In the latest development in the CFPB’s long-running lawsuit against RD Legal Funding, a New York federal district court judge denied RD Legal’s motion to dismiss and held that because the CFPB, under former Director Cordray’s leadership had the authority to initiate the lawsuit, ratification of the lawsuit by former Director Kraninger was unnecessary.  The reinstatement of the lawsuit means the issue of whether the transactions at issue are disguised loans is likely to receive renewed attention.

The ruling follows the Second Circuit’s remand of the case to Judge Preska.  The case involves RD Legal’s purchase at a discount, for immediate cash payments, benefits to which consumers were ultimately entitled under the NFL Concussion Litigation Settlement Agreement (NFLSA) and the September 11th Victim Compensation Fund of 2001 (VCF).  The CFPB and NYAG sued RD Legal in federal district court, asserting federal UDAAP claims under the CFPA and state law claims, and RD Legal filed a motion to dismiss based on the alleged unconstitutionality of the Dodd-Frank for-cause removal provision.  In addition to ruling that the provision was unconstitutional, Judge Preska determined that the proper remedy for the constitutional violation was to invalidate Title X in its entirety because the provision was not severable.  Having invalidated Title X, she dismissed both the CFPB’s UDAAP claims and the NYAG’s UDAAP claims under Dodd-Frank Section 1042 (which authorizes state attorneys general to initiate lawsuits based on UDAAP violations.)  She also dismissed the NYAG’s claims after concluding there was no substantial federal question embedded in the NYAG’s state law claims to provide a basis for federal jurisdiction and declining to exercise supplemental jurisdiction over the state law claims.

Despite dismissing the NYAG’s federal and state claims, Judge Preska determined 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.  She then concluded that because the assignments were void, the transactions were necessarily disguised usurious loans.  For the reasons discussed in a prior blog post, we believe her logic was erroneous on the loan recharacterization question.

The CFPB and NYAG appealed to the Second Circuit and RD Legal filed a cross-appeal from the district court’s conclusion that the transactions were disguised loans and the complaint stated UDAAP claims under the CFPA and claims for usury and misleading conduct under New York law.  While the appeal was pending, the Supreme Court ruled in Seila Law that the for-cause removal provision was unconstitutional but could be severed from Title X.  Thereafter, the CFPB filed a declaration with the Second Circuit in which former Director Kraninger stated that she had ratified the Bureau’s decision to file the enforcement action against RD Legal and to appeal from the district court’s dismissal of the action.

Based on the Supreme Court’s Seila Law decision, the Second Circuit issued a summary order that affirmed Judge Preska’s holding that the for-cause removal provision was unconstitutional, reversed her holding that the provision was not severable, and remanded the case to the district court to consider the validity of former Director Kraninger’s ratification.  The Second Circuit’s order vacated the district court’s judgment dismissing the underlying enforcement action.  In October 2021, the U.S. Supreme Court denied RD Legal’s petition for a writ of certiorari.

On remand, ruling on RD Legal’s motion to dismiss in which it argued that former Director Kraninger’s ratification was invalid, Judge Preska concluded that it was unnecessary for her to decide whether the ratification was valid.  In Collins v. Yellen, the Supreme Court held that an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed.  Relying on Collins, Judge Preska ruled that because former Director Cordray was properly appointed, his decision to file the enforcement action did not need to be ratified.  She also ruled that RD Legal was not entitled to dismissal of the enforcement action as a remedy for the constitutional violation because it could not show that the enforcement action would not have been filed but for the President’s inability to remove former Director Cordray.

Since Judge Preska’s dismissal of the CFPB’s and NYAG’s claims was predicated on her ruling that Title X should be invalidated because the for-cause removal provision was not severable, the Second Circuit’s reversal of her severance ruling reinstated the CFPB’s and NYAG’s federal UDAAP claims.  Additionally, because the Second Circuit’s order vacated Judge Preska’s judgment dismissing the enforcement action, it would also appear to have reinstated the NYAG’s state law claims (although Judge Preska could again decline to exercise supplemental jurisdiction.)  As a result, the issue of whether the transactions should be recharacterized as loans can be expected to reemerge.  In addition to the NYAG’s state law claims, the CFPB’s and NYAG’s UDAAP claims are premised on the argument that the transactions are loans rather than valid assignments or sales of assets as characterized by RD Legal.

In her decision, Judge Preska directed the parties to confer and inform the court by March 30, 2022 how they propose to proceed.