In an unusual procedural move last week in the RD Legal Funding case about which we have previously blogged, SDNY Judge Loretta Preska (the judge presiding over the CFPB’s lawsuit against RD Legal Funding) has referred to EDPA Judge Anita Brody the question of whether the NFL Concussion Litigation settlement agreement forbids assignments of settlement benefits. Judge Brody has been presiding over the multidistrict litigation for over five years and is currently overseeing the implementation of the settlement. Within the Order, Judge Preska noted “[t]his case presents an unusual situation in which the Defendants’ underlying conduct is intertwined with an MDL class action settlement in another court,” and stated the referral “ensures uniformity of adjudication with a single ruling that will apply not only to the Defendants in this action but also to other potential lenders to class members who might assert the same defense[.]” The referral had been requested by the NFL Concussion Litigation Co-Lead Class Counsel, Christopher Seeger.

In related news, earlier this week Judge Brody granted a request from Seeger to compel several entities to produce (1) a list of all retired NFL players with whom the entities communicated, (2) a list of all retired NFL players with whom the entities entered into agreements related to the NFL Concussion Settlement, and (3) a copy of any agreement related to the settlement. However, Judge Brody denied Seeger’s request to compel production of similar information from RD Legal Funding.

RD Legal Funding, LLC is seeking to dismiss the lawsuit filed against it, two of its affiliates, and their individual principal in February 2017 by the CFPB and the New York Attorney General in a NY federal district court alleging that a litigation settlement advance product offered by the defendants is a disguised usurious loan that is deceptively marketed and abusive.  In particular, the complaint alleged that the transactions were falsely marketed as assignments rather than loans and violated New York usury laws. The complaint also alleged that the transactions could not be assignments because the underlying settlements expressly prohibited assignment of claimant recoveries.

In the complaint, both the CFPB and the NY AG asserted deception and abusiveness claims under Sections 1031 and 1042 of Dodd-Frank.  In addition to alleged violations of state civil and criminal usury laws (which were the predicate for one of the CFPB’s deception claims), the NY AG’s state law claims included alleged violations of NY’s UDAP statute.

In their motion to dismiss, the defendants argue that the court should strike down the CFPB as a whole (rather than make the Director removable without cause as the D.C. Circuit panel did in PHH) because its structure is unconstitutional.  The defendants’ other arguments for dismissal include: (1) the court does not have jurisdiction under the CFPA because the defendants’ transactions did not involve an extension of credit and therefore none of the defendants are “covered persons” under the CFPA, (2) the complaint’s deceptive conduct claims fail to meet the heightened pleading standard for claims based on allegations of fraud, (3) the complaint fails to allege abusive conduct because the defendants’ representations about the nature of the transactions were truthful and consumers were encouraged to seek professional advice before entering into a transaction, and (4) state usury laws do not apply because the transactions were sales.

In addition to defending the constitutionality of the CFPB’s structure in their opposition to the motion to dismiss , the CFPB and NY AG assert that the defendants are “covered persons” under the CFPA because they offered or extended credit through the transactions and that all counts in the complaint state valid claims for relief (for reasons that include the argument that heightened pleading standards for fraud claims do not apply to consumer protection claims under the CFPA or NY law.)

When the complaint was filed, the CFPB and the NY AG issued press releases and prepared remarks in which they referenced transactions entered into by the defendants with former NFL players who were entitled to payments from the settlement of the NFL concussion litigation.  Class counsel for the plaintiff settlement class in the concussion litigation filed a letter with the NY district court seeking permission to file a memorandum of law as amicus in support of the CFPB.  In their proposed memorandum, they assert that their participation is intended to address the defendants’ “erroneous” position that the settlement agreement in the concussion litigation permits the assignment of the settlement’s monetary awards.

A request to file a memorandum of law as amicus in support of the CFPB was also filed by the American Legal Finance Association (ALFA), which describes itself as a trade association that represents the country’s leading consumer legal funding companies.  In its memorandum, ALFA indicates that, due to the possibility that a holding in the case could impact the entire legal funding industry, its participation is intended to “assist the Court with expertise not otherwise represented by the parties” regarding the differences between the pre-settlement legal funding transactions offered by ALFA members and the defendants’ transactions.

The defendants opposed the requests of class counsel and ALFA to participate as amici and while the case docket indicates that the court granted permission to ALFA to file its amicus memorandum, it does not indicate the disposition of class counsel’s request.

