A Washington, D.C. federal district court has dismissed the lawsuit filed by Morgan Drexen against the CFPB that alleged the Bureau’s structure was unconstitutional because it violated the Constitution’s separation of powers. Approximately one month after Morgan Drexen’s filing, the CFPB filed an enforcement action against Morgan Drexen in federal district court in California alleging that Morgan Drexen charged unlawful advance fees for debt relief services and engaged in deceptive acts and practices. Morgan Drexen responded by filing a motion for a preliminary injunction in which it asked the D. C. court to enjoin the CFPB from prosecuting the CA action until the D.C. case was resolved. In addition to opposing the injunction, the CFPB then filed a motion to dismiss Morgan Drexen’s lawsuit or, in the alternative, for summary judgment.
In its decision dismissing the lawsuit, the court agreed with the CFPB that injunctive relief was unwarranted because Morgan Drexen could raise its constitutional challenge as a defense in the CA enforcement action. It also agreed with the CFPB that dismissal was appropriate to prevent “procedural fencing,” observing that “the record reveals that at the time of filing suit, Morgan Drexen was aware of the likelihood of a Bureau enforcement action.” It commented that Morgan Drexen was seeking to “have this matter adjudicated in the forum of its choosing, depriving the Bureau of the choice of forum for its enforcement action-the Ninth Circuit.”
The court also ruled that declaratory relief was inappropriate because, in asserting a constitutional challenge, Morgan Drexen was “essentially asking for adjudication of an anticipatory defense” to the CFPB’s enforcement action.
Morgan Drexen’s lawsuit also named as a plaintiff Kimberly Pisinski, a Connecticut bankruptcy attorney who had used Morgan Drexen’s services. Ms. Pisinski had alleged that the she would suffer injury because the information the CFPB sought from Morgan Drexen through civil investigative demands (CIDs) included attorney-client privileged information. The court found that she lacked standing to challenge the CFPB’s constitutionality because she could not show the requisite injury from the CFPB’s actions. According to the court, she could have asserted the attorney-client privilege in defense to any attempt by the CFPB to enforce previously issued CIDs and had made “no effort to show a substantial probability of an imminent CID which would force her to turn over privileged information.” The court also found that she could not base standing on her claim that the CFPB’s regulation of Morgan Drexen would deprive her of their services.
Another case challenging the CFPB’s constitutionality dismissed by a D.C. federal district court, State National Bank of Big Spring v. Lew, has been appealed to the U.S. Court of Appeals for the D.C. Circuit. In addition to challenging Director Cordray’s recess appointment, the case also included a separation of powers challenge.