Consumer Fin. Prot. Bureau v. RD Legal Funding, LLC

592 F.Supp.3d 258

CONSUMER FINANCIAL PROTECTION BUREAU and the People of the State of New York, by Letitia James, Attorney General for the State of New York, Plaintiffs,

v.RD LEGAL FUNDING, LLC; RD Legal Finance, LLC; RD Legal Funding Partners, LP ; and Roni Dersovitz, Defendants.

17-cv-890 (LAP)

United States District Court, S.D. New York.

Signed March 16, 2022

Jane M. Azia, Attorney Gen., New York, NY, Jason Lowell Meizlish, Melvin L. Goldberg, New York State Office of the Attorney General, New York, NY, Christopher Leonard McCall, Mitchell Sandler LLC Bureau of Consumer Frauds & Protection, Washington, DC, Sarah E. Trombley, Massachusetts Office of the Attorney General, Boston, MA, for Plaintiff People of the State of New York.

Eric Todd Kanefsky, Harris, O'Brien, St. Laurent & Chaudhry LLP, New York, NY, Jeffrey M. Hammer, Pro Hac Vice, King & Spalding, Los Angeles, CA, David K. Willingham, Pro Hac Vice, Michael Dietz Roth, Caldwell Leslie & Proctor, PC, Los Angeles, CA, for Defendants RD Legal Funding LLC, RD Legal Funding Partners, LP, RD Legal Finance, LLC, Roni Dersovitz.

Christopher Adam Seeger, Seeger Weiss LLP, Ridgefield Park, NJ, Diogenes P. Kekatos, TerriAnne Benedetto, Seeger Weiss LLP, New York, NY, for Defendant Proposed Amicus Curie Plaintiff Settlement Class.

Carolina A. Fornos, Pillsbury Winthrop Shaw Pittman, LLP, New York, NY, for Defendant American Legal Finance Association.

OPINION & ORDER

Loretta A. Preska, Senior United States District Judge:

This is an action by Plaintiffs Consumer Financial Protection Bureau (the "CFPB") and the People of the State of New York, by Letitia James,¹ Attorney General for the State of New York ("NYAG" or the "Attorney General"), against Defendants RD Legal Funding, LLC; RD Legal Finance, LLC; RD Legal Funding Partners, LP (collectively, the "RD Entities"); and Roni Dersovitz, the founder and owner of the RD Entities (together with the RD Entities, the "Defendants"). The CFPB asserts that the Defendants violated certain provisions of the Consumer Financial Protection Act ("CFPA" or the "Act"). The NYAG joins the CFPB in bringing claims under the CFPA and independently asserts that the RD Entities are liable under New York law for the same actions and events that form the basis of the CFPA claims.

Following this Court's dismissal of the CFPB's claims on the ground that the CFPA's for-cause removal provision was unconstitutional and not severable from the rest of the statute, see Consumer Fin. Prot. Bureau v. RD Legal Funding, LLC ("RD Legal I"), 332 F. Supp. 3d 729, 784 (S.D.N.Y. 2018),² as amended, 2018 WL 11219167 (S.D.N.Y. Sept. 12, 2018), the Supreme Court held that the for-cause removal provision was unconstitutional but that the offending provision was severable from the rest of the statute, Seila Law LLC v. Consumer Fin. Prot. Bureau, ––– U.S. ––––, 140 S. Ct. 2183, 2192, 207 L.Ed.2d 494 (2020). In light of Seila Law, the Court of Appeals affirmed in part and reversed in part RD Legal I and remanded for this Court "to consider in the first instance the validity of [then] Director Kraninger's [July 2020] ratification of this enforcement action." Consumer Fin. Prot. Bureau v. RD Legal Funding, LLC ("RD Legal II"), 828 Fed. Appx. 68 (2d Cir. 2020) (summary order) (Mem.).³ In other words, the case was remanded to determine whether the July 2020 ratification of this enforcement action by the then Director of the CFPB was sufficient to ratify the CFPB's original decision to bring this enforcement action in February 2017, when the CFPB was unconstitutionally structured.

On remand, the Court sought the parties’ views as to how they wished to proceed. (See Dkt. Nos. 120-121.) On March 1, 2021, the parties jointly proposed a briefing schedule "to address the validity of CFPB Director Kraninger's ratification of this action." (Dkt. No. 129.)

On March 12, 2021, Defendants filed the instant motion "to dismiss this enforcement action filed by the [CFPB] because it was brought by an unconstitutionally constituted agency, and the CFPB's untimely attempt to subsequently ratify this action cannot cure the agency's constitutional infirmity." (Dkt. No. 132 at 1.) The CFPB filed its brief in opposition on March 19, 2021 (dkt. no. 136), and Defendants filed their reply on April 2, 2021 (dkt. no. 138).

