Opinion
B321113 B322706
07-12-2024
GEORGE J. GERRO, Plaintiff and Appellant, v. CHRISTOPHER S. SHULTZ, Defendant and Respondent.
Gerro &Gerro, George J. Gerro, and John M. Gerro for Plaintiff and Appellant. Rob Bonta, Attorney General, Tamar Pachter, Senior Assistant Attorney General, Brian D. Wesley and Leanna C. Costantini, Deputy Attorneys General, for Defendant and Respondent.
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County, No. 21STCP02023 Mary H. Strobel and Robert S. Draper, Judges.
Gerro &Gerro, George J. Gerro, and John M. Gerro for Plaintiff and Appellant.
Rob Bonta, Attorney General, Tamar Pachter, Senior Assistant Attorney General, Brian D. Wesley and Leanna C. Costantini, Deputy Attorneys General, for Defendant and Respondent.
CHANEY, J.
In his second amended complaint (SAC), appellant George Gerro alleged that the California Department of Financial Protection and Innovation improperly interpreted Financial Code section 22009 as permitting the Department to issue a finance lender license to lenders who took possession of and used their borrowers' collateral. The SAC contained two causes of action: (1) a declaratory relief cause of action under Government Code section 11350, seeking a declaration that the Department's interpretation of Financial Code section 22009 was wrong; and (2) a declaratory relief cause of action under Code of Civil Procedure section 1060, seeking a declaration that the finance lender license issued to BlockFi Lending LLC (BlockFi) was both void and improperly issued. The first cause of action was alleged against respondent Christopher S. Shultz in his capacity as the Commissioner of the Department, and the second cause of action was alleged against Shultz and BlockFi, BlockFi Inc., and BlockFi Trading LLC.
Gerro alleged, on information and belief, that BlockFi Inc. "is the sole and exclusive member of BlockFi Lending LLC, and was responsible for aiding, abetting, and providing material assistance in the illegal obtainment of BlockFi's Finance Lending License" and that BlockFi Trading "intermittently takes use and possession of personal property securing BlockFi's loans to California residents for the purpose of transporting, liquidating, and converting their security."
Judge Mary H. Strobel of the Writs and Receivers department found that Gerro's challenge against BlockFi's finance lender license was required to be brought as a request for a writ of mandate, and that Gerro lacked standing to do so. She therefore sustained the parties' demurrer to the second cause of action without leave to amend and transferred the remainder of the case to an independent calendar court. Judge Robert S. Draper sustained Shultz's demurrer to the first cause of action, also without leave to amend, finding that Gerro lacked standing to prosecute it.
On appeal, Gerro contends the trial court erred in finding he lacked standing, and in denying him leave to amend. We conclude the court did not err in finding that Gerro lacked standing on the theories advanced below, but also conclude that Gerro has demonstrated on appeal that the SAC is capable of being amended to allege a declaratory relief cause of action under the theory of taxpayer standing. We therefore reverse and remand with directions that Gerro be permitted to file such an amended complaint.
While Gerro had originally appealed the dismissal of the action as to BlockFi, he later asked us to dismiss that portion of the appeal, and we did so.
FACTUAL AND PROCEDURAL BACKGROUND
We limit our summary to the facts and procedural history relevant to the issues raised on appeal.
A. Gerro Files a First Amended Verified Petition for Writ of Mandate
In June 2021, Gerro filed a petition for writ of mandate. In August 2021, Gerro filed his first amended verified petition for writ of mandate, asking the court to order Shultz to revoke or suspend the finance lender license issued to BlockFi in August 2018 because it was "invalidly issued in excess of statutory authority." Gerro alleged that BlockFi was a "California Finance Lender and Broker" that made loans pursuant to a license issued by the Department, and that these loans were secured by its possession of its borrowers' bitcoin, which the borrowers would transfer to BlockFi. When the borrowers were declared to be in default of their loan, BlockFi could sell their bitcoin to repay the loan. Once BlockFi had possession of the bitcoin, it would use the bitcoin for its own purposes without accounting to the borrowers "for the profits or details of BlockFi's use." BlockFi treated its obligation to return the bitcoin as an "unsecured liability." Gerro claimed that, by March 2021, BlockFi had taken possession of bitcoin "and other digital goods" belonging to others, including California residents, with a market value of approximately $15,000,000,000.
Gerro alleged that borrowers were typically required to transfer to BlockFi an amount of bitcoin valued at twice the amount of their loan. If the amount of the loan ever exceeded 70 percent of the value of the transferred bitcoin for 72 hours-as bitcoin has "a very volatile market price"-the borrower could be considered in default of their loan, which would permit BlockFi to foreclose on the bitcoin. If the amount of the loan ever exceeded 80 percent of the value of the transferred bitcoin, BlockFi would be permitted to immediately sell enough of the transferred bitcoin-and presumably apply the sale proceeds to the balance of the loan-to restore the loan-to-value ratio to 70 percent.
Gerro alleged that, in February 2018, BlockFi applied to the Department for a finance lender license. BlockFi stated that its business was to offer "secured loans collateralized by digital assets," explaining that its clients could "access liquidity in the form of a loan in fiat currency by putting up their digital assets as collateral." In later correspondence, BlockFi elaborated that it would require its borrowers to store its assets with its "Licensed custodian . . . throughout the life of the loan." The Department responded that this was "not allowed," that "[t]he Collateral must remain with the borrower," and that BlockFi "cannot hold the borrower's digital assets in escrow as collateral." BlockFi protested that a cryptocurrency was "not a tangible asset like an automobile or house" but more like "money or a deposit account." The Department reiterated that "[t]he collateral must remain with the borrower," and that taking possession of collateral "is not allowed under the CFL." BlockFi responded that the Commercial Code permitted a creditor to take possession of collateral in which it had a security interest and contended that, if the Department's objection was based on Financial Code section 22009, this section did not prohibit taking possession of loan collateral. BlockFi additionally pointed out that the Department recently issued a license for a competitor who also took possession of cryptocurrency as collateral for a loan. The Department responded that the Commercial Code did not "trump" the Financial Code, and that Financial Code section 22009 prohibited BlockFi's practice of taking possession of the borrower's collateral.
