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DC Circuit Holds Bank Has Standing to Challenge CFPB Constitutionality But Not FSOC’s

The U.S. Court of Appeals for the District of Columbia Circuit recently held that a bank has standing to challenge the constitutionality of the federal Consumer Financial Protection Bureau and the recess appointment of its director, reversing the district court and remanding.

However, the Court also held that the plaintiff bank lacked standing to challenge the constitutionality of the federal Financial Stability Oversight Council and the government’s authority to liquidate “too big to fail” financial companies, affirming the district court’s judgment on those claims.

A copy of the opinion is available at:  Link to Opinion.

US Treasury Department Alexander Hamilton Statue Washington DC James Fraser Statue dedicated 1923. One of the founding fathers of the United States, Alexander Hamilton was the first Secretary of the Treasury in George Washington's cabinet. He was also Chief of Staff to General Washington in the American Revolution. Involved in writing Constitution, also wrote the Federalist Papers.

The plaintiff bank joined by a group of states filed suit in the U.S. District Court for the District of Columbia, challenging the constitutionality of the following parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act):

  1. the Dodd-Frank Act’s creation of the Consumer Financial Protection Bureau, arguing that an independent agency like the CFPB cannot be headed by one person and Congress’ broad delegation of authority to the CFPB violates the “non-delegation doctrine;”
  2. President Obama’s recess appointment of the CFPB’s director, because it occurred during a Senate recess of insufficient length;
  3. the Dodd-Frank Act’s creation of the Financial Stability Oversight Council and its authority to designate certain financial companies as “too big to fail,” arguing that this violates the non-delegation and separation of powers doctrines because the FSOC has unfettered power to decide which companies should face additional regulation; and
  4. the Dodd-Frank Act’s grant to the Treasury, Federal Reserve and FDIC of the authority to liquidate failing financial companies that pose a significant risk to the financial stability of the U.S. economy, arguing that because the liquidation authority includes the power to alter the priority of creditors, it violates the Constitution’s Bankruptcy Clause, which guarantees uniform bankruptcy laws, as well as the non-delegation and due process doctrines.

The DC Circuit first considered whether the bank had standing to challenge the constitutionality of the CFPB, and, if so, whether the claim was ripe now or would only be ripe later when an enforcement action was filed against the bank.

The standing question focused on whether the bank “had suffered an injury in fact caused by the [CFPB] and redressable by the Court.”  Because the Supreme Court has noted that “there is ordinarily little question” that a regulated entity has standing to challenge an allegedly illegal statute or rule, the DC Circuit had no difficulty concluding that the bank had standing to challenge the CFPB’s constitutionality.

Turning to the question of when the bank could sue or “ripeness,” the DC Circuit also had little difficulty concluding that, based on Supreme Court precedent, the bank did not have to violate the law in order to challenge the law or, in this case, the authority of the regulating agency itself.

Because the parties had not briefed the merits of the constitutionality of the CFPB, the DC Circuit reversed and remanded to the district court to consider the merits of that claim.

The DC Circuit also concluded, for the same reasons that the bank could challenge the constitutionality of the CFPB, it also had standing to challenge President Obama’s recess appointment of the CFPB’s director, and that the challenge was ripe. The district court’s ruling on this issue was reversed and the case remanded for consideration of the merits in light of the Supreme Court’s 2014 decision in NLRB v. Noel Canning.

The Court specifically instructed the district court to consider the “significance of Director Cordray’s later Senate confirmation and his subsequent ratification of actions he had taken while serving under a recess appointment.”

However, the DC Circuit rejected the bank’s challenge to the Financial Stability Oversight Council.  The Court held that the bank lacked standing because it was not on the “too big to fail” list and, although its main competitor in Texas was, the doctrine of competitor standing, which allows in limited instances a plaintiff to challenge the government’s under-regulation of the plaintiff’s competitor, did not apply because in the case at bar, the competitor was under a heavier, not lighter, regulatory burden as the result of the Dodd-Frank Act, and any harm to the plaintiff bank was “simply too attenuated and speculative to show the causation necessary to support standing.”

Accordingly, the district court’s judgment that the bank lacked standing to challenge the Financial Stability Oversight Council was affirmed.

The DC Circuit then turned to the state plaintiffs’ challenge to the Dodd-Frank Act’s “orderly liquidation authority,” concluding that the states lacked standing and their claims were also not ripe because:  (a) the state plaintiffs would be affected only if a financial company in which they invested is liquidated or reorganized by the government and then only if the government treated them differently than other similarly situated creditors; and  (b) “[i]t is premature for a court to consider the legality of how the Government might wield the orderly liquidation authority in a potential future proceeding.”

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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