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RD Legal Funding has submitted a letter to Judge Preska indicating that it does not oppose her entry of a Rule 54(b) judgment to allow the CFPB to appeal her June 21 constitutionality ruling to the Second Circuit but renews its request that the proceeding be stayed during the pendency of any appeal.

RD Legal’s letter responds to the CFPB’s August 10 letter to Judge Preska indicating that it plans to file a motion for entry of a judgment pursuant to Rule 54(b).  RD Legal asserts that “implicit in the CFPB’s request…is the understanding that the NYAG’s claims should be stayed during the pendency of the appeal.”

In addition to asking Judge Preska to stay the proceeding, RD Legal asks her, if she enters a judgment against the CFPB pursuant to Rule 54(b), to certify the remainder of her June 21 order for interlocutory appeal under 12 U.S.C. Section 1292(b).  According to RD Legal, “[a]ll aspects of the Court’s constitutionality ruling, including its ruling permitting the NYAG to proceed under the stricken provisions of Title X, should be addressed in one proceeding.”  The “remainder” of Judge Preska’s June 21 order would also include her ruling that the NYAG could proceed with its state law claims against RD Legal.  (While the CFPB would have a right to appeal a judgment entered pursuant to Rule 54(b), if Judge Preska were to certify the remainder of her June 21 order for interlocutory appeal as requested by RD Legal, the Second Circuit would need to agree to hear RD Legal’s interlocutory appeal.)

The NYAG has submitted a letter to Judge Preska in which it challenges RD Legal’s argument that her dismissal of the CFPB from the case and striking of Dodd-Frank Title X necessitates her dismissal of the NYAG’s CFPA claims against RD Legal.  The letter also sets forth the NYAG’s opposition to Judge Preska’s issuance of a stay of the proceeding if she enters a Rule 54(b) judgment against the CFPB.

 

 

The New York Attorney General has submitted a letter to Judge Preska that responds to RD Legal Funding’s letter asking her to dismiss all of the NYAG’s federal and state claims.

In its letter, RD Legal Funding asserted that the NYAG’s federal claims should be dismissed because they are brought pursuant to Dodd-Frank Section 1042, which authorizes state attorneys general to file civil actions in federal court to enforce the provisions of the CFPA, and Judge Preska struck all of Title X in its entirety in her June 21 decision, including Section 1042.  In addition to asking the court to dismiss the NYAG’s federal claims with prejudice, RD Legal Funding asked the court to dismiss the NYAG’s state law claims without prejudice to their being refiled in state court.

The NYAG, in its letter to Judge Preska, takes the position that her “termination of the CFPB [from the case] does not necessitate the invalidity of the prohibited conduct provisions of the CFPA or the NYAG’s enforcement authority.”  The NYAG appears to argue that in striking Title X, Judge Preska was only “striking down the CFPB” because of its unconstitutional structure and left in place the CFPA’s substantive provisions (e.g. its UDAAP prohibition) and the right of state AGs to bring CFPA claims.

The NYAG also argues that even if the court were to reverse itself and hold that the NYAG cannot bring CFPA claims, the court would still have subject matter jurisdiction “based upon the embedded federal questions in the NYAG’s state law claims.” According to the NYAG, the embedded federal issue is whether the transactions that RD Legal Funding entered into with consumers entitled to benefits under the September 11th Victim Compensation Fund of 2001 were void under the federal Anti-Assignment Act and therefore loans subject to New York usury law.  (We previously observed that the court, after concluding that the assignments before it were void, leaped to the conclusion that, as a result, the transactions were necessarily disguised loans.  The basis for this conclusion was never articulated by the court.  Just because the underlying transactions are problematic does not mean that they meet the New York definition of usurious loans.)

Finally, the NYAG argues that even if the court finds there is no basis for original jurisdiction over the NYAG’s federal or state law claims, it should nevertheless use its discretion to decide the NYAG’s state law claims because “[b]alancing judicial economy, convenience, fairness, and comity argues for retaining jurisdiction of the state law claims.”  The NYAG asserts that dismissal of its state law claims “would require the NYAG to refile in state court and would unnecessarily delay the proceedings, to the detriment of the consumers harmed by RD Legal, particularly those in poor health.”  The NYAG also points to the district court’s familiarity with the issues in the case and observes that “the state laws at issue are not novel and thus concerns of comity are not implicated.”

