The Fifth Circuit has calendared oral argument in the All American Check Cashing case for March 12, 2019.  The case is one of the three cases currently pending in the circuit courts that involve a challenge to the CFPB’s constitutionality.

The other two cases are RD Legal Funding which is pending in the Second Circuit and Seila Law which is pending in the Ninth Circuit.  While briefing in the Second Circuit in RD Legal Funding will not begin until next month, the Ninth Circuit has already held oral argument in Seila Law (on January 9).  (At the oral argument, the Bureau defended its constitutionality.)  As a result, the March 12 oral argument date in All American Check Cashing creates the strong possibility that two more circuit court decisions ruling on the CFPB’s constitutionality could be issued this year.

One factor that will determine how quickly the issue could get to the U.S. Supreme Court is whether en banc review is sought from the panel decisions in either or both of these cases.  It seems virtually certain that the Supreme Court would grant a petition for certiorari in one of these cases if the circuit court’s decision creates a conflict with the D.C. Circuit’s en banc PHH decision that held the CFPB’s structure is constitutional.  However, even in the absence of a circuit conflict, there is a strong likelihood that the Supreme Court would agree to hear one of the cases given the significance of the constitutionality issue.

With regard to en banc review in All American Check Cashing, in August 2018, All American Check Cashing filed a petition asking the Fifth Circuit for an initial en banc hearing in its interlocutory appeal.  Although the Fifth Circuit’s Clerk’s Office confirmed to us last Friday that the petition has not yet been ruled on, the case docket indicates that oral argument is to be held in the Fifth Circuit’s en banc courtroom.  It is unclear whether the designation of what is presumably a larger courtroom as the venue for the oral argument reflects an anticipated high level of interest in the argument or the possibility that an initial en banc hearing might still be granted.

 

 

The pendency of three cases in circuit courts challenging the CFPB’s constitutionality has given rise to speculation as to whether the CFPB will continue to defend its constitutionality under Director Kraninger’s leadership.  The CFPB continued to defend its constitutionality in these cases while under former Acting Director Mulvaney’s leadership.  It did so, however, as a fallback to its primary argument that because Mr. Mulvaney was removable at will by the President and had ratified the CFPB’s decision to bring the lawsuit in question, any constitutional defect that may have existed with the CFPB’s initiation of the lawsuit was cured.

On January 9, a Ninth Circuit panel heard oral argument in CFPB v. Seila Law LLC, one of the three pending circuit court cases.  The appellant in Seila Law is asking the Ninth Circuit to overturn the district court’s refusal to set aside a Bureau civil investigative demand, arguing that the CID is invalid because the CFPB’s structure is unconstitutional.  In its answering brief filed with the Ninth Circuit, the CFPB relied on the ratification argument and its fallback constitutionality argument. (Mr. Mulvaney was Acting Director at the time of briefing.)

At the oral argument, the CFPB maintained the positions taken in its brief, namely that Mr. Mulvaney’s ratification cured any constitutional defect and, in any event, the Bureau’s structure is constitutional under U.S. Supreme Court precedent and the D.C. Circuit’s en banc PHH decision.  This would suggest that Director Kraninger, like former Acting Director Mulvaney, will continue to defend the CFPB’s constitutionality in the other pending cases.

Should she do so, however, Ms. Kraninger will be at odds with the position of the Department of Justice.  In opposing the petition for certiorari filed by State National Bank of Big Spring (which the Supreme Court denied this week), DOJ argued that while it agreed with the bank that the CFPB’s structure is unconstitutional and the proper remedy would be to sever the Dodd-Frank Act’s for-cause removal provision, the case was a poor vehicle for deciding the constitutionality issue.  It also noted that its position “is that of the United States, not the position of the Bureau to date.”  The DOJ had asked the Supreme Court to allow the CFPB to weigh in should it grant the petition for certiorari.  (The DOJ’s position could have added significance because of the Dodd-Frank provision that requires the Bureau to seek the Attorney General’s consent before it can represent itself in the Supreme Court.)

