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11th Cir. Holds CFPB Action Not Precluded by Res Judicata Based on Prior Consent Order

mortgage lawThe U.S. Court of Appeals for the Eleventh Circuit recently vacated a trial court’s ruling granting summary judgment in favor of a mortgage servicer and against the federal Consumer Financial Protection Bureau (“CFPB”) based on res judicata.

In so ruling, the Eleventh Circuit held that the res judicata effects of an earlier CFPB lawsuit which was resolved by a consent judgment are measured with reference to the terms of the consent judgment and not the complaint.

A link to the opinion in Consumer Financial Protection Bureau v. Ocwen Financial Corporation, et al. is available at:  Link to Opinion.

In 2013, CFPB filed a lawsuit against a mortgage loan servicer (“Servicer”) alleging that the Servicer’s practices violated federal law. The lawsuit was resolved by settlement with a consent judgment that released Servicer from liability for the conduct alleged in the suit and established a three-year period during which Servicer had to comply with certain specified servicing standards enforced through a monitoring and compliance regime.

After the consent judgment’s terms expired, CFBP filed another lawsuit against Servicer alleging Servicer violated various consumer-protection laws between January 2014 and February 2017. The trial court granted summary judgment in favor of Servicer on res judicata grounds.

On appeal, CFPB argued that the consent judgment, and not the complaint, should control res judicata and that the underlying settlement agreement showed that the parties did not intend to preclude a challenge to any conduct occurring from 2014 onwards.

The question before the Court was whether the consent judgment had any res judicata effect barring claims in the second lawsuit.

As you may recall, a claim is barred by res judicata — i.e., claim preclusion — when “(1) there is a final judgment on the merits; (2) the decision was rendered by a court of competent jurisdiction; (3) the parties, or those in privity with them, are identical in both suits; and (4) the same cause of action is involved in both cases.”  Ragsdale v. Rubbermaid, Inc., 193 F.3d 1235, 1238 (11th Cir. 1999).  It was undisputed that the first three conditions were met, and only whether the fourth condition was met was in debate. 

First, the Eleventh Circuit determined whether it should look to the complaint in the 2013 action or the settlement agreement that resolved it.

The Court easily resolved this issue, relying on Norfolk Southern Corp. v. Chevron, U.S.A., Inc., which held that when two parties settle a lawsuit res judicata is “controlled by the Settlement Agreement into which the parties entered,” not by “the original complaint.” 371 F.3d 1285, 1288 (11th Cir. 2004). In Norfolk Southern, the Eleventh Circuit allowed a second claim to proceed based on the intent of the parties encapsulated in the settlement agreement reasoning that a judgment based on settlement “receives its legitimating force from the fact that the parties consented to it.” Id. at 1288.

Similarly, in Original Brooklyn Water Bagel Co. v. Bersin Bagel Grp., the Eleventh Circuit reiterated that “[w]here a case has been settled, the principles of res judicata apply to the matters specified in the settlement agreement.” 817 F.3d 719, 725 (11th Cir. 2016). The Court explained that when a consent judgment is entered based on the parties’ settlement agreement, the agreement becomes the judgment, and the parties are bound as they would be with any other judgment. See Judgment, Black’s Law Dictionary (11th ed. 2019); see also Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 4443 (3d ed. 2021).

Moreover, as the consent judgment is legitimized by the parties’ agreement, the preclusive scope only extends as far as the agreement. See Norfolk S., 371 F.3d at 1288-89; Goldman v. Northrop Corp., 603 F.2d 106, 109 (9th Cir. 1979); Int’l Techs. Consultants, Inc. v. Pilkington PLC, 137 F.3d 1382, 1387 (9th Cir. 1998).

Thus, the Eleventh Circuit held that the consent judgment between the parties controlled the res judicata effect of the 2013 action, and the trial court erred to the extent that it held otherwise.

Having made the determination that the consent judgment controlled the res judicata effect, the Court next determined the preclusive effect of the consent judgment.