The NYAG takes no position in its letter as to whether the court should enter judgment against the CFPB pursuant to Rule 54(b) of the Federal Rules of Civil Procedure so the CFPB can file an immediate appeal with the Second Circuit of Judge Preska’s constitutionality ruling.  However, the NYAG restates its opposition to the court’s issuance of a stay of the proceeding if it enters a Rule 54(b) judgment. The CFPB has sent a letter to Judge Preska indicating that it plans to file a motion for entry of a judgment pursuant to Rule 54(b).

 

The CFPB has filed a letter with Judge Preska in which it asks “for a pre-motion conference with the Court for approval to file a motion under Rule 54(b) for entry of a final judgment with respect to the Bureau” in the RD Legal Funding case.

Under Rule 54(b) of the Federal Rules of Civil Procedure, a district court can certify a final judgment where “(1) there are multiple claims or parties, (2) at least one of the claims or the rights and liability of at least one party has been finally determined, and (3) ’there is no just reason for delay.’”  In her June 21 order, Judge Preska 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, dismissed the CFPB from the case, and allowed the New York Attorney General to proceed with its CFPA and state law claims.

In its letter, the CFPB argues that the three conditions of Rule 54(b) are satisfied.  It asserts that in addition to involving two plaintiffs (the CFPB and NYAG), by dismissing the CFPB from the case while allowing the NYAG to proceed with its CFPA claims, her order “finally resolved the Bureau’s claims.”  It also asserts that her dismissal of the CFPB “deprives the Bureau of its statutorily-assigned right to participate in the litigation of CFPA claims brought by state regulators.”  The CFPB also argues that the issues of its constitutionality and whether the for-cause removal provision is severable from the CFPA are “separable” from the other issues in the case that remain to be decided.  According to the CFPB, the court’s “resolution of New York’s claims will not render the court of appeals’ decision advisory or moot, and the appeals court would not have to reach the merits of New York’s claims in resolving the Bureau’s appeal.”

RD Legal Funding previously submitted a letter to Judge Preska in which it asserted that having struck all of Title X in its entirety (including Section 1042 on which the NYAG relies for its authority to bring the CFPA claims), Judge Preska should dismiss the federal claims with prejudice and dismiss the state law claims without prejudice to their being refiled in state court.  It also asked the court to then enter judgment against the CFPB and NYAG “allowing the Court’s June 21, 2018 Order to be appealed, if appropriate, in its entirety.”  The NYAG has indicated to Judge Preska that it does not take a position on her entry of a Rule 54(b) judgment against the CFPB but that, if the court were to do so, it would oppose any request by RD Legal Funding for a stay of the district court proceeding.

Should Judge Preska enter a final judgment under Rule 54(b) from which the CFPB appeals to the Second Circuit, two circuits will be actively considering the CFPB’s constitutionality, thereby increasing the likelihood of this issue coming before the U.S. Supreme Court in the next year or so.  The issue of the CFPB’s constitutionality is currently before the Fifth Circuit in the interlocutory appeal of All American Check Cashing from the district court’s ruling upholding the CFPB’s constitutionality.

On July 25, Judge Preska entered an order setting deadlines for RD Legal Funding and the New York Attorney General (NYAG) to submit filings on jurisdictional issues and addressing other procedural matters.

Judge Preska had previously issued an order on June 21 denying RD Legal Funding’s motion to dismiss the NYAG’s federal UDAAP claims under the CFPA and state law claims but terminating the CFPB’s participation in the case as a consequence of her determination that because the CFPB’s single-director-removable-only-for-cause structure is unconstitutional, the CFPB lacked authority to bring claims under the CFPA.  In Judge Preska’s view, the proper remedy was to strike the CFPA (Title X of Dodd-Frank) in its entirety rather than just sever the for-cause removal provision.

In her June 21 order, Judge Preska set a July 9 deadline for counsel to advise the court how they intended to proceed.  In the joint submission made by RD Legal Funding and NYAG pursuant to Judge Preska’s order, RD Legal Funding asserted that the June 21 order “struck each substantive provision of the [CFPA] that forms the basis of federal jurisdiction, which RD Legal will address in a separate filing.”  In her July 25 order, Judge Preska set August 3, 2018 as the deadline for RD Legal Funding to make its “proposed filing on what they describe as jurisdictional issues” and set August 13, 2018 as the deadline for the NYAG to respond.

Last week, RD Legal Funding filed an answer to the complaint in which, citing to Judge Preska’s June 21 order, it denied the NYAG’s allegation that it has authority under Dodd-Frank Section 1042 to enforce the provisions of the CFPA.  Presumably, RD Legal Funding will detail the legal basis for these denials in its filing on jurisdictional issues.

