A three-judge panel of the U.S. Court of Appeals for the Second Circuit has unanimously ruled that the CFPB’s funding structure does not violate the Appropriations Clause of the U.S. Constitution.  In its decision, the panel expressly declined to follow the Fifth Circuit panel decision in Community Financial Services Association of America Ltd. v. CFPB that reached the opposite conclusion.  Last month, the U.S. Supreme Court granted the CFPB’s certiorari petition seeking review of the Fifth Circuit decision and agreed to hear the case next Term.

In CFPB v. Law Offices of Crystal Moroney, the federal district court granted the CFPB’s petition to enforce a civil investigative demand (CID) that it issued to Moroney prior to the U.S. Supreme Court’s decision in Seila Law holding that the limitation on the President’s ability to remove the CFPB Director only “for cause” was unconstitutional.  After that decision, then CFPB Director Kraninger ratified the issuance of the CID. 

On appeal to the Second Circuit, Moroney argued that the CID could not be enforced because (1) the CID was void when it was issued because the CFPB Director was unconstitutionally shielded from removal by the President, (2) the CFPB’s funding structure violates the Appropriations Clause, (3) Congress violated the nondelegation doctrine when it created the CFPB’s funding structure, and (4) the CID is unduly burdensome.  In an opinion written by Judge Richard Sullivan, appointed by President Trump, all of Moroney’s arguments were rejected by the Second Circuit panel.  The other two panel members were Senior Judge Amalya Kearse, appointed by President Carter, and Senior Judge John Walker, appointed by President George H. W. Bush.

CID not void when issued.  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, the Second Circuit ruled that the CID was valid despite the unconstitutionality of the CFPA’s removal provision because Richard Cordray, the CFPB Director when the CID issued, was properly appointed.  In addition, relying on Justice Kagan’s separate opinion in Collins (in which Justice Breyer and Justice Sotomayor joined), the Second Circuit held that “to void an agency action due to unconstitutional removal protection, a party must show that the agency action would not have been taken but for the President’s inability to remove the agency head.” (emphasis included).  The Second Circuit found there was “nothing to suggest that the Director’s removal protection affected the issuance of the CID or the investigation into Moroney.”

No Appropriations Clause violation.  The Second Circuit found no violation of the Appropriations Clause “[b]ecause the CFPB’s funding structure was authorized by Congress and bound by specific statutory provisions [in the Consumer Financial Protection Act (CFPA)].  In CFSA, the Fifth Circuit had concluded that Congress had ceded direct control over the CFPB’s budget by insulating it from annual or other limited appropriations and ceded indirect control by providing that the CFPB’s funding was to come from a source outside of the appropriations process, i.e. the Federal Reserve System.  The Fifth Circuit labeled this structure “a double insulation from Congress’s purse strings” that violated the separation of powers. 

The Second Circuit commented as an initial matter that it could not find any support for the Fifth Circuit’s conclusion in Supreme Court precedent.  It stated that “[t]o the contrary, the Court has consistently interpreted the Appropriations Clause to mean simply that ‘the payment of money from the Treasury must be authorized by a statute.’” (emphasis included, citation omitted).  The Second Circuit indicated that it was not aware of “any Supreme Court decision holding (or even suggesting) that the Appropriations Clause requires more than this ‘straightforward and explicit command.’” (citation omitted).

In addition, the Second Circuit stated that it “likewise find[s] no support for the Fifth Circuit’s reasoning in the Constitution’s text.”  That text provides that “[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.”  The Second Circuit observed that “[n]othing in the Constitution, however, requires that agency appropriations be ‘time limited’ or that appropriated funds be drawn from a particular ‘source.’” 

The Second Circuit stated further that it found no support for the Fifth Circuit’s reasoning in the Appropriation Clause’s history.  According to the Second Circuit, the CFPB’s funding was “[c]onsistent with the historical practices of English, colonial, and state governments that formed the basis of the Founders’ understanding of the appropriation’s process at the time of the Constitution’s enactment.”  Those practices required that the “purpose” of an appropriation, a “limit” on its amount, and the “fund” for its payment be specified by a previous law.  According to the Second Circuit, these practices were satisfied by the CFPA’s list of five “objectives” for the CFPB, its limit on funding to 12% of the Federal Reserve System’s total operating expenses as reported in 2009 (subject to adjustment for inflation) and its designation of the combined earnings of the Federal Reserve System as the funding source.

No violation of nondelegation doctrine.  Moroney  argued that, even if the CFPB’s funding did not violate the Appropriations Clause, Congress violated the nondelegation doctrine in enacting the CFPA because it did not articulate an “intelligible principle” in circumscribing the President’s discretion in appropriating funds.  The Second Circuit concluded that the CFPB’s funding structure is proper under the nondelegation doctrine because in the CFPA “Congress has plainly provided an intelligible principle to guide the CFPB in setting and spending its budget.”  The Second Circuit pointed to (1) the statement in the CFPA that the CFPB’s budget is to be used to “pay the expenses of the [CFPB] in carrying out its duties and responsibilities, (2) the CFPB’s purpose as stated in the CFPA to “seek to implement, and where applicable, enforce Federal consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive,” and (3) the CFPA’s list of five “objectives” and six “primary functions” for the CFPB. 

CID not unduly burdensome.  The Second Circuit concluded that Moroney had not met her burden of showing that the CID was unreasonable. Among her arguments rejected by the Second Circuit were that that the CID was not issued for a proper purpose because it sought information implicating the practice of law and attorneys engaged in practice of law are excluded from the CFPB’s enforcement jurisdiction.  The Second Circuit found that the CID was issued for a legitimate purpose because the CID was only addressed to Moroney’s debt collection activities and possible violations of the FDCPA and FCRA.

Moroney might seek rehearing en banc in the Second Circuit or, instead, file a certiorari petition in the Supreme Court.  With the Supreme Court already having granted CFSA’s certiorari petition and issued a briefing schedule, Moroney may be more likely to opt to file a certiorari petition.  If filed, the CFPB is unlikely to oppose Moroney’s petition and the Supreme Court is likely to grant the petition and either consolidate it for argument with CFSA or hold it pending the outcome in CFSA.  

The Supreme Court did not grant CFSA’s cross-petition for certiorari which asked the Court to consider the alternative, non-constitutional grounds for vacating the CFPB’s payday lending rule that the Fifth Circuit rejected.  The Court also declined to consider the alternative grounds as antecedent questions added to the CFPB’s petition.  Nevertheless, some observers have suggested that the constitutional avoidance doctrine could still require the Supreme Court to first consider the alternative grounds before reaching the Appropriations Clause issue.  That doctrine provides that a court should avoid deciding a constitutional issue if there is another non-constitutional basis for resolving the case.  In that circumstance, the Second Circuit decision could provide a better vehicle for reaching the Appropriations Clause issue because Moroney’s non-constitutional arguments appear to be weaker than those of CFSA.

Other than the Fifth and Second Circuits, the D.C. Circuit is the only other circuit to have considered the constitutionality of the CFPB’s funding.  In its 2018 decision in PHH Funding v. CFPB, the en banc D.C. Circuit upheld the CFPB’s funding mechanism because it “fits within the tradition of independent financial regulators.”  However, unlike the Second Circuit decision which involved a direct challenge to the CFPB’s constitutionality based on its funding structure, PHH involved a challenge to the CFPB’s constitutionality based on the CFPB Director’s “for cause” removal protection in which the D.C. Circuit was asked to consider whether the the CFPB’s funding structure, when considered in combination with the Director’s “for cause” removal protection, created a separation of powers constitutional violation. 

Of course, the Supreme Court will have the final say on this matter.