................................................... 12
U.S. v. Salerno
481 U.S. 739 (1987) .............................................................................................................. 2, 9
White v. Mass. Council of Constr. Emp’rs, Inc.
460 U.S. 204 (1983) ................................................................................................................ 11
20
Zimel v. Rusk
381 U.S. 1 (1965) .................................................................................................................... 15
21
STATUTES
22
23
24
25
26
California Financial Code
§ 2002 ...................................................................................................................................... 10
§ 2033 ........................................................................................................................................ 7
§ 2033(b)(1) .......................................................................................................................... 4, 8
§ 2036 ........................................................................................................................................ 7
§ 2040 ........................................................................................................................................ 8
§ 2040(a) ............................................................................................................................... 4, 8
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TABLE OF AUTHORITIES
(continued)
2
Page
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STATUTES (CONT.)
4
United States Code
18 U.S.C. § 1960 .............................................................................................................. passim
18 U.S.C. § 1960(b) ................................................................................................................ 12
18 U.S.C. § 1960(b)(1)(A) ................................................................................................ 13, 14
18 U.S.C. § 1960(b)(1)(B) ................................................................................................ 13, 14
31 U.S.C. § 5330 ..................................................................................................................... 13
5
6
7
8
9
10
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12
13
14
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INTRODUCTION
1
The State Defendants’ motion to dismiss the instant action demonstrated that the Plaintiff
2
3
cannot simply skip applying for a state license to operate as a money transmission business by
4
suing in federal court. In opposing the motion to dismiss, the Plaintiff has asserted that it raises
5
various ill-defined facial and “as applied” challenges, and that prudential reasons support judicial
6
review at this time. Even the law cited by Plaintiff, however, shows that none of its “as applied”
7
challenges are ripe. To the extent that Plaintiff is actually making a very narrow facial challenge
8
(that the law in question can never be applied in a constitutional manner under any
9
circumstances), that contention fails on the merits. No matter how Plaintiff labels the claim, it
10
does not have an interest defined under state law and hence protected under the Due Process
11
Clause. Moreover, its legal assertion that state licensing laws, like the Money Transmission Act,
12
are constitutionally infirm simply because they vest discretionary decision-making authority in a
13
licensing agency is meritless. Further, both Plaintiff’s Due Process and Equal Protection claims
14
fail because the minimum statutory licensure requirements are rationally related to legitimate
15
state interests. The dormant Commerce Clause claim has no basis, because Congress expressly
16
authorized states to license money transmission businesses. All of the Plaintiff’s unripe and
17
invalid claims should be dismissed without leave to amend.
The Plaintiff did not oppose the State Defendants’ motion to dismiss the Governor, Senior
18
19
Advisor Appelsmith, Attorney General, and Acting Secretary Stevens from this case. (Opp. to
20
MTD at 1 n. 2.)1
21
22
23
24
25
26
27
28
ARGUMENT
I.
THE “AS APPLIED” CHALLENGES TO THE LICENSING REQUIREMENTS
ARE NOT RIPE BECAUSE PLAINTIFF NEVER APPLIED FOR A LICENSE
Think Computer Corporation contends that it does not have to ripen its claims by actually
filing an application for, and obtaining a decision on, a money transmission license before
1
The State Defendants’ Motion to Dismiss (Docket No. 24) is hereafter designated
“MTD,” and the Plaintiff’s Opposition To State Defendants’ Motion To Dismiss and Errata
(Docket No. 30) is hereafter designated “Opp. to MTD.”
1
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1
seeking federal court review because: (1) it is making “facial challenges” and (2) it is suffering
2
harm without a license or the legal ability to conduct a money transmission business. (Opp. to
3
MTD at 5-11.) According to the Plaintiff, facial challenges “are inherently ripe when the issues
4
are sufficiently focused without further substantial factual development.” (Opp. to MTD at 5.)
5
The Plaintiff, however, never actually identifies its specific “facial challenge” (as opposed to its
6
“as applied” challenges) or acknowledges the extraordinarily narrow scope of a facial challenge.
7
Moreover, the authorities cited by the Plaintiff confirm that it cannot simply forgo a state
8
application process and file suit in federal court.
9
“A facial challenge to a legislative Act is, of course, the most difficult challenge to mount
10
successfully, since the challenger must establish that no set of circumstances exists under which
11
the Act would be valid. The fact that the [legislative act] might operate unconstitutionally under
12
some conceivable set of circumstances is insufficient to render it wholly invalid.” U.S. v.
