Judges finds bitcoin facility in Falls is operating in violation of court order. Sets fine of $10,000 a day, which could jump to $25,000 a day

Jan. 26—LOCKPORT — A State Supreme Court justice, following the lead of another justice, has ordered a cryptocurrency mining company in the Falls to stop operating or face fines of $10,000 a day.

Justice Edward Pace said he would impose the fines, dating back to Dec. 9, when Supreme Court Justice Frank Sedita III first issued a temporary restraining order (TRO) that directed U.S. Data Technologies Group Ltd. and U.S. Data Mining Group Inc, doing business as U.S. Bitcoin, to stop operating while lawyers for the Falls sought a preliminary injunction to force their cryptocurrency mining facility on Buffalo Avenue to comply with a new zoning ordinance governing high energy use industries.

Pace said the $10,000 fine would be in place through Jan. 31.

"If, by January 31, (the cryptocurrency mining operation) has not shut down, then a check should be delivered to the city of Niagara Falls on February 1 for $540,000," Pace said.

The justice also told John P. Bartolomei, an attorney for U.S. Bitcoin, that if his clients continued to operate past Jan. 31, the daily fine would increase to $25,000 a day until the case was finally settled. Bartolomei protested the ruling and indicated he would appeal Pace's decision to the State Supreme Court Appellate Division Fourth Department in Rochester.

Attorneys for the Falls had asked Sedita, who recently transferred some of his caseload to Pace, to find U.S. Bitcoin in contempt of court for violating his TRO that directed them to shut down their Buffalo Avenue facility, which the city charges is creating "a public nuisance" and engaging in "ongoing violations" of the city's Zoning Code.

Sedita issued the restraining order on Dec. 1. It directed U.S. Bitcoin to cease "engag(ing) in "any and all forms of cryptocurrency mining" pending the outcome of a hearing on the city's request for a preliminary injunction that seeks to shutdown three cryptocurrency mining facilities currently operating in the city "unless and until" they comply with a recently enacted series of amendments to the city's Zoning Code that govern the location and operation of high-energy use industries such as data centers and crypto-mining facilities.

City lawyers noted that one of the crypto-mining facilities immediately shut down its operations when the Falls filed its motion for the preliminary injunction. That facility has since begun the process of applying for permits to re-open.

A second facility has been shuttered since the summer because of a fire in a substation on its property.

However, Dan Spitzer, an outside special counsel to the city on zoning matters, told Pace that U.S. Bitcoin has "thumbed its nose" at Sedita's TRO.

"The people of the city are entitled to relief," Spitzer told the court.

On Dec. 8, the city filed its request for a contempt citation asking Sedita, and now Pace, to impose a "daily fine" against U.S. Bitcoin for it's alleged ongoing violations of the temporary restraining order. During a Wednesday hearing before Pace, the city also asked the justice to issue an order directing National Grid to cut off electrical power to the property U.S. Bitcoin rents.

That brought a howl of protest from both Bartolomei and U.S. Bitcoin's landlord. Pace set a date for further hearings on the request.

Bartolomei, who asked Pace to dismiss the city's motion for a preliminary injunction, vacate or modify Sedita's TRO and not find U.S. Bitcoin guilty of contempt, said forcing his client to stop operating would cause "impermissible damage" to his client's business. He said the Buffalo Avenue facility has more than 12,000 computers "connected in a complicated system" and using "expensive software."

"The abrupt shutdown of these systems will cause impermissible damage," Bartolomei said. "If this facility is damaged it will be in the vicinity of $20 to $30 million and the city doesn't have the money (to pay for that damage). It's an abuse of power. A tyrannical abuse of power."

However, Edward Perlman, another outside counsel for the city, suggested there was another reason for U.S. Bitcoin to resist shutting down its operations. Perlman said the cryptocurrency miner is creating an average of four coins a day, with an individual value of $20,000 each.

"This is hogwash," Perlman said. "U.S. Bitcoin is dragging this out to make more money."

After roughly 90 minutes of argument, Pace told Bartolomei, "The TRO is there. It was issued by Justice Sedita, a judge for a long time. I'm not in a position to second-guess Judge Sedita. The TRO stands."

Pace denied the motion to dismiss the city's request for a preliminary injunction, but did schedule three days of hearings on the request in March. The justice also denied U.S. Bitcoin's request to vacate or modify the TRO.

And he found the cryptocurrency miner "guilty" of contempt.

"My finding is U.S. Bitcoin is in violation of Justice Sedita's temporary restraining order," Pace said. "As a remedy for that violation, I'm setting (a fine) of $10,000 a day."

The justice then added the escalator of $25,000 a day for violations beginning Feb. 1.

All three crypto-mining companies in the Falls received letters, in November and December 2021, from the city's Department of Code Enforcement, advising them that they were in violation of the city's Zoning and Building codes and demanding that they "cease and desist" their operations until they were in compliance.

In September, the city council, on a 4-1 vote with Council Member Donta Myles opposed, approved a set of new high-energy use amendments to the Zoning Code. Those amendments had previously been approved and recommended to the council by both the Niagara Falls and Niagara County planning boards.

City residents living near the three crypto-mining operations have pleaded for action on what they described as unreasonable noise created by the cryptocurrency facilities.

"At the beginning of the year my home was invaded, by noise. It has changed my life. It is constant, 24 hours a day," said Bryan Maacks, who lives near the U.S. Bitcoin facility inside what had been an abandoned industrial plant on Buffalo Avenue. "I'm here for myself and my mental health."

In addition to the three bitcoin mining facilities that are subject to the current legal action, two to three more crypto facilities are reportedly seeking to establish operations in the Falls.

The new Zoning Code amendments restrict high-energy use facilities, like data centers and bitcoin mining operations, to locations that are zoned only for industrial uses. The amendments also act as a so-called "overlay" to the city's current industrial zoning requirements and add new restrictions that require larger set-backs of the high energy use facilities from their neighbors.

The changes also impose strict limits on noise generated by the high-energy use operations.