Last week, the U.S. Court of Appeals for the Second Circuit heard oral argument in RD Legal Funding.  The three judge panel consisted of two members of the Second Circuit, Judge Denny Chin and Senior Judge Barrington Parker, and a Senior Judge on the U.S. Court of International Trade, Judge Jane Restani.  Judge Chin was appointed to the Second Circuit by President Obama.  Judge Parker was appointed to the district court by President Bill Clinton and to the Second Circuit by President George W. Bush.  Judge Restani was appointed to the Court of International Trade by President Ronald Reagan.

RD Legal Funding (RD) purchased at a discount, for immediate cash payments, benefits to which consumers were ultimately entitled under the NFL Concussion Litigation Settlement Agreement (the “NFLSA”) and the September 11th Victim Compensation Fund of 2001 (the “VCF”).  The CFPB and NYAG sued RD in federal district court, asserting federal UDAAP claims under the CFPA and state law claims.  The CFPB appealed from Judge Preska’s June 21, 2018 decision, as amended by her September 12 order, in which she ruled that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional, struck the CFPA (Title X of Dodd-Frank) in its entirety, and dismissed the CFPB from the case.  The NYAG appealed from Judge Preska’s dismissal on September 12, 2018 of all of the NYAG’s federal and state law claims, and her subsequent September 18 order amending the September 12 order to provide that the NYAG’s UDAAP claims under Dodd-Frank Section 1042 were dismissed “with prejudice.”  (Section 1042 authorizes state attorneys general to initiate lawsuits based on UDAAP violations.)

Despite dismissing the NYAG’s federal and state claims, Judge Preska determined in her June 21 decision that the purchase agreements effected assignments of the benefits that, as to the NFLSA benefits, were void under the terms of the underlying settlement agreement and, as to the VCF benefits, were void under the federal Anti-Assignment Act.  After determining that the assignments were void, Judge Preska concluded that, as a result, the transactions were necessarily disguised usurious loans.  (For the reasons discussed in a prior blog post, we believe the court’s conclusion is flawed.)  RD filed a cross-appeal from the district court’s conclusion that the transactions were disguised loans and stated UDAAP claims under the CFPA and claims for usury and misleading conduct under New York law.

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 had ratified the Bureau’s decisions to file the enforcement action against RD and to appeal from the district court’s dismissal of the action.

In the oral argument before the Second Circuit, both the CFPB and NYAG argued that, in light of the Supreme Court’s Seila Law decision, the Second Circuit should reverse the district court’s dismissal of the lawsuit and allow the case to go forward.  The CFPB challenged RD’s argument that Director Kraninger could not ratify the enforcement action or the CFPB’s appeal because the action would be time-barred and the time to appeal had lapsed.  It asserted that, for purposes of whether the enforcement action was timely, the only relevant date is the date on which the action was originally filed which was within the 3-year SOL.

The NYAG focused its arguments to the Second Circuit panel on its position that the complaint plausibly asserted a claim that the transactions were disguised usurious loans and that, as a result of Seila Law, all of the NYAG’s claims should be reinstated. 

RD Legal argued to the panel that the ratification of the CFPB’s lawsuit by both Acting Director Mulvaney and Director Kraninger was ineffective because, as agents of the CFPB, they could not ratify an act that the CFPB, as principal, could not do at the time such act was done.  RD also pressed its argument that in any event, Director Kraninger could not ratify the enforcement action or appeal because the action would be time-barred and the time to appeal had lapsed.  In response to the panel’s suggestion that the district court might have reached a different conclusion if it were considering Director Kraninger’s ratification rather than Acting Director Mulvaney’s ratification, RD asserted that the district court’s rationale—that an agent cannot ratify an action that the principal could not validly take—would apply equally to Director Kraninger’s ratification.

With regard to RD’s cross-appeal, RD argued that there was no need for further factual development because the district court’s ruling that the transactions were void as between the parties was incorrect as a matter of law.  However, one panel member commented that the facts in the case were “troublesome” and at least two panel members expressed strong reservations about ruling on how the transactions should legally be characterized in the context of a motion to dismiss without the benefit of a more developed record.

Despite the panel’s questions as to whether the district court might now reach a different conclusion on ratification, given that there are no relevant disputed facts, it seems unlikely that the Second Circuit would remand a purely legal issue to the district court rather than issue a ruling on ratification.  At the same time, it also seems unlikely that the Second Circuit, without discovery and further factual development, would reverse the district court’s conclusion in the context of a motion to dismiss that RD’s transactions were disguised usurious loans.  Accordingly, even if the Second Circuit were to rule that the CFPB’s claims should be dismissed because its enforcement action could not be ratified or was untimely, it seem likely that it would reinstate the NYAG’s federal and state claims.  (Ratification would not be relevant to the NYAG’s federal UDAAP claims.)  

The question of whether Director Kraninger can ratify actions taken by the CFPB while its Director was unconstitutionally insulated from removal is now before the Ninth Circuit on remand from the Supreme Court in Seila Law.  It is also before the Fifth Circuit in All American Check Cashing.  In March 2020, the Fifth Circuit, on its own motion, entered an order vacating the panel’s ruling that the CFPB’s structure was constitutional 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.  However, on September 9, after the parties filed their supplemental briefs, the Fifth Circuit issued a directive putting the case on hold until the U.S. Supreme Court issues its decision in Collins v Mnuchin.

In Collins, the en banc Fifth Circuit held the FHFA’s structure is unconstitutional because the Housing and Economic Recovery Act of 2008 only allows the President to remove the FHFA’s Director “for cause.”  Presumably the Fifth Circuit issued the directive because of the possibility Collins could result in a decision by the Supreme Court on whether the proper remedy for a constitutional violation in an agency’s structure is to set aside action taken by the agency when it was operating unconstitutionally.  Specifically, in addition to the question of the FHA’s constitutionality, the Supreme Court also agreed to decide whether an amendment to a stock agreement entered into by the FHA while unconstitutionally structured should be invalidated as sought by the plaintiff shareholders in the case.