13
Salerno, 481 U.S. 739, 745 (1987); S.D. Myers, Inc. v. City & Cnty. of S.F., 253 F.3d 461,
14
469 n. 1 (9th Cir. 2001) (a statute “is facially constitutional if there is at least one set of
15
circumstances under which it could be valid”). To the extent that the Plaintiff is really making a
16
facial challenge here, it is (so far as defendants can discern) that the State can never, under any
17
circumstances, enforce legislation requiring minimum funding for a money transmitter or apply a
18
statute not specifying in advance (prior to the application and any hearing) what the requirements
19
will be in particular case. As shown elsewhere in defendants’ memoranda, these constitutional
20
claims fail on the merits. All of the Plaintiff’s other sweeping accusations are not “facial
21
challenges” and are not ripe as “as applied” arguments.
22
All of Plaintiff’s authorities on ripeness acknowledge the ripeness distinctions between
23
facial and “as applied” challenges. (Opp. To MTD at 5-6.) In Pac. Legal Found. v. State Energy
24
Resources Conserv. & Dev. Comm’n, the Ninth Circuit stated that “[a] case or controversy is not
25
presented simply because a party is subject to a general regulatory process which, when applied
26
to the specific facts developed in some future administrative proceeding, might cause a state
27
agency to take a particular action which some court might thereafter determine to be
28
unconstitutional.” 659 F.2d 903, 916 (9th Cir. 1982). Thus, in Pac. Legal Found., only a facial
2
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1
challenge to one statutory requirement (that any applicant identify three alternative sites) was
2
ripe, where it applied unequivocally to all applicants and its validity was not dependent on a
3
factual setting. Id. at 917. Plaintiff’s other authorities are in accord. City of Chicago v. Atchison,
4
T. & S. F. Ry. Co. 357 U.S. 77, 89 (1958) (no requirement to apply for permit where licensing
5
ordinance could never be applied validly); Pub. Utilities Comm’n v. U.S., 355 U.S. 534, 540
6
(1958) (where “an administrative proceeding might leave no remnant of the constitutional
7
question, the administrative remedy plainly should be pursued,” but action was ripe where United
8
States was completely immune from state regulations). These facial ripeness authorities do not
9
apply where (as here) a statute can be applied in a constitutional manner, but a plaintiff claims it
10
11
has been or will be applied invalidly.
Moreover, no matter how Plaintiff labels its claims, its own citations refute its argument
12
that Think Computer Corporation does not have to apply for a money transmission license before
13
seeking federal judicial review. (Opp. to MTD at 9-11.) Plaintiff cannot meet the standards
14
contained in those opinions -- that denial of any application by Think Computer Corporation for a
15
license is objectively inevitable and imposes undue hardship on the Plaintiff. In Freedom to
16
Travel Campaign v. Newcomb, 82 F.3d 143, 1435 (9th Cir. 1996), the court recognized the
17
general rule that applicants must actually apply for a permit -- even in the context of pure
18
questions of law that require no factual development. The court adopted a narrow exception: “if
19
the court can make a firm prediction that the plaintiff will apply for the benefit, and that the
20
agency will deny the application by virtue of the rule-then there may be a justiciable controversy
21
that the court may find prudent to resolve.” Id. at 1436. In Freedom to Travel, the plaintiffs
22
challenged the facial validity of federal regulations requiring individuals to obtain a specific
23
license to travel to Cuba. Id. at 1434. The court noted that to obtain a license, applicants had to
24
show a compelling need to travel to Cuba for certain specified reasons, such as educational
25
activities. Id. at 1434, 1436. The regulations expressly defined what activities would qualify as
26
educational activities. Id. The plaintiffs did not plan to engage in such activities, and for this
27
reason, the court concluded that it could “firmly predict” that the plaintiffs’ applications would be
28
“summarily rejected” under the regulation in these circumstances. Id. at 1436.
3
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1
Here, however, Think Computer Corporation can apply for, and could be granted, a license
2
under the applicable legal standards. Plaintiff’s chief complaint about the Money Transmission
3
Act appears to be the $500,000 minimum statutory capital requirement. Cal. Fin. Code,
4
§§ 2033(b)(1), 2040(a). But the Plaintiff has specifically alleged that it satisfies that minimum
5
requirement for licensure. (FAC, ¶ 50 [“Think had raised approximately $500,000 in additional
6
funding from family members . . ., placing Plaintiff’s tangible shareholder equity well above the
7
written statutory minimum of $500,000 established by the MTA”].) Ignoring this objective
8
standard, Plaintiff claims instead that the State Defendants will deny a license based on a
9
subjective belief that defendants have been “hostile and uncooperative.” (Opp. to MTD at 7-8.)
10
Plaintiff can point to no legal standards that would render denial of Think Computer
11
Corporation’s application “inevitable.”