If Director Kraninger does have a change of heart, she will be following in the shoes of Joseph Otting, who was appointed Acting FHFA Director by President Trump (and also serves as Comptroller of the Currency).  Next week, the Fifth Circuit is scheduled to hold oral argument in the en banc rehearing of Collins v. Mnuchin, in which a Fifth Circuit panel found that the FHFA is unconstitutionally structured because it is excessively insulated from Executive Branch oversight.  The plaintiffs, shareholders of two of the housing government services enterprises (GSEs), are seeking to invalidate an amendment to a preferred stock agreement between the Treasury Department and the FHFA as conservator for the GSEs.

The Fifth Circuit panel had determined that the appropriate remedy for the constitutional violation was to sever the provision of the Housing and Economic Recovery Act of 2008 (HERA) that only allows the President to remove the FHFA Director “for cause” while “leav[ing] intact the remainder of HERA and the FHFA’s past actions.”  The plaintiffs sought a rehearing en banc to overturn the panel’s rulings that the FHFA acted within its statutory authority in entering into the agreement and that the FHFA’s unconstitutional structure did not impact the agreement’s validity.  The FHFA also sought a rehearing en banc but with the goal of overturning the panel’s determination that the plaintiffs had Article III standing to bring a constitutional challenge.

Despite having argued in its petition for rehearing that the panel’s constitutionality ruling was incorrect, the FHFA has now announced that it will not defend the FHFA’s constitutionality to the en banc court.  In the En Banc Supplement Brief of the FHFA and Mr. Otting, the FHFA states that Mr. Otting “has reconsidered the issues presented in this case.”  It further states that while it remains the FHFA’s position that the plaintiffs’ lack of standing makes it unnecessary for the en banc court to reach the constitutionality issue, to the extent the court concludes it is necessary to do so “FHFA will not defend the constitutionality of HERA’s for cause removal provision and agrees with the analysis in Section II.A of the Treasury’s Supplemental Brief that the provision infringes on the President’s control of executive authority.”

The two other pending circuit court cases challenging the CFPB’s constitutionality are the All American Check Cashing case pending in the Fifth Circuit and the RD Legal Funding case pending in the Second Circuit.  Oral argument is tentatively calendared for the week of March 11, 2019 in the All American Check Cashing case and briefing is scheduled to begin next month in the RD Legal Funding case.

 

 

The U.S. Supreme Court has denied the petition for certiorari filed by State National Bank of Big Spring (SNB) which, together with two D.C. area non-profit organizations that also joined in the petition, had brought one of the first lawsuits challenging the CFPB’s constitutionality.

Despite agreeing with the petitioners that the CFPB’s structure is unconstitutional, the DOJ urged the court to deny the petition, calling the case “a poor vehicle to consider the question [of the CFPB’s constitutionality] for multiple reasons.”  Among such reasons was the DOJ’s claim that if the Supreme Court were to grant the petition, the case would likely not be considered by the full Court because of Justice Kavanaugh’s previous participation in the case while a D.C. Circuit judge.  (The order denying the petition for certiorari states that “Justice Kavanaugh took no part in the consideration or decision of this petition.”)

Another reason given by the DOJ was that other cases are pending in the courts of appeal that raise a similar constitutional challenge and “one or more of those cases may not present the same obstacles that could impede the full Court from considering the merits of this important issue.”  Those cases are the All American Check Cashing case pending in the Fifth Circuit, the RD Legal Funding case pending in the Second Circuit, and the Seila Law case pending in the Ninth Circuit.  Oral argument was held last week in the Seila Law case and is tentatively calendared for the week of March 11, 2019 in the All American Check Cashing case.  Briefing is scheduled to begin next month in the RD Legal Funding case.

 

 

 

State National Bank of Big Spring (SNB) and the other petitioners for certiorari have filed a reply to the brief filed by the Department of Justice in which, despite agreeing with the petitioners that the CFPB’s structure is unconstitutional, the DOJ argued that the U.S. Supreme Court should deny the petition.