At the time, the Department was known as the Department of Business Oversight. According to its Web site, its name was changed to the Department of Financial Protection and Innovation in September 2020. <https://dfpi.ca.gov/history/> (as of July 12, 2024), archived at <https://perma.cc/ZMC3-PUQ2>.
CFL stands for California Financing Law.
In May 2018, BlockFi asked the Department to issue an interpretive opinion "with respect to the specific legal question of whether a 'finance lender' under the California Financing Law . . . that takes a security interest in collateral to secure a loan made by the finance lender may possess such collateral." BlockFi also requested that "if the Department reaches a preliminary conclusion in its review of this request that a finance lender may not hold collateral, the Department contact the undersigned and at our option we be permitted to withdraw this request for the interpretive opinion." BlockFi subsequently withdrew its request for an interpretive opinion before one was issued. However, Gerro alleged on information and belief that "the Department agreed with BlockFi's legal conclusion that BlockFi could hold collateral securing its loans consistently with Financial Code section 22009."
In August 2018, the Department issued BlockFi a finance lender license. On information and belief, Gerro alleged that the Department issued the license "upon the understanding that BlockFi would use the license to make loans secured by personal property that BlockFi uses and possesses," with the view that "BlockFi's use and possession of personal property securing its loans with a forfeiture interest in favor of BlockFi was consistent with the Financing Law," and "upon the legal conclusion that a finance lender may retain use and possession of collateral consistently with Financial Code section 22009." Gerro contended this legal conclusion was erroneous. Gerro also alleged that he was informed and believed that the Department had adopted a "policy of issuing 'finance lender' licenses to lenders that retain use or possession of digital . . . [and] intangible assets."
In a declaration submitted by George Washburn-an attorney who represented BlockFi in its dealings with the Department-in a separate lawsuit that Gerro filed in August 2020 (discussed post), Washburn claimed that the Department agreed with BlockFi's analysis of Financial Code section 22009 and its right to hold cryptocurrency as collateral for loans. Washburn also testified that the Department explained it would not issue a formal opinion in response to BlockFi's request but that its agreement with BlockFi's position "would simply be evidenced by the granting of BlockFi's licenses." Washburn denied that BlockFi had withdrawn its request for an opinion.
In the August 2020 lawsuit, Jan Lynn Owen- commissioner of the Department when it issued the finance lender license to BlockFi-also submitted a declaration, averring that "during my tenure as Commissioner[,] the DBO granted many licenses to finance lenders whose planned business operations included the holding and/or use of collateral that was being used to secure loans....As Commissioner, I was required to become intimately familiar with California law including, but not limited to, the CFL (including section 22009) as well as the Uniform/Commercial Code, and the argument that the holding or use of collateral by a finance lender is somehow inconsistent with either of these laws is incorrect."
Gerro alleged that he "pledged 448.15 bitcoins" to BlockFi to "secure a $2.275M loan." On March 12, 2020, the price of bitcoin dropped by more than 50 percent, and BlockFi claimed to have liquidated approximately 90 percent of Gerro's bitcoin. BlockFi did not provide Gerro with details regarding the sale but offered to "reverse" it if he would agree to send more money or bitcoin to BlockFi.
A March 13, 2020 e-mail sent at 12:04 p.m. from BlockFi to Gerro was attached as an exhibit to the amended petition. In it, BlockFi informed Gerro that "81.1555 BTC" were sold for "386300.1962" dollars. Another e-mail sent on the same day at 6:10 p.m. from BlockFi to Gerro-also attached as an exhibit- informed Gerro that "59.1995 BTC" were sold for "$275,336.87." Gerro asked BlockFi to provide "the UTC time, exchanges or brokers, types of orders and its price, and how the bitcoins sold were attributable to my collateral specifically." The record does not reveal if BlockFi ever answered Gerro's questions.
In May 2020, Gerro sued BlockFi to "recover possession of his personal property." This suit was stayed on the grounds of a Delaware forum selection clause contained in BlockFi's contract, which decision Gerro appealed. In August 2020, Gerro filed another lawsuit for "public injunctive relief," which case was also stayed "on the grounds that it constituted the same cause of action" as the May 2020 lawsuit; Gerro appealed that decision also. Gerro claimed he had no choice but to file the instant action to revoke or suspend BlockFi's financing lending license.Gerro asked the court to issue a writ of mandate, ordering Shultz to revoke or suspend BlockFi's license. Gerro also asked for "a Declaration that BlockFi's retention of use or possession of personal property collateral securing its loans is and was outside the scope of" its finance lender license.
In November 2021, we consolidated the appeals for oral argument and decision. (Gerro v. BlockFi Lending LLC (June 14, 2022, B307156, B312647) [nonpub. opn.], 11.) In June 2022, we reversed the trial court's order to stay the California proceedings in the May 2020 lawsuit but affirmed the trial court's order staying the August 2020 lawsuit. (Id. at p. 22.)
In July 2021, Gerro filed a "Notice of Related Case." In August 2021, the trial court declined to relate the current case to Gerro's May 2020 and August 2020 lawsuits.
B. Shultz Demurs
In September 2021, Shultz demurred to the first amended petition, arguing it should be dismissed because: (1) without a direct and substantial interest in the revocation of BlockFi's license, Gerro lacked standing to pursue the writ petition; (2) the relief Gerro sought was unavailable because it sought to control Shultz's discretion rather than enforce a clear, ministerial duty; (3) judicial abstention was required because the requested relief would require the court to assume or interfere with the functions of an administrative agency; and (4) Gerro had other adequate legal remedies.
