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Mtacc, Inc. v. New York State Department of Financial Services

United States District Court, W.D. Washington, Seattle

January 21, 2015

MTACC, INC., a California corporation, Plaintiff,
NEW YORK STATE DEPARTMENT OF FINANCIAL SERVICES; and BENJAMIN M. LAWSKY, in his official capacity as Superintendent of the New York State Department of Financial Services, Defendants.


RICARDO S. MARTINEZ, District Judge.

THIS MATTER comes before the Court upon Motion for Preliminary Injunction by Plaintiff (Dkt. # 2) and Motion to Dismiss by Defendants (Dkt. # 20). The Court heard oral argument on both Motions. Having considered the parties' arguments presented at the hearing and in the briefs as well as the remainder of the record, and for the reasons stated herein, the Court denies Plaintiff's Motion for Preliminary Injunction, continues Defendants' Motion to Dismiss, and grants Plaintiff's request for a limited period of jurisdictional discovery.


This action arises out of the decision of the New York State Department of Financial Services ("NYDFS") that Plaintiff MTACC, Inc. ("MTACC") requires a New York money transmission license under New York banking law, N.Y. Banking L. § 640 et seq ("Article XIII-B"). MTACC is a California corporation in the business of transmitting money, headquartered in California and with offices in Washington and Russia. MTACC is licensed as a money transmitter in Washington, has neither bank accounts nor physical presence in New York, and does not offer MTACC accounts to New York residents. Dkt. # 1 ("Compl."), ¶¶ 12, 17, 18. MTACC asserts that Defendants' decision to subject MTACC to New York licensing requirements violates the company's Due Process rights and unconstitutionally interferes with interstate commerce in violation of the dormant Commerce Clause doctrine.

New York's money transmission laws, Article XIII-B, prohibit "engag[ing] in the business of receiving money for transmission or transmitting the same, without a license therefor obtained from the [NYDFS]." N.Y. Banking L. § 641(1). Once the NYDFS receives an application for a license, it is charged with investigating "the financial condition and responsibility, financial and business experience, character and general fitness of the applicant." Id. If the NYDFS finds that the applicant's business meets its standards, it must grant the applicant a license. Id. To effectuate its goal of protecting New York residents from fraudulent and insolvent money transmitters, the covered applicants must, among various conditions, obtain a surety bond or pledge other assets for the benefit of those who conduct transactions with the entity in the event of its fraudulent conduct, insolvency, or bankruptcy. Id. at § 643(1). The regulations also contain an express exemption for money transmitters who act solely as an "agent of a payee, " where payment to the entity is unequivocally deemed payment to the payee and the transmitter plays only a passive role. See id. at § 641(1).[1]

New York law classifies engaging in the business of receiving money for transmission or transmitting money without a license as a Class A misdemeanor punishable by up to one year in prison. Id. at § 650(2)(a); N.Y. Penal Law § 70.15(1). A person can also be guilty of a class E felony punishable by up to four years in prison by receiving or transmitting money without a license above a certain threshold amount within a specified period or if the person knows the funds to be the proceeds of criminal conduct. N.Y. Banking L. § 650(2)(b); N.Y. Penal Laws § 70.00(2)(e).

Article XIII-B empowers the superintendent of the NYDFS to conduct investigations into unlicensed money transmitters, including by holding hearings and subpoenaing witnesses and production of evidence. N.Y. Banking Law § 646(1)-(2). However, the power to prosecute violations of the laws rests exclusively with county district attorneys. N.Y. County Law § 700(1) (providing that "it shall be the duty of every district attorney to conduct all prosecutions for crime and offenses cognizable by the courts of the county for which he or she shall have been elected or appointed"); N.Y. C.P.L.R. §§ 1310(11) & 1311(1).

In the past, NYDFS has only required entities with a physical presence in New York to comply with its licensing requirements. This policy changed when, in light of the growing prevalence of internet-based financial services, NYDFS issued an industry letter in 2011 concerning "Money Transmitters with No Physical Presence in New York." Dkt. # 21 ("Alter Decl."), ¶ 13 & Ex. A. Reasoning that the language or intent of the banking laws did not support limiting licensing to entities with a physical presence in the state, the letter concluded that "any person...that engages in the business of...receiving money for transmission from persons residing or locating in New York...must be licensed by the Superintendent." Id. at Ex. A. According to Defendants, this new interpretation induced states to begin instructing money transmitters under their supervision to determine whether their activities involving New York residents required them to obtain a New York money transmission license. Defendants' Motion to Dismiss, Dkt. # 20, p. 18.