In its brief, the DOJ argued that the SNB case “would be a poor vehicle to consider the question [of the CFPB’s constitutionality] for multiple reasons.”  Such reasons included the DOJ’s claim that if the Supreme Court were to grant the petition, the case would likely not be considered by the full Court because of Justice Kavanaugh’s previous participation in the case while a D.C. Circuit judge.  Specifically, Justice Kavanaugh authored the D.C. Circuit’s decision that reversed the district court and held that the petitioners had standing to challenge the CFPB’s constitutionality.

A second reason offered by the DOJ was that before it could reach the merits of the constitutionality issue, the Supreme Court would have to resolve in the petitioners’ favor the jurisdictional issue of whether the petitioners have standing.  According to the DOJ, “petitioners’ standing is sufficiently questionable to present a significant vehicle problem.”

In its reply, SNB asserts that “there can be no serious question concerning the Bank’s standing to challenge the CFPB’s constitutionality, and the Government’s manufactured standing question does not present an obstacle to this Court’s consideration of the petition.”  SNB further argues that nothing in the judicial disqualification statute (28 U.S.C. section 455) or the Code of Conduct for United States Judges would require Justice Kavanaugh’s recusal.  In the alternative, SNB argues that even if Justice Kavanaugh were to decide that recusal was warranted because of his prior participation, “any recusal should be limited to the issue decided in that appeal—namely, Petitioners’ standing to bring this suit.”  According to SNB, “[r]ecusing from the threshold jurisdictional question would not require a Justice to recuse from the merits.”

The Supreme Court docket indicates that the filings in the case have been distributed for consideration by the Justices at their January 11 conference.  In its brief, the DOJ had noted that if the Supreme Court were to grant the petition for certiorari, it would be the Court’s “usual practice to appoint an amicus curiae to defend the judgment of the court of appeals” when no party is doing so.  Citing the Dodd-Frank provision that requires the Bureau to seek the Attorney General’s consent before it can represent itself in the Supreme Court, the DOJ asked the Court, before appointing an amicus curiae, to give the Bureau’s new Director “a reasonable opportunity…to determine whether the Bureau will seek to defend the court of appeals’ judgment in this Court and for the Acting Solicitor General to determine whether he will authorize the Bureau to do so.”  We will be interested to see if the Supreme Court follows the DOJ’s suggestion should it grant the petition for certiorari.

 

 

The New York Attorney General, on October 12, 2018, filed a notice of an appeal to the Second Circuit from Judge Preska’s dismissal on September 12, 2018 of all of the NYAG’s federal and state law claims, and her subsequent September 18 order amending the September 12 order to provide that the NYAG’s claims under Dodd-Frank Section 1042 were dismissed “with prejudice.”  (Section 1042 authorizes state attorneys general to initiate lawsuits based on UDAAP violations.)

On September 14, the CFPB filed an appeal with the Second Circuit from Judge Preska’s June 21, 2018 decision, as amended by her September 12 order, in which she 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, and dismissed the CFPB from the case.  That was followed on September 25 by RD Legal Funding’s filing of a cross-appeal with the Second Circuit from Judge Preska’s June 21 decision, as subsequently amended, in which Judge Preska had ruled that the NYAG had stated federal and state law claims against RD Legal Funding.  (Although Judge Preska’s various orders resulted in the dismissal of all of the CFPB’s and NYAG’s claims, RD Legal Funding may have filed the cross-appeal to preserve its ability to challenge Judge Preska’s June 21 ruling that the NYAG had stated claims against RD Legal Funding should the Second Circuit conclude that the CFPB’s structure is constitutional or that the structure is unconstitutional but that the proper remedy is to sever the Dodd-Frank for-cause removal provision rather than strike all of Title X.)