In October 2021, Gerro opposed the demurrer, arguing: (1) he had "consumer standing and public interest standing"; (2) Shultz had a "mandatory duty" to suspend or revoke BlockFi's license; (3) the court had subject matter jurisdiction and judicial abstention was unjustified because "clear legislative direction" existed; and (4) no other proceeding could serve to accomplish Gerro's purpose to revoke or suspend BlockFi's license. Gerro argued that he had consumer standing because "BlockFi acted under authority of its invalid License to deprive Gerro of his bitcoin" and "continues to deprive Gerro of his personal property under color of authority of the License." Therefore, the Department's issuance of the license "directly and substantially harmed Gerro." Gerro contended additionally that he had "public interest standing" as one who sought to "procure the enforcement of a public duty . . . as a citizen in having the laws executed and the duty in question enforced."
In his reply brief, Shultz responded that Gerro's injuries were not directly related to the issuance of BlockFi's finance lender license and Gerro failed to identify any benefit he would gain by the issuance of the writ he sought (or detriment he would suffer if the writ were not issued). Shultz additionally questioned any claim for public interest standing, contending there was "no sharp duty or weighty public need at issue."
In November 2021, the trial court (Judge Strobel) sustained the demurrer but granted Gerro leave to amend. The court held that Gerro lacked standing because he "does not allege how he would benefit if the court issued the requested writs in paragraphs 1 and 2 of the Prayer, or how he would be harmed if the court declined to issue such writs" and "does not allege factually, or cite legal authority, that the liquidation and foreclosure of his Bitcoin by BlockFi would be reversed if Respondent suspended or revoked BlockFi's license." The court discounted Gerro's arguments that BlockFi "acted under authority of its invalid License to deprive Gerro of his bitcoin" and that it "continues to deprive Gerro of his personal property under color of authority of the License," finding no allegations in the petition to support those arguments. The court also rejected Gerro's claim to public interest standing, ruling that he had failed to demonstrate a" 'sharp' duty owed by" Shultz to suspend or revoke BlockFi's license or" 'weighty' public need for the requested writ."
The court noted that Gerro did request a writ commanding Shultz to suspend BlockFi's license "until BlockFi unwinds all of its prior foreclosures of California Collateral and restores possession to Consumers," but found that Gerro "does not cite any statute or other law under which the court would have authority to issue a writ compelling Respondent to cause the suspension of a license until the licensed party unwinds certain transactions or returns collateral."
The court emphasized it was not making a "final determination" regarding Financial Code section 22009 but found Gerro's arguments on its interpretation to be "unpersuasive." The court also found that Gerro had an adequate legal remedy, noting that in the second case Gerro filed against BlockFi, he sought to enjoin BlockFi's alleged practice of" 'engaging in the unlawful business practice of accepting and obtaining forfeiture interests in collateral which it uses and possesses, in violation of California Financial Code Section 21009 [sic]' and 'knowingly and negligently violating the pawnbroker laws.'" The court concluded that should Gerro prove his claims and obtain the injunction he sought, "that would provide him an adequate remedy for the harm alleged in the instant petition."
The court rejected Shultz's argument of judicial abstention.
C. Gerro Files a Second Amended Verified Complaint
In December 2021, Gerro filed a second amended verified complaint, stating two causes of action for declaratory relief. Gerro's first declaratory relief cause of action was brought under Government Code section 11350. He alleged that the Department's interpretation of Financial Code section 22009 constituted an "Underground Regulation" and thus he was entitled to a judicial declaration regarding its validity. His second declaratory relief cause of action was brought under Code of Civil Procedure section 1060 and alleged a dispute between Shultz and him regarding whether the issuance of a finance lender license to BlockFi was consistent with Financial Code section 22009; Gerro sought a judicial determination that the license was void and issued without substantial evidence in an abuse of the Department's discretion.
In January 2022, Shultz demurred again. He argued that Gerro's request for a review of an "Underground Regulation" was "derived entirely from the Commissioner's administrative decision to issue BlockFi's license" and "[t]he sole remedy for asserting a challenge to an administrative decision is an action for mandamus." Shultz also reiterated his previous standing arguments, contending that Gerro would gain nothing if BlockFi's license were declared invalid and would lose nothing if it were not, that there was no "sharp duty or weighty public need," and that Gerro had adequate remedies at law. Shultz argued additionally that Gerro lacked standing to make a claim under Government Code section 11350 because "he is not subject to or affected by the alleged regulation at issue, and the public interest exception does not apply to claims under" that section. Gerro responded that he had standing both as a consumer harmed by the Department's interpretation of Financial Code section 22009 and as a taxpayer. Shultz filed a reply, reiterating the points in his demurrer.
In April 2022, the court partially sustained Shultz's demurrer without leave to amend. Addressing Gerro's second cause of action (seeking declaratory relief under Code of Civil Procedure section 1060 that BlockFi's license was void and invalidly issued), the court found it "subject to dismissal because Petitioner improperly seeks review of an administrative decision-Respondent's issuance of a license-through declaratory relief rather than mandamus." The court also found that if the cause of action was construed as seeking a writ of mandate, then Gerro still lacked standing to bring it. The court found inadequate Gerro's allegation on "information and belief" that if BlockFi's license were revoked, "BlockFi will return Plaintiff's property," finding that Gerro failed to "allege the information that led him to believe that" and noting that a" 'pleading made on information and belief is insufficient if it "merely assert[s] the facts so alleged without alleging such information that 'lead[s] [the plaintiff] to believe that the allegations are true.'" '" The court also rejected Gerro's conclusion that, under the Financial Code, BlockFi would be required to return his bitcoin should its license be voided. As to public-interest standing, the court found that Gerro still failed to persuade the court that his interpretation of Financial Code section 22009 was correct and expressly stated that, "[f[or purposes of this demurrer, the court concludes only that Petitioner has not shown a 'sharp' duty owed by Respondent to suspend or revoke BlockFi's license, nor a 'weighty' public need for the requested writ." The court additionally rejected Gerro's theory that he had "taxpayer standing," finding that taxpayer standing applied only to "challenges involving an 'illegal expenditure of' or 'waste of' public funds," and even if the Department had erroneously interpreted Financial Code section 22009, Gerro "does not allege or propose to amend with specific facts suggesting that Respondent's interpretation was made in bad faith and could be construed as an illegal, ultra vires, fraudulent, or wasteful expenditure of public funds."
