Law Firm Attempts to Resist Subpoena by Arguing CFPB is Unconstitutional

In the wake of last year’s (now-vacated and pending review en banc) decision by the D.C. Circuit in PHH Corp. v. Consumer Fin. Prot. Bureau, 839 F.3d 1 (D.C. Cir. 2016), the constitutionality of the Consumer Financial Protection Bureau (“CFPB”) continues to be an issue in cases involving that agency. The latest party to raise the “CFPB is unconstitutional” defense is a law firm, Seila Law, LLC, which is attempting to evade a civil investigative demand, or “CID,” seeking information relating to the CFPB’s litigation against debt relief firm Morgan Drexel Inc. and its affiliates.

The CFPB first issued the CID to Seila Law in February 2017. Dissatisfied with the law firm’s response to the CID, the CFPB filed suit in the Central District of California in June 2017 seeking to enforce the CID. In its opposition, Seila Law argued that the CFPB’s structure violated the separation of powers (i.e., the conclusion reached in PHH Corp.). While the district court limited the scope of the CID, it rejected Seila Law’s constitutionality argument as foreclosed by controlling Supreme Court precedent, and ordered the law firm to respond to the CID. Seila Law, however, was not inclined to fold so easily and, on September 1, 2017, it filed both an appeal and an emergency motion for a stay with the Ninth Circuit.

On September 8, 2017, the CFPB filed its opposition to Seila Law’s emergency motion, contending that Seila Law’s only argument was that the CFPB “is unconstitutionally structured because its single director is removable only ‘for cause,’ and because the [CFPB] is funded outside the annual congressional appropriations process.” Echoing the previous conclusion of the district court, the CFPB argued that Seila Law’s “unconstitutional” defense “is not likely to succeed because it is foreclosed by controlling cases of the Supreme Court.” The CFPB admitted that PHH Corp. had held that the CFPB’s current structure was unconstitutional, but noted that that decision was under review by the full D.C. Circuit and, in any event, was not controlling on the Ninth Circuit. The CFPB further contended that PHH Corp. was wrongly decided, contrary to controlling Supreme Court precedent, and its position had “been rejected by decisions across the country confirming the [CFPB’s] constitutionality.”

On September 13, 2017, in a victory for Seila Law, the Ninth Circuit granted the law firm’s emergency motion for a stay in a one-page order without explanation. Given that a likelihood of success on the merits is one of the factors considered in deciding whether a stay is warranted, it appears that the Ninth Circuit thought Seila Law had a good chance of prevailing on its constitutionality argument. The Ninth Circuit may also have been reluctant to wade into this issue pending the decision of the full D.C. Circuit in PHH Corp. What seems clear, however, is that the issue of the CFPB’s unconstitutionality is far from settled. Indeed, whatever the outcome of Seila Law’s appeal and the D.C. Circuit’s decision in PHH Corp., this issue is not likely to be definitely resolved until the Supreme Court steps in.

J.H. Jennifer Lee

Jenny represents large and regional banks, card issuers, mortgage bankers or mortgage insurance companies, online lenders, Fin Tech firms, private equity firms with consumer-facing specialty finance strategies, or any “covered person” delineated in the Bureau’s statute, title X of the Dodd-Frank Act. As a lawyer who worked inside the Consumer Financial Protection Bureau (Bureau) Office of Enforcement for several years beginning with the Bureau’s founding, Jenny possesses unique experience that she draws upon to provide clients with defense strategies for enforcement by or litigation with the Bureau....

Kaleb McNeely

As an associate in the Trial Group, Kaleb practices primarily in the area of commercial litigation, representing clients in a variety of contractual and tort-related disputes.

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