The D.C. federal district court has rejected the plaintiffs’ attempt in State National Bank of Big Spring, Texas, et al. v. Lew, et al. to invalidate the actions taken by Director Cordray while he was a recess appointee.  The district court deferred ruling on the plaintiffs’ separation of powers constitutional challenge to the CFPB pending a decision by the D.C. Circuit in PHH Corporation v. CFPB.

In that case, PHH is arguing that the Dodd-Frank Act’s placement of sweeping legislative, executive, and judicial power in the hands of a single director who is not accountable to the President or Congress makes the CFPB’s structure unconstitutional. The D.C. Circuit held oral argument this past April.  In its decision, the district court noted that the plaintiffs in State National Bank of Big Spring had filed an amicus brief in support of PHH in which they made largely the same constitutional argument that they made in their own case.

The district court had initially dismissed the second amended complaint in State National Bank of Big Spring on standing and ripeness grounds.  In July 2015, that decision was reversed in part by the D.C. Circuit, which ruled that the bank had standing to challenge the constitutionality of the CFPB and Director Cordray’s recess appointment.  With regard to the recess appointment challenge, in addition to remanding the case 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.”  In August 2013, following his confirmation by the Senate, Director Cordray published a notice in the Federal Register “affirm[ing] and ratify[ing] any and all actions” he took while a recess appointee.

In its decision on remand, the district court observed that the CFPB made no attempt to rebut the argument that Director Cordray’s recess appointment was unconstitutional, which the district court found to be “unsurprising in light of the Supreme Court’s decision in Noel Canning.”  The plaintiffs conceded that Director Cordray’s confirmation mooted their attempt in the lawsuit to use his recess appointment as grounds for challenging his authority to take any action as CFPB Director.  They argued, however, and the district court agreed, that the entire case was not moot because the court could still grant them partial relief by enjoining the enforcement of regulations that were promulgated prior to Director Cordray’s confirmation.  Nevertheless, the district court concluded that despite his unconstitutional recess appointment, Director Cordray’s subsequent confirmation and ratification “saves the regulations from plaintiffs’ challenge.”

In April 2016, in CFPB v. Chance Edward Gordon, a divided Ninth Circuit panel ruled that Director Cordray’s invalid recess appointment did not render the CFPB’s enforcement action against the defendant invalid because his subsequent valid appointment coupled with his ratification notice cured any initial constitutional deficiencies.

 

 

The U.S. Supreme Court today issued a decision in NLRB v. Noel Canning in which it held that President Obama’s January 2012 recess appointments to the National Labor Relations Board were invalid.

The NLRB recess appointments were made on January 4, the day after a new session of Congress had begun with a pro forma January 3 session and two days before another pro forma session was held on January 6.  The Senate thereafter continued to hold additional  pro forma sessions until reconvening on January 23.  The D.C. Circuit, in the decision reviewed by the Supreme Court, concluded that the NLRB appointments violated the U.S. Constitution’s Recess Appointments Clause (RAC) because the RAC only allows a president to make such appointments during an intersession recess of the Senate, and they can only be used to fill vacancies that first arose during the recess in which the appointments were made.

Although Richard Cordray’s recess appointment as CFPB Director was not at issue in Canning, we followed the case very closely because his appointment was made on the same day and through the same assertion of recess appointment authority as the NLRB appointments.  The Supreme Court’s rationale discussed below for invalidating the NLRB appointments means that Director Cordray’s recess appointment was indeed invalid.  However, Director Cordray’s confirmation by the Senate as CFPB Director in July 2013 and his subsequent ratification of the actions he took prior to his confirmation means that the Canning decision has no impact on Mr. Cordray’s legal status as CFPB Director or the validity of any CFPB actions taken prior to his confirmation.  (While someone could theoretically challenge the validity and effect of Director Cordray’s ratification, we highly doubt that such a challenge would succeed.)

Ironically, while the Supreme Court adopted a broader reading of the president’s RAC authority than the D.C. Circuit, President Obama and his successors may have less need to avail themselves of that authority as a result of Senate Democrats having “gone nuclear” last fall.  In November 2013, Senate Democrats voted to change Senate filibuster rules to only require 51 (a simple majority) rather than 60 votes for most Presidential nominees to proceed to a full Senate vote.

In its Canning decision, the Supreme Court held the following:

  • the President’s recess-appointment power can be exercised during either a recess that occurs between Senate sessions or that occurs within a session of the Senate and is of “substantial length”
  •  the President’s recess-appointment power can be exercised to fill a vacancy either that initially occurs during a recess or that initially occurs before a recess and continues to exist during the recess
  • the Senate was not in recess when it was conducting pro forma sessions in January 2012 (On this point, the court held that for purposes of the RAC, “the Senate is in session when it says it is, provided that, under its own rules, it retains the capacity to transact Senate business.”  It found that the January 2012 pro forma sessions met that standard. According to the court, the 3-day recess between the January 3 and January 6 pro forma sessions was too short to trigger the president’s RAC authority.)

 

Earlier today, we reported on the panel discussion of the lawsuit filed by State National Bank of Big Spring that took place at the ABA Committee on Consumer Financial Services in Naples, Florida during a session entitled “State National Bank of Big Spring, et al. v. Geithner, et al. – Is the CFPB Constitutional?”  Even more interesting to me than the discussion of that lawsuit was what one of the panelists, Deepak Gupta, had to say about the case pending before the U.S. Court of Appeals for the D.C. Circuit which deals with the legality of President Obama’s recess appointments to the NLRB, Noel Canning v. NLRB, No. 12-1115. 

