Federal District Court of New York Rules Ratification of CFPB Enforcement Action Against RD Legal Was Not Necessary and Allows Lawsuit to Continue
In the latest development in the CFPB’s longstanding lawsuit against RD Legal Funding, a federal district court judge in New York denied RD Legal’s motion to dismiss and found that because the CFPB, under the direction of the former Director Cordray, had the authority to initiate the lawsuit, ratification of the lawsuit filed by former Director Kraninger was not required. The reinstatement of the lawsuit means that the question of whether the transactions at issue are disguised loans is likely to receive renewed attention.
The decision follows the referral of the case by the Second Circuit to Judge Preska. The case involves RD Legal’s purchase at a discount, with immediate cash payments, of benefits consumers were ultimately entitled to under the NFL’s Concussion Dispute Settlement Agreement (NFLSA) and of the Compensation Fund for the victims of September 11, 2001 (VCF). The CFPB and NYAG sued RD Legal in federal district court, asserting federal UDAAP claims under the CFPA and state law claims, and RD Legal filed a motion to dismiss based on the alleged unconstitutionality of Dodd-Frank’s termination for cause provision. In addition to ruling that the provision was unconstitutional, Judge Preska determined that the proper remedy for the constitutional violation was to strike down Title X in its entirety because the provision was not severable. After invalidating Title X, she dismissed both the CFPB’s UDAAP claims and the NYAG’s UDAAP claims under Dodd-Frank Section 1042 (which authorizes state attorneys general to sue based on UDAAP violations.) She also denied the NYAG’s claims after finding that there was no built-in federal matter in state law the NYAG claims to provide a basis for federal jurisdiction and denies to exercise additional jurisdiction over claims of state law.
Despite the dismissal of the NYAG’s federal and state claims, Judge Preska determined that the purchase agreements effected assignments of benefits which, with respect to NFLSA benefits, were void under the terms of the purchase agreement. underlying settlement and, with respect to VCF benefits, were void under federal anti-assignment law. She then concluded that since the assignments were void, the transactions were necessarily loan sharks in disguise. For the reasons discussed in a previous blog post, we believe his logic was flawed on the issue of loan requalification.
The CFPB and NYAG appealed to the Second Circuit and RD Legal cross-appealed the district court’s finding that the transactions were disguised lending and the complaint set out UDAAP claims under the CFPA and claims for usury and deceptive conduct under New York law. While the appeal was pending, the Supreme Court ruled in Seila Law that the opt-out provision for cause was unconstitutional but could be severed from Title X. Subsequently, the CFPB filed a statement with the Second Circuit in which former Director Kraninger said she had ratified the Bureau’s decision. file a lawsuit against RD Legal and appeal the dismissal of the action by the District Court.
Based on the Supreme Court’s ruling on the Seila Act, the Second Circuit issued a summary order that upheld Judge Preska’s ruling that the for cause dismissal provision was unconstitutional, reversed her ruling that which the provision was not severable and remanded the case to the district court to consider the validity of former Director Kraninger’s ratification. The Second Circuit order reversed the district court’s judgment dismissing the underlying enforcement action. In October 2021, the United States Supreme Court denied RD Legal’s motion for a writ of certiorari.
On remand, ruling on RD Legal’s motion to dismiss in which he argued that former Director Kraninger’s ratification was invalid, Justice Preska concluded that it was not necessary for her to decide whether the ratification was valid. . In Collins vs Yellen, the Supreme Court ruled that an unconstitutional removal restriction does not invalidate the agency’s action as long as the head of the agency has been properly appointed. Resting on collins, Judge Preska ruled that because former manager Cordray had been duly appointed, his decision to file the enforcement action did not need to be ratified. She also ruled that RD Legal was not entitled to the dismissal of the enforcement action as a remedy for the constitutional violation because it could not show that the enforcement action would not have been filed without the President’s inability to remove former manager Cordray.
Since Judge Preska’s dismissal of the CFPB and NYAG claims was based on her ruling that Title X should be struck down because the severance provision for cause was not severable, the Second Circuit’s strike down of his dismissal decision reinstated the federal UDAAP claims of the CFPB and NYAG. Moreover, since the Second Circuit’s order overturned Judge Preska’s judgment dismissing the enforcement action, it would also appear to have restored the NYAG’s state law claims (although Judge Preska may again decline to exercise additional jurisdiction.) Accordingly, the question of whether the transactions should be requalified as loans can be expected to reappear. In addition to the NYAG’s state law claims, the CFPB and NYAG’s UDAAP claims rely on the argument that the transactions are loans rather than valid assignments or sales of assets as characterized by RD Legal.
In her decision, Judge Preska ordered the parties to consult and inform the court by March 30, 2022 of how they intended to proceed.