Since it was filed in a California federal court in July 2012, we have been following CFPB v. Chance Edward Gordon, a case in which the CFPB alleged that an attorney duped consumers by falsely promising loan modifications in exchange for advance fees and, in reality, did little or nothing to help consumers.  The CFPB charged the defendant with violations of the Consumer Financial Protection Act and Regulation O, the Mortgage Assistance Relief Services Rule.

As part of his affirmative defenses to the CFPB’s complaint, the defendant included a challenge to President Obama’s recess appointment of Director Cordray.  In his summary judgment motion, the defendant asserted that, based on the reasoning of the D.C. Circuit’s decision in NLRB v. Noel Canning, Mr. Cordray was not validly appointed as CFPB Director.  He argued that in the absence of a validly-appointed Director, the CFPB had no authority over non-banks and the CFPB’s action against him was therefore rendered invalid.  The U.S. Supreme Court subsequently affirmed the D.C. Circuit’s ruling that the NLRB appointments at issue in Canning were invalid.

The district court did not address the merits of the defendant’s argument that the CFPB lacked authority to bring the action because of Director Cordray’s unconstitutional appointment, concluding that the argument had been waived.  It found that the defendant had violated the CFPA and Regulation O and ordered approximately $11.4 million in disgorgement and restitution.

In its opinion affirming the district court’s finding of liability, the Ninth Circuit considered whether the district court had Article III jurisdiction to hear the CFPB’s enforcement action (an issue which the defendant had not raised but was raised in an amicus brief).  According to the Ninth Circuit, any defects in Director Cordray’s appointment did not deprive the court of Article III jurisdiction because the CFPB retained its enforcement authority, and therefore its standing to sue, despite such defects. The Ninth Circuit also ruled that Director Cordray’s invalid recess appointment did not render the enforcement action against the defendant invalid because Director Cordray’s subsequent valid appointment coupled with his notice ratifying the actions he took as Director while serving as a recess appointee cured any initial constitutional deficiencies.

A petition for rehearing en banc was denied on  July 20, 2016.  On November 17, 2016, the defendant, represented by the Washington Legal Foundation, filed a petition for a writ of certiorari with the U.S. Supreme Court.

The certiorari petition presents two questions.  The first question is whether a federal official can retroactively ratify an ultra vires government action when (1) no federal official was authorized to perform the act at the time it was initially undertaken, (2) the purported ratification does not include an examination of any facts related to the act performed, and (3) the ratification purports to encompass not only the initial act but also federal court rulings entered in response to the act.  The second question presented is whether federal courts possess Article III subject matter jurisdiction to hear a case filed at the behest of an individual who, from the time suit was filed until judgment was entered, lacked authority to vindicate the Executives Branch’s interest in seeing that the law is obeyed.

The petition asserts that the Ninth Circuit’s ruling conflicts with decisions of the Supreme Court and other appeals courts regarding the authority of federal officials to ratify actions that were unauthorized when undertaken.  It also asserts that because the filing of the lawsuit was not approved by a validly-appointed federal officer, the CFPB lacked standing to prosecute it and the case should have been dismissed for lack of Article III jurisdiction.

The petition also contends that the case raises separation of powers issues, arguing that the Ninth Circuit’s decision “constitutes a significant relaxation of Article III’s standing requirements and thus erodes the separation of powers.”  It asserts that the importance of such issues “is highlighted by the D.C. Circuit’s recent PHH decision.”  In that decision, the D.C. Circuit ruled that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional but noted that it “need not here consider the legal ramifications of our decision for past CFPB rules or for past agency enforcement actions.”  The petition argues that by granting review in this case, the court “can provide desperately needed guidance to the many courts that already face challenges to [the CFPB’s claims regarding ratification of its past actions].”

The issue of the CFPB’s constitutionality reemerged last week in court and Congress.

On the judicial front, the U.S. Court of Appeals for the D.C. Circuit, in State National Bank of Big Spring, Texas, et al. v. Lew, et al., reversed the district court and ruled that the bank had standing to challenge the  constitutionality of the CFPB and Director Cordray’s recess appointment.  The D.C. Circuit did not, however, rule on the merits of the bank’s constitutionality claims.  (In January 2014, in the CFPB’s enforcement action against Morgan Drexen, a California federal court rejected on the merits a challenge to the CFPB’s constitutionality.)

