On The Case

New SCOTUS petition: CFPB enforcement must be undone if agency is unconstitutional

(Reuters) - The drama over the constitutionality of the Consumer Financial Protection Bureau took another surprise turn on Monday, when a Mississippi payday lender, All American Check Cashing, filed a petition asking the U.S. Supreme Court to grant review of its constitutional challenge to the CFPB before the 5th U.S. Circuit Court of Appeals issues an opinion in the case.

But All American’s lawyers at Gibson Dunn & Crutcher are asking the Supreme Court for more than just a ruling that the CFPB’s unusual structure is unconstitutional. Their petition also argues that the justices can only cure the bureau’s constitutional defect with a drastic remedy: undoing CFPB enforcement actions or even striking down the law that created the bureau.

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The Supreme Court, as I’ll explain, seems likely to take up the question of whether the bureau’s structure – in which a lone director who can only, by statute, be removed from office for good cause – violates separation of powers doctrine. The justices could opt to resolve the constitutional question without calling the CFPB’s entire existence into doubt. All-American’s petition challenges the Supreme Court to address both the purported constitutional defect and its remedy.

The context for this latest petition is important. Back in June, you’ll recall, a California debt relief firm Seila Law filed a petition asking the Supreme Court to decide whether the CFPB’s structure is constitutional. Seila had challenged the bureau’s structure after receiving a civil investigatory demand. It lost its case at the 9th Circuit, which relied on the D.C. Circuit’s en banc 2018 ruling in PHH v. CFPB to hold that the bureau’s structure did not violate separation of powers doctrine. Seila’s Supreme Court lawyers at Paul Weiss Rifkind Wharton & Garrison argued that even though the lower courts had not split on the constitutionality of the CFPB’s structure, the issue was bubbling in so many cases that it needed to be resolved.

The Justice Department and the CFPB agreed. On Sept. 17, DOJ and the CFPB the urged the justices to grant review of Seila Law’s case – and to hold that the CFPB director cannot be insulated from the president’s authority.

The filing marked a change in the CFPB’s stance. For years – even after the Trump Justice Department publicly questioned the constitutionality of the CFPB’s structure in a 2018 Supreme Court brief – the bureau defended its structure in appellate courts, including the 9th Circuit in Seila Law’s case and the 5th Circuit in the All American litigation. But after the Sept. 17 brief to the Supreme Court, the CFPB informed lower courts that it had changed its mind.

Shareholders of Fannie Mae and Freddie Mac saw the CFPB’s acquiescence as an opportunity for them to make a Supreme Court play. Like the CFPB, the federal bureau that oversees Fannie and Freddie, the Federal Housing Finance Agency, is headed by a lone director who can only be removed for good cause. In early September, the en banc 5th Circuit held that structure to be unconstitutional, in a case in which some Fannie and Freddie shareholders challenged a 2012 deal that swept all of the housing entities’ net profits to the Treasury Department. CUT

Last week, those shareholders filed a petition asking the Supreme Court to take their case, instead of the Seila Law case, to decide whether the structure of the CFPB and the FHFA comports with separation of powers doctrine. Their lawyers at Cooper & Kirk argued that even though the shareholders prevailed at the 5th Circuit on the constitutional question, their clients effectively lost the case because the 5th Circuit refused to invalidate the 2012 net worth sweep, instead ruling that the remedy for the FHFA’s unconstitutional appointment clause was to sever the clause and strike the director’s for-cause protection. Unlike the CFPB, Cooper & Kirk said, the FHFA is continuing to defend the constitutionality of its structure. So by taking the FHFA case, the firm said, the justices could hear from an agency arguing on its own behalf, rather than from a court-appointed amicus arguing a position that the CFPB has renounced.

The Fannie and Freddie shareholders’ petition also argued that their case would put the question of an appropriate remedy squarely before the court, since the en banc 5th Circuit vigorously debated the consequences of the FHFA’s constitutional defect and split sharply on how to cure it.

But the Fannie and Freddie petition was last week’s twist. This week’s new development is Gibson Dunn’s petition for All American - which pounds hard on the theme of using its case to decide on a remedy for the CFPB’s allegedly unconstitutional structure. The new petition argues that the Seila Law case would not afford the justices that opportunity because Seila challenged the CFPB over a civil investigatory demand. According to All American’s petition, that demand might be enforceable even if the CFPB director were found to have been unconstitutionally appointed. By contrast, the petition said, the CFPB’s enforcement action against the check cashing company falls within the CFPB’s core power. If the Supreme Court agrees to hear All American’s case – either instead of or in addition to the Seila case – it will necessarily have to decide not only whether the CFPB’s structure is constitutional but also what to do if it isn’t.

“The remedies question,” said All American counsel Helgi Walker of Gibson Dunn in an email statement, “is where the constitutional rubber hits the road, and if it is not addressed the current uncertainty about what should actually happen in cases involving the CFPB will only grow.”

I reached out to Seila Supreme Court counsel Kannon Shanmugam of Paul Weiss, who declined to provide a statement on All American’s competing cert petition. Brian Barnes of Cooper & Kirk declined to comment on the Gibson Dunn filing.

The Justice Department did not immediately respond to my request for comment on the All American petition. But DOJ did address the remedial issue in its brief urging the Supreme Court to take the Seila case. DOJ said the justices could use the Seila case as a vehicle to decide an appropriate cure for a constitutional defect in the provision appointing the CFPB’s director. That cure, according to the government, would be to sever the appointment clause and strike its problematic insulation of the CFPB director,  just as the Supreme Court did in 2010’s Free Enterprise Fund v. Public Corporation Accounting Oversight Board. A constitutionally-appointed director could then ratify the CFPB’s previous enforcement actions, curing any hangover of unconstitutionality.

All American’s petition argues that DOJ’s proposed quick-and-easy fix is inadequate. “Accepting that position would mean that even successful separation-of-powers challengers will receive no practical relief, and their matters will proceed as if nothing ever happened,” the petition argued. “But actions taken by unconstitutionally structured agencies are nullities and cannot be ratified.”

More fundamentally, according to All American’s petition, the justices can’t simply sever and rewrite the troublesome provision on the appointment of the CFPB director. Congress specifically drafted the Consumer Financial Protection Act to insulate the CFPB director from the president’s control. For the justices to reverse Congress’ intention would, in turn, disrupt the balance of power between the branches, “inflating the president’s power relative to Congress and transforming the CFPB into something Congress never would have created,” the petition said.

Gibson Dunn has been pushing for the demise of the CFPB for years, beginning with the PHH case at the D.C. Circuit. The All American petition presents well-honed arguments by litigators who have walked this ground before. It’s worth pointing out that so far, all of the appellate courts to have examined the structure of the CFPB or the FHFA have rejected arguments for drastic remedies. Even Justice Brett Kavanaugh, who concluded as a judge on the D.C. Circuit that the CFPB is unconstitutionally structured, opined that the problem could be solved by severing the appointment provision.

All of this tactical maneuvering over which case presents the best vehicle for the Supreme Court’s consideration of the CFPB’s structure underscores the need for the justices to take up the issue. As I said when the CFPB first conceded the unconstitutionality of its structure in that joint brief with DOJ, there’s now a black cloud over everything the agency does, and it won’t go away until the Supreme Court offers a final resolution.

The justices are scheduled to conference on Seila’s petition on Oct. 11.