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

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

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

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

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

RD Legal Funding has filed an answer to the complaint in the lawsuit filed against it by the CFPB and New York Attorney General (NYAG).

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

Accordingly, citing to Judge Preska’s ruling in its answer, RD Legal Funding denies the allegation in the complaint that the CFPB has litigation authority to file the complaint.  Also citing to Judge Preska’s ruling, RD Legal Funding denies the NYAG’s allegation that it has authority under Dodd-Frank Section 1042 to enforce the provisions of the CFPA.

In her June 21 order denying RD Legal Funding’s motion to dismiss, Judge Preska set a July 9 deadline for counsel to advise the court how they intended to proceed.  In the joint submission made by RD Legal Funding and NYAG pursuant to Judge Preska’s  order, RD Legal asked the court to make an express finding that there is “no just reason for delay” and enter judgment against the CFPB alone under Rule 54(b) of the Federal Rules of Civil Procedure, and if the CFPB sought immediate review of the June 21 order, certify the order for interlocutory appeal and stay the proceeding during the appeal’s pendency.  The NYAG indicated that it wanted the case to proceed as quickly as possible and would oppose any request by RD Legal Funding for delay, including a request for interlocutory appeal and a stay of the proceeding.

The CFPB has not yet indicated whether it will appeal Judge Preska’s order to the Second Circuit.  Because the case remains active, it cannot appeal the order without a finding by Judge Preska that there is no reason to delay the appeal under Rule 54(b) of the Federal Rules of Civil Procedure.

 

 

RD Legal Funding and the New York Attorney General have filed a joint submission with Judge Preska of the Southern District of New York regarding how they propose to proceed in the CFPB’s and NYAG’s lawsuit against RD Legal Funding.

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

The joint submission states that the CFPB has indicated to the parties that it has not yet made a decision as to how it will proceed.  Because the case remains active, the CFPB cannot appeal Judge Preska’s decision to the Second Circuit unless she finds that there is no reason to delay that appeal under Rule 54(b) of the Federal Rules of Civil Procedure.

In their joint submission, the NYAG and RD Legal Funding ask the court to set a scheduling conference in September 2018 and describe their positions as follows:

NYAG.  The NYAG indicates that it wants the case to proceed as quickly as possible and would oppose any request by RD Legal Funding for delay, including a request for interlocutory appeal and a stay of the proceeding.  In anticipation of a filing by RD Legal Funding raising jurisdictional issues, the NYAG indicates its belief “that the Court is clear as to jurisdiction in its [June 21 order].”  The NYAG cites Judge Preska’s statements in her June 21 order that the NYAG has “independent authority to bring claims in federal district court under the CFPA, without regard to the constitutionality of the CFPB’s structure” and that “federal question subject matter jurisdiction over the CFPA claims exists regardless of the constitutionality of the CFPB’s structure.”  Also cited is her determination that the court had supplemental jurisdiction over the NYAG’s state law claims because they “arise out of the same common nucleus of operative fact” as the CFPA claims.

RD Legal Funding.   RD Legal Funding contends that the June 21 order “struck each substantive provision of the [CFPA] that forms the basis of federal jurisdiction, which RD Legal will address in a separate filing.”  It also asks the court “to resolve the immediate ambiguity in the CFPB’s position and to prevent potential duplicative proceedings” by first making an express finding that there is “no just reason for delay” and entering judgment against the CFPB only under Rule 54(b) of the Federal Rules of Civil Procedure and then, should the CFPB seek immediate review of the June 21 order, certifying the June 21 order for interlocutory appeal and staying the proceeding during the pendency of the appeal.  RD Legal Funding indicates that should the CFPB not seek immediate review “and the Court permits the NYAG to proceed with claims under the stricken Title X,” it is prepared to litigate in the district court although it “do[es] not believe that would serve the interests of judicial economy.”

We find Judge Preska’s opinion to be self-contradictory.  On the one hand, she denied a motion to dismiss the claims brought by the NYAG against RD Legal Funding.  One of those claims is a federal UDAAP claim brought under Section 1042 of Dodd-Frank.  Section 1042(a) states, in relevant part:

“[T]he attorney general … of any state may bring a civil action in the name of such state in any district court of the United States in that state … to enforce provisions of this title …”

In asserting a federal UDAAP claim under Section 1042, the NYAG relied on Dodd-Frank Section 1031(a) which authorizes the CFPB to “take any actions authorized under Subtitle E [which describes the enforcement powers of the CFPB] to prevent a covered person … from committing and engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.”

On the other hand, toward the end of the opinion, Judge Preska dismissed the CFPB’s claims against RD Legal Funding and held that the entirety of Title X of Dodd-Frank is unconstitutional and should be stricken.  Title X, of course, includes Sections 1042 and 1031 of Dodd-Frank which are the sections relied upon by the NYAG.

