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Will New U.S. Court of Appeals Decision on 'Recess Appointments' Stay Dodd-Frank Powers Granted to CFPB and Vacate Certain Actions?

Financial Services Alert

Authors: Gary Apfel, Richard P. Eckman, Timothy R. McTaggart, Matthew R. Silver and Richard J. Zack


Holding that recess appointments authorized by the Recess Appointments Clause of the U.S. Constitution are limited to “intersession recesses” – “the period between sessions of the Senate when the Senate is by definition not in session and therefore unavailable to receive and act upon nominations from the President,” on January 25, 2013, the U.S. Court of Appeals for the District Court of Columbia1 ruled in the matter of Noel Canning v. National Labor Relations Board (the “Ruling” or the “Canning decision”) that the “recess appointments” made by President Obama on January 4, 2012 to the National Labor Relations Board (NLRB) were invalid. Important to the banking and financial services world, President Obama appointed Richard Cordray as the first director of the Consumer Financial Protection Bureau (CFPB) on the same day he made the NLRB appointments, presumably relying on identical justifications as to what constituted a valid recess appointment.

Issues similar to those in Canning are likely to be raised by one or more litigants in a CFPB matter within months, if not sooner. The Canning decision (as concerns the NLRB) and any associated matters (involving the appointment of the CFPB director or other agency appointments) will no doubt be appealed, possibly directly to the U.S. Supreme Court. According to D.C. Circuit rules, the NLRB may file a petition for panel rehearing or rehearing en banc within 45 days of the decision, which would be March 11, 2013.2 The NLRB will also have 90 days to seek certiorari before the Supreme Court,3 but that deadline may be extended by 60 days with the court’s permission.4

The Recess Appointment Clause

As background, on the day the “recess appointments” were made, the Senate was operating pursuant to a unanimous consent agreement which provided that the Senate would meet in pro forma sessions every three business days from December 20, 2011, through January 23, 2012. This process was apparently designed, in part, to avoid the possibility of valid “recess appointments.”5 The agreement stated that “no business [would be] conducted” during those sessions, but in any case, during the December 23 pro forma session the Senate overrode its prior agreement by unanimous consent and passed a temporary extension to the payroll tax and during the January 3 pro forma session the Senate acted to officially convene the second session of the 112th Congress and to fulfill its constitutional duty to meet on January 3.

As cited in the court’s Ruling, the Justice Department had contended6 that the Senate’s “pro forma” sessions during its winter break, where no business was generally to be conducted, were insufficient to prevent the President from being able to exercise his constitutional power to appoint officials during a recess.

Although Mr. Cordray was nominated to become the CFPB director in July 2011, his appointment was delayed due, at least in a large part, to the fact that 44 Senate Republicans had stated that they would attempt to block7 any nominee for the position of CFPB director until a deal could be reached for desired CFPB reforms on issues such as potentially expanding the CFPB’s leadership from a single director to a five-person commission and making the agency subject to the congressional appropriations process. In any case, on December 8, 2011, the Senate failed to secure cloture on Cordray’s nomination. The final vote was 53-45.

Power of the CFPB Without a Director

The Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010 (the Dodd-Frank Act) created the CFPB and according to various authorities and government agencies,8 the CFPB is substantially limited in the scope of its power without a without a director.9 Under this interpretation, although not free from doubt, at a minimum the new powers granted to the CFPB, including the ability to supervise nondepository financial institutions (such as payday lenders or mortgage lenders) were not designed to become effective until an initial CFPB director was approved.10 Since the recess appointment of Mr. Cordray as director, the CFPB has engaged in a number of actions using “new” Dodd-Frank Act powers, including, among other things, initiating federal court enforcement actions against nondepository consumer financial entities, and suing parties for such things as alleged violations of loan modification laws and violations of the Telephone Sales Rule. Further, while the Dodd-Frank Act does authorize the Secretary of the Treasury, in the absence of a director, to perform the CFPB’s powers that were transferred to it from other federal agencies, it does not authorize the CFPB to exercise those powers on its own and it does not authorize parties not acting under the authority of the Secretary of the Treasury to exercise such powers.11 12

Current Congressional State of Play

Republicans are still working on their goal of reforming the structure of the CFPB and limiting certain of its powers – very similar to the situation that existed at the time of the recess appointment. On February 1, 2013, a letter by 43 Senators13 was sent to President Obama stating that the senators will “continue to oppose the consideration of any nominee, regardless of party affiliation, to be the CFPB director until [certain] key structural changes [outlined in the letter] are made to ensure accountability and transparency at the Consumer Financial Protection Bureau.”