The Bureau’s constitutionality is now before two circuits, the Second and Fifth Circuits.  In April 2018, the Fifth Circuit agreed to hear All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.  Also, a petition for certiorari was recently filed in the U.S. Supreme Court by State National Bank of Big Spring which, together with two D.C. area non-profit organizations that also joined in the petition, had brought one of the first lawsuits challenging the CFPB’s constitutionality.

 

 

All American Check Cashing has filed its reply brief in its interlocutory appeal to the U.S. Court of Appeals for the Fifth Circuit from the district court’s ruling upholding the CFPB’s constitutionality.

All American and the other appellants sought the interlocutory appeal after the district court denied their motion for judgment on the pleadings in a lawsuit filed by the CFPB that alleges the appellants engaged in abusive, deceptive, and unfair conduct in connection with making certain payday loans, failing to refund overpayments on those loans, and cashing consumers’ checks.  Citing the D.C. Circuit’s en banc PHH decision, the district court rejected the defendants’ argument that the CFPB is unconstitutional based on its single-director-removable-only-for-cause structure.  It subsequently agreed to certify the constitutionality issue for interlocutory appeal to the Fifth Circuit which accepted the appeal.

In its opposition brief, the CFPB argued (1) because Acting Director Mulvaney is removable at will by the President and ratified the CFPB’s decision to bring the lawsuit against the appellants, any constitutional defect that may have existed with the CFPB’s initiation of the lawsuit was cured, (2) the CFPB’s structure is constitutional under existing U.S. Supreme Court precedent, and (3) if the Fifth Circuit concludes that the CFPB’s structure is unconstitutional, the proper remedy is to strike the for-cause removal provision.

Responding to these arguments in its reply brief, All American makes the following principal arguments:

  • Not only is the CFPB’s structure unconstitutional under existing U.S. Supreme Court precedent, it is also unconstitutional under “any reasonable reading” of the Fifth Circuit’s decision in Collins v. Mnuchin which found that the Federal Housing Finance Agency (FHFA) is unconstitutionally structured because it is excessively insulated from Executive Branch oversight.  To support this argument, All American applies to the CFPB each of the five factors used by the Fifth Circuit in Collins to determine whether an agency is excessively insulated.  In ruling that the FHFA is unconstitutionally structured, the Fifth Circuit acknowledged the D.C. Circuit’s en banc PHH decision finding the CFPB’s structure to be constitutional but distinguished the CFPB based on its view that the Financial Stability Oversight Council’s (FSOC) can directly control the CFPB’s actions because it holds veto-power over the CFPB’s policies.  All American observes that the Fifth Circuit’s discussion of FOSC was dicta and that the Fifth Circuit did not appear to have the benefit of adversarial briefing on the issue.  In addition, it  argues that FSOC “has very little influence over the CFPB,” noting that FSOC’s veto power requires a two-thirds vote and, because it only applies to formal regulations, that such “narrow authority has no relevance here, because no regulation is at issue.”
  • Acting Director Mulvaney’s purported ratification did not cure the constitutional violation with the CFPB’s structure because the CFPB continues to be unconstitutionally structured (with All American noting that once Kathy Kraninger is confirmed as CFPB Director, “All American will undeniably be subject to an ongoing proceeding by an invalid entity.”)  It further contends that actions of an invalid agency (as distinguished from actions taken by an invalidly appointed officer) cannot be ratified and that even if the lawsuit could be ratified, the 3-year statute of limitations for bringing CFPB enforcement actions would have run by the time of the alleged ratification.
  • Severing the for-cause removal provision is not the appropriate remedy for the CFPB’s unconstitutionality because Congress would not have wanted the CFPB’s Director to be removable at will while leaving the CFPB independent from congressional appropriations and oversight.  In support of their argument that the proper remedy is to strike the CFPA rather than sever the for-cause removal provision, All American cites the decision of Judge Preska of the Southern District of New York in RD Legal Funding.  Judge Preska ruled that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional and struck Title X of Dodd-Frank in its entirety.  The CFPB has filed an appeal with the Second Circuit.  (In Collins, the Fifth Circuit determined that the appropriate remedy for the constitutional violation was to sever the for-cause removal provision from the Housing and Economic Recovery Act of 2008, the statute that created the FHFA.  In its reply brief, All American notes that the severability analysis in Collins “was undertaken without the benefit of the adversarial process” because the appellants in Collins had conceded that severance might be appropriate.)