The case before the D.C. Circuit was originally filed in June 2012 by State National Bank of Big Spring (SNB) and two D.C. area non-profit organizations that joined SNB as plaintiffs.  Eleven Republican state Attorneys General subsequently joined as plaintiffs on the amended complaint filed in September 2012.  The original complaint challenged the constitutionality of Director Cordray’s recess appointment.  It also alleged that the CFPB’s structure and authority violated the Constitution’s separation of powers and that the Financial Stability Oversight Council (FSOC) created by Dodd-Frank was unconstitutional.  The AGs did not join those portions of the amended complaint and instead only joined a newly-added challenge that had nothing to do with the CFPB but dealt with their states’ status as potential creditors of a failed financial institution in the event of an “orderly liquidation” under Title II of Dodd-Frank.  In August 2013, the district court granted the CFPB’s and other defendants’ motion to dismiss on standing and ripeness grounds.

The D.C. Circuit’s decision consisted of the following four rulings:

  • SNB has standing to challenge the CFPB’s constitutionality and the challenge is ripe because SNB is regulated by the CFPB.  The court used the CFPB’s Remittance Rule as an example of the CFPB’s exercise of its regulatory authority to impose new obligations on SNB.  SNB had alleged that the increased compliance costs resulting from the Remittance Rule, coupled with an alleged loss of business, provided sufficient injury to establish standing.  According to the court, SNB was not required to violate the Remittance Rule and trigger an enforcement action to challenge the legality of the CFPB itself.  The D.C. Circuit remanded to the district court for it to consider the merits of SNB’s constitutionality claim.
  • SNB has standing to challenge the constitutionality of Director Cordray’s recess appointment and such challenge is ripe for the same reasons.  While it reversed and remanded to the district court to consider the merits of the issue in light of the U.S. Supreme Court’s decision in Noel Canning, the D.C. Circuit also noted that it “leave[s] it to the District Court to consider the significance of Director Cordray’s later Senate confirmation and his subsequent ratification of the actions he had taken while serving under a recess appointment.”
  • SNB does not have standing to challenge the FSOC because SNB could not rely on the doctrine of “competitor standing” to argue that the designation of another entity as “too big to fail” indirectly harmed SNB by creating a “reputational benefit” for the competitor.
  • The State AGs do not have standing to challenge Dodd-Frank’s order liquidation authority and the claim is not ripe.  Among the reasons given by the D.C. Circuit was that it was premature for a court to consider the legality of how the government might wield its orderly liquidation authority in a potential liquidation or reorganization.

On the Congressional front, the CFPB’s constitutionality was the focus of testimony given to the Senate Judiciary Committee at a hearing last week entitled “The Administrative State v. The Constitution: Dodd-Frank at Five Years.”  Among the witnesses was Professor Neomi Rao of George Mason University School of Law.  In her written testimony, Professor Rao provided extensive support for the position that the CFPB is unconstitutional.  According to Professor Rao, because of its “super independence and expansive delegated authority, the CFPB’s structure undermines the Constitution’s checks and balances.”  She also asserted that the CFPB’s “constitutional infirmities have predictably resulted in agency overreach on matters of fundamental importance to the consumer financial marketplace.”  (The written testimony of the other witnesses is available on the Judiciary Committee’s website.)

It should be no surprise that the CFPB and Republican Congressman Jeb Hensarling, who chairs the House Financial Services Committee, have different perspectives on the U.S. Supreme Court’s ruling last week that President Obama exceeded his Constitutional recess appointment authority when he filled three vacancies on the National Labor Relations Board in January 2012 . 

In a statement issued after the court’s decision in NLRB v. Noel Canning was announced, Mr. Hensarling commented that the decision shows “clearly and unquestionably [that] President Obama exceeded his authority when he appointed Director Cordray, just as he exceeded his authority when he made these NLRB appointments.”  According to Mr. Hensarling, the fact that Richard Cordray served as CFPB Director for 18 months before he was confirmed by the Senate “calls into question the legality of the official actions he took during this time period and may represent a legal risk for the CFPB.” 

The CFPB, as might be expected, downplayed the decision’s significance.  According to a Politico report, CFPB General Counsel Meredith Fuchs issued a statement indicating that the CFPB “do[es] not expect this decision to impact the CFPB or its important work.”  She is also reported to have said that “Director Cordray was confirmed by the Senate in July 2013.  The CFPB was not part of this case, and today’s decision does not include or mention the bureau or Director Cordray.” 

