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11th Circuit lifts a receivership and asset freeze of $85 million
On November 4, the U.S. Court of Appeals for the Eleventh Circuit affirmed in part and vacated in part a district court’s order, finding that portions of the district court’s decision could not stand under the U.S. Supreme Court’s April ruling in AMG Capital Management v. FTC. The Court held in that case that Section 13(b) of the FTC Act “does not authorize the Commission to seek, or a court to award, equitable monetary relief such as restitution or disgorgement.” (Covered by InfoBytes here). According to the 11th Circuit’s opinion, in 2019, the FTC alleged that individuals associated with multiple limited liability companies engaged in unfair or deceptive business practices in violation of 15 U.S.C. § 45(a). The FTC also filed a motion for a temporary restraining order the same day against the corporate defendants, seeking to freeze their assets, place the entities into a receivership, and enjoin all the parties from materially misrepresenting their services or from releasing consumer information obtained through the limited liability company. The district court granted the motion for a temporary restraining order in full in December 2019, and in January 2020, the district court granted a preliminary injunction against the limited liability company, extending the asset freeze, receivership, and injunction for the duration of the lawsuit.
On appeal, the 11th Circuit affirmed those parts of the preliminary injunction enjoining the appellants from misrepresenting their services and releasing consumer information. The panel upheld the portion of the order that enjoined one of the investor entities and its principal, who was the former chairman of the corporate defendant’s board, from misrepresenting services on allegedly deceptive websites or releasing any customer information allegedly gathered through the websites. While the appeal was pending, however, the Court held in AMG Capital Management that 15 U.S.C. § 53(b) does not allow an award of “equitable monetary relief such as restitution or disgorgement,” leading the 11th Circuit to reverse the asset freeze and receivership aspects of the preliminary injunction. Additionally, the 11th Circuit noted that the principal from one of the entities “was individually responsible for the actions of [the corporate defendants],” and “likely knew that [the corporate defendants] made over eighty million dollars in two years selling 'guides' on government services, and it almost beggars belief that he would be completely unaware of how [the corporate defendants’] websites were raising that quantity of money.”
CFPB petitions 7th Circuit to reconsider Regulation O attorney exemption
On October 7, the CFPB filed a petition for panel or en banc rehearing with the U.S. Court of Appeals for the Seventh Circuit, asking the appellate court to reconsider its recent determination “that practicing attorneys are categorically exempt from Regulation O,” as it strips the CFPB “of the authority given it by Congress to hold attorneys to account for violations not just of Regulation O, but of a host of other federal laws as well.” (Covered by InfoBytes here.) In 2014, the CFPB, FTC, and 15 state authorities took action against several foreclosure relief companies and associated individuals, alleging that they made misrepresentations about their services, failed to make mandatory disclosures, and collected unlawful advance fees (covered by InfoBytes here). A ruling issued by the district court in 2019 (covered by InfoBytes here) ordered nearly $59 million in penalties and restitution against several of the defendants for violations of Regulation O, but was later vacated by the 7th Circuit based on the application of the U.S. Supreme Court’s ruling in Liu v. SEC, which held that a disgorgement award cannot exceed a firm’s net profits—a ruling that is “applicable to all categories of equitable relief, including restitution.” (Covered by InfoBytes here.)
In its appeal, the Bureau did not challenge the vacated restitution award, but rather argued that a rehearing is necessary to ensure that the agency can bring enforcement actions against attorneys who violate federal consumer laws, including Regulation O. “The panel’s conclusion. . .threatens to disrupt the existing federal regulatory scheme for multiple consumer laws and expose ordinary people across the country to an increased risk of harm from illegal practices,” the Bureau stated, adding that 12 U.S.C. § 5517(e) does not limit the Bureau’s ability to pursue a civil enforcement action against practicing attorneys who are subject to Regulation O. According to the Bureau, Paragraph 3 of § 5517(e) states that the limitation on the Bureau’s authority “‘shall not be construed’ to limit the Bureau’s authority with respect to an attorney ‘to the extent that such attorney is otherwise subject’ to an enumerated consumer law or transferred authority.” The Bureau asked the 7th Circuit to reconsider its decision on this issue or, in the alternative, withdraw that portion as unnecessary to the outcome.
