The Consumer Financial Protection Bureau, arguing before the Ninth Circuit on Thursday, will attempt to overturn a series of high-profile court rulings limiting federal power to recoup ill-gotten gains from fraudsters in civil cases.
The CFPB faces a daunting task in arguing that the United States Supreme Court’s decision in June 2020 in Liu v. Securities and Exchange Commission– and a more recent Seventh Circuit ruling – shouldn’t restrict the bureau’s ability to seek redress for consumers.
The Liu ruling limited the SEC’s ability to secure restitution as a fair remedy for aggrieved investors, saying the regulator could only tackle the net benefits of a fraudulent scheme, as opposed to the bottom line. In July, the United States Court of Appeals for the Seventh Circuit applied Liu’s limitations to CFPB c. Consumer First Legal, reverse a $ 21.7 million restitution the bureau won against companies allegedly scamming borrowers seeking help with mortgage relief.
Now the spotlight is on the CFPB’s offer of $ 197 million in consumer redress against online lender CashCall Inc. and its founder, J. Paul Reddam, for allegedly offering loans in states with low rates. triple-digit interest was illegal. The U.S. Court of Appeals for the Ninth Circuit called on the parties to deal with both the Liu and Consumer First cases during Thursday’s oral argument, hinting at a way forward.
The Ninth Circuit “appears very concerned about fair restitution,” said Craig Cowie, Alexander Blewett III professor at the University of Montana and a former senior CFPB enforcement official.
The appeal stems from a 2018 ruling by Judge John F. Walter of the U.S. District Court for the Northern District of California. He found that CashCall violated the Consumer Financial Protection Act (CFPA), but imposed only a civil fine of $ 10 million and no restitution.
The Ninth Circuit heard oral arguments in the CFPB’s appeal against the ruling in September 2019, and the tribunal’s three-judge panel appeared. skeptical of Walter’s decision. But the case was put on hold when the Seila Law LLC v CFPB case went to the Supreme Court, which ultimately resulted in a ruling that changed the office’s leadership structure.
The Ninth Circuit reenlisted the CashCall case, setting up arguments to determine whether the CFPB’s restitution powers under the Dodd-Frank Act are unique and have not been addressed by Liu.
The CFPB sued Orange, Calif., CashCall and Reddam in 2013 for granting payday loans – through a tribal lender – which violated interest rate caps in more than one dozen of states, including California, New York and North Carolina.
The CFPB says Dodd-Frank gives it the power to obtain fair redress in the form of restitution, based on the net income paid by consumers who did not legitimately owe businesses in the first place. The Liu case is about another type of fair remedy where it is more appropriate to obtain compensation for profits, according to the office.
“It does not follow that a person deceived by paying sums which he did not owe is not entitled to the reimbursement of this money”, declared the CFPB in a brief of April 13. “It’s as easy a restitution claim as possible. ”
In a subsequent filing in August, the CFPB said the Seventh Circuit was simply “wrong” in applying Liu to the Consumer First Legal enforcement action. The CFPB should travel for a new hearing in this case.
CashCall countered by claiming that allowing the CFPB to obtain equitable relief on net income – by calling for such restitution, rather than restitution of ill-gotten gains – would unduly elude Liu.
“It is inconceivable that Liu could be easily circumvented by simply recasting a fair reparation claim from “disgorgement” to “restitution,” CashCall said in a March brief.
Restitution takes away the profits made by the perpetrator of the illegal conduct, but does not concern the income or the amount of damages suffered by the victims of the illegal conduct.
Lawyers for the company have said the Ninth Circuit is expected to follow the Seventh Circuit in a filing filed in August.
Embolden the accused
The Seventh Circuit ruling in Consumer First Legal is likely to provide a way forward for the Ninth Circuit, said Jonathan Pompan, co-chair of Venable LLP’s consumer financial services practice group.
A loss of the CFPB on the Ninth Circuit could further embolden companies seeking to combat CFPB enforcement action, he said.
“Firms with their backs to the wall that only have one source of revenue under attack could potentially have greater leverage in litigation,” Pompan said.
But this leverage can have limits, according to Cowie.
The Dodd-Frank Act gave the CFPB a host of powers that would allow it to tackle any net income of a suspected fraudster if it tricked consumers into paying money they didn’t owe, a he declared.
Among them is the ability to seek legal remedies, including severe damages, which may require jury trials rather than benches, Cowie said.
The CFPB argued in its briefing materials that even if the Ninth Circuit governed CashCall for reasons defined by Liu, the bureau should still be allowed to get the same relief for consumers as a “money refund” or a “payment of damages” as authorized. under Dodd-Frank.
It’s a model the CFPB is likely to follow in the future, Cowie said.
“In cases where they are in federal court, they should make arguments for legal remedies in addition to fair remedies, in case they lose,” he said.
The case is CFPB c. CashCall Inc., 9th Cir., N ° 18-55407, Oral arguments 23/09/21