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RD Legal Funding and NYAG outline plans for proceeding in SDNY lawsuit

RD Legal Funding and the New York Attorney General have filed a joint submission with Judge Preska of the Southern District of New York regarding how they propose to proceed in the CFPB’s and NYAG’s lawsuit against RD Legal Funding.

On June 18, Judge Preska issued an order denying RD Legal Funding’s motion to dismiss the NYAG’s federal UDAAP claims under the CFPA and state law claims but terminating the CFPB’s participation in the case as a consequence of her determination that because the CFPB’s single-director-removable-only-for-cause structure is unconstitutional, the CFPB lacked authority to bring claims under the CFPA.  In Judge Preska’s view, the proper remedy was to strike the CFPA (Title X of Dodd-Frank) in its entirety rather than just sever the for-cause removal provision.  Her June 18 order also set yesterday as the deadline for counsel to advise the court how they intended to proceed.

The joint submission states that the CFPB has indicated to the parties that it has not yet made a decision as to how it will proceed.  Because the case remains active, the CFPB cannot appeal Judge Preska’s decision to the Second Circuit unless she finds that there is no reason to delay that appeal under Rule 54(b) of the Federal Rules of Civil Procedure.

In their joint submission, the NYAG and RD Legal Funding ask the court to set a scheduling conference in September 2018 and describe their positions as follows:

NYAG.  The NYAG indicates that it wants the case to proceed as quickly as possible and would oppose any request by RD Legal Funding for delay, including a request for interlocutory appeal and a stay of the proceeding.  In anticipation of a filing by RD Legal Funding raising jurisdictional issues, the NYAG indicates its belief “that the Court is clear as to jurisdiction in its [June 18 order].”  The NYAG cites Judge Preska’s statements in her June 18 order that the NYAG has “independent authority to bring claims in federal district court under the CFPA, without regard to the constitutionality of the CFPB’s structure” and that “federal question subject matter jurisdiction over the CFPA claims exists regardless of the constitutionality of the CFPB’s structure.”  Also cited is her determination that the court had supplemental jurisdiction over the NYAG’s state law claims because they “arise out of the same common nucleus of operative fact” as the CFPA claims.

RD Legal Funding.   RD Legal Funding contends that the June 18 order “struck each substantive provision of the [CFPA] that forms the basis of federal jurisdiction, which RD Legal will address in a separate filing.”  It also asks the court “to resolve the immediate ambiguity in the CFPB’s position and to prevent potential duplicative proceedings” by first making an express finding that there is “no just reason for delay” and entering judgment against the CFPB only under Rule 54(b) of the Federal Rules of Civil Procedure and then, should the CFPB seek immediate review of the June 18 order, certifying the June 18 order for interlocutory appeal and staying the proceeding during the pendency of the appeal.  RD Legal Funding indicates that should the CFPB not seek immediate review “and the Court permits the NYAG to proceed with claims under the stricken Title X,” it is prepared to litigate in the district court although it “do[es] not believe that would serve the interests of judicial economy.”

We find Judge Preska’s opinion to be self-contradictory.  On the one hand, she denied a motion to dismiss the claims brought by the NYAG against RD Legal Funding.  One of those claims is a federal UDAAP claim brought under Section 1042 of Dodd-Frank.  Section 1042(a) states, in relevant part:

“[T]he attorney general … of any state may bring a civil action in the name of such state in any district court of the United States in that state … to enforce provisions of this title …”

In asserting a federal UDAAP claim under Section 1042, the NYAG relied on Dodd-Frank Section 1031(a) which authorizes the CFPB to “take any actions authorized under Subtitle E [which describes the enforcement powers of the CFPB] to prevent a covered person … from committing and engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.”

On the other hand, toward the end of the opinion, Judge Preska dismissed the CFPB’s claims against RD Legal Funding and held that the entirety of Title X of Dodd-Frank is unconstitutional and should be stricken.  Title X, of course, includes Sections 1042 and 1031 of Dodd-Frank which are the sections relied upon by the NYAG.

Because of these contradictory rulings, Judge Preska will need to decide whether the NYAG’s claims remain alive.  We would expect Judge Preska to dismiss the NYAG’s Section 1042 claim since Section 1042 provides that a state attorney general opting to use Section 1042 must first consult with the CFPB about his or her intent to file a 1042 claim and that, while the CFPB may not preclude a state attorney general from filing such a lawsuit, the CFPB has the right to intervene in that lawsuit as a party.  This seems to demonstrate Congressional intent not to give a state attorney general the power to use Section 1042 if the CFPB lacks such power.

Judge Preska has already ruled that the CFPB lacks any power under Title X of Dodd-Frank because it was unconstitutionally structured.  If she dismisses the NYAG’s Section 1042 claim as we expect, the NYAG will need to determine whether it wants to appeal such ruling.  Because the NYAG’s state law claims remain viable, the NYAG could only appeal if Judge Preska gives the NYAG permission to file an interlocutory appeal and the Second Circuit agrees to hear the appeal.  If the NYAG decides not to appeal such a ruling, Judge Preska probably should dismiss the case in its entirety for lack of federal subject matter jurisdiction (unless the CFPB asks Judge Preska to enter a final judgment as to its claims so that the CFPB can appeal the constitutionality issue to the Second Circuit.)

Copyright © by Ballard Spahr LLP

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About this Author

Kaplinksy, partner, New York, finance
Partner

Alan S. Kaplinsky is Co-Practice Leader of the firm's Consumer Financial Services Group, which has more than 115 lawyers. Mr. Kaplinsky devotes his practice exclusively to counseling financial institutions on bank regulatory and transactional matters, particularly consumer financial services law, and defending financial institutions that have been sued by consumers in individual and class action lawsuits and by government enforcement agencies. Visit Mr. Kaplinsky's profile in Wikipedia.

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