The NLRB appointments took place on January 4, 2012, the same day the President appointed Richard Cordray to be CFPB Director.  In making all of these appointments, the President took the same legal position – namely, that the Senate was in a de facto recess despite the pro forma Senate sessions held twice a week during the holiday season when the Senators were not actually present in the Senate Chamber.  Deepak observed that the panel which heard oral argument on December 5, 2012, Judges Sentelle, Henderson and Griffith, are quite conservative.  It is my understanding that the panel questioned the government lawyer quite intensively.

If the D.C. Circuit were to hold that the President’s NLRB appointments are invalid, then the President’s appointment of Mr. Cordray would also be invalid.  The Third and Fourth Circuits will also soon address the legality of the President’s NLRB appointments. NLRB v. New Vista Nursing, No. 11-3440 (3rd Cir.) and Nestle Dreyer’s Ice Cream Company v. NLRB, Nos. 12-1684 and 12-1783 (4th Cir.).  It is conceivable that the legality of these appointments may end up in front of the U.S. Supreme Court later this year.  In the meantime, a holding by any Circuit Court that the NLRB appointments are invalid would result in chaos at the CFPB. 

Would any or all of the CFPB’s actions since Mr. Cordray was appointed be invalid?  How do you unscramble the egg?  What about future CFPB actions?  Would the CFPB still be able to supervise large banks? Would the CFPB’s new remittances and mortgage regulations be valid? Would the CFPB be able to issue any new regulations? Would President Obama be able to get the “new” Senate to confirm Mr. Cordray or some other nominee?  Would the President agree to support the demand of many Republican Senators to amend Title X of Dodd-Frank to substitute a 5-member commission for a single director and to subject the CFPB to the Congressional appropriations process?

I don’t think we should get too far ahead of ourselves.  However, there is a real risk that a Circuit Court could invalidate the President’s recess appointments.  Hopefully, the CFPB is planning for that possibility.

Because of their potential implications for the validity of CFPB Director Cordray’s appointment, we have been following several pending cases challenging the National Labor Relations Board’s authority to take various actions based on the alleged invalidity of President Obama’s recess appointment of three individuals to the NLRB.

On December 26, the Seventh Circuit issued an opinion in Richards v. NLRB dismissing the petitions for review for lack of standing.  According to the Seventh Circuit, because the NLRB had already struck down the NLRB policies at issue, the petitioners could no longer show that they suffered an injury-in-fact necessary to provide standing.  Having found the petitioners lacked standing, the Seventh Circuit ruled that it did not need to reach the legitimacy of the NLRB recess appointments.

Earlier in December, the U.S. Court of Appeals for the D.C. Circuit heard oral arguments in Noel Canning v. NLRB, another of the cases challenging the NLRB appointments, and a decision in that case is expected soon.

Another case we have been following is State National Bank of Big Spring, Texas, et al. v. Geithner, et al., which is pending in federal district court in Washington, D.C. and includes a direct challenge to President Obama’s recess appointment of Director Cordray.  The case was originally filed in June 2012 by State National Bank of Big Spring, Texas and two non-profit organizations in the metropolitan Washington, D.C. area. In September, an amended complaint was filed adding as plaintiffs the Republican state Attorneys General of Oklahoma, South Carolina and Michigan.  The court is now considering the CFPB’s motion to dismiss the amended complaint which was filed in November.

Yesterday, the U.S. Court of Appeals for the D.C. Circuit heard oral arguments in Noel Canning v. National Labor Relations Board.  The outcome in the case could have implications for the validity of CFPB Director Cordray’s appointment because it challenges the National Labor Relations Board’s authority to take various actions based on the alleged invalidity of President Obama’s recess appointment of three individuals to the NLRB. 

Amicus briefs in support of the plaintiff have been filed by House Speaker John Boehner and Senator Mitch McConnell joined by 41 other Republican senators.  In addition, Professor Victor Williams of Catholic University’s Columbus School of Law has filed an amicus brief that argues that recess appointments are not subject to judicial review because they raise nonjusticiable political questions.  Professor Williams has filed similar amicus briefs in other cases challenging the NLRB appointments.

 Although there has been much discussion during the past week as to the legality of President Obama’s appointment of Richard Cordray as the first Director of the CFPB, there has been little discussion of the President’s appointment at the same time of three individuals to fill vacancies on the National Labor Relations Board (NLRB). Yet it is those latter appointments that may determine the legality of Cordray’s appointment.

That results from the fact that it is more likely that the NLRB (as opposed to Director Cordray) will soon take an official act that will give standing to someone to challenge the appointments in court. If a court determines that the President’s appointments of the three persons to fill the vacancies on the NLRB Board was invalid because the Senate was not in recess, then the same would hold true for Cordray’s appointment. If the court were to hold that the appointments of the persons to the NLRB Board were valid, that would eliminate the “no vacancy” argument but would still leave objectors to Cordray’s appointment with two other arguments – namely, that there was no “vacancy” to fill because Cordray was the first person to fill the position and that Dodd-Frank Act requires confirmation by the Senate.