Finally, the court again concluded that, through his other lawsuits, Gerro had an adequate remedy for both the return of his bitcoin and his quest to cause BlockFi to cease operations. The court also stated that, even were Gerro's second cause of action properly brought as one for declaratory relief, the court would "exercise its discretion and determine that declaratory relief is not necessary or proper at this time under all the circumstances" because Gerro had adequate alternative remedies for relief and because the timing of the request for relief" 'suggests litigation strategy motivated the filing rather than a concern that judicial guidance was needed and would not be forthcoming absent the filing of a declaratory relief action.'" The court sustained the demurrer to the second cause of action without leave to amend.
As to the first cause of action for declaratory relief under Government Code section 11350, the court found that it was not an improper challenge of a specific administrative decision and was "properly brought as a claim for declaratory relief, rather than writ of mandate." Because the department where the demurrer was being heard was a "specialized Writs and Receivers department," the court transferred the case for reassignment to an independent calendar department.
The case was subsequently assigned to Judge Robert S. Draper. In June 2022, Judge Draper sustained Shultz's demurrer to Gerro's first cause of action without leave to amend. The court found that while the Department's interpretation of Financial Code section 22009 could be properly challenged under Government Code section 11350, Gerro lacked standing to do so. The court agreed with Judge Strobel's conclusion that Gerro "does not allege any ultimate facts supporting a theory that a writ directing Respondent to set aside BlockFi's license would cause any benefit to [Plaintiff] or that [Plaintiff] would be harmed by denial of the writ. Indeed, [Plaintiff] admits that BlockFi has liquidated almost all of the alleged bitcoin, and [Plaintiff] does not allege any factual or legal reasons to conclude that revocation of BlockFi's license would actually cause BlockFi to return any of Petitioner's pledged Bitcoin." The court also rejected Gerro's claim of taxpayer standing for the same reason as Judge Strobel: "the Second Amended Complaint contains no allegations, let alone detailed facts, asserting an actual or threatened expenditure of public funds."
In August 2022, the court entered a judgment dismissing the action. Gerro timely appealed.
D. Request for Judicial Notice
In March 2024, Shultz asked us to take judicial notice of three documents. First, Shultz asked us to judicially notice an unsigned stipulation between the Department and BlockFi to suspend BlockFi's finance lender license. The stipulation provides that: "Upon the execution of this agreement BlockFi agrees to be immediately subject to a CFL License suspension under California Financial Code § 22714" and that "This Agreement shall become final and effective when signed by all Parties and delivered by the Commissioner's agent via e-mail to BlockFi's counsel, Michael Nonaka, Covington &Burling LLP, at the following email address: mnonaka@cov.com." Nothing in the record indicates the stipulation was signed or e-mailed to BlockFi's counsel.
Second, he asked us to judicially notice an August 2023 memorandum decision from the United States Bankruptcy Court of the District of New Jersey in In re BlockFi, Inc., Case No. 2219361 (MBK), disallowing a claim filed by Gerro. In response to Gerro's claim that BlockFi violated the CFL, the bankruptcy court found that "[g]iven the Department's own interpretation of the CFL, and given the fact that the Department granted BlockFi a license premised upon an application wherein BlockFi explicitly had held itself out to be a business that intended to hold cryptocurrency as security for loans, this Court cannot conclude- as Gerro urges-that BlockFi willfully violated the California Financial Code."
Third, Shultz asked us to judicially notice excerpts from an October 2023 order made by the United States Bankruptcy Court of the District of New Jersey confirming BlockFi's third amended joint Chapter 11 plan. The plan provides: "On and after the Effective Date, the Debtors or the Wind-Down Debtors (1) for all purposes shall be deemed to have withdrawn their business operations from any state in which the Debtors were previously conducting ...."
In April 2024, we granted Shultz's request.
DISCUSSION
A. The Automatic Stay Does Not Prevent Our Consideration of This Appeal
During oral argument, Shultz argued that our consideration of this appeal was barred by the BlockFi bankruptcy's automatic stay. As neither party had addressed this issue in their appellate briefs, we asked for supplemental briefing. After review of that briefing, we conclude that the automatic stay-if it is still in place-does not bar our consideration of this appeal.
Gerro contends the automatic stay has expired because "a discharge has already been granted to BlockFi upon confirmation of its bankruptcy plan." (See 11 U.S.C. § 1141(d)(1) ["Except as otherwise provided in this subsection, in the plan, or in the order confirming the plan, the confirmation of a plan-[¶] (A) discharges the debtor from any debt that arose before the date of such confirmation, and any debt of a kind specified in section 502(g), 502(h), or 502(i) of this title . . ."].) Shultz contends it is still in place because "[t]he confirmation of a plan does not discharge a debtor if-[¶] (A) the plan provides for the liquidation of all or substantially all of the property of the estate; [¶] (B) the debtor does not engage in business after consummation of the plan; and [¶] (C) the debtor would be denied a discharge under section 727(a) of this title if the case were a case under chapter 7 of this title." (11 U.S.C. § 1141(d)(3).) We need not resolve whether the automatic stay is still in place because, as discussed below, we conclude that even if it were, it would not prevent us from adjudicating this appeal.
"Ordinarily . . . unless the assets of the bankrupt estate are at stake, the automatic stay does not extend to actions against parties other than the debtor." (United States v. Dos Cabezas Corp. (9th Cir. 1993) 995 F.2d 1486, 1491.) Shultz argues that three provisions of the automatic stay prevent our consideration of this appeal. Specifically, pursuant to title 11 of the United States Code section 362(a), the automatic stay prevents:
"(1) the commencement or continuation . . . [¶] . . . of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
[¶] . . . [¶]
"(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;
[¶] . . . [¶]
"(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title."