Seila Law will not petition Supreme Court a second time
On October 8, counsel for the appellant in CFPB v. Seila Law LLC sent a letter to the U.S. Court of Appeals for the Ninth Circuit stating that, after further consideration, the law firm has decided not to seek further review from the U.S. Supreme Court in its long-running challenge with the Bureau. Seila Law’s last trip to the Court resulted in a decision that declared the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau (covered by a Buckley Special Alert). October 11 was the deadline for Seila Law to file a certiorari petition with the Court after the 9th Circuit granted the law firm’s request to stay a mandate ordering compliance with a 2017 civil investigative demand (CID) issued by the Bureau. As previously covered by InfoBytes, the order stayed the appellate court’s mandate (covered by InfoBytes here) for 150 days, or until final disposition by the Court if the law firm had filed its petition of certiorari. The letter did not explain Seila Law’s reasoning.
This announcement follows the Court’s recent decision not to hear a petition filed by a New Jersey-based finance company accused by the CFPB and the New York attorney general of misleading consumers about high-cost loans allegedly mischaracterized as assignments of future payment rights (covered by InfoBytes here), and may mark the beginning of the end of litigation over former Director Kraninger’s July 2020 ratifications of the Bureau’s private actions (covered by InfoBytes here). Since the Court’s decision in Seila, several courts have heard challenges from companies claiming the Bureau could not use ratification to avoid dismissal of their lawsuits.
8th Circuit lets GSE shareholders seek retrospective relief
On October 6, the U.S. Court of Appeals for the Eighth Circuit held that Fannie Mae and Freddie Mac shareholders have standing to seek retrospective, but not prospective, relief related to their claims that they suffered damages as a result of the FHFA’s leadership structure. The shareholders alleged FHFA’s leadership structure and appointments violated the appointments clause, the separation of powers, and the non-delegation doctrine. Among other things, the shareholders claimed that (i) the Housing and Economic Recovery Act (Recovery Act), which created the agency, violated separation of powers principles because it only allowed the president to fire the FHFA director “for cause,” and (ii) FHFA acted outside its statutory authority when it adopted a third amendment to the Senior Preferred Stock Purchase Agreements, which replaced a fixed-rate dividend formula with a variable one requiring the GSEs to pay quarterly dividends equal to their entire net worth minus a specified capital reserve amount to the Treasury Department (known as the “net worth sweep”). The district court dismissed the claims for lack of standing, and in the alternative, rejected them on the merits.
The 8th Circuit began by rejecting the district court’s holding that the shareholders lacked standing. Relying on the U.S. Supreme Court’s recent ruling in Collins v. Yellen (covered by InfoBytes here), the appellate court held that the shareholders’ alleged injury flowed from the adoption of the agreement containing the net worth sweep by FHFA’s acting director, who did not properly hold office. However, the shareholders were limited to seeking retrospective relief, because prospective relief was mooted by the adoption of subsequent amendments to the agreement by validly-appointed directors.
However, the appellate court went on to hold that the shareholders were not entitled to relief based on their argument that the acting director had been in office too long in an “acting” role when he adopted the agreement. Even if the shareholders were correct, the acting director’s decisions were valid under the de facto officer doctrine, which confers validity on the acts of persons operating “under the color of official title even though it is later discovered that the legality of that person’s appointment or election to office is deficient.” Moreover, even if the de facto officer doctrine did not control, “[a]ny defect was resolved when the subsequent FHFA directors—none of whose appointments were challenged—ratified the third amendment.”
The 8th Circuit also rejected the argument that Congress unlawfully delegated authority to FHFA in the Recovery Act, finding that the statute directs FHFA “to act as a ‘conservator,’ with clear and recognizable instructions.”
Finally, the 8th Circuit did agree with the shareholders that FHFA’s leadership structure was unconstitutional because, as the Court held in Collins, it limited the president’s ability to remove the director. But the appellate court rejected the shareholders’ request that it vacate the adoption of the agreement containing the net worth sweep as a result, noting that the acting director was always “removable at will,” and that there was no allegation that subsequent agency directors (who took actions to implement the agreement) were appointed improperly. Still, the appellate court noted that, in Collins, the Court had remanded the case for a determination whether the constitutional violation “caused compensable harm” to the plaintiffs, and it did the same here.