Senator Jerry Moran (R-Kan.), a member of the Senate Committee on Banking, Housing and Urban Affairs, has also reintroduced legislation14 to, in part, replace CFPB Director Richard Cordray with a five-person commission and subject the CFPB to an annual appropriations process. If passed, The Responsible Consumer Financial Protection Regulations Act of 2013 would also subject the CFPB to a regular congressional appropriations process15 and establish what is stated to be a “safety and soundness check” that would ensure “excessive regulations do not cause financial institutions to fail.”

S. 190 (introduced by Senator Mike Johanns (R-NE) and entitled “Restoring the Constitutional Balance of Power Act of 2013”) would also have an impact on the CFPB. The bill states, in part, “[n]o funds may be transferred from the Federal Reserve to be used by the Bureau of Consumer Financial Protection to carry out activities that are authorized only upon the confirmation of a Director of the Bureau [until such time as a director of the CFPB is confirmed] consistent with the advice and consent requirements of the United States Constitution, as determined in accordance with the decision of the United States Court of Appeals for the District of Columbia Circuit in the case Noel Canning v. National Labor Relations Board (No. 12-1115).”

Likely Short-Term Implications of the Opinion

CFPB Director of Enforcement Kent Markus has stated concerning the Canning decision,16 “That is a case in one court, about the NLRB. It is a not a case about the CFPB. It is not a decision that is done, necessarily, being litigated in any way so our view is that we have a director, we have our authority, we have our responsibility to American consumers and American businesses and we intend to proceed.”

We would expect that some financial institutions subject to CFPB investigations and examinations may reconsider whether they are subject to CFPB jurisdiction while the current validity of certain CFPB powers may be in doubt. We believe an assertion by a financial institution that it is not subject to CFPB authority is a very risky strategy and should only be undertaken after consulting with counsel. No doubt, such an assertion will cause a confrontation with the CFPB. Nonetheless, it is likely that the CFPB will consider delaying certain actions where the powers needed to take action may rely, at least in part, on the CFPB having a validly appointed director.

We would also expect certain proposed new CFPB initiatives relying on powers the CFPB arguably was never granted or expected to wield – such as the CFPB possibly taking on an active role in helping Americans manage their retirement savings17 (a role Mr. Cordray has noted as being “one of the things we’ve been exploring and are interested in in terms of whether and what authority we have”) to be put on hold for now. It should be noted that various Web sites are speculating whether such retirement savings “help” would be strictly voluntary.18

Will Prior CFPB Rules and Actions Remain Valid?

Some have concerns if the rules and orders issued by Director Cordray will be upheld if his January 2012 appointment is found to be invalid. With that in mind:

The Dodd-Frank Act invested the Secretary of the Treasury with certain CFPB powers (although, in general, largely powers transferred to the CFPB from other federal agencies and not powers newly established by the Dodd-Frank Act) until such time as a CFPB director could be appointed. As such, without a valid CFPB director appointment, the Secretary of the Treasury could have taken or initiated many of the same actions taken by Mr. Cordray. As a result, it is quite possible that the Secretary of the Treasury could validly “ratify” many of the actions taken by the CFPB since January 4, 2012. It is also possible that the Secretary of the Treasury could delegate a significant amount of authority to new CFPB Acting Deputy Director Steve Antonakes or even to Director Cordray.19

Pepper Point: If Mr. Cordray’s appointment is ultimately decided to have been invalid, we believe that the CFPB will operate in the same general fashion as it did prior to January 4, 2011 (i.e., with significant, but more limited powers). Additionally, it is unlikely that a court would view ratification by the Secretary of the Treasury of any actions taken by the CFPB in the intervening period as particularly problematic (at least to the extent that the CFPB’s actions could have been authorized by the Secretary of the Treasury prior to Mr. Cordray’s appointment as CFPB director). For this reason, financial institutions considering raising the point that the CFPB does not have regulatory authority should carefully consider the merits of such a claim and the implications of proffering it.