In the joint submission made pursuant to Judge Preska’s June 21 order, RD Legal Funding also asked the court to make an express finding that there is “no just reason for delay” and enter judgment against the CFPB alone under Rule 54(b) of the Federal Rules of Civil Procedure, and if the CFPB sought immediate review of the June 21 order, certify the order for interlocutory appeal and stay the proceeding during the appeal’s pendency.  The NYAG indicated that it wanted the case to proceed as quickly as possible and would oppose any request by RD Legal Funding for delay, including a request for interlocutory appeal and a stay of the proceeding.

The CFPB has not yet indicated whether it will appeal Judge Preska’s June 21 order to the Second Circuit.  Because the case remains active, it cannot appeal the order without a finding by Judge Preska that there is no reason to delay the appeal under Rule 54(b).  In her July 25 order, Judge Preska preemptively denied RD Legal Funding’s request for certification of her June 21 order for interlocutory appeal and for a stay of the proceeding during the pendency of the appeal in the event the CFPB were to seek immediate review of her June 21 order by the Second Circuit “pursuant to some mechanism other than a Rule 54(b) judgment.”

Judge Preska’s July 25 order also directed the NYAG to inform the court if it wished to be heard should RD Legal Funding “persist in their request that the Court enter judgment against the [CFPB] under Rule 54(b).”  In a letter to Judge Preska dated July 27, 2018, the NYAG stated that it “does not take a position on this issue, with one caveat related to expediency.”  The NYAG indicated that it “believes that this case should proceed as expeditiously as possible in this Court and objects to any scenario where the Court would issue a stay.”  It stated further that “to the extent that the Court issues a judgment under Rule 54(b), the NYAG requests that the Court deny any request by the RD Legal Parties for a stay of this proceeding.”

 

We have blogged twice (here and here) about the conclusion in RD Legal Funding that Title X of Dodd-Frank is unconstitutional because it provides that the sole director of the CFPB can be removed only for cause.  This post addresses the issue that took up 95 pages of the 101-page opinion—whether RD Legal Funding violated UDAAP and usury laws because purported asset purchases were in fact disguised loans.  Before enforcement authorities or plaintiffs’ attorneys get too excited that the court found against RD Legal Funding on this issue, the unusual facts of the case and the basis for the court’s opinion need to be examined.

RD Legal Funding 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”).  In both situations, the court indicated, consistent with the complaint, that the consumer’s right to a benefit and the amount of the benefit had been determined.  The party responsible for payment (the NFL or the U.S. Government) was unquestionably willing and able to make the required payment.  The only question was when payment would be made.  Of course, this scenario differs greatly from the typical situation where a litigation funding company purchases an interest in a claim in ongoing personal injury or other litigation. Indeed, an industry trade group, siding with the CFPB and NY AG against RD Legal Funding, made exactly this point:

The pre-settlement legal funding transactions referenced in ALFA’s amicus curiae brief differ in a crucial respect. (See ALFA Br.)   In those transactions, the pre-settlement legal funding agreements are entered into before the claim is resolved.  The ALFA Member’s right to repayment is contingent on the consumer’s ultimate success on his or her claim. (ALFA Br. 5.)

Opinion at p. 53.

For some reason, the CFPB and NY AG did not argue, and the court did not determine, that the payment of settlement benefits and subsequent payment to RD Legal Funding were assured and, hence, the advances functioned the same as loans.  Accordingly, and because the decision was on a motion to dismiss, where all factual allegations are required to be accepted as true, the RD Legal Funding decision did not address whether benefit payments were certain.

Rather, the decision was based on the court’s determination that the purported benefit assignments in question were void.  In the case of the NFLSA benefits, the underlying settlement agreement expressly provided that any “assignment, or attempt to assign … any rights or claims relating to the subject matter of the Class Action Complaint will be void, invalid, and of no force and effect.” (Opinion at 20).  As to the VCF benefits, the court pointed to three requirements under the federal Anti-Assignment Act, 31 U.S.C. § 3727, for the assignment of claims against the United States.  It then observed that “neither party has argued that the RD Entities complied with the Anti-Assignment Act’s three requirements under Section 3727(b).” (Opinion at 41).  (The court did not address why the assignments to RD Legal Funding could not function as valid assignments of the proceeds of VCF benefits and why such assignments could not be enforced against the VCF beneficiaries.)