12
Nor does Plaintiff’s alleged hardship (fear of denial and loss of income) excuse it from
13
applying for a license. As already noted, the risks inherent in a not-yet-applied permitting scheme
14
generally do not qualify as a present injury for ripeness purposes. Pac. Legal Found. v. State
15
Energy Resources Conserv. & Dev. Comm’n 659 F.2d 903, 916 (“(a) case or controversy is not
16
presented simply because a party is subject to a general regulatory process which, when applied
17
to the specific facts developed in some future administrative proceeding, might cause a state
18
agency to take a particular action which some court might thereafter determine to be
19
unconstitutional”). Only where a challenge is purely legal will a court accept such arguments
20
and, in those cases, the hardship imposed on a plaintiff must be much higher than Plaintiff’s
21
purported harm. Pac. Gas & Elec. Co. v. State Energy Res. Conserv. & Dev. Comm’n,
22
461 U.S. 190, 201-202 (1983) (challenge to moratorium on nuclear energy ripe where issue was
23
purely legal and ultimate decision on power plants would take 12-14 years and millions of dollars
24
to obtain). For instance, in Skull Valley Band of Goshute Indians v. Nielson, 376 F.3d 1223, 1228
25
(10th Cir. 2004), after utility companies seeking to construct a nuclear waste facility on tribal land
26
in Utah applied for a federal license to do so, the State of Utah imposed a “sweeping prohibition”
27
on the transfer, storage, treatment, and disposal of nuclear waste in Utah. Id. at 1237. Plaintiffs
28
argued that the ban was completely pre-empted by federal law and, until that issue could be
4
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1
decided, they faced, inter alia, payment of a five million dollar non-refundable application fee.
2
Id. at 1234-35. Similarly, in Triple G. Landfills, Inc. v. Bd. of Comm’rs of Fountain Cnty., 977
3
F.2d 287, 288 (7th Cir. 1992), after a county “caught wind” of the plaintiff’s plan to build a
4
landfill in the county, the county enacted an ordinance banning all landfills in the county. The
5
legal issue there was a narrow and facial one: whether a county could even adopt such an
6
ordinance. Id. at 291. Finally, in Gary D. Peake Excavating Inc. v. Town Bd. of the Town of
7
Hancock, 93 F.3d 68, 70 (2d Cir. 1996), a month after the plaintiff applied to the state for a
8
permit to construct a landfill on his property, the town where the property was located adopted an
9
ordinance completely banning landfills. Unlike each of these cases, the State of California has
10
not banned (but rather has long permitted) various money transmission activities in the state and
11
plaintiff can apply for a license under the applicable standards. Moreover, Plaintiff’s hardship in
12
applying for such a license is significantly less than in this line of authorities.2
13
The Plaintiff’s main hardship argument that its claims are ripe under prudential ripeness
14
standards is predicated on the outcome of a licensing proceeding that never occurred. The
15
Plaintiff asserts it “could not and cannot now apply for a license in California on paper, because
16
without first knowing the absolute requirements of the licensure process and without those
17
requirements being subject to being changed by the State Defendants the risk of denial, even with
18
a hearing, would mean the subsequent denial of similar applications in other states.” (Opp. to
19
MTD at 11.) In other words, the Department of Financial Institutions should never have an
20
opportunity to consider the Plaintiff’s license application because it might deny the license
21
application, which then might prompt other states to also deny or revoke the Plaintiff’s license
22
applications. This hypothetical situation cannot amount to a direct and immediate hardship
23
sufficient to make this case ripe for review. Pac. Legal Found., 659 F.2d at 916. Finally, the
24
Plaintiff suggests that it is under a threat of criminal penalty. (Opp. to MTD at 10.) It is true that
25
in some circumstances, the threat of criminal penalty is considered a hardship. Freedom to Travel
26
Campaign, 82 F.3d at 1435. But the Plaintiff opted to discontinue its business activity, not apply
27
28
2
The Plaintiff also points to some of these same cases in support of its “as-applied”
claims (Opp. to MTD at 8), but as noted, they involved facial or purely legal challenges.
5
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1
for a license, and it is not subject to criminal penalty so long as it does not operate an illegal
2
business. These actions, entirely within the Plaintiff’s control, should not operate to find this
3
action ripe for review.
4
At most, Plaintiff’s purely legal challenges might be ripe for review, but even in those
5
circumstances, the law has required applicants to apply for a license unless it is objectively
6
inevitable that the license will be denied. In any case, as discussed below, those facial claims fail
7
on the merits. Beyond that, all of the Plaintiff’s so-called as-applied arguments are not ripe due to
8
the Plaintiff's failure to apply for a license. In these circumstances, this action should be
9
dismissed without leave to amend.
10
11
II.