While I agree with Congressman Hensarling that the Canning decision provides potential ammunition for challenging CFPB actions taken before Director Cordray’s confirmation, I would give low odds to such a challenge’s chances of success.  As I told reporters from Politico and the Wall Street Journal who asked me to comment on what the decision means for the CFPB, someone could theoretically challenge the validity and effect of Mr. Cordray’s ratification of the actions he took prior to his confirmation as Director.  However, at the end of the day, I very much doubt whether such a challenge would succeed.

Although the controversy over the validity of Richard Cordray’s recess appointment as CFPB Director effectively ended with his confirmation by the Senate this past July, Freedom of Information Act (FOIA) requests for documents relating to the appointment were the subject of a decision issued on September 30 by a federal district court in Washington D.C. 

The FOIA requests at issue were made to the CFPB in January 2012 by Judicial Watch following Mr. Cordray’s January 4 recess appointment. Judicial Watch filed the FOIA action on June 7, 2012. The district court found that Judicial Watch had constructively exhausted its administrative remedies and could initiate the lawsuit because the CFPB had failed to take the steps necessary to trigger the need for an administrative appeal. The decision contains an interesting discussion of the three privileges asserted by the CFPB as grounds for withholding certain records:  the deliberative process privilege, the attorney client/attorney work product privilege, and the presidential communications privilege.  

The court agreed with the CFPB’s invocation of these privileges except with regard to one e-mail from a White House staffer to a CFPB employee. The court indicated that the deliberative process privilege was only available to certain White House employees and the CFPB had not provided the information necessary to determine whether the staffer who had sent the e-mail worked in a capacity covered by the privilege.  Accordingly, the court denied the CFPB’s request for summary judgment with respect to the e-mail and directed the CFPB to either disclose the e-mail or indicate in sufficient detail why withholding it was proper.

The U.S. Supreme Court agreed today to review the D.C. Circuit’s decision in Noel Canning v. NLRB invalidating President Obama’s January 4, 2012 appointment of three NLRB members.  Because Richard Cordray was appointed CFPB Director on the same day and through the same assertion of “recess” appointment authority as the NLRB members at issue in Noel Canning, the Supreme Court’s ultimate ruling will effectively determine the validity of Mr. Cordray’s appointment.  A Supreme Court decision can be expected by the end of this year or early next year.  For more details on the grant of certiorari, see our legal alert

All eyes will now be on the Obama Administration, to see whether the Supreme Court’s grant of certiorari (which we thought was a virtual certainty) will impact the Administration’s strategy regarding the President’s renomination of Mr. Cordray as CFPB Director.  (Mr. Cordray’s recess nomination term expires at the end of this year.)  So far, the Administration and Democrats have resisted the Republicans’ demands for changes in the CFPB’s structure and governance.  Those demands include converting the CFPB’s leadership from a single director to a board or commission and subjecting the CFPB to the Congressional appropriations process.  Industry groups have already reacted to the certiorari grant by urging Congress to make changes to the CFPB.


We have been following very closely developments in NLRB v. Noel Canning, the case seeking Supreme Court review of the D.C. Circuit Court’s judgment invalidating President Obama’s January 4, 2012 appointment of several NLRB members. This case will likely determine the fate of Richard Cordray, who was appointed as Director of the CFPB on the same day and through the same assertion of “recess” appointment authority as the NLRB members in Noel Canning. Accordingly, the outcome of Noel Canning should control Richard Cordray’s current status as CFPB Director and any future purported “recess” appointments by the President of a CFPB director. See our prior posts here and e-alerts here and here.

On May 28, we reported that Noel Canning had advised the Supreme Court on May 23 that it does not oppose the NLRB’s cert petition. We pointed out, however, that the brief urges the Court to consider a third question (in addition to the two questions presented by the NLRB): “Whether the President’s recess appointment power may be exercised when the Senate is convening every three days in pro forma sessions.” The NLRB’s deadline for filing a reply brief is June 4. Once that occurs, the briefing on the NLRB’s cert petition will be complete. Accordingly, we expect that the petition will be considered at the Court’s June 20 Conference, the last scheduled Conference before the Court recesses for the summer. Assuming that the Court grants cert (which we regard as virtually a foregone conclusion), briefing on the merits will take place during the summer and the case will probably be set for oral argument shortly after the Court begins its new term in October. Unless the Court accelerates the issuance of its opinion, it is doubtful that the opinion will be issued before the end of this year, when Mr. Cordray’s term will expire.

