Last week, in Morgan Drexen, Inc. v. Consumer Financial Protection Bureau, a divided panel of the D.C. Circuit Court of Appeals affirmed the dismissal of an action challenging the constitutionality of the CFPB.  The court did not reach the merits of the constitutional challenge, but rather held that the district court properly dismissed the case for lack-of-standing, and for failure to demonstrate that declaratory and injunctive relief were procedurally proper.

Morgan Drexen is a provider of paralegal and other support services to bankruptcy and debt relief lawyers. Following a more-than one-year investigation, the CFPB notified Morgan Drexen that it was considering an enforcement action against Morgan Drexen and its CEO for alleged violations of the Consumer Financial Protection Act, and the Telemarketing Sales Rule.

Before any enforcement action was filed, Morgan Drexen – as well as Kimberly Pisinski, an attorney who contracted for services from Morgan Drexen –filed a complaint against the CFPB in the district court for the District of Columbia, seeking declaratory and injunctive relief based on a multi-faceted challenge to the constitutionality of the CFPB.  Less than a month later, the CFPB filed an enforcement action in federal court in California against Morgan Drexen and its CEO, but not against Pisinski or any other attorneys who contracted with Morgan Drexen for services.

About eight weeks after the CFPB’s enforcement action was filed, the D.C. court dismissed Morgan Drexen’s and Pisinski’s lawsuit. The court held that Morgan Drexen had an adequate remedy at law in the CFPB’s enforcement action and would suffer no irreparable harm, and that Piskinski had not adequately alleged the requisite injury-in-fact for standing.

The D.C. Circuit affirmed the dismissal.  Addressing Pisinski’s claims first, the court initially observed that Pisinski was not the target of any actual or threatened enforcement action by the CFPB, and that standing to challenge government action is substantially more difficult to establish when the challenger is not the object of the government action.  The court then concluded that Pisinski had not cited sufficient evidence to support her various theories of standing, including that she was responsible for Morgan Drexen’s alleged illegal conduct, that her practice would be harmed by the CFPB’s enforcement action against Morgan Drexen, and that implicit accusations by the CFPB could damage Pisinski’s professional standing.

The court then turned to Morgan Drexen’s claims. The court initially acknowledged that a pre-enforcement suit for injunctive relief aimed at the constitutionality of a statute may be warranted so that a regulated entity is not forced to wait until it is subjected to an enforcement action to raise its constitutional arguments.  But the court explained that the CFPB had brought its enforcement action against Morgan Drexen less than thirty days after Morgan Drexen’s own suit, which at that point gave Morgan Drexen a vehicle to raise its constitutional challenges.  The court further reasoned that the dismissal of the D.C. district court suit relieved the court system of litigating overlapping issues in two federal forums.

As for Morgan Drexen’s claim for declaratory relief, the court held that the D.C. district court properly exercised its discretion not to grant such relief because an adjudication of Morgan Drexen’s constitutional challenges in the D.C. district court would not finally settle the controversy given the pendency of the enforcement action in California, and because the California action could resolve all issues raised in the D.C. district court case. The court further explained that the D.C. district court’s decision to decline to exercise jurisdiction avoided a potentially unnecessary decision on constitutional issues given that Morgan Drexen might have prevailed in the California case based on its non-constitutional defenses.

Judge Cavanaugh wrote a short dissenting opinion. In his view, the CFPB’s action against Morgan Drexen constituted regulation of a business in which Pisinski engaged given that she worked together with Morgan Drexen employees to provide the challenged services.  When a regulated party challenges the legality of the regulating agency’s actions, Judge Cavanaugh reasoned, there is ordinarily little question that the party has standing.

It remains to be seen whether Morgan Drexen and Pisinski will try to leverage Judge Cavanaugh’s dissent into a petition for rehearing en banc.  

Meanwhile, in the CFPB’s enforcement action in California, the district court rejected each of Morgan Drexen’s various constitutional arguments in a nineteen-page January 10, 2014 Order denying Morgan Drexen’s motion to dismiss. More recently, in an Order dated April 21, 2015, the district court entered a default judgment against Morgan Drexen based on alleged falsification of evidence in discovery, and deferred until completion of supplemental briefing whether such sanctions also should be imposed against Morgan Drexen’s CEO. Just last week, the court entered an Order imposing a temporary freeze on Morgan Drexen’s assets, and that same day, Morgan Drexen filed a petition under Chapter 7 of the Bankruptcy Code.