Check Cashers Triumph in Long Zoning Battle



Although local governments have always enjoyed wide control over zoning matters, that power is not without its limits. Recently, after a town in New York made major changes to its zoning ordinance governing where check cashing businesses could operate, the check cashers sought to have the changes overturned.
On Jan. 10, 2006, the Town of Hempstead adopted Section 302(K) of the town’s Building Zone Ordinance. Section 302(K) prohibited check cashing businesses within the town in any districts other than industrial and light manufacturing.
Under an amortization provision in 302(K), check cashing businesses already operating in districts where such businesses would be prohibited were required to terminate or relocate to industrial or light manufacturing districts within five years.

Suit Filed

A number of check cashers filed suit seeking a judgment declaring, among other things, that Section 302(K) was void and of no effect, that Section 302(K) was preempted by state law, that it was not a valid exercise of the town’s zoning power, and that it was unconstitutional.
The check cashers asked for a summary judgment on the complaint. The town, likewise in a cross motion, sought a summary judgment, in effect, to declare that Section 302(K) was valid.
The section provided that:
“ (1) Prohibition. In any use district except Y Industrial and LM Light Manufacturing Districts, check cashing establishments are hereby expressly prohibited.”
“(2) Definition. A check cashing establishment is defined as a place where checks are cashed and/or payday or other short term type loans are offered, but where general banking services, including but not limited to the establishment of savings and checking accounts, provision for deposits and withdrawals therefrom, and payment of accrued interest, are not offered on a regular basis.”
“(3) Amortization. Any check cashing establishment that is in violation of this subsection but is lawfully in existence in any unincorporated portion of the Town of Hempstead upon the effective date of this subsection shall become a legal nonconforming use and shall terminate by amortization no later than five years immediately following the effective date of this subsection.”

Check Cashers’ Arguments

First, the check cashers operating in the town’s business district claimed that Section 302(K) conflicted with New York State law.
Second, they asserted that the five-year amortization period constituted an unlawful taking of their property without due process of law.
Third, they claimed that Section 302(K) was not reasonably related to promoting the public health, safety, morals, or general welfare of the town. They further argued that its enactment was not a valid exercise of the town’s zoning power because, rather than dealing with the zoning of property, it impermissibly addressed the operation of the check cashers’ businesses. They complained that check cashing was not a use that can be regulated by zoning.
Fourth, the check cashers said that the section deprived them of their rights in property without due process of law.
And finally, they sought to permanently enjoin the town from enforcing Section 302(K) against them. In connection with the first four causes of action, the check cashers sought a judgment declaring the section null and void.
The check cashers argued that check cashing businesses in New York State were completely regulated by the New York State Banking Department and the Superintendent of Banks. They said that the Banking Law preempted Section 302(K) because it set forth a detailed and comprehensive regulatory scheme that demonstrated the state’s intent to reserve the field of banking for state oversight and control.
The check cashers contended that, because the field was preempted by the state, the town was precluded from enacting legislation in the same area.
In addition, they claimed that the section conflicted with provisions of the Banking Law. Accordingly, the check cashers argued that Section 302(K) was preempted based on both conflict and field preemption.

Large Zoning Out

The check cashers also contended that Section 302(K) was an invalid exercise of the town’s zoning power.
They claimed that the section was enacted with an exclusionary and discriminatory purpose, and that the town sought to “zone out” the check cashing establishment from certain districts simply because it deems such establishments undesirable for reasons completely unrelated to land use. The check cashers argued that this was not a permissible and valid use of the town’s zoning power.
Next, the check cashers said that the section was arbitrary and capricious because it was not enacted to further a legitimate government purpose and was not reasonably related to the end the town sought to achieve.
They argued that the town ignored the fact that their check cashing businesses were lawful, licensed and state regulated. The check cashers claimed that the town’s alleged comparison of check cashing establishments to “seedy” operations “akin to pawnshops and strip clubs” was irresponsible and demonstrated that it acted in an arbitrary and capricious manner because it perceived check cashing establishments as undesirable, clearly demonstrating a bias toward such establishments and the communities they serve. The check cashers asserted that Section 302(K) was “completely unrelated to the ‘evils’ imagined by the town.”
The check cashers then claimed that Section 302(K) was unconstitutional and that its passage violated their due process rights because they were not afforded sufficient notice or an opportunity to be heard. Although the check cashers acknowledged that a public hearing was held prior to the enactment, they argued that they did not receive adequate notice of the specific risk they faced in having their businesses terminated.
Finally, the check cashers claimed that Section 302(K) violated the Equal Protection Clause of the United States Constitution because it had a discriminatory and disparate impact. They said that the section effected an unconstitutional taking of their property because they would be forced to relocate or close their operations within the five year amortization period.