Supreme Court won’t hear challenge to CFPB ratification
On October 4, the U.S. Supreme Court declined to hear a petition filed by a New Jersey-based finance company accused by the CFPB and the New York attorney general of misleading first responders to the World Trade Center attack and NFL retirees about high-cost loans mischaracterized as assignments of future payment rights (see entry #20-1758). In 2020, the U.S. Court of Appeals for the Second Circuit vacated a 2018 district court order, which had previously dismissed the case on the grounds that the Bureau’s single-director structure was unconstitutional, and that, as such, the agency lacked authority to bring claims alleging deceptive and abusive conduct by the company (covered by InfoBytes here). At the time, the district court also rejected an attempt by then-acting Director Mulvaney to salvage the Bureau’s claims, concluding that the “ratification of the CFPB’s enforcement action against defendants failed to cure the constitutional deficiencies in the CFPB’s structure or otherwise render defendants’ arguments moot.” The 2nd Circuit remanded the case to the district court, determining that the Court’s ruling in Seila Law LLC v. CPFB (which held that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau, as covered by a Buckley Special Alert) superseded the 2018 ruling. The appellate court further noted that following Seila, former Director Kathy Kraninger ratified several prior regulatory actions (covered by InfoBytes here), including the enforcement action brought against the defendants, and as such, remanded the case to the district court to consider the validity of the ratification of the enforcement action.
In its June petition for writ of certiorari, the company argued that the Bureau could not use ratification to avoid dismissal of the lawsuit. The company noted that while several courts, including the U.S. Court of Appeals for the Ninth Circuit (covered by InfoBytes here) have “appl[ied] ratification to cure the structural problem,” other courts have rejected the Bureau’s ratification efforts, finding them to be untimely (see a dismissal by the U.S. District Court for the District of Delaware, as covered by InfoBytes here). As such, the company had asked the Supreme Court to clarify this contradictory “hopeless muddle” by clarifying the appropriate remedy for structural constitutional violations and addressing whether ratification is still effective if it comes after the statute of limitations has expired.
As is customary when denying a petition for certiorari, the Supreme Court did not explain its reasoning.
En banc 9th Circuit: FHA does not support downstream injuries
On September 28, the U.S. Court of Appeals for the Ninth Circuit issued an en banc decision concluding that the Fair Housing Act (FHA) “is not a statute that supports proximate cause for injuries further downstream.” As previously covered by InfoBytes, the City of Oakland sued a national bank alleging violations of the FHA and the California Fair Employment and Housing Act, claiming the bank provided minority borrowers mortgage loans with less favorable terms than similarly situated non-minority borrowers, which led to disproportionate defaults and foreclosures and caused (i) decreased property tax revenue; (ii) increased city expenditures; and (iii) neutralized spending in Oakland’s fair-housing programs. In 2020, a three-judge panel affirmed both the district court’s denial of the bank’s motion to dismiss claims for decreased property tax revenue, as well as the court’s dismissal of Oakland’s claims for increased city expenditures. (Covered by InfoBytes here.) The panel further held that Oakland’s claims for injunctive and declaratory relief were also subject to the FHA’s proximate-cause requirement and, on remand, the district court must determine whether Oakland’s allegations satisfied this requirement. The bank filed a petition for panel rehearing and rehearing en banc last year arguing, among other things, that the panel had “fashioned a looser, FHA-specific proximate-cause standard” in conflict with the U.S. Supreme Court’s decision in Bank of America Corp. v. City of Miami. As covered by a Buckley Special Alert, in 2017, the Supreme Court held that municipal plaintiffs may be “aggrieved persons” authorized to bring suit under the FHA against lenders for injuries allegedly flowing from discriminatory lending practices, but that such injuries must be proximately caused by, rather than simply the foreseeable result of, the alleged misconduct.
The 9th Circuit agreed with the bank and remanded the case for dismissal of the FHA claims and proceedings consistent with the opinion. Citing the Miami decision as one of the leading factors, the panel stated that “[w]e begin where Miami began, with ‘[t]he general tendency. . .not to go beyond the first step,’” adding that “[t]here is no question that Oakland’s theory of harm goes beyond the first step—the harm to minority borrowers who receive predatory loans. Oakland’s theory of harm runs far beyond that—to depressed housing values, and ultimately to reduced tax revenue and increased municipal expenditures. Oakland thus fails a strict application of the general tendency not to stretch proximate causation beyond the first step.” The panel also affirmed the district court’s decision that Oakland failed to sufficiently plead claims related to increased municipal expenditures and reversed the district court’s denial of the bank’s motion to dismiss claims for lost property tax revenue and injunctive and declaratory relief.
