Judge Disallows Constitutional Challenge to Consumer Bureau


In Washington, a federal judge overruled a challenge to the
constitutionality of the Consumer Financial Protection Bureau, ruling
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 scrutinizing Morgan Drexen and had warned
it in writing that an enforcement action was likely. 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

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.”
Contributed by Justice .O. Nwaneri

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