The CFPB’s constitutionality is again before the D.C. Circuit, with the D.C Circuit now being asked to consider the impact of the U.S. Supreme Court’s decision in NLRB v. Canning on actions taken by the CFPB while Director Cordray was serving as a recess appointee.  In that decision, the Supreme Court ruled that President Obama exceeded his constitutional recess appointment authority when he filled three vacancies on the National Labor Relations Board in January 2012.  The D.C. Circuit, whose decision was reviewed by the Supreme Court, had also ruled that the NLRB recess appointments were invalid but did so based on a different reading of the President’s recess appointment authority.

As previously reported, in July 2013, Morgan Drexen filed a lawsuit against the CFPB in a Washington, D.C. federal district court in which it alleged the CFPB’s structure was unconstitutional because it violated the Constitution’s separation of powers.  In August 2013, the CFPB responded by filing an enforcement action against Morgan Drexen in a California federal district court alleging that Morgan Drexen had charged unlawful advance fees for debt relief services and engaged in deceptive acts and practices.  That was followed by Morgan Drexen’s filing of 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 October 2013, the D.C. federal district court granted the CFPB’s motion to dismiss Morgan Drexen’s lawsuit.  The court agreed with the CFPB that injunctive relief as requested by Morgan Drexen 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 because Morgan Drexen’s filing was an attempt to prevent the CFPB from having its enforcement action adjudicated in the Ninth Circuit.

In November 2013, Morgan Drexen appealed the dismissal to the D.C. Circuit.  Briefing on the appeal by Morgan Drexen and the CFPB was completed this past spring.  However, on November 3, Morgan Drexen submitted a letter to the D.C. Circuit regarding the Supreme Court’s Canning decision.  The letter asserts that the Supreme Court’s rationale in Canning for invalidating the NLRB appointments means that Director Cordray’s recess appointment was also invalid.  The letter suggests that the CFPB’s enforcement action against Morgan Drexen is invalid because it resulted from an investigation conducted while Mr. Cordray was not lawfully serving as CFPB Director.  (Lawmakers have questioned Director Cordray’s ability to ratify actions he took while a recess appointee.  On August 30, 2013, the CFPB published a notice in the Federal Register in which Director Cordray ratified those actions.)  Oral argument before the D.C. Circuit is scheduled for November 19.

In January 2014, the California federal district court hearing the CFPB’s enforcement action against Morgan Drexen rejected Morgan Drexen’s motion to dismiss based on a challenge to the CFPB’s constitutionality.  The court found that none of the CFPB’s structural features cited by Morgan Drexen rendered the CFPB unconstitutional.  Although similar challenges have been made in other cases, this appears to be the first decision to rule on the merits of such a challenge.

On October 7, 2014, the CFPB filed a motion for summary judgment in which it seeks a permanent injunction barring the defendants from providing debt relief services, $90.7 million in restitution, and a civil money penalty in an unspecified amount.  Morgan Drexen has filed a brief opposing the motion.