On November 21, 2017, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar: Litigation Funding: Risks and Rewards.  Click here to register.

 

The Minnesota Attorney General announced that she has filed a lawsuit in state court against two pension advance companies.

According to the AG’s press release, the companies often solicited borrowers through their own websites or websites of “lead generators” who marketed “pension loans” or “loans that can fit your needs.”  The press release states that the transactions required military veterans and senior citizens to assign portions of their monthly pension payments for up to ten years in exchange for much smaller cash amounts (usually less than $5,000) on which the AG claimed the companies typically charged annual percentage rates of 200 percent.

The lawsuit is reported to allege that the companies violated Minnesota lending laws by making loans to Minnesota borrowers without being licensed as a lender and sought to evade Minnesota law by falsely characterizing the transactions as pension “purchase agreements” rather than loans.

In February 2017, the CFPB and the New York Attorney General filed a lawsuit in which they alleged that a litigation settlement advance product offered by the defendant was a usurious loan that was deceptively marketed as an assignment.  In August 2015, the CFPB and the New York Department of Financial Services filed a lawsuit against two pension advance companies in which the CFPB and NYDFS made similar allegations regarding the advances made by the companies.

The Minnesota AG’s lawsuit and the CFPB/NY lawsuits not only indicate that pension advance companies and litigation funding companies have become targets of regulatory enforcement actions, but also suggest that merchant cash advance providers and other finance companies whose products are structured as purchases rather than loans could face heightened scrutiny from state and federal regulators.

 

Regulators from the states of Connecticut, Idaho, Massachusetts, Minnesota and North Dakota (“Participating States”) have entered into a settlement agreement with three affiliated debt collection companies to settle allegations that the companies engaged in collection activities that violated the Fair Debt Collection Practices Act, the FTC Act, and state laws and regulations.  The settlement requires the companies to pay $500,000 to be divided equally among the Participating States.

The agreement indicates that the companies were licensed as collection agencies under the laws of the Participating States.  It also indicates that the Participating States began a multi-state examination of the companies that was conducted concurrently with a targeted review by the CFPB of one of the companies’ federal student loan debt collection activity.  The initial examination review period covered collection activity from February 11, 2013 to February 27, 2015, with consideration also given to activity outside of that period.

In addition to alleging that all of the companies failed to provide access to collection records and submit timely and complete responses to requested information in violation of state statutes and regulations, the agreement alleges that one of the companies engaged in the following unlawful conduct:

  • To meet revenue goals, the company’s agents were directed to make calls to telephone numbers that previously had been designated as “do not call” and to mark the accounts with a special identifier to avoid disciplinary action for violations of law and company policy.  The agreement alleges that such calls violated various FDCPA provisions, such as those limiting third party calls and calls to a consumer at his or her place of employment.  It further alleges that the calls constituted unfair conduct in violation of the Consumer Financial Protection Act’s UDAAP prohibition and also violated specified state statutes and regulations.
  • The company failed to credit payments made by check on the day the check was received and instead delayed credit until the check cleared, which typically took four to five days.  The agreement alleges that such conduct violated the FDCPA prohibition on collecting amounts that are not expressly authorized by the agreement creating the debt or permitted by law, was an unfair or abusive practice in violation of Section 5 of the FTC Act, was unfair, deceptive, or abusive behavior in violation of the CFPA’s UDAAP prohibition, and violated specified state statutes and regulations.

State regulators do not have authority to directly enforce the FDCPA or Section 5 of the FTC Act.  However, many state debt collection statutes (such as the Connecticut statute) require debt collectors to comply with the FDCPA.  Under Section 1042 of the CFPA, state regulators are authorized to bring a civil action to enforce the CFPA’s UDAAP prohibition against state-licensed entities.

In addition to making the $500,000 payment, the settlement agreement requires the companies to establish a compliance management system that meets specified standards for oversight, monitoring, training, and audits.  It also prohibits the companies from continuing to engage in the alleged unlawful conduct, to reimburse consumers for any interest or fees that resulted from not crediting a payment made by check on the date the check was received, and to comply with specified state requirements.

The Minnesota Supreme Court recently ruled that two for-profit postsecondary education schools had charged usurious interest rates on student loans and could not charge rates greater than 8% without obtaining a lending license.