THE PLAINTIFF DOES NOT HAVE A DUE PROCESS OR EQUAL PROTECTION CLAIM
A.
12
13
The Plaintiff Does Not Have a Property Right Protected Under the Due
Process Clause
The State Defendants argued in their opening brief that, in order to assert any violation of
14
substantive or procedural due process based on an alleged deprivation of a property right, the
15
plaintiff must first establish the existence of a protected property interest. Such rights “are
16
created and their dimensions are defined by existing rules or understandings that stem from an
17
independent source such as state law-rules or understandings that secure certain benefits.” Bd. of
18
Regents of State Colls. v. Roth, 408 U.S. 564, 577 (1972). Without citation to any authority, the
19
Plaintiff simply asserts that it “has identified its vested property rights in the continuation of its
20
money transmission business.” (Opp. to MTD at 2, 13 (emphasis in original).) In other words,
21
the Plaintiff has identified a property right, protected under the Due Process Clause, because it
22
says so. That is not the law.
23
State law creates protected property rights. The Plaintiff, however, points to no state law
24
that protected its asserted right to continue operating as a money transmitting business once the
25
Legislature enacted the Money Transmission Act and required that the Plaintiff obtain licensure
26
for its business activities.3 And the Plaintiff points to no state law that protects its asserted right
27
28
3
The Plaintiff does not address the State Defendants’ related argument that it has no
possible procedural due process challenge to the legislative adoption of the Money Transmission
(continued…)
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to operate as an illegal money transmitting business now. Where a licensing body has discretion
2
to deny the license or to impose licensing criteria of its own creation -- like the Department of
3
Financial Institutions has concerning money transmitting licenses (Cal. Fin. Code, §§ 2033, 2036)
4
-- the Ninth Circuit has held that a licensure applicant does not have a protected property interest
5
in the license. Thornton v. City of St. Helens, 425 F.3d 1158, 1164-1165 (9th Cir. 2005);
6
Jacobson v. Hannifin, 627 F.2d 177 (9th Cir. 1980).
7
The Plaintiff does not directly dispute this authority. Instead, it cites Mathews v. Eldrige,
8
424 U.S. 319 (1976).4 (Opp. to MTD at 18.) Mathews involved the question of whether the Due
9
Process Clause required a pre-deprivation hearing before a person’s social security disability
10
benefit payments could be terminated. Mathews, 424 U.S. at 323. There, however, it was already
11
established that “the interest of an individual in continued receipt of these benefits is a statutorily
12
created ‘property’ interest protected by the Fifth Amendment.” Id. at 332 (emphasis added).
13
Here, as noted, the Plaintiff has not identified a statutorily-created property right protected under
14
the Due Process Clause. Rather, the Ninth Circuit’s decision in Jacobson v. Hannifin is
15
instructive.5 There, a first-time license applicant (like the Plaintiff here, if it ever applies for a
16
license) formally sought licensure from the State of Nevada as the landlord of a hotel-casino.
17
Jacobson, 627 F.2d at 178-179. After a hearing, Nevada’s Gaming Control Board recommended
18
that the plaintiff be found suitable for licensure, subject to several conditions. Id. at 179. Plaintiff
19
objected to the conditions and proposed four alternatives, including licensure without any
20
conditions, and the outright sale of the plaintiff’s gaming establishment. Id. The Gaming
21
22
23
24
25
26
27
28
(…continued)
Act. (MTD at 15 n. 7.) Thus, to the extent the Plaintiff asserts this procedural claim, it should be
dismissed.
4
The cited excerpt from Mathews in the Plaintiff’s brief, found on page 321 of that case,
is actually a part of the case syllabus, rather than the court’s opinion. Moreover, this excerpt was
compiled from a portion of the court’s opinion discussing whether the court would waive an
exhaustion requirement under a federal statute. This was not a part of the court’s due process
analysis, and the Plaintiff’s citation to it is unclear. Mathews, 424 U.S. at 330.
5
To reiterate, this Due Process claim is not ripe because the Plaintiff did not pursue the
procedural hearing process prescribed under the Money Transmission Act. (MTD at 16 n. 8.)
Manufactured Home Communities v. City of San Jose, 420 F.3d 1022, 1033 (9th Cir. 2005) (due
process challenge not ripe where plaintiff never engaged in administrative hearing process: “Due
process has not been denied because no process was pursued”).