Submit Memo

In support of their motion for a summary judgment, the check cashers submitted an unsigned and unaffirmed “Inter Departmental Memo” dated Dec. 13, 2005. The subject of the memo was “Public Policy behind Check Cashing Ordinance,” and it stated that Section 302(K) represented “sound public policy.”
According to the memo, “Essentially, it serves the interest of encouraging young people and those of lower incomes to establish savings and checking accounts, do their banking at sound and reputable banking institutions, and develop credit ratings. It also eliminates predatory and exploitative finance enterprises from commercial areas, which is beneficial because these enterprises tend to keep a neighborhood down.”
The memo went on to state that, “Studies have found that a substantial portion of young and lower income people don’t have a bank account. Check cashing and payday loan establishments help to perpetuate this condition, by making it convenient for them to remain in the cash only economy. This is bad for society as a whole because it discourages savings and the development of credit ratings that will help young and lower income people later in life.”
The memo also observed that, “orthodox studies have found that check cashing establishments actually exploit the poor and African Americans” and that the high fees charged by check cashing establishments constituted a form of racial discrimination.
It indicated that check cashing businesses tend to cater disproportionately to minorities and pop up predominately in minority neighborhoods, keeping its patrons in the cash economy, to their detriment.
It also noted that the proposed ordinance would seek to end this pernicious exploitation and encourage banks and other financial institutions to become more conveniently located for everyone, including the poor and minorities.
Finally, the memo concluded that enactment of Section 302(K) would remove “a seedy type of operation, akin to pawnshops and strip clubs, from the commercial areas of the town.”

Town Response

The town largely denied the allegations in the check cashers complaint and asserted seven affirmative defenses, including that the check cashers’ claims were barred by the Municipal Home Rule Law. The town filed a cross motion for a summary judgment that would, in effect, declare that Section 302(K) was valid.
The town claimed that in the absence of substantial evidence to the contrary, the court was required to assume, as a matter of law, that the town acted rationally in enacting the section.
It asserted that the check cashers had no vested constitutionally protected property interest in the prior zoning classification of their properties, and accordingly, there could be no actionable claim of a taking. Moreover, the town claimed that the check cashers had not been denied due process.
Among the documents it submitted was a notice of a public hearing, dated Nov. 29, 2005, which stated that a hearing would be held on Dec. 13, 2005, to consider the proposed Section 302(K), “Restrictions on Check Cashing Establishments” and an affirmation of publication.
The town also submitted a summary of the law arguing, among other things, that the superintendent of Banks of the State of New York, as a defendant in the case of American Broadcasting Cos. v Siebert, provided a rational basis for the town’s concern that check cashing businesses represented a potential threat to public welfare.
In that case, the then superintendent conceded that, “the risk of robberies inherently exists in the check cashing business.”