Minnesota’s general usury law caps interest rates at 8% for written contracts but allows a lender to charge up to 18% on a “consumer credit sale pursuant to an open end credit plan.”  In State of Minnesota v. Minnesota School of Business, et al., the Minnesota Attorney General sought to enjoin the schools from making private student loans that typically had interest rates between 12% and 18%, alleging that the loans were subject to the 8% cap.  The schools did not pay out money to the student and instead credited the loan amount against the student’s outstanding tuition balance.  The credit was not available to the student for any other purpose.  The student repaid the loan through monthly payments pursuant to a schedule that had a fixed date by which the entire loan and accrued interest had to be paid in full, and no additional funds were available if the student paid off the loan early.

At issue was whether the loans qualified as a “consumer credit sale pursuant to an open end credit plan” on which Minnesota allowed up to 18 percent interest to be charged.  (The decision states that the parties agreed that the loans “were consumer credit sales.”)   Although the Supreme Court found that the definition of “open end credit plan” under Minnesota law only incorporated the Truth in Lending Act and Regulation Z definition of “open-end credit plan” in effect in 1971 and not as subsequently amended to expressly require revolving credit, it found that revolving credit was nevertheless an essential part of the 1971 definition.

Reversing the Minnesota Court of Appeals, the Supreme Court concluded that the loans were not made pursuant to an open-end plan.   It found that the repayment schedule on the schools’ loans, which provided for a fixed end date, was consistent with a closed-end plan and also observed that the schools had required students to sign a form containing an acknowledgment that a loan was not an “extension of credit under an open-end consumer credit plan.”  According to the Supreme Court, the schools had “structured their loans to give themselves the benefit of open-end credit plans, charging interest in excess of 8 percent-without providing their students the benefit of revolving credit.”

Having found that the schools had charged usurious interest rates, the Supreme Court concluded that to charge rates higher than 8 percent on loans that were not made pursuant to an open-end credit plan, the schools needed to obtain a Minnesota lending license.

The opinion states that the schools did not contest “that they were [engaged] in the business of making loans” for purposes of the lending license statute.  Thus, it appears that the schools did not attempt to argue that, in extending credit to students to finance tuition, they were not acting as lenders making “loans” subject to Minnesota’s general usury law but instead were acting as sellers of goods or services extending credit to buyers to which the time-price doctrine applies.  Sellers making closed-end credit sales should consult with counsel as to how they can avoid the 8 percent rate cap by taking advantage of the time-price doctrine under Minnesota law.

 

 

 

Pennsylvania’s Attorney General, Josh Shapiro, announced last Friday that his office is creating a Consumer Financial Protection Unit “to better protect Pennsylvania consumers from financial scams.”

The announcement indicated that the new Unit “will focus on lenders that prey on seniors, families with students, and military service members, including for-profit colleges and mortgage and student loan servicers.”  The new Unit will be led by Nicholas Smyth, a former CFPB enforcement attorney, who was named Assistant Director of the Office of Attorney General’s Bureau of Consumer Protection.

 

 

We previously reported that the Connecticut Attorney General, on behalf of himself and the Attorneys General of Indiana, Kansas and Vermont (the “state AGs”), had filed a joint motion to intervene in a CFPB enforcement action against Sprint to request a Consent Order modification permitting unused settlement funds to be paid to the National Association of Attorneys General (“NAAG”).  Under the proposed modification, the undistributed settlement funds would be used by NAAG for the purpose of developing the National Attorneys General Training and Research Institute Center for Consumer Protection (“NAGTRI”).

Subsequently, in February 2017, the state AGs and the defendant filed a joint submission seeking to allocate $14 million of the unused settlement funds from the U.S. Treasury to NAAG and to redirect the remaining $1.14 million to a community organization that provides internet access to underprivileged high school students.  The court thereafter directed the CFPB and the DOJ to state, in separate submissions, their positions with respect to the modified proposal to redirect the unused settlement funds.

The CFPB filed what the court characterized as “a gossamer two-page memorandum, modifying its previous position of indifference to one of steadfast opposition to the State AGs’ proposal.”  In a “Statement of Interest of the United States of America,” which the court characterized as “a thoughtful submission,” the DOJ likewise opposed the proposal.  “If NAAG wishes to fund its program with federal dollars,” remarked the DOJ, “it may seek a Congressional appropriation, but no portion of the Redress Amount may be diverted for that purpose.”  Although still advocating for the proposed modification, the defendant “took a more measured tone” in its responsive memorandum, “in essence deferring to the Court on the issue.”  The State AGs filed a responsive memorandum, maintaining what the court characterized as “a full-court press, infusing their brief with a new basis to substantiate their modification request.”