6th Circuit: TCPA robocall claims not invalidated by severance of 2015 amendment in AAPC
On September 9, the U.S. Court of Appeals for the Sixth Circuit determined that the U.S. Supreme Court’s decision in Barr v. American Association of Political Consultants Inc. (AAPC) (covered by InfoBytes here, which held that the government-debt exception in Section 227(b)(1)(A)(iii) of the TCPA is an unconstitutional content-based speech restriction and severed the provision from the statute) does not invalidate a plaintiff’s TCPA claims concerning robocalls he received prior to the Court issuing its decision. In the current matter, the plaintiff filed a proposed class action alleging violations of the TCPA’s robocall restriction after he received two robocalls from the defendant in late 2019 and early 2020 advertising its electricity services. Following the Court’s decision in AAPC, the district court granted the defendant’s motion to dismiss, ruling that because severance of the exception in AAPC only operates prospectively, “the robocall restriction was unconstitutional and therefore ‘void’ for the period the exception was on the books.” As such, the district court concluded that because the robocall restriction was void, it could not provide a basis for federal-question jurisdiction for alleged TCPA robocall violations arising before the Court severed the exception.
On appeal, the 6th Circuit conducted a severability analysis, holding that the district court erred in concluding that the court, in AAPC, offered “‘a remedy in the form of eliminating the content-based restriction' from the TCPA.” Rather, the appellate court pointed out that “the Court recognized only that the Constitution had ‘automatically displace[d]’ the government-debt-collector exception from the start, then interpreted what the statute has always meant in its absence,” adding that the legal determination in AAPC applied retroactively and did not render the entire TCPA robocall restriction void until the exception was severed by the court. A First Amendment defense presented by the defendant premised on the argument that “government-debt collectors have a due-process defense to liability because they did not have fair notice of their actions’ unlawfulness” for robocalls placed before AAPC was also rejected. The 6th Circuit opinion emphasized that “[w]hether a debt collector had fair notice that it faced punishment for making robocalls turns on whether it reasonably believed that the statute expressly permitted its conduct. That, in turn, will likely depend in part on whether the debt collector used robocalls to collect government debt or non-government debt. But applying the speech-neutral fair-notice defense in the speech context does not transform it into a speech restriction.”
District Court reimposes $5 million restitution award in FTC action
On September 13, the U.S. District Court for the Northern District of Illinois reimposed a more than $5 million restitution award in an action dating back to 2018, this time under Section 19 of the FTC Act. The court originally granted the FTC’s motion for summary judgment against a credit monitoring service and its sole owner in an action filed under Section 13(b) of the FTC Act, after concluding that no reasonable jury would find that the defendants’ scheme of using false rental property ads to solicit consumer enrollment in credit monitoring services without their knowledge could occur without engaging in unfair or deceptive practices (covered by InfoBytes here). However, as previously covered by InfoBytes, in 2019, the U.S. Court of Appeals for the Seventh Circuit held that Section 13(b) does not grant the FTC authority to order restitution—a position that the U.S. Supreme Court ultimately agreed with when issuing its decision in AMG Capital Management, LLC v. FTC (which unanimously held that Section 13(b) of the FTC Act “does not authorize the Commission to seek, or a court to award, equitable monetary relief such as restitution or disgorgement”—covered by InfoBytes here).
In its current ruling, the court agreed to reimpose the damages under the Restore Online Shopper Confidence Act (ROSCA) and Section 19. The court noted that because ROSCA incorporates all the enforcement tools of the FTC Act, the FTC could seek remedies using Section 19 of the FTC Act instead of relying on Section 18. Further, the court noted that the FTC indicated that the FTC may seek remedies under Section 19 when it brought the action under Section 5(a) of ROSCA, which the court ultimately agreed was correct. “The FTC has the better of this dispute,” the court wrote, adding, among other things, that “the court is unmoved by [the defendant’s] claims of unfair prejudice. Aside from the particular route to an award of restitution, nothing will materially change. The FTC seeks the same remedy, for the same reasons, and for the same victims under section 5(a) via section 19 as it did under section 13(b).”