Over the ensuing nine months, the CFPB and Defendants submitted over a dozen letters addressing supplemental authority that they believe may be relevant to the ratification issue and the pending motion to dismiss. Of note, the parties exchanged a series of letters on the import, if any, of the Supreme Court's June 2021 decision in Collins v. Yellen, ––– U.S. ––––, 141 S. Ct. 1761, 210 L.Ed.2d 432 (2021). (See Dkt. Nos. 149, 150, 154, 155, 158, 161, 162, 163.) The Court construes these numerous detailed submissions as supplemental briefing on the motion to dismiss.

Accordingly, the question presented in this motion to dismiss is narrow and concerns only Counts I-V of the Complaint—those counts brought under the CFPA—and it concerns those counts only to the extent they are brought by the CFPB.⁴ As explained in more detail below, the Supreme Court's decision in Collins v. Yellen compels the conclusion that the CFPB possessed the authority to bring this action in February 2017 and, hence, that ratification by Director Kraninger was unnecessary. The motion to dismiss is denied.

I. Background

The facts of this case are set forth in the Court's prior opinion. RD Legal I, 332 F. Supp. 3d at 746-750. Recited below are only those facts necessary to decide the narrow question presented.

The RD Entities are companies that offer cash advances to consumers waiting on payouts from settlement agreements or judgments entered in their favor. The CFPB alleges that Defendants violated the CFPA by misleading these consumers into entering cash advance agreements that the Defendants represented as valid and enforceable sales but in reality functioned as usurious loans that were void under state law.

In bringing this action, the CFPB invokes its authority under Section 1054 of the Consumer Financial Protection Act of 2010 (CFPA), 12 U.S.C. § 5564. That statute provides, in relevant part, that:

If any person violates a Federal consumer financial law, the Bureau may ... commence a civil action against such person to impose a civil penalty or seek all appropriate legal and equitable relief including a permanent or temporary injunction as permitted by law.

12 U.S.C. § 5564(a). The statute also provides that, subject to certain exceptions not relevant here or "as otherwise permitted by law or equity, no action may be brought under this title more than 3 years after the date of discovery of the violation to which an action relates." Id. § 5564(g)(1).

The CFPB filed the Complaint on February 7, 2017. (Dkt. no. 1.) On that date, the CFPB was headed by Richard Cordray, who was appointed by President Obama and confirmed by the Senate. Director Cordray was removable only for cause under the CFPA, a provision that the Supreme Court has ruled is unconstitutional in violation of the separation of powers. See Seila Law, 140 S. Ct. at 2192. That provision has been severed from the CFPA, and CFPB directors are now removable at will by the President. Id. According to Defendants, because the enforcement action was brought at a time when the CFPB's director was not removable at will, the CFPB Director's (and therefore the CFPB's) decision to bring an enforcement action was void ab initio.

On November 24, 2017, Director Cordray resigned his position at the CFPB. English v. Trump, 279 F. Supp. 3d 307, 313 (D.D.C. 2018). Later that day, President Trump appointed Mick Mulvaney, the incumbent director of the Office of Management and Budget, to be the acting director of the CFPB. Id. at 314 ; see also Dkt. No. 78. Acting Director Mulvaney was removable by President Trump at will because the CFPA's removal provision by its terms applied only to "the Director," not to an acting director. See 12 U.S.C. § 5491(c)(3) ; see also RD Legal I, 332 F. Supp. 3d at 785 (noting that "the President may remove Mr. Mulvaney at will").

On May 11, 2018, Eric Blankenstein, then Policy Associate Director for Supervision, Enforcement, and Fair Lending of the CFPB, submitted a declaration ratifying this enforcement action under authority delegated to him by Acting Director Mulvaney:

On March 11, 2018 ..., Acting Director Mulvaney delegated to me the authority to ratify on behalf of the Bureau those enforcement matters where a lawsuit has been initiated and a complaint has been filed in court prior to November 25, 2017.

...

After having been briefed by the Bureau staff regarding this case, and pursuant to the authority delegated to me, I ratified the Bureau's decision to file a lawsuit against RD Legal Funding, LLC; RD Legal Finance, LLC; RD Legal Funding Partners, LP; and Roni Dersovitz.

(Dkt. No. 78-1.)

On December 11, 2018, Acting Director Mulvaney was replaced by Director Kathleen Kraninger, who was appointed by President Trump and confirmed by the Senate. (Dkt. No. 136-1.) On July 8, 2020, following the Supreme Court's decision in Seila Law, Director Kraninger, who was removable by the President at will, submitted a declaration ratifying this enforcement action:

In my capacity as the Bureau's Director, I have considered the basis for the Bureau's decisions to file the lawsuit against Defendants and to appeal the district court's dismissal of that action.

On behalf of the Bureau, I hereby ratify the decisions to file the lawsuit against Defendants and to appeal the district court's dismissal of that action.

(Dkt. No. 136-1.) The July 8, 2020 ratification came more than three years after the filing of the Complaint on February 7, 2017 and, therefore, more than three years "after the date of discovery of the violation to which [the] action relates." 12 U.S.C. § 5564(g)(1).

Defendants argue that the ratification doctrine does not apply here as a legal matter...