Ninth Circuit rules CID issued to Seila Law was validly ratified by Director Kraninger

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Less than six weeks after hearing oral argument, a unanimous panel of the U.S. Court of Appeals for the Ninth Circuit ruled that the CID issued to Seila Law was validly ratified by Director Kraninger and affirmed the district court’s decision granting the CFPB’s petition to enforce the CID.

After ruling that the CFPB’s structure was unconstitutional because its Director could only be removed by the President “for cause,” the Supreme Court remanded the case to the Ninth Circuit to consider the CFPB’s argument that former Acting Director Mulvaney’s ratification of the CID issued to Seila Law cured any constitutional deficiency.  Because it had ruled that the CFPB’s leadership structure was constitutional, the Ninth Circuit had not previously considered the CFPB’s ratification argument.  Following the Supreme Court’s decision, the CFPB filed a declaration with the Ninth Circuit in which Director Kraninger stated that she had ratified the Bureau’s decisions to: issue the CID to Seila Law, deny Seila Law’s request to modify or set aside the CID, and file a petition in federal district court to enforce the CID.

On remand, the Ninth Circuit determined that Director Kraninger’s ratification made it unnecessary for the panel to decide whether the CID was validly ratified by former Acting Director Mulvaney.  The Ninth Circuit concluded that Director Kraninger’s ratification remedied any constitutional injury that Seila Law may have suffered due to the defect in the Bureau’s structure.  According to the Ninth Circuit, “Seila Law’s only cognizable injury arose from the fact that the agency issued the CID and pursued its enforcement while headed by a Director who was improperly insulated from the President’s removal authority.”  In the court’s view, the CID’s ratification by “[a] Director well aware that she may be removed by the President at will” removed “[a]ny concerns that Seila Law might have had about being subjected to investigation without adequate presidential oversight and control.”

In ruling that the ratification was valid, the Ninth Circuit rejected Seila Law’s argument that until the Supreme Court invalidated the for-cause removal provision, the CFPB was exercising its powers unlawfully, which in turn rendered all of the agency’s prior actions void at the time they were taken and therefore incapable of being ratified.  The Ninth Circuit determined that Seila Law’s argument was “largely foreclosed” by the Ninth Circuit’s decision in CFPB v. Gordon, which involved former Director Cordray’s ratification of the CFPB’s enforcement action against Gordon.  Director Cordray ratified the action after his recess appointment was called into question by the U.S. Supreme Court’s Canning decision and he was reappointed and confirmed by the Senate.  In that case, the Ninth Circuit ruled that the enforcement action was validly ratified by Director Cordray.

In the Ninth Circuit’s view, as in Gordon, the constitutional infirmity at issue in Seila Law related to the Director alone, not to the legality of the CFPB itself.  Therefore, since the CFPB as an agency had the authority to issue the CID in 2017, the CID was not void and could be validly ratified by Director Kraninger.  The Ninth Circuit concluded that “taken together, [the D.C. Circuit’s 1996 decision in] Legi-Tech and Gordon confirm that ratification is available to cure both Appointments Clause defects and structural separation-of-powers defects.”  (In Legi-Tech, the Federal Election Commission brought an enforcement action while two individuals were impermissibly serving as Commission members.  After the presence of those members was held to violate the separation of powers, the Commission reconstituted itself and ratified the enforcement action.  The D.C. Circuit held that the ratification was valid.)

The Ninth Circuit also rejected Seila Law’s argument that Director Kraninger’s ratification was invalid because it took place outside the three-year SOL for bringing an enforcement action against Seila Law.  According to the Ninth Circuit, this argument failed because the SOL “pertains solely to the bringing of an enforcement action, which the CFPB has not yet commenced against Seila Law.”  It observed that the purpose of a CID is to assist the Bureau in determining whether Seila Law has engaged in violations that could justify bringing an enforcement action  and that the question of whether Seila Law could successfully assert an SOL defense in a future enforcement action “had no bearing on the validity of Director Kraninger’s ratification.”

Last month, in RD Legal Funding, the Second Circuit issued a summary order affirming the district court’s holding that the Dodd-Frank Act’s for-cause removal provision is unconstitutional, reversing its holding that the provision is not severable, and remanding the case to the district court to consider the validity of Director Kraninger’s ratification of the enforcement action against RD Legal.  All American Check Cashing, another case involving the ratification question, has been put on hold by the Fifth Circuit until the U.S. Supreme Court issues its decision in Collins v Mnuchin. [link to blogs]

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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