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 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.

 

 

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.

 

 

 

A petition for certiorari was filed in the U.S. Supreme Court late last week 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.

Originally filed in 2012 in D.C. federal district court, the complaint alleged that the CFPB’s structure violated the U.S. Constitution’s separation of powers. The district court dismissed for lack of standing but on appeal, the D.C. Circuit held that the plaintiffs did have standing and remanded the case to the district court.  Further proceedings in the case were held in abeyance by the district court pending the outcome of the PHH case in the D.C. Circuit.

Following the D.C. Circuit’s en banc PHH decision that held the CFPB’s structure is constitutional, the district court lifted its abeyance order and, with the parties having agreed that PHH foreclosed the district court from ruling in favor of the plaintiffs on their constitutional challenge, entered judgment against the plaintiffs.  On June 8, 2018, the D.C Circuit entered an order summarily affirming the district court’s judgment.  Citing its en banc PHH decision, the D.C. Circuit order stated that “the merits of the parties’ positions are so clear as to warrant summary action.”

In their petition for certiorari seeking Supreme Court review of the D.C. Circuit’s June 8 order,  SNB and the non-profits urge the Supreme Court to grant the petition “to resolve the conflict” between PHH and the Fifth Circuit’s decision in Collins v. Mnuchin.  In Collins, the Fifth Circuit ruled that the Federal Housing Finance Agency (FHFA) is unconstitutionally structured because it is excessively insulated from Executive Branch oversight.  While stating that it was “mindful” of the D.C. Circuit’s en banc PHH decision, the Fifth Circuit found that “salient distinctions” between the CFPB’s structure and the FHFA’s structure dictated different conclusions as to each agency’s constitutionality.  SNB and the non-profits argue in their petition that “the approaches of the D.C. Circuit and the Fifth Circuit cannot be reconciled.”

We continue to follow two other active cases involving challenges to the CFPB’s constitutionality that could come before the Supreme Court.  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.  In RD Legal Funding, Judge Preska of the Southern District of New York is expected to soon enter a Rule 54(b) judgment against the CFPB so that it can file an appeal with the Second Circuit from her June 21 order in which she ruled that the CFPB’s structure is unconstitutional and struck all of Title X of Dodd-Frank.

 

 

The CFPB has filed a proposed Rule 54(b) judgment in the RD Legal Funding case.  The proposed judgment provides that “for the reasons stated in the Court’s June 21, 2018 Order, (ECF No. 80), final judgment is hereby entered pursuant to Rule 54(b) against the Consumer Financial Protection Bureau and in favor of Defendants [RD Legal Funding et al.]”

In her June 21 order, Judge Preska ruled that the CFPB’s structure is unconstitutional and struck all of Title X of Dodd-Frank.  Since Judge Preska, on August 23, entered an order granting the CFPB’s request for entry of a Rule 54(b) judgment so that it could appeal her June 21 ruling, she can be expected to sign the proposed order.  In a letter accompanying the proposed order, the CFPB states that “the parties have conferred” and the NYAG and all of the defendants “do not object to the proposed judgment.”

 

The New York Attorney General has sent a letter to Judge Preska asking her to clarify her August 23 order granting the CFPB’s request for entry of a Rule 54(b) judgment so that it can appeal her June 21 constitutionality ruling.  In the August 23 order, Judge Preska also denied RD Legal’s request that she certify the remainder of her ruling for interlocutory appeal but granted RD Legal’s request to stay the district court proceedings pending the outcome of the CFPB’s appeal.

In her June 21 ruling, Judge Preska held that 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.  RD Legal had argued that Judge Preska’s 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.  Accordingly, it had asked Judge Preska to dismiss the NYAG’s federal claims with prejudice and dismiss the NYAG’s state law claims for lack of federal subject matter jurisdiction without prejudice to their being refiled in state court.

Judge Preska’s August 23 order appears to implicitly accept RD Legal’s argument that her constitutionality ruling, if upheld by the Second Circuit, would require dismissal of the NYAG’s CFPA claims.  In its letter, the NYAG asks her to provide answers to three questions that it deems “essential to determining the NYAG’s further conduct in this case.”