7
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Commission adopted the plaintiff’s proposal to sell the establishment, without ruling on the other
2
alternatives, and the plaintiff filed suit, claiming that the manner in which the State rejected the
3
plaintiff’s request for licensure violated due process. Id. The court stated that the issue to be
4
resolved was whether the plaintiff, “in the position of a first-time applicant for a license, had a
5
property interest protected by the due process clause.” Id. Because Nevada’s licensing statute
6
gave the state discretion to deny an application for licensure, the court held that the plaintiff had
7
no protectable property interest in the license. Id. at 180. “Because we find that [the plaintiff]
8
has no protectable property interest in a new gaming license, . . . [the plaintiff] failed to state a
9
claim for denial of due process.” Id. at 179.
10
The Plaintiff has not, and cannot, establish any property interest protected under the Due
11
Process Clause. Absent such a protected property interest, it has no Due Process claim. Nor has
12
the Plaintiff suggested any facts that might allow it to establish a Due Process claim.
13
Accordingly, the claim should be dismissed without leave to amend.
14
15
16
B.
Discretionary Licensing Standards Are Not Facially Invalid Under the Due
Process Clause
In a related argument, the Plaintiff asserts that, because the Money Transmission Act’s
17
statutory requirement for minimum adequate shareholder equity vests discretion in the
18
Department of Financial Institutions, it is invalid both facially and as applied for lack of clear
19
standards. (Opp. to MTD at 14-15.) The Plaintiff cites no authority for this proposition because
20
it is not the law.
21
The Plaintiff argues that the Department of Financial Institutions somehow violated its Due
22
Process rights by not informing it about the minimum equity required to apply for a license. (See,
23
e.g., FAC, ¶ 51 [“Mr. Greenspan . . . continued to have difficulty establishing the true minimum
24
net worth required by the DFI in order to apply for a license under the MTA”].) Section
25
2033(b)(1) of the California Financial Code requires license applicants to have “adequate tangible
26
shareholders’ equity, as specified in Section 2040 to engage in the business of money
27
transmission.” Cal. Fin. Code, § 2033(b)(1). Section 2040(a) of the California Financial Code
28
requires that license applicants have a minimum of $500,000 in tangible shareholders’ equity.
8
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1
Together, these statutes authorize the Department of Financial Institutions to determine whether a
2
license applicant has “adequate tangible shareholders’ equity” of an amount not less than
3
$500,000. In arguing that the Department denied the Plaintiff’s Due Process rights by not
4
clarifying this discretionary standard before the Plaintiff actually applied for a license, the
5
Plaintiff essentially argues that the discretionary standard is itself unlawful. However, a statute is
6
not constitutionally infirm simply because it vests decision-making discretion in a government
7
body such as the Department. See Jacobson, 627 F.2d at 180 (upholding a decision denying a
8
license against a procedural due process challenge where the licensing statute permitted denial of
9
an application “for any cause deemed reasonable”); Freedom to Travel Campaign, 82 F.3d at
10
1441 (vagueness claim not ripe because court had “no idea how [the government] will exercise its
11
discretion or if it ever will”). This procedural claim has no merit.
12
13
14
C.
The Plaintiff’s Due Process and Equal Protection Challenges to the Money
Transmission Act’s Licensing Requirements Fail Because the
Requirements Are Rationally Related to a Legitimate State Purpose
The Plaintiff also challenges the Money Transmission Act’s statutory licensure
15
requirements, particularly the $500,000 minimum tangible shareholder equity requirement (an
16
amount that the Plaintiff admits it could have satisfied). (FAC, ¶ 50.) The Plaintiff has
17
characterized this as a facial challenge. (FAC, ¶ 75; Opp. to MTD at 4.) As noted, facial
18
challenges are “the most difficult challenge[s] to mount successfully, since the challenger must
19
establish that no set of circumstances exists under which the Act would be valid. The fact that the
20
[legislative act] might operate unconstitutionally under some conceivable set of circumstances is
21
insufficient to render it wholly invalid.” U.S. v. Salerno, 481 U.S. 739, 745 (1987). Plaintiff
22
concedes that its Due Process and Equal Protection claims are subject only to rational level
23
review. (Opp. to MTD at 2, 17.) Under that standard, any conceivable legitimate government
24
purpose will do, and “[i]f it is ‘at least fairly debatable’ that the [government’s] conduct is
25
rationally related to a legitimate governmental interest, there has been no violation of substantive
26
due process.” Halverson v. Skagit Cnty., 42 F.3d 1257, 1262 (9th Cir. 1994). Even “rational
27
speculation unsupported by evidence or empirical data” will pass muster, F.C.C. v. Beach
28
Commc’ns, Inc., 508 U.S. 307, 315 (1993), and the law “need not actually further a legitimate
9
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interest; it is enough that the governing body could have rationally decided that the action would
2
further that interest,” Johnson v. Rancho Santiago Cmty. Coll. Dist., 623 F.3d 1011, 1031 (9th
3
Cir. 2010) (internal quotations and emphasis omitted).