The Eleventh Circuit noted that in determining the preclusive effect of a consent judgment, it had to apply principles of contract law to ascertain the parties’ intent. Norfolk S., 371 F.3d at 1289; see also United States v. S. Ute Tribe or Band of Indians, 402 U.S. 159, 161 (1971); Keith v. Aldridge, 900 F.2d 736, 740 (4th Cir. 1990) Wright & Miller, supra, at § 4443.

The Court determined there were three ways in which the parties’ intent could be understood: (1) the CFPB could sue Servicer for all alleged violations that occurred between January 2014 and February 26, 2017; (2) the CFPB could not sue Servicer for any alleged violations between January 2014 and February 26, 2017; or (3) the CFPB could sue Servicer only for legal violations not covered by the settlement terms.

The CFPB argued for the first interpretation, relying on the release provision of the settlement agreement which stated CFPB “does not release any liability for conduct other than conduct related to the Mortgage Servicing Practices asserted or that might have been asserted in this complaint.” 

CFPB asserted that the release made it clear that the parties only intended to release Servicer from liability that occurred prior to the filing of the complaint in the first action. However, the Eleventh Circuit disagreed, reasoning that fundamental contract interpretation principles counsel against reading one provision in isolation. See Hegel v. First Liberty Ins. Corp., 778 F.3d 1214, 1221 (11thh Cir. 2015); Feaz v. Wells Fargo Bank, N.A., 745 F.3d 1098, 1104 (11th Cir. 2014).

Servicer argued that the agreement’s three-year servicing standard, monitoring and enforcement regime indicated that if any legal violations covered by the standards were committed, the parties intended CFPB to remedy the violation through the agreed upon processes and not through a separate court proceeding.

The Eleventh Circuit found this argument more persuasive, ruling that as a practical matter, the agreement would have been impossible to enforce if CFPB could unliterally decide when to invoke or when to ignore it. The Court found Servicer could not have intended to get so little security from the parties’ agreement.

Servicer also argued that the parties agreed to an exclusive enforcement regime during the three-year term of the agreement, meaning CFPB could not now initiate a new legal proceeding for any legal violation that occurred during that time period.

However, the Eleventh Circuit found two issues with this argument: (1) there was no provision that stated CFPB could not sue Servicer at all during the consent judgments term; and (2) the release provision stated in part that nothing in the release “shall limit the CFPB’s authority with respect to [Servicer], except to the extent the CFPB has herein expressly released claims.” The Court found that CFPB would not have agreed to let Servicer violate the law so long as it didn’t violate a servicing standard, and thus rejected this argument.

The Eleventh Circuit concluded the best interpretation of the agreement was that it created a particular enforcement mechanism that CFPB was required to follow for conduct covered by the consent judgment’s servicing-standards-and-monitoring-regime and occurring between January 2014 and Feb. 26, 2017. 

But, the Court continued, the CFPB could sue Servicer to enforce legal violations that occurred during that period which were not covered by the regime.

In the Eleventh Circuit’s view, this interpretation avoided rendering the agreement’s enforcement mechanism meaningless, while preserving CFPB’s authority to enforce the law.

Thus, the Eleventh Circuit vacated the trial court’s ruling and remanded for the trial court to determine which counts the CFPB’s current complaint were barred by the consent judgment between the parties.

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Jenna Tersteegen is an Associate in Maurice Wutscher's New York City office, practicing in the firm’s Consumer Credit Litigation and Commercial Litigation groups. Prior to joining the firm, Jenna was an associate attorney at a litigation law firm in New York City. Her practice covered New York state labor and employment laws, premises liability and property damage cases. She conducted all pre-trial aspects of litigation, including preparing case strategy and evaluation reports, taking and defending depositions, and drafting dispositive pre- and post-trial motions. She is admitted to practice law in Illinois and New York, and the U.S. District Court for the Eastern District of New York.

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