The NYAG asks Judge Preska:

  • Whether the NYAG’s CFPA claims remain before the court because it has found that it has jurisdiction to hear those claims
  • Whether, if the court actually dismissed the NYAG’s CFPA claims in its June 21 ruling, the court retained jurisdiction over the NYAG’s state law claims because the claims contain an embedded federal law question (which the NYAG has previously identified to be whether the transactions that RD Legal Funding entered into with consumers entitled to benefits under the September 11th Victim Compensation Fund of 2001 were void under the federal Anti-Assignment Act and therefore loans subject to New York usury law)
  • Whether, even if the court dismissed the NYAG’s CFPA claims and found that it lacked jurisdiction to hear the NYAG’s state law claims based on the existence of an embedded federal law question, the court has nonetheless exercised its jurisdiction to retain supplemental jurisdiction over the state law claims

The NYAG observes that by staying the case as to the NYAG rather than dismissing all of its claims, “it appears that the Court has determined that it retains some jurisdiction over at least some claims.” (emphasis provided).  According to the NYAG, if the court has dismissed the NYAG’s CFPA claims in their entirety, “the NYAG may wish to seek leave to have the dismissal certified for interlocutory appeal in the hopes of having such an appeal consolidated with the CFPB’s so that all CFPA claims in this case might be reviewed at once.”  The NYAG also indicates that if the court has dismissed the NYAG’s CFPA claims entirely but retained jurisdiction over the state law claims, the NYAG may need to “seek vindication of its state law claims in state court” rather than wait for an appeal to be decided because of “the age and ill health of some of the New York residents who are victims in this case.”  Finally, the NYAG indicates that “giving the parties certainty about their positions will facilitate any settlement discussions that may take place during the stay.”

 

 

Judge Preska has entered an order granting the CFPB’s request for entry of a Rule 54(b) judgment to allow the CFPB to appeal her June 21 constitutionality ruling to the Second Circuit.  Although Judge Preska’s order denies RD Legal’s request that she certify the remainder of her ruling for interlocutory appeal, it grants RD Legal’s request to stay the district court proceedings pending the outcome of the CFPB’s appeal.

In her June 21 ruling, Judge Preska held that 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.  RD Legal had argued that Judge Preska’s 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.  Accordingly, it had asked Judge Preska to dismiss the NYAG’s federal claims with prejudice and dismiss the NYAG’s state law claims for lack of federal subject matter jurisdiction without prejudice to their being refiled in state court.

While denying RD Legal’s request to certify her ruling on the NYAG’s claims for interlocutory appeal, Judge Preska’s order appears to implicitly accept RD Legal’s argument that her constitutionality ruling, if upheld by the Second Circuit, would require dismissal of the NYAG’s CFPA claims.  She stated that “[t]he controlling question of law as to the Court’s subject matter jurisdiction, and thus to the order dismissing the CFPB, relates to the constitutionality of the CFPB’s structure….Assuming that the CFPB proceeds with its stated intention of appealing this Court’s June 21, 2018 Order dismissing its claims against the RD Legal Parties, the final disposition of that appeal alone will ‘materially advance the ultimate termination of the litigation’ because it will bring certainty to the parties in their litigation of the federal issues presented.  The same cannot be said for the state law issues.  By and large, they are well-settled.”  (As discussed in a prior blog post, we think the logic used by the court in concluding that the transactions at issue were disguised loans was erroneous.)

The NYAG had opposed RD Legal’s request for a stay of the district court proceedings pending the outcome of the CFPB’s appeal.  In explaining her rationale for granting a stay, Judge Preska stated that “[a] stay will avoid the possibility of prejudice to the parties and will mitigate the expense and practical difficulties Defendants would face if tasked with defending two overlapping trials at once.”

A CFPB appeal of Judge Preska’s constitutionality ruling to the Second Circuit means that 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.  American Check Cashing has filed a petition asking the Fifth Circuit to hear its interlocutory appeal en banc as an initial matter.  A third circuit, the D.C. Circuit, held in its January 2018 en banc PHH decision that the CFPB’s structure is constitutional.

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

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

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

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

 

 

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

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

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

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

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

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