Penny's case will return to court on March 20. The trial will occur no earlier than the fall, the judge said.
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When he exited court, Penny was confronted by protesters who shouted at him and chased after his vehicle.
The defense has said Penny did not intend to kill Neely but was subduing a passenger who was "insanely threatening."
SEE ALSO | Jordan Neely, man killed in chokehold on subway, remembered as entertainer shattered by mom's murder
Prosecutors hit Penny with a top charge of manslaughter -- which the judge declined the motion to dismiss the case.
"His attorneys tried to get the judge to overrule that - to say that what the grand jury said didn't matter, but the judge didn't do that, the judge said Daniel Penny will face these charges," Neely family attorney Donte Mills said.
Mills called the decision a win.
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The defense on Wednesday also requested additional testing to determine the level of synthetic cannabinoids in Neely's blood.
READ MORE | Man who held Jordan Neely in fatal chokehold on NYC subway 'never intended to harm' him: attorneys
Penny's caught-on-camera chokehold of Neely lasted about six minutes, prosecutors have said, beyond the point when Neely was moving.
Witnesses have varied in their accounts. Some testified they were in fear as Neely broke into a "sickening" rant and made lunging movements. But other witnesses did not describe the same picture of panic before the chokehold.
The case has sparked political and racial tensions and controversy around vigilantism -- but most importantly to Neely's attorney, the case is moving forward.
"It's a win for Jordan's family, it's a win for the people who stood on that subway platform and stopped the trains from moving, it's a win for everybody who stood up for houselessness, for mental health and said that they matter," Mills said.
Penny's lawyers, Steven Raiser and Thomas Kenniff, released the following statement:
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"While we disagree with the Court's decision not to dismiss the indictment, we understand that the legal threshold to continue even an ill-conceived prosecution is very low. We are confident that a jury, aware of Danny's actions in putting aside his own safety to protect the lives of his fellow riders, will deliver a just verdict. Danny is grateful for the continued prayers and support through this difficult process."
SEE ALSO | Counter-protesters detained after rally for Daniel Penny, man charged in Jordan Neely's death