We conclude that none of these provisions applies.
First, while Gerro's case and appeal may have begun as a proceeding against BlockFi, it no longer is-Gerro dismissed BlockFi from this appeal, thus rendering final the trial court's sustention of its demurrer and entry of judgment thereon.
We find distinguishable Shultz's citation to Keitel v. Heubel (2002) 103 Cal.App.4th 324. There, the question the appellate court addressed was whether the automatic stay applied when the appeal was initiated by the debtor, because the automatic stay applies to a "commencement or continuation" of an "action or proceeding against the debtor." (Id. at pp. 332-333.) An appeal brought by the debtor is not an action or proceeding against the debtor. The appellate court concluded that, in analyzing this question, "the relevant inquiry is whether the original proceeding, i.e., the underlying action, was brought against the debtor" as the appeal was a "continuation" of that underlying action. (Id. at p. 333.) But Keitel did not involve a situation, as here, in which the debtor was no longer a party.
Second, while Gerro may believe that obtaining the relief he seeks would ultimately aid in his quest to recover his bitcoin, this action does not seek that recovery. This action seeks a declaration that the Department has been issuing finance lender licenses in contravention of Financial Code section 22009.
Quoting Kagan v. St. Vincents Catholic Med. Ctrs. (In re St. Vincents Catholic Med. Ctrs.) (Bankr. S.D.N.Y. 2011) 449 B.R. 209, 217, Shultz argues that the automatic stay "is not limited solely to actions against the debtor, but rather bars actions against even against [sic] third-parties that would have an adverse impact on the property of the estate." Kagan is inapposite. There, the dispute involved records relating to the closure of a New York hospital-run by the debtor-pursuant to a plan approved by the New York State Department of Health. (Id. at p. 211.) When the plaintiff in Kagan sought state records relating to the closure in an action brought against the Department of Health, the bankruptcy court enjoined her from proceeding, concluding that the action violated the automatic stay. (Id. at pp. 212-213.) In issuing this order, the bankruptcy court made factual findings that the plaintiff was seeking discovery to "build[] a case for fraud committed by the debtor and its board" but that it was "the exclusive right of the debtor and the committee to investigate the debtor and the propriety of its closing, and to recover fraudulent and preferential transfers." (Id. at pp. 215-216.) The district court agreed, finding it reasonable for the bankruptcy court to conclude that plaintiff's action "was to compile discovery to pursue such claims [of waste, fraud, and questionable expenditures], which 'exclusively lie[] with the debtor and committee to remedy.'" (Id. at p. 218.)
Here, by contrast, there is no indication that the trustee in the BlockFi bankruptcy is interested in pursuing an action against Shultz for a determination that the Department is issuing finance lender licenses in contravention of Financial Code section 22009. Nor do we read Kagan or any other authority cited by Shultz to stand for the proposition that any actions that could indirectly affect a debtor's property must be stayed in all circumstances. If such were the law, then the bankruptcy of any entity who obtained a license from a governmental department based on that department's interpretation of California law would insulate that interpretation from challenge for the duration of the bankruptcy, because an adverse finding could potentially aid a claim against the debtor. We do not think such a result is required by the automatic stay.
Moreover, Schultz asserted in his appellate brief that BlockFi's license to do business in California "no longer exists" and that BlockFi has "ceased its business operations pursuant to its confirmed Bankruptcy Plan." Thus, it is difficult to see how a judicial declaration that the Department issued finance lender license in contravention of Financial Code section 22009-should such a declaration ever be issued-would affect BlockFi's bankruptcy estate.
Finally, in his supplemental brief, Gerro offered "to amend his operative complaint to remove all allegations against BlockFi." For the reasons stated above, coupled with Gerro's agreement that he will make no allegations against BlockFi in any amended complaint, and the fact that Gerro has already dismissed BlockFi from the appeal, we conclude that Gerro is not prohibited from pursuing this appeal, and we are not prohibited from adjudicating it.
B. The Suspension of BlockFi's License Does Not Render Gerro's Second Cause of Action Moot
Shultz argues that because the Department "suspended BlockFi's CFL license after it petitioned for bankruptcy, and BlockFi has since ceased its business operations pursuant to its confirmed Bankruptcy Plan," Gerro's second cause of action is moot. We disagree.
Gerro's second cause of action sought not only a determination that BlockFi's license was void, but also a determination that the license was initially issued in an abuse of discretion and without substantial evidence. Neither the stipulation nor the bankruptcy plan stated that the license was invalidly issued. As such, Gerro's contention that the trial court erred in sustaining the demurrer to his second cause of action is not moot.
We also reject Shultz's contention that the litigation cannot proceed "because BlockFi . . . is the real party in interest and, therefore, an indispensable party to the action." Even if BlockFi should be made a party to the lawsuit under Code of Civil Procedure section 389, "[i]f a person as described in paragraph (1) or (2) of subdivision (a) cannot be made a party, the court shall determine whether in equity and good conscience the action should proceed among the parties before it, or should be dismissed without prejudice, the absent person being thus regarded as indispensable. The factors to be considered by the court include: (1) to what extent a judgment rendered in the person's absence might be prejudicial to him or those already parties; (2) the extent to which, by protective provisions in the judgment, by the shaping of relief, or other measures, the prejudice can be lessened or avoided; (3) whether a judgment rendered in the person's absence will be adequate; (4) whether the plaintiff or cross-complainant will have an adequate remedy if the action is dismissed for nonjoinder." (Code Civ. Proc., § 389, subd. (b).) Shultz wholly fails to analyze whether the action could proceed "in equity and good conscience" without BlockFi and has thus forfeited this argument on appeal. (WFG National Title Ins. Co. v. Wells Fargo Bank, N.A. (2020) 51 Cal.App.5th 881, 894 ["appellant must supply the reviewing court with some cogent argument supported by legal analysis and citation to the record"].)
