Oral argument held in SDNY credit union lawsuit challenging Mulvaney appointment

by Ballard Spahr LLP

The U.S. District Court for the Southern District of New York recently held oral argument regarding the pending motions in the Lower East Side People’s Federal Credit Union v. Trump and Mulvaney.  Pending before the Court are the credit union’s motion for a preliminary injunction, and the government’s motion to dismiss.  As we’ve reported previously, this is the second lawsuit challenging the appointment of Mick Mulvaney as CFPB Acting Director.

At the beginning of the proceeding, Judge Paul G. Gardephe indicated that he would like the parties to focus on the standing issue.  Standing is, of course a threshold issue because the judicial power under Article III of the U.S. Constitution extends only to a “case or controversy” involving an alleged “injury-in-fact” that is “fairly traceable to the challenged action” and redressable by a favorable decision.  According to the brief filed by the DOJ, “[a]ll Plaintiff’s [opening] brief offers on standing is six words in a footnote: ‘Plaintiff is regulated by the CFPB.’”  The DOJ’s brief and the credit union’s reply brief devoted significant attention to the standing issue.

Ilann M. Maazell, arguing on behalf of the credit union, asserted that the primary source of standing was the credit union’s status  as an entity regulated by the CFPB.  He relied, in part, on State National Bank of Big Spring v. Lew, a 2015 decision of the D.C. Circuit involving, inter alia, a constitutional challenge by State National Bank to the CFPB’s structure and Richard Cordray’s  recess appointment as CFPB Director.  In State National Bank, the D.C. Circuit observed that “[t]he Supreme Court has stated that ‘there is ordinarily little question’ that a regulated individual or entity has standing to challenge an allegedly illegal statute or rule under which it is regulated.’”  The Court inquired, however, whether the D.C. Circuit had subsequently “walked that back” in John Doe Co. v. CFPB, 849 F.3d 1129 (D.C. Cir. 2017).

In John Doe, the recipient of a CFPB non-self-executing civil investigative demand sought to challenge the constitutionality of the Bureau’s structure without objecting to any regulatory measure taken by the Bureau or identifying other regulatory burdens to which it objected.  The district court denied John Doe’s request for a preliminary injunction, holding that the plaintiff had not met its burden of demonstrating a likelihood of success on the merits or irreparable harm.  John Doe then filed with the D.C. Circuit an emergency motion for an injunction pending appeal.  In John Doe, the D.C. Circuit quoted Supreme Court precedent for the proposition that standing is not dispensed “in gross” but a plaintiff “must demonstrate standing for each claim he seeks to press and for each form of relief that is sought.”  It ultimately held that the plaintiff had failed “to demonstrate that the action of merely requesting information from private entities subject to regulation is . . . exclusively confined to the Executive Branch, and thus that issuance of this CID by the Bureau violates separation of powers.”

Plaintiff’s counsel asserted that it was not clear that the plaintiff in John Doe, a company engaged in the business of purchasing and selling income streams, was a regulated entity.  He further argued that John Doe involved a pre-enforcement challenge in which the question presented was whether the district court had abused its discretion in determining that the plaintiff had not demonstrated a likelihood of success on the merits and irreparable harm.  With respect to the notion that “standing is not dispensed in gross,” Plaintiff’s counsel asserted that this is not the case with respect to a regulated entity, and suggested that the holding in John Doe was not based upon a lack of standing.  He further argued that the credit union was not required to violate the law in order to create standing.

The other decisions cited by Plaintiff’s counsel were Olympic Fed. Savs. & Loan Ass’n v. Dir., Office of Thrift Supervision, 732 F. Supp. 1183 (D.D.C.), appeal dismissed and remanded, 903 F.3d 837 (D.C. Cir. 1990), and Free Enter. Fund v. Pub. Co. Accounting Oversight Board, 561 U.S. 447 (2010).  In its reply brief, the credit union had cited Olympic Fed. Savs. & Loan Ass’n for the proposition that a regulated entity was directly harmed by the assertedly unconstitutional appointment of an Acting Director of the Office of Thrift Supervision (OTS).  According to the credit union’s reply brief, the district court awarded injunctive relief that “was rendered moot by the subsequent constitutional appointment of the OTS Director.”

