A federal district court in Atlanta has granted the defendants’ motions for Rule 37 sanctions against the CFPB for its conduct in connection with the defendants’ depositions of CFPB witnesses. To sanction the CFPB, the court struck four counts from the CFPB’s complaint, and with no claims remaining against them, the court dismissed the defendants who sought the sanctions from the case.
The underlying case is a CFPB enforcement action filed in April 2015 targeting an alleged debt collection scam that named as defendants not only the debt collectors and their individual principals but various companies alleged to have been “service providers” to the collectors, including payment processors. The CFPB claimed that the payment processors were subject to its enforcement authority as both “covered persons” and “service providers” under the CFPA.
The CFPB’s complaint alleged that the debt collectors, using information purchased from debt and data brokers, made phone calls to consumers in which they threatened arrest or notice to a consumer’s employer unless the consumers agreed to settle debts falsely claimed to be owed. The CFPB claimed that the payment processors facilitated the alleged scheme by enabling the debt collectors to accept credit and debit card payments. According to the complaint, the processors engaged in deficient underwriting when they agreed to provide services for the debt collectors and failed to appropriately monitor the debt collectors’ accounts, including by ignoring signs that the debt collectors were committing fraud, such as high chargeback volumes.
The payment processor defendants argued that the CFPB had not presented a knowledgeable witness because its designated witness relied heavily on various “memory aids” and was not prepared to testify as to any exculpatory facts. The court agreed, characterizing the “memory aids” used by the CFPB’s witness as “scripts” and finding that “the witness was hardly able to offer any testimony beyond what he read off the memory aids. And…the readings were often unrelated to the question asked.” According to the court, by displaying an inability to answer follow-up questions or stray from the memory aids, the CFPB’s witness had failed to abide by instructions given by the court that the witness be able “to provide a ‘human touch’ by responding to Defendants’ follow-up questions.”
The court also found that the position taken by the CFPB’s witness that he was unable to identify any exculpatory facts was not reasonable and reflected an unwillingness to comply with the court’s instructions that the CFPB be prepared to testify as to any facts “it could reasonably identify as exculpatory.” The court found the CFPB’s insistence that it could not find any exculpatory evidence to also reflect “a bad faith attempt to frustrate the purpose of the Defendants’ depositions” and concluded that such conduct amounted to a failure to present a knowledgeable witness.
As their second argument in support of sanctions, the payment processors argued that the CFPB had improperly relied on privilege objections to prevent its witness from answering questions about the factual bases of the CFPB’s claims. In particular, the processors pointed to the CFPB’s refusal to answer on the basis of work product questions regarding the facts on which the CFPB was relying to establish its claim that the defendants either knowingly or recklessly disregarded unlawful conduct engaged in by the debt collector defendants.
The court found that the CFPB’s continued assertion of privilege objections showed “blatant” and “willful” disregard for the court’s instructions that the CFPB answer questions regarding facts within its knowledge supporting the CFPB’s claims of knowledge or recklessness. In the court’s view, the CFPB had “put up as much opposition as possible at every turn” to the court’s instruction that it “needed to produce a witness prepared to apprise the Defendants of the facts they would face at trial.” The court observed that the CFPB’s opposition took two forms: (1) “to bury the Defendants in so much information that it cannot possible identify, with any reasonable particularity, what supports the CFPB’s claims,” and (2) “to assert privilege objections to questions that the Court has repeatedly ordered to be answered.”
Concluding it was not “optimistic that reopening the depositions would be fruitful” in light to the CFPB’s pattern of conduct, the court struck the four counts of the complaint containing the CFPB’s UDAAP and “substantial assistance” claims against the payment processors. Having stricken all of the CFPB’s claims against them, the court then dismissed these defendants from the case.
We see several significant takeaways from the court’s ruling. First, it will likely serve as an additional factor to encourage financial services companies to be more willing to litigate CFPB enforcement claims. We have seen an increase in parties litigating cases with the CFPB recently, and in our view, the success of the defendants in this case will further encourage parties to believe that successfully defending a CFPB enforcement action is a real possibility.
Second, in contested cases, the ruling will provide a road map for parties to seek discovery from the CFPB about the factual basis for its claims and the information discovered during its investigation. In this sense, the decision really illustrates the level playing field that the CFPB finds itself on when it litigates a case in court, which is very different from the one-way discovery that occurs in connection with a civil investigative demand.
Third, we would hope that the decision will change the CFPB’s approach to participating in discovery in litigation – to be more open about the basis for its claims – in order to prevent its enforcement cases from being disposed of in the manner that played out here, and to carry its motto of being a transparent agency through to its litigated matters.