De Facto Officer Doctrine

If the validity of the current CFPB director is challenged, the CFPB and the Obama administration may argue that the past actions of the CFPB should be upheld due to a legal principle known as the “de facto officer doctrine”20 – a doctrine that has been stated to “spring[] from the fear of the chaos that would result from multiple and repetitious suits challenging every action taken by every official whose claim to office could be open to question, and [which] seeks to protect the public by insuring the orderly functioning of the government despite technical defects in title to office,” or potentially ratified by a later duly appointed CFPB director – which may include Mr. Cordray himself (or the CFPB board, if legislation sponsored by Republican senators is successful).

In Franklin Savings Association v. Director of the Office of Thrift Supervision21 it was recognized that an action by one government official in this case, Danny Wall (who was found to have been unconstitutionally appointed to serve as director of the Office of Thrift Supervision (OTS)) had his actions ratified by a successor, in this case Timothy Ryan, Jr., the validly appointed director of the OTS. The Franklin court noted22 that for a ratification to be effective, the ratifying person or entity must have had authority to do the underlying act both at the time of the original act (something potentially not existing as of February 2013 for the CFPB, at least as far as actions taken under powers that are were only to be granted to the CFPB on the appointment of the first valid CFPB director) and at the time of ratification.

However, notwithstanding the constitutionally defective appointment of Director Wall in Franklin, the Franklin court found that plaintiffs’ challenge to the actions of Director Wall, based on the defective appointment, “must fail under the time-honored doctrine of ‘de facto officer.’” This doctrine, as explained by the Franklin court “provides that when … plaintiffs challenge government action on the ground that the official who took the action was improperly in office, the challenged acts of the officer will be upheld against such challenge in the interest of the public …[. Such] doctrine exists to prevent wholesale invalidation of an improperly appointed official’s acts, and thus prevents interference with orderly government.”

Pepper Point: Case law on the de facto officer doctrine is not well developed. If the CFPB had already operated with one or more directors and if the existence of the full Dodd-Frank Act-authorized power of the CFPB was not so apparently dependent on the appointment of an initial director, then “de facto officer” arguments likely would be stronger than they are. However, in our view and largely as a practical agency matter, the Supreme Court is more likely than not to accept “ratification” of past actions once a validly appointed CFPB director is in place (assuming the Canning decision stands).


1 See http://www.cadc.uscourts.gov/internet/opinions.nsf/D13E4C2A7B33B57A85257AFE00556B29/$file/12-1115-1417096.pdf (last visited February 22, 2013) for the text of the Noel Canning v. National Labor Relations Board decision.

2 Available at http://www.cadc.uscourts.gov/internet/home.nsf/Content/VL%20-%20RPP%20-%20Circuit%20Rules/$FILE/RulesDecember2011LINKSandBOOKMARKScj2013.pdf (last visited February 22, 2013). See, in particular, Circuit Rule 35(a) as interacting with the Federal Rules of Appellate Procedure (FRAP) 40(a)(1).

3 If requested, certiorari may very well be granted, in light of both the practical political importance of the Canning decision and the split it represents with the decision of the Eleventh Circuit in the case of Evans v. Stephens, 387 F.3d 1220 (11th Cir. 2004), cert. denied, 544 U.S. 942 (2005), which determined that the word “recess” had a more expansive meaning. See http://law.justia.com/cases/federal/appellate-courts/F3/387/1220/532548/ for the text of the Eleventh Circuit decision and http://www.law.cornell.edu/supct/html/04-828.ZA.html concerning the denial of certiorari.

4 See Supreme Court Rule Number 13, available at http://www.supremecourt.gov/ctrules/2010RulesoftheCourt.pdf (last visited February 22, 2013). In the meantime, the Obama administration has re-nominated (or, technically nominated – as a new congressional session has commenced since the original nominations were made) Sharon Block and Richard F. Griffin, Jr. to serve on the NLRB and Mr. Cordray as the Director of the CFPB. See http://www.whitehouse.gov/the-press-office/2013/02/13/presidential-nominations-sent-senate and http://www.banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=092ac137-38b3-48e5-9887-8fe7220c54fa.