In a well-reasoned Opinion and Order, the court recently granted the joint motion to intervene, and denied the modification request.  The court analyzed the proffered alternative bases for modification separately.

Rule 60(a) – Modification to Correct an Inadvertent Error:  In their motion and supporting memorandum, the State AGs asserted that their proposed modification was permissible, pursuant to Fed. R. Civ. P. 60(a), because it would correct an inadvertent error.  Specifically, they argued that “wiring the remaining funds to the U.S. Treasury contravenes the parties’ intent to use all funds for consumer protection purposes.”  The CFPB ultimately opposed the proposed modification on the basis that there is no clerical mistake or inadvertent error in the Consent Order.

The court framed “the critical question” with respect to the inadvertent error argument as whether the Final Judgment, which incorporates the Redress Plan by reference, establishes an intent “for the settlement funds to be used generally toward consumer protection initiatives, untethered to [the defendant’s] third-party billing practices.”

Under the Residual Clause of the Redress Plan, the Bureau was the only party that could apply the unused settlement funds toward other equitable relief.  The Residual Clause relegated the Federal Communications Commission (“FCC”) and the State AGs, which had been involved in parallel litigation with the defendant, to consulting with the Bureau concerning whether unused settlement funds might be used for other equitable relief.  However, with respect to the State AGs’ motion to redirect the unused settlement funds, the court noted “that the CFPB’s involvement at this juncture in the litigation has been underwhelming.”

The court observed that, “[u]ntil this Court issued its April 10 Order, the CFPB appeared uninterested in the fate of the unexpended funds.”  In the view of the court, this disinterest was evidenced by the fact that the unexpended funds still reside in the defendant’s account notwithstanding a Redress Plan provision directing the defendant to wire any remaining balance to the CFPB after nine months from the Claims Deadline.  The court perceived this as an abdication of responsibility that “leads this Court to ask who will guard the guardians.”

Secondly, the court noted that the Residual Clause expressly required that any other equitable relief must be “reasonably related to the allegations set forth in the Complaint” (i.e., the alleged third-party billing practices of the defendant).  “Nowhere in the Final Judgment or the Redress Plan,” the court stated, “is there any language supporting the State AGs’ view that leftover funds should broadly aid consumers.”  The absence of any such language may have prompted the court, in its Memorandum and Order directing the CFPB and the DOJ to address the State AGs’ proposal, to characterize the clerical error argument as “particularly galling.”

Rule 60(b)(6) – Modification Due to Extraordinary Circumstances or Extreme Hardship:  The court next addressed a new argument asserted by the State AGs in their response to the CFPB and DOJ submissions – that the proposed modification was authorized by Fed. R. Civ. P. 60(b)(6) for other reasons that justify awarding the relief requested.  In this regard, the State AGs noted “the Consent Order represents a global settlement involving” the parties to the CFPB enforcement action, the FCC and the state attorneys general.  They further noted that, “should the Court deny the proposed modification, consumers, like those harmed by the acts and practices alleged in the Complaint, may not have the full benefit of a valuable resource for consumers – consumer protection attorneys well-trained by the NAGTRI Center for Consumer Protection.”

The court stated, however, that Rule 60(b) required the moving party to demonstrate extraordinary circumstances or extreme hardship and concluded that “[t]he equities in this action do not weigh in favor of the relief the State AGs seek.”  After acknowledging that the proposed alternative use of the funds “is perhaps a noble undertaking,” the court nevertheless concluded that the State AGs should seek a Congressional appropriation if they wish to fund the NAGTRI with federal dollars.  Absent other equitable relief reasonably related to the challenged third-party billing practices, noted the court, “[c]ondoning an unintended use of the settlement funds . . . . would circumvent ‘the congressional appropriations process under the guise of Article III’ and invoke questions regarding ‘the proper relationship of our Federal government’s three branches when dealing with the People’s money.’”  Observing that “[t]he proper body to which the State AGs must make their appeal is Congress,” the court stated that “[t]here is simply no extraordinary hardship or circumstance to justify re-writing the negotiated terms of the Redress Plan and Final Judgment.”

