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.

The Attorneys General for the states of Connecticut, Indiana, Kansas, and Vermont recently took the unusual step of filing a joint motion to intervene to modify the settlement terms of a CFPB enforcement action.

The motion was filed in the CFPB’s action filed in a New York federal district court in December 2014 against Sprint Corporation that alleged Sprint had violated the Consumer Financial Protection Act by allowing unauthorized third-party charges on its customers’ telephone bills.  To settle the action, Sprint and the CFPB entered into a Stipulated Final Judgment and Order (Stipulated Judgment) that required Sprint to pay $50 million in consumer refunds pursuant to a redress plan.

According to the memorandum in support of the joint motion to intervene, the redress plan provides that once the deadline for customers to file passes and Sprint refunds all charges for approved claims, Sprint must pay the balance of the $50 million to the CFPB.  The CFPB, in consultation with the states (which were parties to separate agreements with Sprint relating to similar billing practices claims) and the FCC, must then determine if additional consumer redress is “wholly or partially impracticable or otherwise inappropriate.”  If additional redress is determined to be “wholly or partially impracticable or otherwise inappropriate,” the CFPB, again in consultation with the states and the FCC, can 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 are to be deposited in the U.S. Treasury as disgorgement.

The AGs claim in their motion that, after payment of claims, approximately $14 million of Sprint’s redress funds remain unused and that the CFPB, in consultation with the Vermont AG acting as liaison for the states and the FCC, has concluded that additional redress is wholly or partially impracticable or otherwise inappropriate and did not identify any other equitable relief towards which the CFPB could apply the remaining funds.

The AGs seek to modify the Stipulated Judgment to require the CFPB to deposit the remaining funds with the National Association of Attorneys General to continue and complete the development of the National Attorneys General Training and Research Institute (NAGTRI) Center for Consumer Protection.  NAGTRI proposes to use the funds “to train, support and improve the coordination of the state consumer protection attorneys charged with enforcement of the laws prohibiting the type of unfair and deceptive practices alleged by the CFPB [in its action against Sprint].”  The AGs state that neither the CFPB nor Sprint oppose their motion.

State AGs and financial regulators are widely expected to ramp up their enforcement of federal and state consumer financial protection laws in response to anticipated changes to the CFPB and other federal regulatory agencies in a Trump administration.  In a recent webinar, “Beyond the CFPB-Preparing for State Enforcement Post-Election,” Ballard Spahr attorneys reviewed the enforcement authority of state AGs and regulators, surveyed enforcement and rulemaking activity in the financial services industry, and discussed what can be done by companies to prepare to defend against state enforcement activity.

Since last Tuesday’s election, there has been much discussion of how expected changes under a Trump Administration are likely to reduce the CFPB’s impact, particularly in the enforcement arena.  Little attention, however, has been paid to the election’s implications for the role of state attorneys general and state financial services regulators in enforcing federal and state consumer financial protection laws.

Faced with a less aggressive CFPB, state attorneys general and financial regulators may be emboldened to ramp up their enforcement activity, with Democratic-controlled states such as New York, California and Illinois already known for an activist approach likely to take the lead.  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.  Indeed, the New York AG, the New York Department of Financial Services, and the Illinois AG have already filed lawsuits using their Section 1042 authority.

Several federal consumer financial protection laws such as the TILA, FCRA, and RESPA directly give enforcement authority to state AGs.  In addition to relying on that authority, state AGs can be expected to take a more aggressive approach to enforcement of state law, including provisions in many states under which a federal law violation is deemed to be violation of state law.  When enforcing state law, state AGs can bring civil actions against national banks or federal savings associations to enforce state laws that are not preempted. (Such authority is expressly provided by the CFPA, which codified the U.S. Supreme Court’s 2009 decision in Cuomo v. Clearing House Association, LLC.)  The issue of which state laws are preempted could take on heightened significance in the face of increased state AG enforcement activity.

Providers of consumer financial services will need to be prepared to defend against this likely surge in state investigations and enforcement activity.  To help clients prepare, we will hold a webinar, “Beyond the CFPB: Preparing for State Enforcement Post-Election,” on December 15, 2016 from 12 p.m. to 1 p.m.  A link to register is available here.