As part of a routine audit in 2011, the Washington Department of Financial Institutions ("DFI") instructed MTACC to send a letter to NYDFS to ascertain whether MTACC's service offerings require licensure under Article XIII-B. Compl., ¶ 21. MTACC submitted its written request to the NYDFS on August 29, 2011. Id. The NYDFS then contacted MTACC's counsel for further information regarding payment flows underlying its services. Id. at ¶ 22. Of the three payment flows that MTACC outlined, the NYDFS ultimately found that the following of these payment flows, Payment Flow Three, brings MTACC under the ambit of Article XIII-B[2]:

First, MTACC enters into contracts for services with customers from Western or

Eastern Europe, who create MTACC accounts by entering into user agreements with MTACC. Next, an MTACC foreign customer may perform work for a third-party in the United States, which could include a company located in New York. When the U.S. company is ready to pay the foreign MTACC customer, the MTACC customer provides the U.S. company with its unique MTACC account number and instructs the company to send payment to MTACC via wire, Automated Clearing House ("ACH") payment, or check. The U.S. company then sends the payment to MTACC by, for instance, instructing its bank or a third-party money transmitter to send the payment to MTACC for credit to the MTACC customer account. MTACC then receives the funds and credits them to the customer's account. The U.S. company sending the funds never enters into an agreement directly with MTACC. This payment flow, as with the other two, occurs pursuant to MTACC's Washington money transmitter license. Compl., ¶¶ 13-15; Alter Decl., Ex's. H & J.

Eight months after MTACC submitted the requested clarification, NYDFS responded, requesting copies of MTACC's user agreements. Compl., ¶ 23. After a telephone conference and further follow-up, NYDFS sent a responsive letter to MTACC on July 23, 2013. Id. at ¶ 25. The letter concluded that, based on the information provided, MTACC's third payment flow constitutes "receiving money for transmission or transmitting the same" from U.S. companies to MTACC's foreign customers within the meaning of Article XIII-B and that, since some of the U.S. companies are located in New York, MTACC must be licensed as a money transmitter in New York. Alter Decl., Ex. J; Compl., ¶¶ 25-27. NYDFS also determined that MTACC does not qualify for exemption as an "agent of the payee" because its user agreements subject the transmission of funds to "numerous conditions and limitations, as well as significant discretion and control on the part of MTACC in regard to the Client's ability to access funds." Alter Decl., Ex. J, p. 5. For instance, MTACC reserves the right to suspend or close a client's account and send its balance back to the original sender, which could be an entity based in New York. Id.

MTACC contested the NYDFS decision, and on October 23, 2013, its outside counsel, Joseph Cutler, sent a letter to NYDFS requesting that it reconsider its conclusion that MTACC's business activities require a New York money transmission license. In response, NYDFS's general counsel, Daniel Alter, spoke with Mr. Cutler by telephone upon his request on March 17, 2014 and informed him that the Department's opinion had not changed. Alter Decl., ¶ 34; Compl., ¶ 29. Plaintiff asserts, and Defendants deny, that Mr. Alter threatened that NYDFS would bring an enforcement action against MTACC for operating without a license. Dkt. # 3 ("Cutler Decl."), ¶ 4; Alter Decl., ¶ 34.

MTACC filed this action on April 24, 2014, seeking declaratory and injunctive relief against Defendants NYDFS and its superintendent, Benjamin M. Lawsky. See Compl. In its Complaint, MTACC claims that it will incur substantial time and expense if forced to apply for a New York money transmission license. Id. at ¶ 36. MTACC further asserts that once licensed, it would be forced to comply with a range of onerous New York regulatory requirements, including paying an annual assessment, preparing reports, paying a cash or surety bond of at least $500, 000, and being subject to the right of the NYDFS to issue a compulsory process to inspect books and records of a licensee. Id. at ¶ 41.

MTACC's Complaint asserts two causes of action. First, MTACC asserts that initiation of enforcement proceedings or imposition of a penalty by NYDFS against MTACC would violate its constitutional rights to due process. Second, MTACC asserts that NYDFS's interpretation and application of Article XIII-B to require MTACC to obtain a New York money transmitter license violates the Dormant Commerce Clause by regulating conduct outside of New York and by unduly burdening interstate commerce. MTACC seeks declaratory judgment that NYDFS cannot constitutionally require it to obtain a license and cannot institute an enforcement action or other penalty against it, as well as a permanent injunction barring NYDFS from taking any such action. See generally Compl.

MTACC brought the instant Motion for Preliminary Injunction (Dkt. # 2) simultaneous with filing its Complaint. The parties thereafter agreed to re-note the Motion for consideration simultaneous with Defendants' Motion to Dismiss (Dkt. # 20). See Dkt. # 19.


A. Motion to ...

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