Former officials agree SEC usurped FinCEN’s BSA enforcement authority
On August 20, former FinCEN officials filed an amicus brief in support of a petition for certiorari filed by penny stock broker-dealer (petitioner) against the SEC claiming the agency usurped FinCEN’s Bank Secrecy Act (BSA) enforcement authority. The petition seeks to reverse a U.S. Court of Appeals for the Second Circuit decision, which upheld a $12 million penalty and concluded the SEC has the authority to bring an action under Section 17(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 17a-8 promulgated thereunder for failure to comply with the Suspicious Activity Report (SAR) provisions of the BSA. As previously covered by InfoBytes, the appellate court rejected the broker-dealer’s argument that the SEC is attempting to enforce the BSA, which only the U.S. Treasury Department has the authority to do. The appellate court noted that the SEC is enforcing the requirements of Rule 17a-8, which requires broker-dealers to adhere to the BSA in order to comply with requirements of the Exchange Act, which does not constitute the agency’s enforcement of the BSA. Moreover, the appellate court concluded that the SEC did not overstep its authority when promulgating Rule 17a-8, as SARs “serve to further the aims of the Exchange Act by protecting investors and helping to guard against market manipulation,” and that the broker-dealer did not meet its “‘heavy burden’ to show that Congress ‘clearly expressed [its] intention’ to preclude the SEC from examining for SAR compliance in conjunction with FinCEN and pursuant to authority delegated under the Exchange Act.”
The former officials’ brief states that they “have no interest in the facts” of the petitioner’s dispute with the SEC, but rather “are concerned that the Second Circuit’s misunderstanding of FinCEN’s delegated enforcement authority will lead to confusion among the financial institutions that must comply with the BSA; create multiple, conflicting BSA regulatory regimes; decrease American influence over global financial regulators; and hamper U.S. law enforcement and national security efforts by diminishing the value of BSA data.” They further pointed out that the appellate court “erred in conflating delegated compliance examination efforts with the exercise of enforcement authority and let stand SEC and lower court decisions applying materially different legal standards with a lower level of judicial oversight and review than that established by Congress.” The former officials stressed that the appellate court’s decision fails “to appreciate the nature of the AML regime and therefore FinCEN’s unique expertise and central role,” adding that the decision “threatens to undermine the BSA statutory regime and harm U.S. efforts to fight money laundering and terrorist financing” and may affect other regulators and regulated entities.
District Court denies request to set aside $120.2 million judgment in Belizean real estate scheme
On August 24, the U.S. District Court for the District of Maryland denied a request to set aside a more than $120.2 million judgment against several defaulted defendants involved in an international real estate investment development scheme. As previously covered by InfoBytes, the FTC initiated the action in 2018 against several individuals and corporate entities, along with a Belizean bank, asserting that the defendants violated the FTC Act and the Telemarketing Sales Rule by advertising and selling parcels of land that were part of a luxury development in Belize through the use of deceptive tactics and claims. In 2019, a settlement was reached with the Belizean bank requiring payment of $23 million in equitable relief, and in 2020, the district court ordered the defaulted defendants to pay over $120.2 million in redress and granted the FTC’s request for permanent injunctions (covered by InfoBytes here and here).
In their motion, the defaulted defendants argued that the U.S. Supreme Court’s decision in AMG Capital Management, LLC v. FTC (which unanimously held that Section 13(b) of the FTC Act “does not authorize the Commission to seek, or a court to award, equitable monetary relief such as restitution or disgorgement”—covered by InfoBytes here) nullified the judgment. The district court disagreed, stating that the AMG Capital decision does not render his judgments in the case void and that “[i]n its Opinion rendered before the Supreme Court reached its decision, the Court considered the effect that a decision in AMG Capital adverse to the FTC might have, reasoning that: ‘this Court’s findings of fact and determinations as to liability—including contempt of court and violations of the Telemarketing Services Rule []—would not be affected by a decision in AMG.’” Moreover, the court pointed out that immediate denial of the motion is also warranted because the defaulted defendants failed to comply with a local rule requiring submission of a memorandum of law in support of their motion. The court asked, “In failing to do so, they have skirted among other fundamental questions: What authority do they, as defaulted defendants, involved as part of a common enterprise with virtually all other [d]efendants, have to upset a final and valid judgment against them after willfully defaulting?”