Finally, the court noted that the State AGs could have negotiated the requested relief in their separate settlement with the defendant.  Permitting them to do so now in the federal enforcement action by the Bureau would “hollow out the terms of the Final Judgment” and “permit State actors with, at best, a collateral interest in this Federal action to hijack a significant portion of the settlement funds under the guise of ‘consumer protection,’ . . . for the purpose of underwriting a project that principally benefits the states.”  In the view of the court, this result would erode the “extraordinary circumstances” standard for a modification pursuant to Rule 60(b) and “deprive the Federal agency here of its responsibility to monitor and enforce the settlement’s terms to completion.”

Accordingly, the court concluded that “[t]he time when these funds should have been remitted to the People is long past,” and directed the Bureau to deposit the unused settlement funds, including any accrued interest, with the U.S. Treasury as disgorgement forthwith.

Analogizing to the Sessions Memorandum:  One of our colleagues recently reported on the U.S. Attorney General’s memorandum (the “Sessions Memorandum”) prohibiting “payments to various non-governmental, third-party organizations as a condition of settlement with the United States.”  In the aftermath of its issuance, the Chair of the Senate Judiciary Committee sent a letter to Attorney General Sessions inquiring as to whether payments made to non-governmental third parties pursuant to Obama-era settlements with the DOJ “could lawfully be rescinded and re-directed back into the General Fund of the U.S. Treasury.”

In its decision, the court analogized to the Sessions Memorandum.  Although acknowledging that the Sessions Memorandum was not directly on point, the court nevertheless characterized it as instructive.  Specifically, the court noted that the Sessions Memorandum “recognizes that the ‘goals of any settlement are, first and foremost, to compensate victims, redress harm, or punish and deter unlawful conduct,’ and seeks to end the practice of using settlements to provide ‘payment or loan to any non-governmental person or entity that is not a party to the dispute.’” (emphasis in original).

We previously reported that the Connecticut Attorney General, on behalf of the Attorneys General of Indiana, Kansas and Vermont, (the “state AGs”) had filed a joint motion to intervene in a CFPB enforcement action against Sprint to request a Consent Order modification permitting unused settlement funds to be paid to the National Association of Attorneys General (“NAAG”).  Under the proposed modification, the undistributed settlement funds would be used by NAAG for the purpose of developing the National Attorneys General Training and Research Institute Center for Consumer Protection (“NAGTRI”).  We subsequently reported that the CFPB and the DOJ had been directed to state, in separate submissions, their positions with respect to the state AGs’ modified proposal to redirect $14 million of the unused settlement funds from the U.S. Treasury to NAAG and to redirect the remaining $1.14 million to a community organization that provides internet access to underprivileged high school students.

In its Memorandum on the Joint Motion to Intervene to Modify Stipulated Final Judgment and Order, the CFPB stated that the Consent Order should not be modified because Fed. R. Civ. P. 60(a) “does not, in the Bureau’s view, provide grounds for the proposed modification.”  Rule 60(a) permits a court to “correct a clerical mistake or a mistake arising from an oversight or omission” in a judgment, order or other part of the record.

The Bureau also noted in its submission that it had not proposed to apply the unused settlement funds to other equitable relief reasonably related to the allegations set forth in the complaint and therefore the Consent Order provision authorizing alternative uses of that nature was not at issue.  The Bureau concluded its submission by stating that it would direct the Defendant to pay the unused settlement funds to the U.S. Treasury if the Court declined to modify the Consent Order.

In a separate submission titled “Statement of Interest of the United States of America,” the DOJ initially asserted that the motion to intervene should be denied as untimely.  It then proceeded to argue that Rule 60(a) is limited to modifications that implement the result intended by the court when the order was entered, and does not allow changes that alter the original meaning of the judgment.  The DOJ further noted that the state AGs had not identified any clerical error or mistake arising from an omission or oversight.  Instead, the DOJ noted, the provision at issue requiring that unused settlement funds be deposited in the U.S. Treasury as disgorgement “is a standard term that appears in numerous CFPB consent orders.”  Finally, the DOJ asserted that “[n]othing in the Consent Order suggests that NAGTRI or NAAG is an intended beneficiary” and, as the Court itself had noted, the proposed modification “seeks to alter the Consent Order in a fundamental way by redirecting elsewhere” unused settlement funds of $15.14 million that would otherwise be deposited in the U.S. Treasury.

