Ninth Circuit Stays Mandate in Seila Law Pending Resolution of Petition to Supreme Court

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On June 1, 2021, the Ninth Circuit, in CFPB v. Seila Law LLC, No. 17-56324, granted Seila Law LLC’s motion to stay the mandate requiring its compliance with a civil investigative demand, while it petitions the U.S. Supreme Court for a writ of certiorari on the question of whether the ratification of the Consumer Financial Protection Bureau’s (CFPB) demand is an appropriate remedy for the separation-of-powers violation identified by the Supreme Court last year.  The panel ordered that the mandate would be stayed for a period of 150 days, or until final disposition by the Supreme Court.  If certiorari is granted, it would be the second time that the CFPB and Seila Law face off in the high court, and the Court’s decision could resolve lingering questions that have emerged in the wake of the parties’ prior contest.

The battle between Seila Law and the CFPB began when the latter issued a civil investigative demand to the firm in 2017, as part of a debt-relief services investigation into whether the firm violated federal consumer financial protection law.  The firm asked the CFPB to set aside the civil investigative demand on several grounds, including that the CFPB’s structure was unconstitutional. The CFPB refused, and filed a petition in federal court to enforce the demand.  The district court held that the demand was valid, and the Ninth Circuit affirmed.  The U.S. Supreme Court granted review and, on June 29, 2020, it vacated the panel’s decision, upholding that the law firm’s constitutional challenge that the CFPB’s structure violated the separation of powers.  The Supreme Court held that the agency could be validly restructured, however, by striking down the statutory provision protecting the CFPB Director from removal except for cause.

The Supreme Court remanded the Seila Law case to the Ninth Circuit to determine whether the constitutional defect with the civil investigative demand could be cured, such that it would still be enforceable.  On remand, Seila Law argued that a ratification submitted by the CFPB, which the then-Director Kathy Kraninger had signed only after the Supreme Court’s decision in the case, was not valid because an action taken by an agency without authority cannot be ratified if the principal lacked the authority to take the action when the action was taken.  The Ninth Circuit disagreed, holding that the investigative demand was still enforceable because the CFPB’s ratification had cured any constitutional defect in the demand by validly reauthorizing it under the agency’s new structure.

The panel denied rehearing, despite the dissenting judges’ opinion that ratification is not “a proper remedy for separation-of-powers violations” that affect an agency’s structure, and “no ratification is permissible” because the Supreme Court’s “determination that severance was necessary confirms that the CFPB lacked Executive authority pre-severance,” and “[t]he doctrine of ratification does not permit the CFPB to retroactively gift itself power that it lacked.”

If the Supreme Court decides to take up the review, it could provide subjects of CFPB enforcement with an opportunity to gain clarity as to ratification issues that have emerged in other court cases throughout the nation since litigants have sought dismissal on the grounds established by the Supreme Court’s decision last year.

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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