N.Y. Judge Adds Fire to CFPB Constitutionality Question

By Evan Weinberger

A new ruling that the Consumer Financial Protection Bureau’s single-director leadership was unconstitutional could help spur the U.S. Supreme Court to take up the question, and will give defense attorneys more ammunition to fend off lawsuits from the agency.

The U.S. District Court for the Southern District of New York said in a 104-page ruling June 21 that the leadership structure at the CFPB was unconstitutional and that the only way to remedy that problem was to eliminate the bureau.

The ruling from Senior U.S. District Judge Loretta A. Preska came in a motion to dismiss filed by RD Legal Funding LLC in a case filed by the CFPB and the New York Attorney General’s office over an alleged scam that targeted 9/11 victims and NFL players who were parties to a concussion settlement. Preska’s ruling is at odds with a Jan. 31 opinion from the U.S. Court of Appeals for the District of Columbia Circuit that said the CFPB’s structure was constitutional.

Preska’s ruling sets up a potential circuit split if the U.S. Court of Appeals for the Second Circuit also has a different reading of the CFPB’s constitutionality than the D.C. Circuit.

That scenario would almost certainly require the Supreme Court to act, according to Christopher Peterson, the director of financial services at the Consumer Federation of America and a former top CFPB official.

“The fate of a federal agency is a pretty big deal, so the Supreme Court would probably have to take it,” he told Bloomberg Law.

The problem for critics of the CFPB’s structure is that Preska is a district court judge, and while her opinion on the question carries a lot of weight, it is not the same as a circuit court making a decision, he said.

“Its effect is not as bad as if this were, say, a circuit court,” Peterson said.

Nagging Question

Questions over the constitutionality of the CFPB’s single-director leadership structure that only allows the president to fire the director for cause rather than at will have dogged the bureau since its creation in the 2010 Dodd-Frank Act.

Several defendants in CFPB enforcement actions have challenged the bureau’s constitutionality, with PHH Corp., a New Jersey-based mortgage servicer, coming the closest to getting a change to the way the bureau is constructed.

In the PHH litigation, a split D.C. Circuit panel ruled that the bureau’s structure was unconstitutional and attempted to fix that problem by stating that the president could fire the director at will.

The Justice Department under Attorney General Jeff Sessions supported that ruling when the CFPB appealed that decision to the full D.C. Circuit. The CFPB’s current acting director, Mick Mulvaney, supports that reasoning, as well.

But the en banc D.C. Circuit panel disagreed in the Jan. 31 ruling, upholding the CFPB’s structure.

‘Clean Vehicle’ for Top Court

Preska, an appointee of former President George H.W. Bush, disagreed with both D.C. Circuit decisions June 21 by deeming the CFPB’s structure to be unconstitutional, and the proposed solution of making the CFPB director an at-will employee insufficient.

Instead, Preska said the bureau should be eliminated.

“A severability clause ‘does not give the court power to amend’ a statute. Nor is it a license to cut out the ‘heart’ of a statute,” Preska wrote.

However, Preska upheld the case against RD Legal, allowing the New York attorney general’s office to move forward. The office has indicated it plans to continue to press the case.

The CFPB has so far declined to comment, or say whether it intends to appeal.

If the CFPB elects to move forward with an appeal, Preska’s ruling creates a “clean vehicle” for a case to head to the Supreme Court, Andrew M. Grossman, a partner at Baker Hostetler LLP, told Bloomberg Law.

“The appeal would likely raise that one issue,” said Grossman, a legal adjunct at the libertarian Cato Institute.

Other Options

An appeal to the Second Circuit could take months, however, and two other cases are likely to be decided at the appellate level in the interim.

The U.S. Court of Appeals for the Fifth Circuit on April 24 agreed to hear an interlocutory appeal out of federal court in Mississippi challenging the CFPB’s constitutionality. The plaintiff, All American Check Cashing Inc., is represented by Gibson Dunn & Crutcher partner Ted Olson, who represented PHH at the D.C. Circuit.

The U.S. Court of Appeals for the Ninth Circuit also has a case teed up about the CFPB’s alleged constitutional problems. Seila Law LLC is trying to stop a 2017 CFPB civil investigative demand related to its work for defunct debt collection firm Morgan Drexen. Oral arguments have not yet been set in the Seila Law case, but the company filed a reply brief May 10.

Because those two cases are further ahead, they will likely be decided before the Second Circuit gets going. Most legal observers said the Fifth Circuit is more likely to produce a split with the D.C. Circuit than the Ninth.

Grossman cautioned that the Fifth Circuit is notorious for allowing en banc reviews of panel opinions, which could add an extra year to that litigation.

More Ammo

While the legal community and the CFPB waits for a case to ripen and possibly head to the Supreme Court, Preska’s decision is likely to have an impact beyond her courtroom, Allison Schoenthal, the head of the Consumer Finance Litigation Practice at Hogan Lovells LLP, told Bloomberg Law.

Preska’s senior status in the Southern District of New York could make other judges in the district look more closely at the CFPB’s structure, although Preska’s decision is not binding, she said.

And companies looking to fend off a CFPB lawsuit — if the CFPB enforcement slowdown that accompanied Mulvaney’s appointment lifts — could cite Preska as a way to say the bureau’s constitutionality remains an open question despite the D.C. Circuit ruling.

“A lot of other defendants are going to put this in their motion to dismiss,” Schoenthal said.

RD Legal is represented by Boies Schiller & Flexner LLP.

The case is Consumer Financial Protection Bureau et al. v. RD Legal Funding LLC , S.D.N.Y., No. 17-cv-00890, 6/21/18 .

To contact the reporter on this story: Evan Weinberger in New York at eweinberger@bloomberglaw.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com

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