5 See Congressional Research Service Report prepared for Congress on January 9, 2012 entitled “Recess Appointments: Frequently Asked Questions” available at http://www.senate.gov/CRSReports/crs-publish.cfm?pid='0DP%2BP%5CW%3B%20P%20%20%0A (last visited February 22, 2013). Between the beginning of the Reagan presidency in January 1981 and the end of December 2011, the shortest intersession recess during which a President made a recess appointment was 11 days, and the shortest intrasession recess during which a President made a recess appointment was 10 days. Congressional Research Service data on recess appointments before this period is incomplete; however, based on the public record, they were only able to identify two historical occasions in which a President has made recess appointments during recesses of three days or less – 1903 (in which many appointments were made, primarily of military officers) and 1949 (in which one appointment was made to the Civil Aeronautics Board – the appointee being an individual already serving on the board), both of these occasions having been during the period of transition between sessions.

6 See the U.S. Department of Justice memorandum of January 6, 2011 entitled “Lawfulness of Recess Appointments During a Recess of the Senate Notwithstanding Periodic Pro Forma Sessions” available at http://www.justice.gov/olc/2012/pro-forma-sessions-opinion.pdf (last visited February 22, 2013).

7 See the June 9, 2011 Washington Post article entitled “GOP’s Mitch McConnell, Senate minority leader, stands by vow to block CFPB nominees” available at http://www.washingtonpost.com/business/economy/gops-mitch-mcconnell-senate-minority-leader-stands-by-vow-to-block-cfpb-nominees/2011/06/09/AG3LcjNH_story.html (last visited February 22, 2013).

8 See, i.e., the January 10, 2011 Joint Response by the Inspectors General of the Department of the Treasury and Board of Governors of the Federal Reserve System addressed to the chairman of the House Committee on Financial Services and the chairman of the House Committee on Financial Services, Subcommittee on Insurance, Housing and Community Opportunity in response to a congressional request concerning activities to date to establish the CFPB. The Joint Response is available at http://www.federalreserve.gov/oig/files/Treasury_OIG_Posted_PDF_-_Response_CFPB.pdf (last visited February 22, 2013).

In the Joint Response the Inspector Generals specifically stated their interpretations of the following: “5. Do you agree that the interim authority specified in Section 1066 of the [Dodd-Frank] Act terminates on the designated transfer date, and that after such date, the Bureau can function only if a director has been confirmed with the advice-and-consent of the Senate?” and provide, in approximately three pages of text, their views of what powers the CFPB has and does not have absent a director confirmed with the advice and consent of the Senate.

9 See generally Section 1011 et. seq. As noted in Section 1066 (concerning only the powers transferred to the CFPB from other agencies), “(a) IN GENERAL.—The Secretary is authorized to perform the functions of the Bureau under this subtitle until the Director of the Bureau is confirmed by the Senate in accordance with section 1011.”

10 See the Congressional Research Service report of May 18, 2011 entitled “Limitations on the Secretary of the Treasury’s Authority to Exercise the Powers of the Bureau of Consumer Financial Protection” available at http://www.llsdc.org/attachments/files/314/CRS-R41839.pdf (last visited February 22, 2013) or the Dodd-Frank Act itself, as available at http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf (last visited February 22, 2013). Section 1066 of the Dodd-Frank Act provides for more limited authority absent the appointment of a CFPB director – “The Secretary is authorized to perform the functions of the Bureau under this subtitle until the Director of the Bureau is confirmed by the Senate in accordance with section 1011.”

11 See Section 1066. See also the Congressional Research Service report of May 18, 2011 entitled “Limitations on the Secretary of the Treasury’s Authority to Exercise the Powers of the Bureau of Consumer Financial Protection” available at http://www.llsdc.org/attachments/files/314/CRS-R41839.pdf (last visited February 22, 2013) that states, in part, “Until a CFPB Director is appointed, the CFP Act [meaning Title X of the Dodd-Frank Act, also referred to as the “Consumer Financial Protection Act”] provides the Secretary the authority to exercise some, but not all of the Bureau’s authorities. Although not beyond debate, the CFP Act appears to provide the Secretary the authority to exercise the Bureau’s transferred powers, but not the authority to exercise the Bureau’s newly established powers.”