(Code Civ. Proc., § 389, subd. (a)(2) [BlockFi shall be made a party "if (1) in [its] absence complete relief cannot be accorded among those already parties or (2) [it] claims an interest relating to the subject of the action and is so situated that the disposition of the action in [its] absence may (i) as a practical matter impair or impede [its] ability to protect that interest or (ii) leave any of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of [its] claimed interest"].)
C. Gerro Lacked Standing Under the SAC as Pled
"Both standing and the interpretation of statutes are questions of law to which we typically apply a de novo standard of review." (San Luis Rey Racing, Inc. v. California Horse Racing Bd. (2017) 15 Cal.App.5th 67, 73.)
1. First Cause of Action
Gerro's first cause of action was brought under Government Code section 11350 and sought a declaration that the Department's interpretation of Financial Code section 22009 was incorrect. Government Code section 11350 provides that "[a]ny interested person may obtain a judicial declaration as to the validity of any regulation or order of repeal by bringing an action for declaratory relief in the superior court in accordance with the Code of Civil Procedure." (Gov. Code, § 11350, subd. (a).)
The trial court found Gerro was not an "interested person," and thus was not entitled to relief under section 11350. Gerro argues the court erred because he suffered an "ongoing harm that was factually caused by the Commissioner's interpretation and policy," as the challenged interpretation "continues to impair Gerro's legal rights to the return of his property." Specifically, he contends that the bankruptcy court handling BlockFi's bankruptcy "defer[red]" to the Department's allegedly erroneous interpretation of Financial Code section 22009 to disallow his claim against BlockFi.
The record does not support Gerro's claim. The bankruptcy court held that "[g]iven the Department's own interpretation of the CFL, and given the fact that the Department granted BlockFi a license premised upon an application wherein BlockFi explicitly had held itself out to be a business that intended to hold cryptocurrency as security for loans, this Court cannot conclude- as Gerro urges-that BlockFi willfully violated the California Financial Code." In other words, the bankruptcy court did not deny Gerro's claim against BlockFi because it was deferring to the Department's interpretation of Financial Code section 22009, but because it could not find that any violation was willful, given the Department's interpretation of the section and its granting of a license to BlockFi, and BlockFi's consistent transparency about the type of business it intended to conduct.
In Gerro's reply brief, he argued that, should he obtain his requested relief, BlockFi would, at the very least, "forfeit all interest and charges" on his loan under Financial Code section 22752. (Fin. Code, § 22752, subd. (a) ["If any provision of this division is violated in the making or collection of a loan, for any reason other than a willful act of the licensee, the licensee shall forfeit all interest and charges on the loan and may collect or receive only the principal amount of the loan"].) Gerro provides no explanation why he waited until his reply brief to raise this argument. We thus find it forfeited in this appeal. (See, e.g., Rubinstein v. Fakheri (2020) 49 Cal.App.5th 797, 809 ["For obvious reasons of fairness, points raised for the first time in a reply brief will ordinarily not be considered. [Citation.] [Appellant] does not provide any explanation of his decision to raise the statute of limitations argument for the first time on reply. His failure to make the argument in his opening brief provides another ground to conclude that he has forfeited the argument"].)
2. Second Cause of Action
Gerro's second cause of action sought a declaration that BlockFi's license was void and improperly issued. The trial court sustained Shultz's demurrer to that cause of action, first finding that Gerro could only challenge the issuance of BlockFi's license through a writ of mandate, then finding he lacked standing to do so. (State of California v. Superior Court (Veta) (1974) 12 Cal.3d 237, 249 ["an action for declaratory relief is not appropriate to review an administrative decision"]; Tejon Real Estate, LLC v. City of Los Angeles (2014) 223 Cal.App.4th 149, 155 [same]; Save the Plastic Bag Coalition v. City of Manhattan Beach (2011) 52 Cal.4th 155, 165 ["As a general rule, a party must be 'beneficially interested' to seek a writ of mandate. (Code Civ. Proc., § 1086.) 'The requirement that a petitioner be "beneficially interested" has been generally interpreted to mean that one may obtain the writ only if the person has some special interest to be served or some particular right to be preserved or protected over and above the interest held in common with the public at large' "].) The demurrer to the second cause of action was properly sustained on this ground alone. (Tejon Real Estate, at p. 155.)
Gerro essentially concedes this point in his reply brief, stating that he "concedes that declaratory relief cannot remedy the Commissioner's quasi-judicial decision to issue BlockFi's license."
Citing Venice Town Council v. City of L.A. (1996) 47 Cal.App.4th 1547, Gerro argues the court erred because "[d]eclaratory relief has been held to be the proper remedy when it is alleged an agency has a policy of ignoring or violating applicable laws." (Id. at p. 1566; see also Californians for Native Salmon and Steelhead Ass'n v. Dep't of Forestry (1990) 221 Cal.App.3d 1419, 1429 ["an overarching, quasi-legislative policy set by an administrative agency . . . is subject to review in an action for declaratory relief"].) Gerro misunderstands the trial court's ruling. As evident from Gerro's SAC and as the trial court found, the second cause of action did not challenge the Department's interpretation of Financial Code section 22009 or its policy to issue finance lender licenses in general according to its interpretation, but instead "expressly challenges Respondent's administrative decision to issue a 'finance lender' license to Real Party BlockFi." Neither Venice Town Council nor Californians for Native Salmon and Steelhead addressed a situation in which a specific administrative action was challenged. (Venice Town Council, at p. 1566 [appellants "do not challenge any particular decision or order.... [Citation.] Instead, appellants seek to resolve the City's fundamental misunderstanding of its responsibilities under the Mello Act to avoid continued violations or nonenforcement in the future"]; Californians for Native Salmon and Steelhead, at p. 1422 ["This case raises the issue of whether an action for declaratory relief may lie against an administrative agency when it is alleged that the agency has a policy of ignoring or violating applicable laws and regulations, but when no specific agency decision is attacked"].) As such, Gerro fails to demonstrate the court erred in finding that he could only challenge the Department's issuance of a license to BlockFi through a petition for a writ of mandate.