After concluding that the assignments before it were void, the court leaped to the conclusion that, as a result, the transactions were necessarily disguised loans.  The basis for this conclusion was never articulated by the court.  Just because the underlying transactions are problematic does not mean that they meet the New York definition of usurious loans.

Remarkably, the decision never addressed the New York (or any other) definition of the term “loan.” It ignored that, for over 150 years, New York courts have declared that “there can be no usury unless the principal sum advanced is repayable absolutely.” Pomeroy v. Ainsworth, 22 Barb. 118 (1856).  Even the NY AG has recognized this principle.  In a February 2005 press release regarding litigation financing reforms, the Attorney General stated:

The cash advances provided by these firms are not considered “loans” under New York State law because there is no absolute obligation by a consumer to repay them. The contracts provide that, in the event the consumer receives no recovery from his or her claim, the consumer owes no money to the cash advance firm.

Maybe in the instant case, if it had confronted the issue, the court would have concluded that the assignments provided the requisite certainty of payment.  In most other cases, however, this certainty will be lacking.

But even putting aside this glaring omission, it is clear that the decision applies to a narrow range of transactions, where the assignments of the underlying claims are void for some reason.  That is not the case when the anticipated proceeds of lawsuit claims are sold on a non-recourse basis.  See Williams v. Ingersoll, 89 N.Y. 508, 518-521 (1882). (binding authority in New York holding that the proceeds of personal injury claims may be assigned).  Critically, “[i]f the assignments are valid … the entire basis of the Government’s jurisdictional theory under the CFPA [that the transactions are loans’ would fall apart.”  (Opinion at 19).

In two closely-watched enforcement actions pending in Colorado state court, the Administrator of the Uniform Consumer Credit Code for the State of Colorado is employing the “true lender” theory and the Second Circuit’s decision in Madden v. Midland Funding, LLC to challenge two bank-model lending programs.  Specifically, the Administrator asserts that the origination of the loans by state-chartered banks should be disregarded under the “predominant economic interest” test employed by some district courts in true lender cases, and that the banks’ power to export interest rates under federal law does not follow loans they assign to their program partners.  For these reasons, the Administrator contends that the loans are subject to Colorado usury laws despite the fact that state interest rate limits on state bank loans are preempted by Section 27 of the Federal Deposit Insurance Act (FDIA).

Although these cases were filed in January 2017, little has happened on the merits to date.  The cases were removed to federal court by the program sponsors and remanded a year later.  The banks involved in the programs filed separate declaratory relief actions in federal court, but those cases were dismissed without prejudice on abstention grounds.  The banks then filed motions to intervene in the state court actions, and the program sponsors moved to dismiss the state court cases.  The motions to dismiss argue that the usury claims are preempted by the FDIA, that Madden was wrongly decided and should not be followed, and that the banks are the “true lenders” as a matter of federal law, and also under state law if it applies.

On June 22, 2018, the state court heard oral argument on the motions to dismiss and to intervene in both cases.  The Court allowed argument for nearly two hours, and provided no clear indication on how it would rule before taking the motions under submission.  We will continue to follow the cases closely and report on additional developments.

 

 

 

 

The New Jersey Attorney General, Gurbir Grewal, has sent a letter to Department of Education Secretary Betsy Devos in which the NJ AG invites the ED to work with his office “to ensure that any investigations of fraudulent activities by educational institutions are completed properly, rather than ended prematurely or allowed to grow dormant.”

The NJ AG indicates that his invitation is intended to put to rest recent reports that the ED has discontinued investigations into potentially fraudulent activity at several large for-profit colleges and restricted communications between the ED’s staff and state AGs about such investigations.  He asserts that “[a]bandoning the Department’s cooperative relationships with State Attorneys General could only harm the public interest we should be working together to serve.”

The NJ AG asks the ED to let his office partner with the ED if it continues to pursue the investigations it “reportedly has (or had) in progress” or, if the ED will not pursue such investigations, to let his office “pick up where you leave off” and give it access to the ED’s files (claiming that his office can arrange to protect the confidentiality of any shared investigative files.)

 

According to media reports, CFPB Acting Director Mick Mulvaney has sent an email to Bureau staff indicating that he plans to fold the Office of Students and Young Consumers into the Office of Financial Education.  Both Offices are part of the Bureau’s Consumer Education and Engagement Division.  The Student Loan Ombudsman, a position created by the Dodd-Frank Act, will also be part of the Office of Financial Education.  The current staff of the Office of Students and Young Consumers is expected to be reassigned to other Offices.