Court’s Order

The court issued an order April 16, 2010, that denied the check cashers’ motion for a summary judgment and granted the town’s cross-motion, basically declaring that Section 302(K) was valid in all respects.
The court, in effect, ruled that the relevant body of state law did not demonstrate that the legislature intended to occupy the field of regulating check cashing establishments.
The court concluded that the check cashers failed to demonstrate that the doctrines of field preemption or conflict preemption prevented the town from enacting Section 302(K) and that they failed to rebut the presumption of validity. Finally, the court ruled that the check cashers failed to demonstrate that the section had violated the Equal Protection Clause of the United States Constitution.
The check cashers then appealed to the Supreme Court of the State of New York, Appellate Division. The Appellate Court noted that New York’s constitutional home rule provision “confers broad police powers upon local governments relating to the welfare of its citizens.”
Yet, noted the Appellate Court, although local governments do possess broad authority to enact legislation that promotes the welfare of their citizens, they cannot adopt laws that are inconsistent with the Constitution or with any general law of the state, and their power to enact laws is subject to the fundamental limitation of the preemption doctrine
Conflict Preemption
Broadly speaking, said the court, state preemption occurs in one of two ways: First, when a local government adopts a law that directly conflicts with a state statute; and second, when a local government legislates in a field for which the state legislature has assumed full regulatory responsibility.
The Appellate Court noted that conflict preemption occurs when a local law prohibits what a state law explicitly allows, or when a state law prohibits what a local law explicitly allows.
In determining the applicability of conflict preemption, the court said it examines not only the language of the local ordinance and the state statute but also whether the direct consequences of a local ordinance renders illegal what is specifically allowed by state law.
The crux of conflict preemption is whether there is a head on collision between the ordinance, as it is applied, and a state statute.

Field Preemption

Under the doctrine of field preemption, noted the Appellate Court, a local law regulating the same subject matter as a state law is deemed inconsistent with the state’s superior interest, whether or not the terms of the local law actually conflict with a state wide statute.
Such local laws, were they permitted to operate in a field preempted by state law, said the court, would tend to inhibit the operation of the state’s general law and thereby thwart the operation of the state’s overriding policy concerns.
Field preemption applies under any of three different scenarios, noted the court. First, an express statement in the state statute explicitly asserting that it preempts all local laws on the same subject matter. Second, a declaration of state policy demonstrates the intent of the legislature to preempt local laws on the same subject matter. And third, the legislature’s enactment of a comprehensive and detailed regulatory scheme in an area in controversy is deemed to demonstrate an intent to preempt local laws.

Banking Law Article 9 A

To determine whether Section 302(K) was preempted by state law, the Appellate Court said it needed to examine certain provisions of the Banking Law, specifically Banking Law Article 9 A, and related materials.
Article 9 A pertains to “Licensed Cashers of Checks.” A note accompanying Article 9 A, setting forth the legislative findings, states, in part, that “the legislature hereby finds and declares that the purpose and objective of article 9 A of the banking law, and specifically section 367, is to provide for the regulation of the business of cashing checks by the Superintendent of Banks whether the cashing of checks, drafts and money orders … is performed for customers that are natural persons or any business, corporation, partnership, limited liability company or partnership, association or sole proprietorship, or any other entity”
Section 367 pertains to license requirements for cashers of checks. Under that section, “No person, partnership, association or corporation shall engage in the business of cashing checks, drafts or money orders for a consideration without first obtaining a license from the superintendent.” To obtain a license, a person or entity must apply, in writing, under oath, “in the form prescribed by the superintendent.” The applicant must also pay to the superintendent a fee “for investigating the application.”
Section 369 of the banking law addresses conditions precedent to the issuance of a license, the issuance, and filing, and posting of a license. It provides, in part, that:
In setting forth the legislative intent in connection with the 1994 amendment of Section 369(1) of the banking law, which added a substantial portion of the foregoing language, the legislature stated:
“The legislature hereby finds and declares that check cashers provide important and vital services to New York citizens; that the business of check cashers shall be supervised and regulated through the banking department in such a manner as to maintain consumer confidence in such business and protect the public interest; that the licensing of check cashers shall be determined in accordance with the needs of the communities they are to serve; and that it is in the public interest to promote the stability of the check cashing business for the purpose of meeting the needs of the communities that are served by check cashers.”

Posted in Summer 2012.