A tale of two lawsuits: CFPB sues Morgan Drexen

by Ballard Spahr LLP

Yesterday, the CFPB filed a lawsuit against Morgan Drexen, the company that on July 22 sued the CFPB claiming that the Bureau’s structure violates the Constitution’s separation of powers. Although Morgan Drexen sued the CFPB in federal district court in Washington, D.C., the CFPB filed its complaint in federal district court for the Central District of California where, according to the complaint, Morgan Drexen has its “physical business address.”

The CFPB’s complaint alleges that Morgan Drexen charged advance fees for debt relief services in violation of the Telemarketing Sales Rule (TSR) and engaged in deceptive acts and practices in violation of the Consumer Financial Protection Act (CFPA). The CFPB is seeking a permanent injunction to bar Morgan Drexen from selling debt relief services, monetary redress for consumers and civil penalties. (The CFPB filed its lawsuit against Morgan Drexen in the same court in which it filed its lawsuit against Chance Gordon, a law firm alleged to have falsely promised mortgage loan modifications in exchange for unlawful advance fees. In that case, the CFPB obtained summary judgment and permanent injunctive relief.)

Having become a target of the CFPB’s crackdown on the debt relief industry, Morgan Drexen filed its lawsuit to block the CFPB from taking enforcement action against the company. It seems likely that Morgan Drexen will ask the California federal court for a stay of proceedings pending a ruling by the Washington, D.C. federal court on its constitutional challenge, particularly since that case is now proceeding on a fast track.

Although Morgan Drexen had initially filed a motion for a preliminary injunction in its lawsuit, it withdrew that motion on August 7 after it and the CFPB agreed to proceed according to the expedited briefing schedule set forth in the court’s Scheduling and Procedures Order entered on July 25. The order required Morgan Drexen to file its motion for summary judgment by August 7 and requires the CFPB to file its opposition to the summary judgment motion and cross-motion to dismiss and/or for summary judgment by August 27. Morgan Drexen and the CFPB have, respectively, until September 13 and September 25 to file replies to each other’s filings. In her order, Judge Colleen Kollar-Kotelly stated that the court would “also endeavor to issue a ruling on the parties’ motions on an expedited basis and will advise the parties in the event a hearing is necessary.” 

In its summary judgment motion filed on August 7, Morgan Drexen asked the court to declare that Title X of the Dodd-Frank Act is unconstitutional for violating the Constitution’s separation of powers. To explain why it has standing, Morgan Drexen claimed that it faced a “certainly impending” threat of injury because it had received a “Notice and Opportunity to Respond and Advise” from the CFPB stating that the CFPB’s staff expected to charge Morgan Drexen with TSR and CFPA violations and had also been threatened by the CFPB with injunctive and monetary relief. With the filing of the CFPB’s complaint, there would seem to be no question about Morgan Drexen’s standing to challenge the CFPB’s constitutionality.

On August 20, the CFPB filed a Notice with the Washington, D.C. court indicating that it had filed the California action against Morgan Drexen. In its notice, the CFPB stated that it “will address the significance of its enforcement action in its memorandum of points and authorities opposing Plaintiffs’ motion for summary judgment and supporting its cross-motion for summary judgment.”

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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