4
With these extraordinarily deferential standards in mind, the Plaintiff cannot sustain its
5
challenge to the licensing requirements. The Plaintiff has not challenged the legitimacy of the
6
stated legislative purposes supporting the Money Transmission Act, including protecting those
7
who utilize money transmission services, maintaining public confidence in financial institutions
8
and ensuring that licensed institutions provide safe and sound business practices. Cal. Fin. Code,
9
§ 2002. Instead, in a wide-ranging discussion about economic policy, including the downfall of
10
Bernard Madoff and the 2008 financial crisis, the Plaintiff simply disagrees with the Legislature
11
that the Money Transmission Act’s minimum capital requirements protects consumers. (Opp. to
12
MTD at 14-16.) This fails to address the other legitimate purposes of the act -- that the public
13
actually wants shareholders who are invested in their own financial institutions and to ensure that
14
licensed businesses provide safe and sound business practices. It is also nothing more than a
15
disagreement about legislative judgment, an argument that has no place in rational basis review.
16
F.C.C., 508 U.S. at 313 (courts do not judge the “wisdom, fairness, or logic of legislative
17
choices”). Even Plaintiff admits, in sharing its own thoughts on how to best regulate, that “the
18
efficacy of financial regulation continues to be the subject of national debate.” (Opp. to MTD at
19
16 n. 11.) This is precisely the question asked of the Legislature in reviewing its decisions for a
20
rational basis: is its purpose “at least fairly debatable”? Halverson, 42 F.3d 1257, 1262; Johnson,
21
623 F.3d at 1031 (legislative choice does not “need to actually further a legitimate interest; it is
22
enough that the governing body could have rationally decided that the action would further that
23
interest.” [internal quotations and emphasis omitted]). Where the Plaintiff seeks to establish itself
24
as a non-bank financial institution, and to hold and transmit the money of state citizens, it is
25
entirely rational for the State to require some minimum levels of equity and security to ensure that
26
such businesses are financially stable and reliable for the benefit of its citizens. For these reasons,
27
the Plaintiff does not have a substantive due process or equal protection claim, and the first claim
28
for relief has no merit. It should be dismissed without leave to amend.
10
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2
III. THE PLAINTIFF’S COMMERCE CLAUSE CLAIMS FAIL ON THE MERITS BECAUSE
CONGRESS HAS EXPRESSLY AUTHORIZED THE STATES TO LICENSE AND REGULATE
MONEY TRANSMISSION BUSINESSES
3
The State Defendants explained in their initial memorandum that Congress may (and often
4
does) authorize the states to regulate in ways that interfere with and burden interstate commerce.
5
(MTD at 18; White v. Mass. Council of Constr. Emp’rs, Inc., 460 U.S. 204, 213 (1983) (“Where
6
state or local government action is specifically authorized by Congress, it is not subject to the
7
Commerce Clause, even if it interferes with interstate commerce.”) The State Defendants also
8
pointed out that Congress, in section 1960 of title 18 of the United States Code, authorized the
9
various states to license and regulate money transmission businesses like the Plaintiff. (MTD at
10
19-21.) In response, the Plaintiff argues that: (1) Congress did not intend to authorize the states to
11
license and regulate money transmission activities in the USA PATRIOT Act; (2) Congress
12
delegated to the Department of the Treasury authority to “handle” money transmission matters;
13
and (3) any such Congressional authorization would be itself unconstitutional. (Opp. to MTD at
14
20-24.) None of these arguments has merit. First, Congress expressly authorized states to license
15
money transmission businesses before the USA PATRIOT Act. Second, the Department of the
16
Treasury’s authority relates to federal registration and reporting requirements, not to the state
17
licensure of money transmission businesses. Lastly, an unbroken line of Supreme Court authority
18
endorses Congress’ power to incorporate state laws as a proper exercise of its own commerce
19
power.
20
The Plaintiff claims that Congress did not intend to “implicitly endorse every requirement
21
in the MTA,” and “did not intend to give the states carte blanche to enforce a regulatory scheme
22
in the manner that the State Defendants have done here.” (Opp. to MTD at 20.) Plaintiff cites to
23
a report from the Department of Treasury on the USA PATRIOT Act for the proposition that
24
Congress intended to outlaw certain types of unlicensed money transmission services --
25
“traditional Islamic hawala financial networks” -- in order to deter terrorist financing, but not to
26
regulate businesses like the Plaintiff.6 (Id. at 21.) The Plaintiff does not, however, even attempt
27
28
6
But the Plaintiff points to no authority in support of its claim that a report created by the
executive branch a full year after the enactment of the USA PATRIOT Act is somehow
(continued…)
11
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1
to refute the express language of section 1960, and the Plaintiff is wrong on the legislative history
2
of that law.
