August 28, 2013

Under Fire from CFPB, Company Counterattacks

When Morgan Drexen Inc. found itself in the Consumer Financial Protection Bureau's crosshairs, the company, which works with law firms to provide debt relief services to consumers, initiated a response that's proving to be both unusually aggressive and public.

The CFPB filed suit against the company earlier this week in California federal court, alleging that it charged illegal up-front fees and deceived consumers. But Morgan Drexen, which is represented by Venable partner Randall Miller, beat the agency to the punch, filing a suit in late July challenging the CFPB’s constitutionality.

It’s also launched an extensive website detailing the litigation,, including a timeline, blog, document demands, video footage and press clips. There are even assurances to the charities Morgan Drexen supports that it “refuses to abandon” them, despite spending millions on its fight with the CFPB. ("Some companies might choose to pull back on charitable partnerships at a time like this, but that will not be us.")

In its August 20 compliant, the CFPB alleged that the company violated the Telemarketing Sales Rule and the Dodd-Frank Act by illegally charging consumers “hundreds if not thousands of dollars in up-front fees” for debt relief services, and claiming consumers will be “debt free in months,” when in reality, almost none of them are.

“This company took advantage of people who were struggling,” said CFPB Director Richard Cordray in a news release. “The company charged consumers illegal fees and deceived them about the services provided. We will hold them accountable for these actions.”

No sooner had the CFPB issued its press release than Morgan Drexen countered with one of its own, calling the suit “retaliatory” and a bid by the CFPB to “avoid its date with destiny.”

"There are two glaring misrepresentations in the CFPB press release—one, that Morgan Drexen is a support services company NOT a debt-settlement company; and two, that CFPB's constitutionality as an agency is in question now—because of a lawsuit Morgan Drexen filed last month," said Morgan Drexen CEO Walter Ledda in the news release.

In that suit, filed in U.S. District Court for the District of Columbia on July 22, Morgan Drexen and Connecticut lawyer Kimberly Pisinski, a solo practitioner, say the CFPB’s structure violates the “Constitution's separation of powers given: (1) the extraordinary scope of power delegated to CFPB; and (2) the lack of political oversight and necessary checks and balances,” according to their motion for summary judgment filed on August 7.

A prior case brought on behalf of groups including a community bank, the Competitive Enterprise Institute and several states, State National Bank of Big Spring, Texas et. al. v. Lew, made similar claims but was dismissed on August 1 for lack of standing. (The case is now pending in the U.S. Court of Appeals for the D.C. Circuit.)

Morgan Drexen is unlikely to have that problem. The company already had a strong standing argument based on the money it spent in complying with a Civil Investigative Demand for documents from the CFPB. If any question still remained, now that the CFPB “has actually filed a lawsuit, the standing issue kind of goes away,” said Miller of Venable.

Miller said the company set up the litigation website as a resource, given the public interest in the challenge to the CFPB’s constitutionality. “It’s unprecedented the way the agency is structured. We’re in new territory,” he said. “We’re hopeful our case will be the one where we get the answer.”

Morgan Drexen, which provides back office support to lawyers advising clients on bankruptcy, also objects that the CFPB “demanded the production of documents— including privileged attorney-client communications and confidential personal material held by Morgan Drexen for lawyers like Pisinski.” The CFPB is “pushing beyond its statutory mandate and seeking to regulate lawyers engaged in the practice of law.”

The plaintiffs have asked the court to declare Title X of the Dodd Frank Act that created the CFPB unconstitutional—an action that would abolish the agency (unless the court took it upon itself to restructure it), effectively kicking the matter back to Congress. However, Miller said the goal wasn’t do to away with the CFPB, but to redesign it with more checks and balances and oversight. “We’re not saying the CFPB should not continue to exist, but that it might …require restructuring,” he said.

The case, which is before U.S. District Judge Colleen Kollar-Kotelly, is on an expedited schedule, making amicus curiae support now impractical, but Miller said he anticipates there will be widespread interest on appeal. “This is the kind of case that could go all the way to the Supreme Court,” he said.