D. Gerro Should Be Granted Leave to Amend
When a demurrer "is sustained without leave to amend, we decide whether there is a reasonable possibility that the defect can be cured by amendment: if it can be, . . . we reverse; if not, . . . we affirm. [Citations.] The burden of proving such reasonable possibility is squarely on the plaintiff." (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) Additionally, on an appeal from a demurrer, we "make a de novo determination of whether the complaint alleges 'facts sufficient to state a cause of action under any possible legal theory,'" including "a legal theory presented for the first time in an opening appellant's brief." (Gutierrez v. Carmax Auto Superstores California (2018) 19 Cal.App.5th 1234, 1244; 20th Century Ins. Co. v. Quackenbush (1998) 64 Cal.App.4th 135, 139, fn. 3 ["When a demurrer is sustained without leave to amend the petitioner may advance on appeal a new legal theory why the allegations of the petition state a cause of action"].)
On appeal, Gerro argues that "[t]he Commissioner's policy of ignoring and violating the California Financing Law establishes a separate and independent basis for declaratory relief." We conclude that Gerro has taxpayer standing to bring such a cause of action.
"An action to obtain a judgment, restraining and preventing any illegal expenditure of, waste of, or injury to, the estate, funds, or other property of a local agency, may be maintained against any officer thereof, or any agent, or other person, acting in its behalf, either by a resident therein, or by a corporation, who is assessed for and is liable to pay, or, within one year before the commencement of the action, has paid, a tax that funds the defendant local agency, including, but not limited to, the following: [¶] (1) An income tax." (Code Civ. Proc., § 526a, subd. (a).)
Under the common law, a "taxpayer may sue a governmental body in a representative capacity in cases involving fraud, collusion, ultra vires, or failure on the part of the governmental body to perform a duty specifically enjoined." (Gogerty v. Coachella Val. Jr. College Dist. (1962) 57 Cal.2d 727, 730.) Gerro contends that the Department's issuance of finance lender licenses to lenders who take possession of their borrowers' collateral is ultra vires because such an issuance violates Financial Code section 22009.
Black's Law Dictionary defines "ultra vires" as "Unauthorized; beyond the scope of power allowed or granted by a corporate charter or by law." (Black's Law Dict. (11th ed. 2019).)
Shultz argues that Gerro lacks taxpayer standing because: (1) taxpayer standing under Code of Civil Procedure section 526a exists only when there is an allegation of illegal expenditure or waste of public funds; (2) there is no factual basis that the Department interpreted Financial Code section 22009 "as allowing a finance lender to retain use and possession of collateral"; (3) Financial Code section 22009 does not "clearly or explicitly prohibit a finance lender from using or possessing collateral," and therefore the Department was not required to adopt Gerro's interpretation of the section; (4) the decision of whether Financial Code section 22009 permitted a finance lender to take possession of and use a borrower's collateral was within the Department's discretion to decide; and (5) Gerro's ability to bring an action before the Office of Administrative Law precludes his cause of action. We are unpersuaded.
1. Gerro Can Allege Statutory Taxpayer Standing
Shultz argues that "[t]axpayer standing under Code of Civil Procedure section 526a applies only to actions to enjoin an 'illegal expenditure of' or 'waste of' public funds." The trial court found that "the Second Amended Complaint contains no allegations, let alone detailed facts, asserting an actual or threatened expenditure of public funds."
However, "Code of Civil Procedure, section 526a, provides that plaintiff may maintain an action to restrain the expenditure of public funds for illegal purposes. It is immaterial that the amount of the illegal expenditures is small or that the illegal procedures actually permit a saving of tax funds." (Wirin v. Parker (1957) 48 Cal.2d 890, 894; see also Raju v. Superior Court (2023) 92 Cal.App.5th 1222, 1246-1247 ["ample precedent permits the use of Code of Civil Procedure section 526a to challenge an agency's expenditure of funds for activity carried out in a manner violative of constitutional or statutory provisions, even if the expenditure also produces some public benefit" and therefore "[h]aving alleged that defendants have organized the court's workload in a manner which violates [Penal Code] section 1050(a), plaintiffs have stated a statutory taxpayer claim for 'waste' "].)
Our Supreme Court has held that "[t]he primary purpose of this statute . . . is to 'enable a large body of the citizenry to challenge governmental action which would otherwise go unchallenged in the courts because of the standing requirement.'" (Blair v. Pitchess (1971) 5 Cal.3d 258, 267-268.) "California courts have consistently construed section 526a liberally to achieve this remedial purpose." (Id. at p. 268.) We therefore conclude that Gerro can state a statutory taxpayer claim under Code of Civil Procedure section 526a to challenge the Department's issuance of finance lender licenses under an allegedly invalid interpretation of Finance Code section 22009.
In this appeal, we have not been asked to determine whether the Department's issuance of finance lender licenses to entities such as BlockFi violates Financial Code section 22009 and do not do so.
2. There Is a Factual Basis for Gerro's Allegations
Gerro contends that the Department's issuance of finance lender licenses to lenders who take possession of the borrowers' collateral is ultra vires because such an issuance violates Financial Code section 22009. Shultz counters that the issuance of such licenses is not an ultra vires act because there is no factual basis that the Department interpreted Financial Code section 22009 "as allowing a finance lender to retain use and possession of collateral." We disagree.