12 Prior to the recess appointment of Mr. Cordray, Elizabeth Ann Warren (now U.S. Senator Warren) in her role as Special Advisor to the Secretary of the Treasury on the CFPB, was effectively tasked with running CFPB operations in the name of the Secretary of the Treasury. Ms. Warren’s departure officially took effect August 1, 2011. Given that the CFPB has operated absent the authority and control of the Treasury Department since that time, a question also exists as to the validity of even the actions performed by the CFPB in the intervening period that would be within the “more limited” range of pre-director appointment CFPB/Secretary of the Treasury authority.

13 Release and letter available at http://www.cfpbmonitor.com/files/2013/02/Senate-Republican-Leader-McConnell-42-Senators-Demand-Accountability-and-Transparency-at-the-Consumer-Financial-Protection-Bureau-Full-Text-of-February-2013-and-May-2011-Letters-to-President-Obama.pdf (last visited February 22, 2013).

14 See http://moran.senate.gov/public/index.cfm/news-releases?ContentRecord_id=b21a1872-cad9-437f-9d39-6bb44ba97718 (last visited February 22, 2013).

15 Section 3 of S. 205 is, in fact, currently titled “Bringing the Bureau Into the Regular Appropriations Process.”

16 See the February 7, 2013 article entitled Remarks of Ken Markus at DBA Annual Conference, available at http://www.cfpbmonitor.com/2013/02/07/remarks-of-kent-markus-at-dba-annual-conference/ (last visited February 22, 2013).

17 See January 18, 2013 Bloomberg article entitled “Retirement Savings Accounts Draw U.S. Consumer Bureau Attention and available at http://www.bloomberg.com/news/2013-01-18/retirement-savings-accounts-draw-u-s-consumer-bureau-attention.html (last visited February 22, 2013).

18 See, i.e., http://www.businessinsider.com/homeland-security-fear-and-your-retirement-savings-2013-2 ; or http://www.wnd.com/2012/11/now-obama-wants-your-401k/#8uQm6KDQ7MO5K8pC.99 (complete with polling options concerning whether readers think “Obama is after your retirement savings.” Various “yes” variant option responses far outweigh the possible “no” responses. As of February 11, 2013, two voters have selected “No, I think the rumors are unsubstantiated” and 540 voters have selected “Yes, everything about Obama is evil, and this is just another example.” This story is widely circulated among conservative leaning sites, in particular those with interests in precious metals or firearms.

19 For more about the transition from the prior deputy director to Mr. Antonakes this February, see the February 1, 2013 LegalNewline.com article entitled “Deputy director of CFPB leaving agency; acting deputy director named” and available at http://legalnewsline.com/federal-government/239260-deputy-director-of-cfpb-leaving-agency-acting-deputy-director-named (last visited February 22, 2013).

20 See Ryder v. United States, 515 U.S. 177, 180-81 (1995), available at http://www.law.cornell.edu/supct/html/94-431.ZS.html (last visited February 22, 2013) where it was found that while the de facto officer doctrine, which confers validity upon acts performed under the color of official title even though it is later discovered that the legality of the actor’s appointment or election to office is deficient can be valid, cannot be used in cases where there is a more fundamental problem with the constitutionality of the appointment of an officer in question.

As noted in Ryder, the de facto doctrine “springs from the fear of the chaos that would result from multiple and repetitious suits challenging every action taken by every official whose claim to office could be open to question, and seeks to protect the public by insuring the orderly functioning of the government despite technical defects in title to office.”