In August 2018, All American Check Cashing filed a petition asking the Fifth Circuit to hear their interlocutory appeal as an initial matter en banc.  The petition remains pending, with the Fifth Circuit perhaps having waited for briefing in the appeal to be concluded before ruling on the petition.  The Fifth Circuit is also considering petitions for rehearing en banc in Collins filed by both the plaintiffs and the FHFA.

 

 

 

On September 17, 2018, four Amici filed briefs in the CFPB’s case against All American Check Cashing, which is now before the Fifth Circuit Court of Appeals. The Court is considering whether the structure of the CFPB is constitutional and what impact its structure, right or wrong, has on its ability to continue to prosecute claims against regulated entities. The Amici, all supporting the CFPB, were as follows:

  • Certain current and former Members of Congress involved in drafting Dodd-Frank;
  • Five people calling themselves “CFPB Separation of Powers Scholars,” including Harold Bruff, Gillian Metzger, Peter Shane, Peter Strauss, and Paul Verkuil;
  • Nine consumer advocacy groups, including Public Citizen, Inc., Americans for Financial Reform Education Fund, Center for Responsible Lending, Consumer Federation of America, Consumers Union, National Association of Consumer Advocates, National Consumer Law Center, Tzedek DC, and U.S. Public Interest Research Group Education Fund, Inc.; and
  • The Appleseed Foundation, Inc.

The Amici made substantially the same arguments made by amici supporting the CFPB in connection with the PHH case.

We have been following very closely the lawsuit filed by the CFPB and the New York Attorney General against RD Legal Funding.  We earlier reported that on June 21 Judge Preska dismissed the CFPB’s claims based on the unconstitutionality of the CFPA. We subsequently reported that on September 12 Judge Preska dismissed the claims brought by the New York Attorney General under Section 1042 of Dodd -Frank (i. e., the provision authorizing state attorneys general to initiate lawsuits based on UDAAP violations) and also dismissed the Attorney General’s state law claims for lack of subject matter jurisdiction as a result of there being no remaining federal questions in the case.

The most recent development is that yesterday Judge Preska amended her September 12 order to provide that her dismissal of the New York Attorney General’s 1042 claims are “with prejudice”. That means that the New York Attorney General should not be able to re-file her 1042 claims in state court unless and until a higher court reverses Judge Preska’s order. The CFPB has already filed an appeal with the Second Circuit and it seems likely that the New York Attorney General will do the same.

As expected, following Judge Preska’s dismissal on September 12 of all of the New York Attorney General’s federal and state law claims, the CFPB filed an appeal with the Second Circuit from Judge Preska’s June 21 ruling in the RD Legal Funding case in which she held that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional, struck the CFPA (Title X of Dodd-Frank) in its entirety, and dismissed the CFPB from the case.

In its Notice of Appeal filed on September 14, the CFPB gives notice that it “appeals to the United States Court of Appeals for the Second Circuit from this Court’s June 21, 2018 Order (ECF No. 80), as amended by its September 12, 2018 Order (ECF No. 105), dismissing the Bureau’s claims against Defendants, and this Court’s Judgment (ECF No. 106) entered on September 12, 2018.”

Since Judge Preska dismissed all of its claims, the NYAG can also appeal to the Second Circuit.  Alternatively, the NYAG can refile its CFPA and state law claims in New York state court (although a state court might stay the case pending a decision by the Second Circuit in the CFPB’s appeal, particularly if the NY AG decides to appeal the dismissal of its claim brought under Dodd-Frank Section 1042.  If the NYAG appeals the jurisdictional dismissal of its state law claims, then RD Legal should be able to file a cross-appeal of Judge Preska’s June 21 decision ruling on the merits of the state law claims and denying RD Legal’s motion to dismiss.

