Yesterday, a three-judge panel of the Second Circuit Court of Appeals issued a unanimous opinion declining to follow the Fifth Circuit’s decision in Community Financial Services Association of America, Ltd. v. Consumer Financial Protection Bureau (CFPB or Bureau) finding no “support for the Fifth Circuit’s conclusion” that the CFPB’s funding structure is unconstitutional in Supreme Court precedent.
In CFPB v. Law Offices of Crystal Moroney, P.C., the Bureau initially served a civil investigative demand (CID) on a law firm specializing in debt collection in 2017. While the Bureau’s petition to enforce the CID was pending in a district court, the Supreme Court issued its opinion in Seila Law LLC v. CFPB, holding that the provision that protected the Director of the CFPB from removal was unconstitutional. Concerned about the validity of its enforcement action, the CFPB filed a notice to ratify the CID, which the district court granted. The law firm appealed arguing, among other things, the CID is not enforceable because the funding structure of the CFPB violates the Appropriations Clause. The court of appeals rejected this argument and affirmed the district court’s order.
In analyzing the law firm’s argument, the court of appeals found that because “the CFPB’s funding structure was authorized by Congress and bound by specific statutory provisions,” it does not offend the Appropriations Clause. Specifically, in enacting the Consumer Financial Protection Act (CFPA) Congress provided that funds obtained by the CFPB shall remain available until expended to pay the expenses of the CFPB. Congress also limited the amount of funding the CFPB can draw from the Federal Reserve System to 12% of the Federal Reserve System’s 2009 Operating Expenses. To receive additional funding, the CFPB must seek approval through the annual Congressional appropriations process.
The Second Circuit did not find the Fifth Circuit’s contrary reasoning persuasive. The Fifth Circuit concluded that Congress ceded direct control over the CFPB’s budget by insulating it from annual appropriations and ceded indirect control by providing that the funding be drawn from a source that is itself outside the appropriations process, namely, the Federal Reserve System. According to the Fifth Circuit, this constitutes “a double insulation from Congress’s purse strings,” which runs “afoul of the separation of powers embodied in the Appropriations Clause.” The Second Circuit disagreed for several reasons.
First, the Second Circuit found no support in Supreme Court precedent. “[T]he Court has consistently interpreted the Appropriations Clause to mean simply that ‘the payment of money from the Treasury must be authorized by a statute.'” Here, the court found that Congress expressly appropriated the CFPB’s funding by enacting the CFPA.
Second, the court found no support in constitutional text. “The Appropriations Clause states that ‘[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.’ Nothing in the Constitution, however, requires that agency appropriations be ‘time limited’ or that appropriated funds be drawn from a particular ‘source.'”
Lastly, the Second Circuit found no support in the history of the Appropriations Clause. “Consistent with the historical practices of English, colonial, and state governments that formed the basis of the Founders’ understanding of the appropriations process at the time of the Constitution’s enactment, Congress specified ‘the purpose, the limit, and the fund’ of its appropriation for the CFPB in ‘a previous law.'”
The Second Circuit also rejected the law firm’s other three bases for appeal finding the CID was not void ab initio because the CFPB Director was validly appointed, that the CFPB’s funding structure is not constitutionally infirm under the nondelegation doctrine, and that the CID served on the law firm is not an unduly burdensome administrative subpoena.
As discussed here, on February 27, 2023, the U.S. Supreme Court granted the CFPB’s petition for certiorari on the Appropriations Clause issue in Community Financial Services Association of America, Ltd. v. CFPB. Because the Court declined to hear the case on an expedited basis, a decision is not expected until next term. The split in circuit authority makes the need for a dispositive ruling on the issue even more compelling.