A New York Southern District judge has rejected the January ruling by the D.C. Circuit Court of Appeals on the constitutionality of the Consumer Financial Protection Bureau’s (CFPB) single-director structure in a decision invalidating the bureau’s claims in a class action lawsuit alleging multiple violations of consumer protection laws.
If the ruling is upheld by a higher court, it could have sweeping implications for the CFPB’s rules and even its past cases. The defendants in the case still are subject to charges brought by the New York Attorney General’s (NYAG) office, using its authority to enforce provisions of the Consumer Financial Protection Act (CFPA).
District Judge Loretta Preska’s recommendation for curing the constitutionality issue would have potentially Earth-shattering consequences for the bureau and any entity that has ever been entrenched in a case involving it. Preska based her constitutionality decision on a dissent in the en banc ruling in PHH Corp. v. CFPB written by Justice Brett Kavanaugh – one of the three justices who originally declared the bureau unconstitutional before the en banc hearing. Kavanaugh’s solution to cure the constitutionality issue was to strike the provision of the Dodd-Frank Act making the CFPB director removable only for cause. However, Preska proposes it would be necessary to strike Title X, the provision that created the bureau, entirely, as proposed in a separate dissenting opinion by D.C. Circuit Judge Karen LeCraft Henderson.
The complaint at the center of the latest constitutionality debate involving the CFPB was filed by in early 2017 by the bureau and the NYAG. It alleged 11 counts against RD Legal Funding, LLC, RD Legal Finance, LLC, RD Legal Funding Partners, LP, and Roni Dersovitz, the companies’ owner and founder for unfair, deceptive or abusive acts or practices (UDAAP), and violations of New York state laws. The defendants were accused of misleading consumers, including former National Football League players and 9/11 first-responders, into entering cash advance agreements that were falsely represented as valid and enforceable sales but, in reality, functioned as usurious loans that were void under state law.
The defendants moved to dismiss the complaint on three principal grounds:
- The CFPB is unconstitutionally structured and therefore lacks the authority to bring claims under the CFPA;
- The court lacks federal jurisdiction because the RD Entities are not “covered persons” under the CFPA and therefore do not come within the law’s jurisdictional purview; and
- The plaintiffs failed to state a claim for relief, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.
Preska agreed with the defendants’ first claim, ruling that the CFPB should be “terminated as a party” to the action on the grounds that “because the CFPB’s structure is unconstitutional, it lacks the authority to bring claims.”
“Respectfully, the court disagrees with the holding of the en banc court and instead adopts Sections I-IV of Judge Brett Kavanaugh’s dissent (joined in by Senior Circuit Judge A. Raymond Randolph), where, based on considerations of history, liberty, and presidential authority, Judge Kavanaugh concluded that the CFPB ‘is unconstitutionally structured because it is an independent agency that exercises substantial executive power and is headed by a single director,’ ” Preska wrote in her opinion.
The split between the district and circuit courts creates an interesting legal dilemma. Dodd Frank Update reached out to Goodwin Law Partners William Jay and Anthony Alexis, former head of enforcement at the CFPB, to explain the series of events that would have to occur to attract a grant of certiorari from the Supreme Court, by which the higher court would review the lower courts’ decisions.
Because Preska’s ruling is not a final decision, the case is not yet appealable unless she grants permission, Jay noted. If Preska does so, the CFPB could appeal to the Second Circuit Court of Appeals. If the Second Circuit Court agreed with the D.C. Circuit Court, there still would be no split that traditionally would attract a grant of certiorari. It is noteworthy that a similar case questioning the constitutionality of the bureau’s structure is pending in the Fifth Circuit Court as well as cases in the Ninth Circuit which have been granted an interlocutory appeal.
“This is a constitutional issue that could conceivably be cert-worthy even without a circuit split, but it would be unusual for the Solicitor General (or the bureau) to ask the Supreme Court to step in before a decision from the circuit,” Jay said. “So this case could eventually lead to a Supreme Court decision, depending on what happens in the district court and the Second Circuit in the meantime.”
There is no telling whether the constitutionality question, which has loomed over the bureau for years now, ultimately will be heard by the Supreme Court.
What is certain is that the defendants in the case are not in clear following Preska’s ruling. As Jay noted, her ruling was not final and simply stipulated that the CFPB should not be a party to the charges, leaving the NYAG as the sole authority bringing claims against the defendants under the CFPA.
“The court concludes that NYAG has alleged plausibly claims under the CFPA and under New York law,” Preska wrote. “Accordingly, defendants’ motion to dismiss the complaint is denied.”
Preska did not agree with the defendants’ arguments that they are not “covered persons” under CFPA standards or that the complaint is invalid because it lacked claim for relief. Preska ruled that the defendants are covered persons under the CFPA because they extended credit and serviced loans.
Addressing the defendants’ claim that the complaint failed to include a claim for relief, Preska cited an excerpt from Rahman v. Schriro, stating: “In certain circumstances, the court may permissibly consider documents other than the complaint in ruling on a motion under Rule 12(b)(6). Documents that are attached to the complaint or incorporated in it by reference are deemed part of the pleading and may be considered. In addition, even if not attached or incorporated by reference, a document ‘upon which [the complaint] solely relies and which is integral to the complaint" may be considered by the court in ruling on such a motion.’ ”
Consumer Bankers Association President and CEO Richard Hunt saw the lawsuit as highlighting his contention that the bureau needs to be restructured into a multi-member, bipartisan commission, as he stated during his recent testimony before the House Financial Institutions and Consumer Credit Subcommittee.
“The court’s ruling further proves one person should not have the sole authority over the financial lives of every American consumer,” Hunt said, according to a report by The Hill. “It creates uncertainty, limits opinions and turns the bureau into a political pendulum, swinging with each new administration.”
American Bankers Association (ABA) President and CEO Rob Nichols also issued a statement in light of the ruling.
“We are still reviewing today’s ruling from a federal district court in New York concluding that the CFPB is ‘unconstitutionally structured,’ ” Nichols said. “Other federal courts have ruled differently, so the implications of this decision remain unclear.
“ABA has long believed that the bureau should be more accountable to Congress and that a five-member, bipartisan commission — as originally envisioned in drafts of the Dodd-Frank Act — would balance the bureau’s needs for independence and accountability, while broadening perspectives on rulemaking and enforcement,” he continued. “Today’s ruling does not alter that view.”