District Court (N.Y.) Strikes Down CFPB’s Structure as Unconstitutional

In CFPB v. RD Legal Funding, Inc., 17-CV-890 (U.S.D.C. S.D. N.Y. June 21, 2018), here, Judge Preska disagreed with the DC Circuit’s PHH decision and found the CFPB’s structure unconstitutional.

In reaching the question of the constitutionality of Title X of Dodd-Frank, which established the CFPB as an “independent bureau” within the Federal Reserve System, 12 U.S.C. § 5491(a), the Court acknowledges the en banc holding of the Court of Appeals for the District of Columbia Circuit in PHH Corp. v. CFPB, 881 F.3d 75 (D.C. Cir. 2018), upholding the statute. Of course, that decision is not binding on this Court.  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.” Id. at 198. Also most respectfully, the Court disagrees with Section V of Judge Kavanaugh’s opinion wherein he determined the remedy to be to “invalidate and sever the for-cause removal provision and hold that the Director of the CFPB may be supervised, directed, and removed at will by the President.” Id. at 200. Instead, the Court adopts Section II of Judge Karen LeCraft Henderson’s dissent wherein she opined that “the presumption of severability is rebutted here. A severability clause ‘does not give the court power to amend’ a statute. Nor is it a license to cut out the ‘heart’ of a statute. Because section 5491(c)(3) is at the heart of Title X [Dodd Frank], I would strike Title X in its entirety.” Id. at 163-64 (citations omitted).ii. CFPB’s Notice of Ratification On May 11, 2018, the CFPB filed a Notice of Ratification (“Ratification”) with the Court in response to Defendants’ constitutional challenge to the for-cause removal provision ofthe CFPB’s enabling statute. In the Ratification, the CFPB attempts to ratify its decision to file this enforcement decision prior to the appointment of the CFPB’s Acting Director, Mick Mulvaney, on November 24, 2017. (Notice of Ratification (hereinafter, Ratification) 1.) Because the President may remove Mr. Mulvaney at will, the CFPB asserts that Defendants may not obtain dismissal on the grounds that the instant action was initially filed by a Director at the CFPB removable only for cause. Ratification 3.)As Defendants note, ratification is a principle of agency law. (Defendants’ Opp’n to Ratification (“Ratif. Opp’n”) 2, ECF No. 79.) Ratification addresses situations in which an agent was without authority at the time he or she acted and the principal later approved of the agent’s prior unauthorized acts. See GDG Acquisitions LLC v. Government of Belize, 849 F.3d 1299, 1310 (11th Cir. 2017) (noting that ratification assumes that the agent “did not have actual authority at the time he acted”); Wilkes-Barre Hosp. Co. v. NLRB, 857 F.3d 364, 371 (D.C. Cir. 2017) (explaining role of principal that ratifies prior unauthorized acts of agent).The Court agrees with Defendants that the CFPB’s ratification does not address accurately the constitutional issue raised in this case, which concerns the structure and authority of the CFPB itself, not the authority of an agent tomake decisions on the CFPB’s behalf. See CFPB v. Gordon, 819 F.3d 1179, 1192 (9th Cir. 2016) (holding, after invalidation of CFPB Director’s recess appointment, that the Director’s “ratification, done after he was properly appointed as Director, resolves any Appointments Clause deficiencies”); Wilkes-Barre Hosp. Co. v. NLRB, 857 F.3d 364, 371 (D.C. Cir. 2017) (holding, after invalidation of Board members’ recess appointments, that NLRB properly ratified the appointment of its Regional Director who, in turn, ratified his prior unauthorized actions); Advanced Disposal Servs. East, Inc. v. NLRB, 820 F.3d 592, 605-06 (3d Cir. 2016) (same).Here, the constitutional issues presented by the structure of the CFPB are not cured by the appointment of Mr. Mulvaney. As Defendants point out, the relevant provisions of the Dodd-Frank Act that render the CFPB’s structure unconstitutional remain intact. (Ratification 4.) Furthermore, Mr. Mulvaney cannot serve past June 22, 2018 (210 days after the vacancy arose), unless the President nominates a new Director, and then only until the new Director is appointed. Thus, there will likely be a new Director appointed in the coming months who will be subject to the for-cause removal provision. Therefore, the Ratification does not cure the constitutional deficiencies with the CFPB’s structure as the CFPB argues. Accordingly, the Court rejects the Notice of Ratification (ECF No. 78) to the extent the CFPB argues that the Ratification renders Defendants’ constitutional arguments moot. Accordingly, the Court finds that the CFPB “lacks authority to bring this enforcement action because its composition violates the Constitution’s separation of powers,” and thus the CFPB’s claims are dismissed. Fed. Election Comm’n v. NRA Political Victory Fund, 6 F.3d 821, 822 (D.C. Cir. 1993).