The CFPB’s appeal means that the Bureau’s constitutionality is now before two circuits, the Second and Fifth Circuits.  In April 2018, the Fifth Circuit agreed to hear All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.  Also, a petition for certiorari was recently filed in the U.S. Supreme Court by State National Bank of Big Spring which, together with two D.C. area non-profit organizations that also joined in the petition, had brought one of the first lawsuits challenging the CFPB’s constitutionality.

 

On September 12, Judge Preska entered an order and judgment dismissing all of the New York Attorney General’s federal and state law claims against RD Legal Funding.  The NYAG had filed the case jointly with the CFPB and in a June 21 ruling, Judge Preska held 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 NYAG to proceed with its CFPA and state law claims.

Judge Preska had initially rejected RD Legal’s argument that her dismissal of the CFPB from the case and striking of Dodd-Frank Title X necessitated her dismissal of the NYAG’s CFPA claims against RD Legal.  In an August 23 order, Judge Preska ruled that she would enter a Rule 54(b) judgment against the CFPB so it could immediately appeal her constitutionality ruling to the Second Circuit.  She also denied RD Legal’s request that she certify the remainder of her June 21 ruling for interlocutory appeal but granted RD Legal’s request to stay the district court proceedings pending the outcome of the CFPB’s appeal.  The NYAG thereafter sought clarification of the effect of her August 23 ruling on its federal and state law claims and the CFPB filed a proposed Rule 54(b) judgment.

In her September 12 order and judgment, Judge Preska “amends” her June 21 order to provide as follows with respect to the NYAG’s claims:

  • Having determined that invalidating Title X in its entirety is the proper remedy for the constitutional violation resulting from the CFPB’s for-cause removal provision, there is no longer a statutory basis for the NYAG to bring its CFPA claims and therefore such claims are dismissed without prejudice for lack of federal jurisdiction
  • There was no substantial federal question embedded in the NYAG’s state law claims that provided federal question jurisdiction over the state law claims. (The NYAG had argued that its state law claims raised issues involving the federal Anti-Assignment Act.)
  • The court will decline to exercise supplemental jurisdiction over the state law claims.
  • The NYAG’s state law claims are dismissed without prejudice.

Judge Preska also closed the case in her September 12 order and judgment.  Since Judge Preska has now dismissed the district court case in its entirety, a Rule 54(b) judgment is no longer necessary for the CFPB to appeal her constitutionality ruling to the Second Circuit and both the CFPB and NYAG can appeal as of right.  Alternatively, the NYAG can refile its CFPA and state law claims in New York state court (although a state court might stay the case pending the outcome of an appeal by the CFPB of the constitutionality issue.)

Judge Preska states in her September 12 order that the conclusions of law in the order “supersede and replace any legal conclusions to the contrary in the June 11, 2018 order.”  In her June 11 order, Judge Preska also concluded that under New York law, the transactions at issue were disguised loans.  As discussed in a prior blog post, we believe the court’s logic was erroneous on the loan recharacterization question.  It would seem that Judge Preska’s ruling that the court did not have jurisdiction to hear the NYAG’s state law claims means that she could not properly rule on the merits of such claims and her recharacterization of the transactions as loans is effectively nullified.

RD Legal has sent a letter to Judge Preska “to clarify a potential clerical error” in her September 12 order.  It notes that she dismissed both the NYAG’s federal and state law claims “without prejudice.”  RD Legal suggests that the court intended to dismiss the NYAG’s federal claims “with prejudice.”

The CFPB’s constitutionality is also at issue in two other pending cases.  A petition for certiorari was filed in the U.S. Supreme Court late last week by State National Bank of Big Spring which, together with two D.C. area non-profit organizations that also joined in the petition, had brought one of the first lawsuits challenging the CFPB’s constitutionality.  In April 2018, the Fifth Circuit agreed to hear All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.