Because of these contradictory rulings, Judge Preska will need to decide whether the NYAG’s claims remain alive.  We would expect Judge Preska to dismiss the NYAG’s Section 1042 claim since Section 1042 provides that a state attorney general opting to use Section 1042 must first consult with the CFPB about his or her intent to file a 1042 claim and that, while the CFPB may not preclude a state attorney general from filing such a lawsuit, the CFPB has the right to intervene in that lawsuit as a party.  This seems to demonstrate Congressional intent not to give a state attorney general the power to use Section 1042 if the CFPB lacks such power.

Judge Preska has already ruled that the CFPB lacks any power under Title X of Dodd-Frank because it was unconstitutionally structured.  If she dismisses the NYAG’s Section 1042 claim as we expect, the NYAG will need to determine whether it wants to appeal such ruling.  Because the NYAG’s state law claims remain viable, the NYAG could only appeal if Judge Preska gives the NYAG permission to file an interlocutory appeal and the Second Circuit agrees to hear the appeal.  If the NYAG decides not to appeal such a ruling, Judge Preska probably should dismiss the case in its entirety for lack of federal subject matter jurisdiction (unless the CFPB asks Judge Preska to enter a final judgment as to its claims so that the CFPB can appeal the constitutionality issue to the Second Circuit.)

 

 

 

 

 

 

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

RD Legal Funding purchased at a discount, for immediate cash payments, benefits to which consumers were ultimately entitled under the NFL Concussion Litigation Settlement Agreement (the “NFLSA”) and the September 11th Victim Compensation Fund of 2001 (the “VCF”).  In both situations, the court indicated, consistent with the complaint, that the consumer’s right to a benefit and the amount of the benefit had been determined.  The party responsible for payment (the NFL or the U.S. Government) was unquestionably willing and able to make the required payment.  The only question was when payment would be made.  Of course, this scenario differs greatly from the typical situation where a litigation funding company purchases an interest in a claim in ongoing personal injury or other litigation. Indeed, an industry trade group, siding with the CFPB and NY AG against RD Legal Funding, made exactly this point:

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

Opinion at p. 53.

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

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

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

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

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

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

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

The CFPB and the New York Attorney General this week filed an action against RD Legal Funding, LLC, two of its affiliates, and their principal (collectively, “RD”), alleging that a litigation settlement advance product offered by RD is a disguised usurious loan that is deceptively marketed and abusive.  In particular, the Complaint alleges that the transactions were falsely marketed as assignments rather than loans, that the transactions violate New York usury laws, and that RD misrepresented when the funding would be provided and falsely claimed that it could “expedite funding and ‘cut through red tape’” associated with the settlements being financed.  The Complaint alleges that the transactions could not be assignments because the underlying settlements expressly prohibit assignment of claimant recoveries.

In the Complaint, both the CFPB and the AG allege several deception claims and an abusiveness claim under Sections 1031 and 1042 of Dodd-Frank.  The AG also alleges state law claims for civil and criminal usury, fraud, and violation of NY UDAP statutes.  Notably, one of the deception claims alleged by the CFPB is predicated on alleged state usury law violations, implicating one of several issues involved in the pending CashCall appeal.

The CFPB and the AG issued press releases and prepared remarks trumpeting the RD Legal Funding action as a defense of 9/11 heroes and NFL concussion victims who were “scammed” through “convoluted contracts.”  The public statements also focus on the cost of the financing, providing examples such as a 9/11 first responder who paid $15,000 on an advance of $18,000 when the settlement funds ultimately were received six months after the advance was made.

Before the lawsuit was filed, on January 4 of this year, two of the RD entities filed separate preemptive actions for declaratory and injunctive relief against the CFPB and the AG.  Among other things, these complaints challenge the CFPB’s jurisdiction over RD and the propriety of the AG’s threatened enforcement activity on the basis that RD does not extend credit, but rather engages in bona fide purchases of receivables.  The complaints quote extensively from the relevant agreements, including the assignment provisions and non-recourse language, neither of which appear to be “convoluted” as the CFPB and AG allege.  The complaint against the CFPB also attaches a prior Civil Investigative Demand served on RD.

While the action filed this week may have been driven primarily by the sympathetic facts alleged in the Complaint, it may foreshadow a broader enforcement effort by the CFPB, state Attorneys General, and other state regulators directed at litigation funding companies, merchant cash advance providers, and other finance companies whose products are structured as purchases rather than loans.  (While the CFPB’s jurisdiction over small business finance is limited, this is not true of other enforcement authorities, such as state AGs.)  Notably, the CFPB previously has taken action against structured settlement and pension advance companies, in the former case leading to a jurisdictional challenge supported by the U.S. Chamber of Commerce.  It therefore is critical for all players in this space to revisit true sale compliance, both in the language of their agreements and in the company’s actual practices.