A federal judge in Washington rejected a challenge to the constitutionality of the Consumer Financial Protection Bureau, ruling that the question should be addressed in a pending enforcement matter the agency brought in California federal court.
In an unusually aggressive move, California-based Morgan Drexen, which works with law firms to provide debt relief services to consumers, launched a preemptive strike against the consumer agency in July. The company sued the CFPB in U.S. District Court for the District of Columbia, alleging that its structure violates the Constitution's separation of powers. Connecticut solo practitioner Kimberly Pisinski, who uses Morgan Drexen's services, joined in the suit.
At the time, the CFPB was investigating Morgan Drexen and had warned it in writing that an enforcement action was likely. Indeed, a few weeks later, the agency sued Morgan Drexen in U.S. District Court for the Central District of California, alleging that it charged illegal up-front fees for debt relief services and deceived consumers.
Represented by Venable partner Randall Miller, Morgan Drexen asked U.S. District Judge Colleen Kollar-Kotelly to stop the CFPB from pursuing its suit in California until the Washington challenge, which was filed first, was resolved.
The judge was not persuaded. "Morgan Drexen has an adequate remedy to address its claims of the Bureau's unconstitutionality," she wrote in a decision issued yesterday. "Any harm alleged by Morgan Drexen here can be remedied by a favorable ruling in the California Court."
Miller said Morgan Drexen will file a motion to dismiss the case in Orange County, Calif. on the grounds that the CFPB is unconstitutional.
"This was a procedural skirmish," he said of the decision by Kollar-Kotelly. "Ultimately, it doesn't matter. We still have the same constitutional argument."
Miller anticipates the California court will schedule arguments on the motion to dismiss for December 13.
It's likely to be the first time a court will squarely consider whether the CFPB, created by the Dodd-Frank Act, has too much power and lacks the necessary checks and balances. A prior case brought on behalf of groups including a community bank, the Competitive Enterprise Institute and several states, State National Bank of Big Spring, Texas et. al. v. Lew, made similar claims but was dismissed on August 1 for lack of standing. (The case is now pending in the U.S. Court of Appeals for the D.C. Circuit.)
As the target of a CFPB action, Morgan Drexen won't have a problem with standing. However, Kollar-Kotelly found that Pisinski, the Connecticut lawyer, did not have grounds to sue the agency.
Pininski, who is not named in the California case, argued that the CFPB sought information from Morgan Drexen that interfered with her confidential relationship with her clients.
"This injury is illusory," Kollar-Kotelly found. First, she said, the agency never sought privileged information. Further, the CFPB's discovery requests (known as civil investigative demands) are not self-enforcing. The only way the CFPB could force Morgan Drexen to provide Pisinski's information would be through a court proceeding, where she could assert privilege.
Courts in Washington have seen Morgan Drexen's tactic before. In 1987 former White House Deputy Chief of Staff Michael Deaver was under investigation by the independent counsel for illegal lobbying activities. Rather than wait to be hit with charges, he filed suit alleging that the Ethics in Government Act (from which the independent counsel drew its power) was unconstitutional based on separation of powers grounds.
The U.S. Court of Appeals for the D.C. Circuit refused to take the bait, and told Deaver to raise the argument in the prosecution. (He was convicted on three counts of perjury and fined $100,000.)
Kollar-Kotelly followed the Deaver court's logic, rejecting Morgan Drexen's argument that the decision didn't apply because it was a criminal matter.
Allowing a plaintiff to "independently raise a constitutional challenge that also served as a defense in a pending enforcement action would frustrate the final judgment rule," she wrote.
Further, courts have a well-established obligation to avoid constitutional questions if at all possible. Because Morgan Drexen also has non-constitutional defenses to the CFPB suit, letting the California court take the lead means that court could "resolve the issue in Morgan Drexen's favor without addressing the constitutional question raised here."
She also rejected the company's argument that denying injunctive relief would mean that if anyone went after the CFPB on constitutional grounds, the agency could turn around and bring an enforcement action and force the plaintiff to become a defendant.
"The Court considers these predictions somewhat of an exaggeration," she wrote. "Moreover, the Court presumes that agency enforcement actions are brought in good faith, and that the Bureau will not simply manufacture a spurious enforcement action in order to turn a constitutional plaintiff into an enforcement defendant."