Free Enterprise Fund involved a challenge to the constitutionality of the Sarbanes-Oxley Act provision that created the Public Company Accounting Oversight Board and, in particular, the issue of whether the district court had jurisdiction over the proceeding notwithstanding a Securities Exchange Act provision that only allowed aggrieved parties to challenge a final SEC order or rule in a court of appeals.  In its reply brief, the credit union cited Free Enterprise Fund for the proposition that it need not select and challenge a rule at random while simultaneously noting that Free Enterprise Fund involved a general challenge that was collateral to any agency rules from which review might be sought.  Its reply brief also argued that John Doe had distinguished Free Enterprise Funding as a case where “denying standing would ‘foreclose all meaningful judicial review,’ as it would here, where plaintiff has no other forum.”

Plaintiff’s counsel also referred to another source of standing, namely amendments to Regulation C, the implementing regulation for the Home Mortgage Disclosure Act, that became effective on January 1, 2018.  Although the  Regulation C amendments were not adopted under Acting Director Mulvaney, Plaintiff’s counsel stated that they are being implemented by the Acting Director and would cause the credit union to incur additional compliance costs.  In response to a question from the Court, Plaintiff’s counsel indicated that the credit union did not object to the regulation.  He asserted, however, that a regulated entity does not need to object to a regulation in order to have standing.  The credit union was granted permission to submit a declaration regarding its standing allegations relating to Regulation C.

Finally, in its reply brief, the credit union had argued that it was unable to engage in long-range planning concerning its HMDA reporting obligations due to uncertainty stemming from the Bureau’s recent announcement that it intends to reconsider various aspects of  Regulation C.  Plaintiff’s counsel asserted that none of the cases cited by the DOJ for the proposition that uncertainty does not confer standing involved a regulated entity.

Matthew J. Berns, arguing for the DOJ, asserted that no case cited by the credit union supports the proposition that uncertainty confers standing and, in response to the Plaintiff’s contrary assertion, noted that one of the cases cited by the defendant, New England Power Generators Ass’n, Inc. v. FERC, 707 F.3d 364 (D.C. Cir. 2013), did, in fact, involve a regulated entity.  He also disputed the assertion that State National Bank was predicated solely on the status of the bank as a regulated entity.  Defense counsel asserted, rather, that the decision acknowledged that the bank incurred compliance costs as a result of the CFPB Remittance Rule.  (State National Bank noted that “[t]he Bank indeed alleged that it must now monitor its remittances to stay within the safe harbor [under the CFPB Remittance Rule], and the monitoring program causes it to incur costs.”)

Defense counsel also noted that the plaintiff in John Doe had not objected to any CFPB regulation.  (In John Doe, the D.C. Circuit appears to distinguished State Bank on the basis that John Doe did not object to any regulatory action or identify any regulatory burdens other than “the harm occasioned by having to respond to a non-self-executing CID.”)   Finally, he emphasized that Supreme Court standing jurisprudence requires that an injury-in-fact that is concrete and particularized, and actual or imminent.  Whereas plaintiff’s counsel had characterized this as a quintessential standing case in which the injury consisted of being regulated by a person without the authority to regulate the credit union, defense counsel argued that this type of asserted injury was too generalized to constitute an “injury-in-fact.”

The Court asked defense counsel who would have standing to challenge the appointment of Mulvaney as Acting Director if the credit union did not have standing.  Defense counsel responded by noting that the defendants had not asserted a lack of standing in the counterpart challenge filed by Leandra English in the District of Columbia.  He further noted that a proper party could litigate the issue in a pre-enforcement challenge to a regulation or regulatory action.

Although the Court did not hear argument on the merits issues, the credit union was granted permission to submit a short letter addressing the decision by Judge Timothy J. Kelly denying the motion for a preliminary injunction by Leandra English in the D.C. lawsuit.  This submission, and the credit union’s supplemental standing declaration relating to the HMDA regulation, are due to be filed by January 19, 2018; the Defendants’ reply is due to be filed on January 24, 2018.  The Court indicated that it would rule as expeditiously as possible once the record closes.

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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