With the U.S. Supreme Court having ruled in Seila Law that the CFPB’s leadership structure is unconstitutional, two circuit court cases involving the same constitutional challenge that were “on hold” pending the Supreme Court’s decision will now be moving forward. The two cases are RD Legal Funding pending in the Second Circuit and All American Check Cashing pending in the Fifth Circuit.
RD Legal Funding. The underlying case is an enforcement action filed jointly by the CFPB and the New York Attorney General in 2017 in a New York federal district court alleging federal UDAAP and state law claims. The CFPB appealed to the Second Circuit from the district court’s June 2018 decision, as amended by a September 2018 order, in which it ruled that the CFPB’s structure is unconstitutional, struck the entire CFPA (Title X of Dodd-Frank), and dismissed the CFPB from the case. The NYAG appealed from the district court’s dismissal of all of the NYAG’s federal and state law claims, and a subsequent order that dismissed the NYAG’s claims under Dodd-Frank Section 1042 “with prejudice.” (Section 1042 authorizes state attorneys general to initiate lawsuits based on UDAAP violations.)
The CFPB had filed a notice of ratification by former Acting Director Mulvaney with the district court. In its June 2018 decision, the district court stated that the CFPB’s ratification “does not address accurately the constitutional issue raised in this case, which concerns the structure and authority of the CFPB itself, not the authority of an agent to make decisions on the CFPB’s behalf.”
On July 10, 2020, the CFPB filed a declaration with the Second Circuit in which Director Kraninger stated that she has ratified the Bureau’s decisions to file the enforcement action against RD Legal and to appeal from the district court’s dismissal of the action. In response, RD Legal filed a letter with the Second Circuit in which it stated that the CFPB has waived the ratification issue because it did not appeal the district court’s ruling on ratification. Alternatively, it argued that the ratification is not effective because Director Kraninger cannot ratify an act that the CFPB could not do at the time such act was done and, in any event, she cannot ratify the enforcement action or appeal because the action would be time-barred and the time to appeal has lapsed.
The Second Circuit can be expected to follow Seila Law and affirm the district court’s ruling that the CFPB’s structure is unconstitutional. However, also following Seila Law, the Second Circuit can be expected to reverse the district court’s ruling striking all of Title X and rule instead that the Dodd-Frank Act’s “for cause” removal provision should be severed. Although the district court considered former Acting Director Mulvaney’s ratification and not Director Kraninger’s ratification, its rationale for rejecting former Acting Director Mulvaney’s ratification would apply equally to Director Kraninger’s ratification. It therefore seems unlikely that the Second Circuit would remand that issue to the district court rather than issue a ruling on ratification.
All American Check Cashing. The underlying case is an enforcement action filed by the CFPB against All American Check Cashing in 2016 in a Mississippi federal district for alleged violations of the CFPA’s UDAAP prohibition. In March 2018, the district court denied All American’s motion for judgment on the pleadings based on the Bureau’s unconstitutionality and ruled that the CFPB’s structure is constitutional. In opposing All American’s motion to certify the case for interlocutory appeal, the CFPB argued that a notice of ratification of the action by former Acting Director Mulvaney cured any constitutional defect and mooted the constitutional issue. The district court did not rule on the CFPB’s ratification argument and in March 2018 granted All American’s motion for interlocutory appeal which the Fifth Circuit agreed to hear.
On March 3, 2020 (the same day that the Supreme Court heard oral argument in Seila Law), a Fifth Circuit panel ruled that the CFPB’s structure is constitutional. On March 20, the Fifth Circuit, on its own motion, entered an order vacating the panel decision and granting rehearing en banc. On June 30, the Fifth Circuit tentatively calendared the case for en banc oral argument during the week of September 21, 2020 and ordered the parties to file supplemental briefs.
Following Seila Law, the en banc Fifth Circuit can be expected to reverse the panel’s ruling that the CFPB’s structure is constitutional and sever the Dodd-Frank Act’s “for cause” removal provision. Because it ruled that the CFPB’s structure is constitutional, the panel did not reach the CFPB’s ratification argument. Assuming the CFPB files a declaration of ratification by Director Kraninger as it did in RD Legal, the en banc Fifth Circuit will have an opportunity to issue a ruling on ratification or could decide to remand that issue to the district court.
In Seila Law, the Supreme Court remanded the case to the Ninth Circuit to consider the CFPB’s argument that former Acting Director Mulvaney had ratified the civil investigative demand issued to Seila Law by the CFPB. As a result, three circuit courts (the Second, Fifth and Ninth Circuits) could now issue rulings on the ratification issue.