Less than one month after hearing oral argument in RD Legal Funding, the U.S. Court of Appeals for the Second Circuit has issued a summary order affirming the district court’s holding that the Dodd-Frank Act’s single-director-removable-only-for-cause provision is unconstitutional, reversing its holding that the provision is not severable, and remanding the case to the district court “to consider in the first instance the validity of Director Kraninger’s ratification of this enforcement action.”  The order vacates the district court’s judgment dismissing the underlying enforcement action filed jointly by the CFPB and New York Attorney General.

In their joint enforcement action, the CFPB and NYAG alleged federal UDAAP and state law claims against RD Legal arising from its cash purchase at a discount of benefits to which consumers were entitled under the NFL Concussion Litigation Settlement Agreement (NFLSA) and the September 11th Victim Compensation Fund of 2001 (VCF).  The district court dismissed the CFPB’s claims, ruling that the CFPB’s structure was unconstitutional and that the proper remedy for the constitutional violation was to invalidate Title X in its entirety because the for-cause removal provision was not severable from Title X.

Having invalidated Title X, the district court also determined that there was no longer a statutory basis for the NYAG to bring its federal UDAAP claims and therefore dismissed such claims for lack of federal jurisdiction.  It also determined that because there was no substantial federal question embedded in the NYAG’s state law claims that provided federal question jurisdiction, it would decline to exercise supplemental jurisdiction over the state law claims.  In its ruling on the defendants’ motion to dismiss, the district court also concluded 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 and, as a result, the transactions were necessarily disguised usurious loans.

Since the district court’s dismissal of the CFPB’s and NYAG’s claims was predicated on its ruling that Title X should be invalidated because the for-cause removal provision was not severable, the Second Circuit’s reversal of the district court’s severance ruling reinstates the CFPB’s and NYAG’s federal UDAAP claims.  Because the Second Circuit’s order vacates the district court’s judgment dismissing the enforcement action, it would also appear to reinstate the NYAG’s state law claims (although the district court could again decline to exercise supplemental jurisdiction.)

The district court ruled that former CFPB Acting Director Mulvaney’s ratification of the CFPB’s enforcement action against RD Legal did not cure the constitutional deficiency but did not consider Director Kraninger’s ratification because it did not take place until the case was on appeal to the Second Circuit.  In rejecting former Acting Director Mulvaney’s ratification, the district court stated that the 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.”  That rationale would appear to apply equally to Director Kraninger’s ratification.  Should the district court decide that her ratification was not valid, it could dismiss the CFPB from the case and allow the NYAG to pursue the action on its own.

The Second Circuit also stated in its summary order that it “did not reach defendants’ other arguments, including, for example, that RD Legal does not qualify as a “covered person” under the Dodd-Frank Act.”  RD Legal has argued that because its transactions do not constitute extensions of “credit,” they are not usurious loans and RD Legal is not a “covered person” subject to the CFPB’s enforcement authority.  The district court’s conclusion that the transactions were disguised loans was made in its ruling on the defendants’ motion to dismiss without the benefit of any discovery.  RD Legal can be expected to urge the district court to reverse that conclusion, either on a renewed motion to dismiss or a motion for summary judgment. 

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.  The parties have filed supplemental briefs with the Ninth Circuit on this issue and oral argument is scheduled for November 18.

The ratification question 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.