While the reorganization means that the Office of Students and Young Consumers will no longer be involved in investigations that could result either in supervisory actions or in enforcement actions, it does not mean that the CFPB will no longer bring such actions against student loan lenders and servicers.

As might be expected, the reorganization has quickly attracted criticism from consumer advocates and others. New York State Department of Financial Services Superintendent Maria Vullo released a statement expressing her Department’s concern “with the CFPB’s troubling decision to minimize the role of the Office of Students and Young Consumers.” She indicated that “DFS’s Student Protection Unit will continue its nation leading efforts in safeguarding students from fraud and misrepresentation in the market, monitoring student-related financial practices in New York and educating student consumers and their families regarding available financial products and services to empower them to make informed choices.  And violators of the law will be met with swift DFS response.”

In February 2018, Mr. Mulvaney announced that he planned to transfer the CFPB’s Office of Fair Lending from the Supervision, Enforcement, and Fair Lending Division to the Director’s Office, where it will become part of the Office of Equal Opportunity and Fairness.

Mr. Mulvaney is also reported to have indicated in his email to Bureau staff that he plans to hire more political appointees and create an office of cost-benefit analysis staffed by economists that report directly to him.  Another reported change is Mr. Mulvaney’s creation of an Office of Innovation, known previously as Project Catalyst, an initiative launched by the CFPB in 2012 for facilitating innovation in consumer financial products and services.

The New Jersey Attorney General recently announced that the state’s governor will nominate Paul R. Rodriguez to serve as the Director of the New Jersey Division of Consumer Affairs, the state’s lead agency charged with protecting consumers’ rights, regulating the securities industry, and overseeing 47 professional boards.

According to the AG’s press release, Mr. Rodriguez’s selection is intended “to fill the void left by the Trump Administration’s pullback of the [CFPB]” and fulfills the promise of the state’s governor “to create a ‘state-level CFPB’  in New Jersey.”  Mr. Rodriguez will begin serving as Acting Director of the Division of Consumer Affairs on June 1, pending his approval as Director by the New Jersey Senate.

The New Jersey announcement is consistent with announcements by other state AGs that they intend to fill any vacuum created by a less aggressive CFPB under the Trump Administration.

Mr. Rodriguez currently serves as Acting Counsel to New York City Mayor Bill de Blasio.  Before joining the de Blasio administration, Mr. Rodriguez was an associate with a major New York City-based law firm where he worked in a variety of areas.

Democratic Senator Dianne Feinstein announced that she and three other Democratic Senators have introduced a bill, the “Accountability for Wall Street Executives Act of 2017,” that would allow state attorneys general to issue investigative subpoenas to national banks in connection with suspected violations of state law.

The bill appears intended to overturn the U.S. Supreme Court’s 2009 decision in Cuomo v. Clearing House Association interpreting the National Bank Act (NBA) provision that bars state officials from exercising “visitorial powers” over national banks.  While the Supreme Court held in Cuomo that the filing of a civil lawsuit by a state AG against a national bank to enforce state law was not barred as the exercise of “visitorial powers,” it also held that the issuance of extra-judicial subpoenas by a state AG in connection with an investigation was barred.

The bill would amend the NBA (12 U.S.C. 484) to provide that, notwithstanding the limit on visitorial powers, “an attorney general (or other chief law enforcement officer) of a State may issue subpoenas or administer oversight and examination to national banks or officers of national banks upon reasonable cause to believe that the national bank or an officer of a national bank has failed to comply with applicable State laws.”

In attempting to further empower state AGs, the bill likely is a response to the concern of Democratic lawmakers that CFPB enforcement activity will significantly decrease under the Trump administration.  A group of Democratic state AGs recently sent a letter to President Trump in which they threatened to aggressively use their enforcement authority under federal and state law.

In addition to various federal consumer protection statutes that give direct enforcement authority to state AGs or regulators, Section 1042 of the Consumer Financial Protection Act authorizes state AGs and regulators to bring civil actions to enforce the provisions of the CFPA, most notably its prohibition of unfair, deceptive or abusive acts or practices.  A state AG or regulator, before filing a lawsuit using his or her Section 1042 authority, must notify the CFPB and Section 1042 allows the CFPB to intervene as a party and remove an action filed in state court to federal court.

On January 11, 2018, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar: Who Will Fill the Void Left Behind by the CFPB?  Click here to register.