However, in Ryder, the Court distinguished claims based on the Appointments Clause of Article II of the Constitution – in effect, a claim that there has been a “trespass upon the executive power of appointment,” and claims where there is simply a misapplication of statute (for example, a statute providing for the assignment of already appointed judges to serve in other districts). The Appointments Clause reads in full: “[The President] shall nominate, and by and with the Advice and Consent of the Senate, shall appoint Ambassadors, other public Ministers and Consuls, Judges of the Supreme Court, and all other Officers of the United States, whose Appointments are not herein otherwise provided for, and which shall be established by Law: but the Congress may by Law vest the Appointment of such inferior Officers, as they think proper, in the President alone, in the Courts of Law, or in the Heads of Departments.” U. S. Const., Art. II, §2, cl. 2.

In Ryder, an enlisted member of the United States Coast Guard challenged his conviction by a court martial. He appealed to the Coast Guard Court of Military Review, which, except in one minor aspect, affirmed his conviction. On request for rehearing, petitioner challenged the composition of that court as violative of the Appointments Clause of the Constitution because two of the judges on the three-judge panel were civilians merely appointed by the General Counsel of the Department of Transportation and such appointments by the Secretary of Transportation were without constitutional and statutory authority and therefore ineffective. Agreeing, the Supreme Court held that the Court of Military Appeals erred in according de facto validity to the actions of the civilian judges of the Coast Guard Court of Military Review and stated that the petitioner was entitled to a hearing before a properly appointed judicial panel.

21 See Franklin Savings Association v. Director of the Office of Thrift Supervision, 740 F. Supp. 1535, 1541-42 (D. Kan. 1990), available at http://www.leagle.com/xmlResult.aspx?xmldoc=19902275740FSupp1535_12104.xml&docbase=CSLWAR2-1986-2006 (last visited February 22, 2013). See also Olympic Federal Sav. & Loan Ass'n v. Director, Office of Thrift Supervision, 732 F. Supp. 1183 (D.D.C. 1990) where, among other assertions, a thrift argued that the previous and current directors of OTS were unconstitutionally appointed and thus had no legal authority to appoint a conservator or receiver. The court granted the injunction. The previous director was appointed by operation of § 301 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 and not appointed in the manner specified by the Appointments Clause of the Constitution. In view of the fact that the previous director never constitutionally became the director of OTS, the current director’s appointment was not authorized by the Vacancies Act, 5 U.S.C.S. § 3345 et seq., because the previous director’s resignation did not constitute the resignation of an officer of a bureau of an Executive department. The Court found that the thrift had a strong probability of success on its claim, the destruction of its business would be an irreparable harm, and the granting of the requested relief did not pose a threat to public interest. In any case, the Court of Appeals later dismissed an appeal of the case as moot because, by that time, the President had nominated and the Senate confirmed an OTS director. See Olympic Fed. Sav. & Loan Ass’n v. Director, Office of Thrift Supervision, 903 F.2d 837 (D.C. Cir. 1990).

See also Doolin Sec. Sav. Bank, F.S.B. v. the Office of Thrift Supervision, 139 F.3d 203 (D.C. Cir. 1988). Doolin involved an OTS director who was appointed by President George H.W. Bush and thereafter delegated his authority to the acting director and resigned. The acting director signed a notice of charges against the bank. The bank was found to have violated the law and to have engaged in unsafe and unsound banking practices. The acting director resigned without signing the final order and a new director, designated by President Clinton, signed the order. The bank argued that the directors did not have authority to sign the order. Ultimately the court found that the order was valid because (1) the Clinton director had been confirmed by the Senate for another position and thus qualified under 5 U.S.C.S. § 3347 of the Vacancies Act to fill the position, (2) the acting director did not ascend to the post through Presidential appointment and, thus, the Vacancies Act, 5 U.S.C.S. §§ 3345, 3346, 3347, did not apply to the acting director, (3) under 5 U.S.C.S. § 3348, the President could fill the position vacated by Bush’s director without any time limit, and therefore, Clinton’s director lawfully occupied the position, and (4) the acting director’s signing of the notice was harmless error and was ratified by Clinton’s director.

22 In part, citing United States v. Heinszen & Co., 206 U.S. 370, 382, 27 S.Ct. 742, 745, 51 L.Ed. 1098 (1907), available at http://supreme.justia.com/cases/federal/us/206/370/case.html (last visited February 22, 2013).

Gary Apfel, Richard P. Eckman, Timothy R. McTaggart, Matthew R. Silver and Richard J. Zack

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