In the meantime, a cloud continues to hang over the CFPB and the actions it has taken that require a lawful director. This cloud will not dissipate unless and until the Administration and the Senate Democrats negotiate a legislative compromise regarding the future governance of the CFPB. The President and Senate Democrats seem intent to play out the string in court before negotiating a deal with Senate Republicans. That strategy is not in anyone’s interest – consumers, the consumer financial services industry, and even the President and Senate Democrats. While uncertainty remains as to the outcome of Noel Canning, Senate Republicans will undoubtedly be more limited in their demands than they will be if and when the Supreme Court affirms the D.C. Circuit and holds that the President’s appointments to the NLRB are invalid. I recognize that Majority Leader Reid has threatened to change Senate Rules in order to enable Presidential appointments to be confirmed by a simple majority of 51 Senators rather than the 60 Senators now required to kill a Republican filibuster. Political pundits, including Senate Republicans, don’t believe that Senator Reid will deploy this so-called “nuclear option” since it will come back to haunt the Democrats when there is a Republican President and Republican-controlled Senate. Certainly, a reasonable compromise over CFPB structure and governance is a better option than further impasse and division.

We recently reported that counsel for the respondent in NLRB v. Noel Canning planned to make a filing advising the U.S. Supreme Court that the respondent did not oppose the NLRB’s petition for certiorari

That filing occurred on May 23, with respondent filing a brief stating that it “does not oppose certiorari because this case presents a constitutional question of extreme importance. The D.C. Circuit’s decision further calls into question the current authority of two major executive agencies [the NLRB and CFPB] to perform their statutory duties, a question of particular importance given that the D.C. Circuit effectively has national jurisdiction over the federal Government. Certiorari is therefore appropriate.” (footnote omitted).  According to SCOTUSblog, the Supreme Court Justices will consider the certiorari petition in their June 20 conference. 

The NLRB’s certiorari petition presented two questions: whether recess appointments can only be made during intersession recesses and whether the vacancy being filled through a recess appointment must first arise during the recess in which the appointment is made.  

In its brief, the respondent proposes a third question presented: “Whether the President’s recess-appointment power may be exercised when the Senate is convening every three days in pro forma sessions.” According to the respondent, if the court were to grant certiorari and resolve the NLRB’s two questions in favor of the NLRB, it would not decide the validity of the three NLRB appointments made on January 4, 2012.  In its brief, the respondent argues that the three appointments were invalid for the additional reason that they were made “during the Senate’s Session, at a time when the Senate had not adjourned for more than three days.” The respondent further contends that “until January 4, 2012, all Presidents to confront the issue had recognized that recess appointments are impermissible when the Senate is convening pro forma sessions every three days.” 

In addition to Gary Lofland, the counsel for respondent listed on the brief include attorneys from the National Chamber Litigation Center and the Jones Day law firm.  The Center is the litigation arm of the U.S. Chamber of Commerce.  According to a Reuters report, Jones Day serves as outside counsel to the Center, and if the petition for certiorari is granted, it will be the first time the Chamber has represented a member company (Canning) directly before the Supreme Court.



The dark cloud that has been hanging over CFPB Director Richard Cordray’s recess appointment just got darker.  In a 2-1 decision in NLRB v. New Vista Nursing and Rehabilitation, the U.S. Court of Appeals for the Third Circuit ruled today that, under the U.S. Constitution’s Recess Appointments Clause (RAC), the President may only make recess appointments during an intersession recess.  In addition, the Third Circuit rejected the NLRB’s argument that pro forma sessions should be deemed a “recess” (on the theory that “recess” for purposes of the RAC should be read to mean any time the Senate is not open for business and unavailable to provide its advice and consent).  While the recess appointment invalidated in New Vista was a 2010 appointment and not the 2012 appointments at issue in Noel Canning, the Third Circuit’s views fully accord with the D.C. Circuit’s determination in Noel Canning v. NLRB.  

In its January 2013 Noel Canning decision, the D.C. Circuit ruled that, because the most recent session began on January 3, 2012 and President Obama’s three NLRB appointments were made on January 4 (while the Senate was conducting pro forma sessions), the appointments were not made during a “recess” within the meaning of the RAC.  Since the President’s recess appointment of Richard Cordray as CFPB Director was also made on January 4, the D.C. Circuit’s opinion cast serious doubt on the validity of Mr. Cordray’s appointment.  By agreeing that recess appointments must be made during an intersession recess to be valid, the Third Circuit has added to that doubt. 

On April 25, the NLRB filed a petition for certiorari, asking the Supreme Court to review Noel Canning.  The respondent has advised the Court it does not intend to oppose the petition. 

We thought the petition for certiorari in Noel Canning had a high probability of success before today’s decision.  The panel split in New Vista further increases the likelihood that certiorari will be granted.