In March 2021, Jan Lynn Owen-commissioner of the Department when it issued a finance lender license to BlockFi- submitted a declaration on behalf of BlockFi averring that "during my tenure as Commissioner[,] the DBO granted many licenses to finance lenders whose planned business operations included the holding and/or use of collateral that was being used to secure loans.... As Commissioner, I was required to become intimately familiar with California law including, but not limited to, the CFL (including section 22009) as well as the Uniform/Commercial Code, and the argument that the holding or use of collateral by a finance lender is somehow inconsistent with either of these laws is incorrect." Thus, a factual basis underlies Gerro's allegation that the Department interpreted Financial Code section 22009 "as allowing a finance lender to retain use and possession of collateral."
3. The Ultimate Issue Should Not Be Decided on Standing Grounds
We agree with Shultz that Gerro's claim that Financial Code section 22009 does not permit a finance lender to retain use and possession of its borrower's collateral is a legal conclusion, and not a "fact" that we must accept. But whether Gerro or Shultz has correctly interpreted the statute is not a legal issue that can be resolved in a dispute about standing.
And, indeed, the trial court does not seem to have resolved this ultimate issue. After explaining why it was unconvinced by Gerro's reasoning regarding his interpretation of Financial Code section 22009, the court expressly stated that, "[f[or purposes of this demurrer, the court concludes only that Petitioner has not shown a 'sharp' duty owed by Respondent to suspend or revoke BlockFi's license, nor a 'weighty' public need for the requested writ."
On this issue, we find instructive California DUI Lawyers Assn. v. Department of Motor Vehicles (2018) 20 Cal.App.5th 1247. There, the "California DUI Lawyers Association and Attorney Steven R. Mandell . . . brought a taxpayer action" challenging the procedure used by the Department of Motor Vehicles to suspend a driver's license following an arrest for driving under the influence. (Id. at p. 1251.) Among other things, the DMV argued the plaintiffs lacked standing because its procedures were legal and complied with the Vehicle Code. (Id. at p. 1260.) Our colleagues in Division Four rejected this reasoning as circular and found that "DMV's argument that the allegedly unconstitutional action is 'legal' seeks to limit standing-a threshold issue-based on a substantive determination of the ultimate issue in this case.' "The fundamental aspect of standing is that it focuses on the party seeking to get his complaint before a . . . court and not in the issues he wishes to have adjudicated." '" (Id. at pp. 1260-1261, citing Harman v. City and County of San Francisco (1972) 7 Cal.3d 150, 159.)
4. The Interpretation of Financial Code Section 22009 Is Not Left to the Department's Discretion
Shultz argues that "[e]ven assuming that the Commissioner's issuance of BlockFi's license required a determination regarding the issue of whether a finance lender can retain use and possession of collateral, that determination invokes the discretion of the Commissioner." We disagree. Unlike in Grosz v. California Dept. of Tax &Fee Administration (2023) 87 Cal.App.5th 428, 446, where we held that the department's determination of whether an entity constituted a retailer was a matter of discretion because the statute "expressly giv[es] the DTFA discretion to determine who 'may [be] regard[ed] . . . as retailers' for purposes of the Sales and Use Tax Law," Shultz cites no such provision granting the Department similar leeway here.
5. Gerro's Ability to Bring an Action with the Office of Administrative Law Does Not Preclude His Cause of Action
Finally, we decline Shultz's invitation to extend the reasoning set forth in Department of Consumer Affairs v. Superior Court (2016) 245 Cal.App.4th 256. There, two individuals were "seeking to declare an expression of policy of the Arbitration Certification Program of petitioner, the Department of Consumer Affairs, to be an underground regulation adopted without following the processes required by the Administrative Procedures Act (Gov. Code, §§ 11340 et seq.), and thus invalid." (Id. at p. 259, fn. omitted.) The appellate court found that "regulations governing the Office of Administrative Law (OAL) confer administrative standing on 'any person who submits a petition to OAL alleging that a state agency has issued, used, enforced, or attempted to enforce an underground regulation,'" and thus "recogniz[ing] real parties in interest's public interest standing in this case, in the absence of any beneficial interest in an actual controversy, would undermine the efficacy of the administrative remedy provided to citizen taxpayers by the OAL." (Id. at p. 262.) We find Department of Consumer Affairs inapposite for two reasons. First, the court therein considered whether the parties had public interest standing, not taxpayer standing. (In re Chavez (2003) 30 Cal.4th 643, 656 ["As is well established, a case is authority only for a proposition actually considered and decided therein"].)
Second, OAL procedures provide that "[a] written petition may be submitted to OAL alleging that a state agency has issued, used, enforced, or attempted to enforce an underground regulation and seeking a determination from OAL pursuant to Section 11340.5 of the Government Code." (Cal. Code Regs., tit. 1, § 260, subd. (a).) But, should the OAL review the petition-it has "exclusive discretion" not to-it will then issue a determination whether "the challenged rule is not an underground regulation" or "whether or not the challenged agency has issued, used, enforced, or attempted to enforce an underground regulation." (Cal. Code Regs., tit. 1, § 270, subds. (f)(1) &(j).) But the trial court already determined that Gerro "has stated sufficient facts to show that Defendant's interpretation [of Financial Code section 22009] served as a regulation of broad applicability." Therefore, it would make no sense to find Gerro lacked standing to challenge the Department's interpretation because he failed to first obtain a ruling from the OAL that the interpretation in fact constituted a regulation.
An "underground regulation" is defined as "any guideline, criterion, bulletin, manual, instruction, order, standard of general application, or other rule, including a rule governing a state agency procedure, that is a regulation as defined in Section 11342.600 of the Government Code, but has not been adopted as a regulation and filed with the Secretary of State pursuant to the APA and is not subject to an express statutory exemption from adoption pursuant to the APA." (Cal. Code Regs., tit. 1, § 250, subd. (a).)
DISPOSITION
The judgment in favor of Shultz is reversed. On remand, Gerro is granted leave to file an amended complaint consistent with the opinions expressed herein. Shultz may challenge any such amended complaint in any manner permitted by law. In the interests of justice, the parties shall bear their own costs on appeal.
NOT TO BE PUBLISHED
We concur: ROTHSCHILD, P. J. BENDIX, J.