3
As Congress has done many times before as an appropriate exercise of its commerce power
4
(see, e.g., Ky. Whip & Collar Co. v. Ill. Cent. R.R. Co., 299 U.S. 334 (1937)), section 1960
5
expressly incorporates state money transmission licensing laws into federal law:
7
(a) Whoever knowingly conducts, controls, manages, supervises, directs, or owns all
or part of an unlicensed money transmitting business shall be fined in accordance
with this title or imprisoned not more than 5 years, or both.
8
(b) As used in this section—
9
(1) the term “unlicensed money transmitting business” means a money transmitting
business which affects interstate or foreign commerce in any manner or degree and—
6
10
13
(A) is operated without an appropriate money transmitting license in a State where
such operation is punishable as a misdemeanor or a felony under State law . . . .
…
(2) the term “money transmitting” includes transferring funds on behalf of the public
by any and all means including but not limited to transfers within this country or to
locations abroad by wire, check, draft, facsimile, or courier; and
14
(3) the term “State” means any State of the United States . . . .
11
12
15
18 U.S.C. § 1960 (emphasis added).
16
For decades, it has been clear that a “dormant” commerce clause issue is negated when
17
Congress affirmatively authorizes state regulation. James Clark Distilling Co. v. W. Md. Ry. Co.,
18
242 U.S. 311, 325 (1917); Int’l Shoe Co. v. State of Wash., 326 U.S. 310, 315 (1945). Here,
19
Congress expressly acknowledged that money transmitting business “affects interstate or foreign
20
commerce” and imposed a penalty against any person who operates in violation of state money
21
transmission licensing laws. In construing this requirement, the courts have looked to state
22
licensing laws to define whether a violation of section 1960 has occurred. See U.S. v. Mazza-
23
Alaluf, 621 F.3d 205, 212 (2d Cir. 2010). A money transmitting business “is defined by reference
24
to state law,” and “[t]he reference to ‘State law’ in § 1960(b) makes it plain that an appropriate
25
license is whatever is required under state law.” U.S. v. Dimitrov, 546 F.3d 409, 411, 415
26
27
28
(…continued)
cognizable as demonstrating Congressional intent.
12
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1
(7th Cir. 2008). The Plaintiff cannot escape the plain text of section 1960, which evinces
2
Congress’ intent to endorse state licensing laws by enforcing those laws through federal law.
3
The Plaintiff argues at length that a Department of Treasury report on the USA PATRIOT
4
Act shows Congress’ interest in outlawing certain money transmission activities -- that is,
5
“traditional Islamic hawala financial networks” -- and not an intent to more broadly authorize
6
state regulation of money transmitting businesses. This is incorrect. Before Congress enacted the
7
USA PATRIOT Act, it had already authorized state money transmission licensing by enforcing
8
those laws through a prior version of section 1960. U.S. v. Dimitrov, 546 F.3d at 413 (comparing
9
the pre- and post-PATRIOT Act versions of section 1960 and noting that the pre-PATRIOT Act
10
version defined an illegal money transmitting business as one “intentionally operated without an
11
appropriate money transmitting license in a State where such operation is punishable as a
12
misdemeanor or felony under State law”) (original emphasis altered)).
13
The Plaintiff’s USA PATRIOT Act argument is only possibly relevant to section
14
1960(b)(1)(B), a provision requiring certain federally-designated financial institutions --
15
institutions that the Department of the Treasury separately defines as money transmitting
16
businesses -- to register with the Department of the Treasury pursuant to section 5330 of title 31
17
of the United States Code. Sections 1960(b)(1)(A) and (B) are completely separate provisions,
18
and have been treated as such by the courts. See U.S. v. Barre, 324 F.Supp.2d 1173, 1177 (D.
19
Colo. 2004). The Plaintiff’s own submissions show that such federally-designated businesses
20
must, “[p]ursuant to the current MSB regulations, . . . register with the Financial Crimes
21
Enforcement Network, conduct customer identification procedures for certain transactions, and
22
maintain financial records. They are also required to file Currency Transaction Reports (CTRs)
23
and Suspicious Activity Reports (SARs).” (Docket No. 27, Ex. C, p. 4.) But these specific
24
requirements have nothing to do with state licensure, and the Plaintiff’s purported Congressional
25
intent argument is simply inapplicable.
26
In summary, as the court in U.S. v. Barre noted, “the Federal government has left regulation
27
of [money transmitting] businesses to the States,” and section 1960 “does not preempt State laws.
28
Instead, it provides for an expanded Federal role in a way that enhances and supplements State
13
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1
regulation.” U.S. v. Barre, 324 F.Supp.2d at 1176 (quoting S. Rep. 101-460, Sept. 12, 1990
2
(emphasis omitted)).