The DOJ concluded its submission with observations relating to the Miscellaneous Receipts Act.  Specifically, the DOJ noted that, “while [its] Statement of Interest is submitted on behalf of the United States as a whole, the CFPB is submitting a separate response opposing modification of the Consent Order.”  As a result, and in view of the fact that it believed there is no ground under Rule 60(a) to permit the proposed modification, the DOJ suggested that the Court need not address the issue of whether the proposed modification would implicate the Miscellaneous Receipts Act.

The DOJ noted, however, that “because the funds at issue have been constructively received by the United States, the Miscellaneous Receipts Act in any case would preclude the CFPB from directing the funds anywhere but the U.S. Treasury, including to NAAG or NAGTRI.”  “If NAAG wishes to fund its program with federal dollars,” the DOJ remarked, “it may seek a Congressional appropriation, but no portion of the Redress Amount may be diverted for that purpose.”

The state AGs and the Defendant may file responsive memoranda by May 24, 2017.  We will continue to monitor developments in this case.

 

 

 

 

We previously reported that the Connecticut Attorney General, on behalf of the Attorneys General of Indiana, Kansas and Vermont, (the “state AGs”) had filed a joint motion to intervene in a CFPB enforcement action to request a Consent Order modification permitting unused settlement funds to be paid to the National Association of Attorneys General (“NAAG”).  Under the proposed modification, the undistributed settlement funds would be used by NAAG for the purpose of developing the National Attorneys General Training and Research Institute Center for Consumer Protection (“NAGTRI”).

The state AGs’ motion and supporting memorandum was filed in CFPB v. Sprint Corporation, a litigation in which the Bureau alleged that Sprint had violated the Consumer Financial Protection Act by allowing unauthorized third-party charges on its customers’ telephone bills.  The associated Stipulated Final Judgment and Order (“Consent Order”) authorized the implementation of a consumer redress plan pursuant to which Sprint would pay up to $50 million in refunds.  The redress plan provided for the payment of refund claims on a “claims made” basis subject to a filing deadline.  Any balance remaining nine months after the claim filing deadline was to be paid to the CFPB.

The Bureau, in consultation with the AGs of all fifty states and the District of Columbia, which were parties to concurrent settlement agreements with Sprint relating to similar billing practice claims, and the FCC, was then to determine whether additional consumer redress was “wholly or partially impracticable or otherwise inappropriate.”  If so, the Bureau, again in consultation with the states and the FCC, was authorized to apply the remaining funds “for such other equitable relief, including consumer information remedies, as determined to be reasonably related to the allegations set forth in the Complaint.”  Any funds not used for such equitable relief were to be deposited in the U.S. Treasury as disgorgement.

In a recent Memorandum and Order recounting the history of the litigation, the district court stated that “the siren song of $15.14 million in unexpended funds [had] lured some new sailors into the shoals of this litigation” because “[d]espite full restitution to Sprint customers and subsequent consultations with the Attorneys General and the FCC, the CFPB could not identify any equitable relief to which $15.14 million in unexpended settlement funds could be applied.”  The court observed that, “[a]pparently, the prospect of simply complying with the Consent Order by paying the funds into the U.S. Treasury lacked sufficient imagination.”

Although the defendant initially filed a memorandum in opposition to the intervention motion, it subsequently filed a joint submission with the state AGs that adopted their proposal to redirect $14 million of the unused settlement funds from the U.S. Treasury to NAGTRI and proposed redirecting the remaining $1.14 million to a community organization that provides internet access to underprivileged high school students.  (The court acknowledged that these were perhaps noble causes worthy of consideration.)  The joint submission stated that the CFPB had been consulted about the proposed modification but “[took] no position” on it.  The court characterized its failure to do so as remarkable, given that the Bureau was “the plaintiff in this lawsuit responsible for securing the $50 million settlement.”

The district court thus observed that it had been left “in a quandary” because:

  • The proposal would “alter the Consent Order in a fundamental way by redirecting elsewhere $15.14 million earmarked for the U.S. Treasury”;
  • The proposal may raise an issue under the Miscellaneous Receipts Act, which requires that government officials receiving money for the government “from any source” must deposit such money with the Treasury;
  • The proposed modification “does not appear, at least at first blush, to be ‘reasonably related to the allegations set forth in the Complaint’”; and
  • The defendant had concurrently entered into settlements with the Attorneys General of all 50 states and the District of Columbia and already paid them $12 million to resolve a multi-state consumer protection investigation.

