The validity of President Obama’s January 2012 recess appointment of Richard Cordray as Director of the Consumer Financial Protection Bureau is now under a dark cloud as a result of the decision by the U.S. Court of Appeals for the D.C. Circuit holding that the President’s contemporaneous recess appointments of three National Labor Relations Board members violated the U.S. Constitution’s Recess Appointments Clause (RAC).

In Noel Canning v. NLRB, the court ruled that the NLRB order under review was void for lack of a quorum, as three of the five NLRB members were never validly appointed. The significance of this decision cannot be overstated. It directly calls into question not just the NLRB order at issue, but every NLRB rule and order in which the three recess appointees participated since their appointments. Indirectly, the decision raises a host of questions about the potential impact of a judicial ruling that Mr. Cordray’s recess appointment was similarly invalid.

The RAC authorizes the president to fill vacancies “that may happen during the Recess of the Senate” through appointments that expire at the end of the next session. The D.C. Circuit found two constitutional problems with the NLRB recess appointments.

First, the court held that the words “the Recess” referred only to an intersession recess of Congress, and not to an intrasession recess (more properly described by the Founders as an “adjournment”).

Because the second session of this past Congress began on
January 3, 2012, and the appointments were made on January 4, they were not made during a “recess” within the meaning of the RAC. (The court also scrutinized the Congressional Record to determine that the Senate had not been in recess, contrary to the contention of the President and the Office of Legal Counsel (OLC). In January 2012, the OLC had opined that the NLRB and CFPB appointments were valid.)

Second, the court held that to qualify for a recess appointment under the RAC, the vacancy must “happen” during the intersession recess. Vacancies that precede a recess do not qualify, as they could be filled by the default nomination “advise and consent” process.

The same deficiencies the D.C. Circuit found with the NLRB appointments would apply to Mr. Cordray’s appointment. In addition, Mr. Cordray’s appointment could be challenged on the ground that, in contrast to the NLRB, the CFPB is a new agency that never had a Director. As a result, a recess appointment would arguably have been unavailable under the RAC because there was technically no “vacancy” to fill.

Given the importance of the issues raised, the government can be expected to petition for rehearing and rehearing en banc and, if unsuccessful, to seek review by the U.S. Supreme Court. The government has 45 days to petition for the former and 90 days from the denial of a rehearing petition to petition for the latter.

In our view, the probability of success is higher for a certiorari petition, not only because of the importance of the separation of powers issue the decision raises, but also because of the circuit split Canning creates. The D.C. Circuit’s interpretation of the RAC disagrees with that of the 11th Circuit’s 2004 ruling in Evans v. Stephens.

A host of questions would be raised should Mr. Cordray’s appointment be found invalid. For example:

  • Would CFPB regulations and orders involving the authority transferred to the CFPB from other federal agencies be valid? (e.g., the CFPB’s remittance transfer regulation under the Electronic Fund Transfer Act and its mortgage-related regulations under the Truth in Lending Act and the Real Estate Settlement Procedures Act)
  • Could the CFPB continue to exercise the authority that was newly created by the Dodd-Frank Act, and would any CFPB actions stemming from that authority be valid? (most notably, the CFPB’s supervisory and enforcement authority over nonbank entities, such as payday lenders; private student lenders; debt collectors and debt buyers; companies providing credit reporting services; and mortgage brokers, lenders, and servicers)
  • What would be the impact on investigations conducted, settlements reached, and consent orders issued during the past year?
  • Would the “de facto officer” doctrine preserve any of the above against invalidation?

On February 4, 2013, from 12 p.m. to 1:30 p.m. ET, Ballard Spahr will hold a webinar on “The Impact of the D.C. Circuit Court NLRB Ruling on the CFPB.”  More information on the webinar and a link to register can be found here.

We believe Canning’s political reverberations will extend beyond the fight over President Obama’s renomination of Mr. Cordray to include the revival of proposed legislation to convert the CFPB’s leadership from a single director to a board or commission. The legislation also calls for the Financial Stability Oversight Council to oversee CFPB regulations and would subject the CFPB to the Congressional appropriations process.

Despite the serious questions Canning raises, it is important to note that, as yet, no court has invalidated Mr. Cordray’s appointment or any of the CFPB’s subsequent actions. As a result, all CFPB regulations and orders remain presumptively legal and valid for now.

Ballard Spahr’s Consumer Financial Services Group produces CFPB Monitor, a blog that focuses exclusively on important CFPB developments. To subscribe, use the link provided to the right. The group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

For more information, please contact:

Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com,

Practice Leader Jeremy T. Rosenblum at 215.864.8505 or rosenblum@ballardspahr.com,

Mortgage Banking Group Practice Leader Richard J. Andreano, Jr., at 202.661.2271 or andreanor@ballardspahr.com,

John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com,

Christopher J. Willis at 678.420.9436 or willisc@ballardspahr.com, or

Keith R. Fisher in the Bank Regulation and Supervision Group at 202.661.2284 or fisherk@ballardspahr.com.

Topics:  Barack Obama, Canning v NLRB, CFPB, NLRB, Political Appointments, Pro Forma Sessions, Recess Appointments, Richard Cordray

Published In: Constitutional Law Updates, Elections & Politics Updates, Finance & Banking Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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