3
Here, Congress has exercised its commerce power by incorporating state licensing laws into
4
federal law. The inescapable conclusion from both the express terms of section 1960 and its
5
history is that Congress expressly authorized the states to license and regulate money transmitting
6
businesses. In this circumstance, where Congress has exercised its commerce power, there can be
7
no dormant commerce clause challenge to California’s money transmission licensing statutes.7
8
In a related argument, the Plaintiff attempts to muddy the waters further by asserting that
9
“Congress expressly delegated authority to the United States Department of the Treasury to
10
handle matters relating to money transmission.” (Opp. to MTD at 24.) True, but as the Plaintiff’s
11
own complaint acknowledges, that agency has a limited role, distinct from the states. As the
12
Plaintiff states, the Financial Crimes Enforcement Network’s (FinCEN) role in money
13
transmission matters is to “coordinate the registration of” designated money services businesses
14
“as a data collection mechanism to prevent fraud due to the requirements of the federal Bank
15
Secrecy Act (‘BSA’).” (FAC, ¶ 31.) As detailed above, the roles of the states and federal
16
government are distinct: the states issue licenses to money transmission businesses (see
17
18 USC § 1960 (b)(1)(A)); FinCEN registers designated money transmission businesses,
18
irrespective of state licensure. See 18 U.S.C. § 1960(b)(1)(B); 31 U.S.C. § 5330. Thus, while the
19
Plaintiff’s judicially-noticeable exhibits related to FinCEN regulations might be relevant to the
20
Plaintiff’s obligation to register with FinCEN, they have no bearing on the Plaintiff’s obligation
21
to obtain a state license. The Plaintiff’s attempt to confuse the issue should fail.
22
23
24
25
26
27
28
The Plaintiff finally argues that such a Congressional authorization to the states, which
renders the Money Transmission Act invulnerable “to constitutional challenge[,] . . . would itself
7
The Plaintiff also asserts that times have changed in the last five years, and that Congress
could not have intended to permit state licensure of the Plaintiff’s business in “a new and
different era of commerce.” (Opp. to MTD at 23.) In the context of the dormant Commerce
Clause, the Supreme Court disposed of this argument almost 100 years ago when it noted that
Congress can subject interstate commerce to the present and future prohibitions of the states.
James Clark Distilling, 242 U.S. at 326. “[T]he will which causes the [state law] prohibitions to
be applicable is that of Congress, since the application of state prohibitions would cease the
instant the act of Congress ceased to apply.” Id.
14
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1
be unconstitutional.” (Opp. to MTD at 20.) The Plaintiff cites to Zimel v. Rusk, 381 U.S. 1
2
(1965) in support of this proposition. As a preliminary matter, the State Defendants never
3
claimed that Congressional authorization renders the Money Transmission Act invulnerable to
4
any constitutional challenge, only to a “dormant” Commerce Clause attack. Moreover, Zimel
5
does not involve the Commerce Clause, but rather delegation of authority to administrative
6
agencies. See Freedom to Travel Campaign, 82 F.3d at 1438 (noting that Zimel found proper a
7
delegation to the Secretary of State even where it provided “no standards to guide the use of his
8
discretion”) (emphasis in original).
9
At bottom, Congress has authorized the states to license money transmission businesses
10
through its express incorporation of state laws in section 1960. This authorization is also amply
11
supported in the history of that statute. Because Congress has spoken in this area of commerce,
12
there is no dormancy and the Plaintiff’s Commerce Clause claims must fail.8
13
14
CONCLUSION
The Plaintiff’s claims are not ripe, and even if they were, the Plaintiff is without any
15
legitimate claim for relief. Accordingly, its claims must be dismissed without leave to amend.
16
Dated: March 6, 2012
Respectfully Submitted,
17
KAMALA D. HARRIS
Attorney General of California
PETER SOUTHWORTH
Supervising Deputy Attorney General
18
19
20
/ S/
RYAN MARCROFT
Deputy Attorney General
Attorneys for All Defendants
21
22
23
24
25
26
27
28
8
This argument also disposes of the Plaintiff’s related, but separately argued, claim that
the Money Transmission Act violates the dormant Commerce Clause by regulating activity out of
state. (Opp. to MTD at 24-25.) Nonetheless, the State Defendants also noted in their opening
brief that this claim was not ripe for review because the State Defendants do not (as to the
Plaintiff), and have not (as to some other unidentified money transmission business), applied the
Money Transmission Act in that hypothetical way.
15
Reply Memorandum in Support of Motion to Dismiss (5:11-cv-05496-HRL)
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