The court characterized as “particularly galling” the argument that Fed. R. Civ. P. 60(a) permits the proposed modification to correct a clerical mistake.  It noted that the parties had “unmistakably understood that the Consent Order related to federal claims and that any undistributed settlement funds would be paid to the U.S. Treasury.”

In view of the foregoing, the court concluded that it needed “to hear from the Government” because of “the peculiar posture of the intervention application.”  Specifically, the court noted that the CFPB, as the plaintiff in the action, needed to take a position on the proposed intervenors’ motion and application to modify the Consent Order.  And because the proposed modification would redirect funds earmarked for the U.S. Treasury, the court noted that the United States has a direct interest that should be considered.

Accordingly, the court directed the CFPB and the Department of Justice to respond separately to the proposed intervenors’ motion and application to modify the Consent Order.  Their separate memoranda must be filed by May 10, 2017; the state AGs and the defendant may file responsive memoranda by May 24, 2017.  The court stated that the responsive submission of the Bureau “should advise this Court where the unexpended funds have been deposited during the pendency of the intervenors’ application.”   We will continue to monitor developments in this case.

 

The Democratic Attorneys General of 16 states and the District of Columbia have filed a motion with the D.C. Circuit seeking to intervene in the PHH appeal.  The states are Connecticut, Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Mississippi, New Mexico, New York, North Carolina, Oregon, Rhode Island, Vermont, and Washington.

According to the AGs, they had little reason to intervene when PHH originally filed its appeal in June 2015 because the CFPB then had an independent Director and was fully committed to defending the CFPB’s constitutionality.  They assert that the situation has changed due to the Presidential election, with President Trump having expressed strong opposition to Dodd-Frank reforms and media reporting that he is considering the removal of Director Cordray as soon as possible.  More specifically, they claim that the new Administration “has indicated that it may not continue an effective defense of the statutory for-cause protection of the CFPB director” and “[a] significant probability exists that the pending petition for rehearing will be withdrawn, or the case otherwise rendered moot, in a way that directly prejudices the interests of the State Attorneys General and the citizens of the States that they represent.”

The AGs argue that they satisfy the standard for intervention on appeal as of right because:

  • Although a motion to intervene must be filed within 30 days after a petition for review is filed, the motion is timely because the court has discretion to extend the deadline for good cause.  Such cause exists because there was no reason for the AGs to believe until after the presidential election “that their interests would not be represented in full.”
  • They have a legally protected interest in the litigation based on their role in enforcing consumer protection laws.  The AGs claim that because the CFPA requires a state AG to notify the CFPB when the AG is using his or her Section 1042 authority to enforce the CFPA and allows the CFPB to intervene as a party, “[r]emoval of the Director’s independence as a result of this Court’s ruling would…effectively giv[e] the President veto power over the State Attorneys’ General enforcement of the CFPA.”  They also note that because the CFPA directs the CFPB to coordinate regulatory actions with state AGs, the D.C. Circuit’s ruling threatens the AGs’ ability to bring coordinated regulatory actions “free from political influence and interference.”
  • If the CFPB chooses to no longer defend the case, the interests of the state AGs and state citizens will be seriously impaired because by “permitting the immediate termination of the Director at will,” the panel’s decision not only compromises the CFPB’s independence but also “will likely derail pending policy initiatives and enforcement actions and possibly call into question the validity of past initiatives.”
  • Because “[t]here is reason to believe that the new administration will not maintain its defense of the CFPB,” the interests of the state AGs are unlikely to be adequately represented by the executive branch.

The AGs also argue in the alternative that they satisfy the requirements for permissive intervention because, in arguing like the CFPB and United States that the D.C. Circuit’s constitutionality ruling is wrong, they “would have a defense that would share a common question of law with the main action.”

Since the AGs indicate in their motion that they do not intend to file additional briefs unless the D.C. Circuit “orders briefing for the en banc proceedings,” the motion seems unlikely to significantly delay a ruling on the CFPB’s petition for en banc rehearing.  Pursuant to the D.C. Circuit’s order granting PHH’s motion for leave to file a supplemental response to the CFPB’s petition, PHH must file its supplemental response by January 27.  Presumably, the D.C. Circuit will rule on the petition soon thereafter.