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WBK Industry News - Litigation Developments

DC Circuit Court of Appeals to Rehear Two Panel Decisions En Banc

On February 16, 2017, the U.S. Court of Appeals for the D.C. Circuit vacated two panel decisions to rehear them en banc. The first panel, in PHH v. CFPB, determined that the CFPB’s structure is unconstitutional because the agency is headed by one Director. The second panel, in Lucia v. SEC, ruled on the constitutionality of the Securities and Exchange Commission’s (“SEC”) use of administrative law judges (“ALJs”). The Circuit Court will now reconsider both cases en banc, and will hear oral arguments in both cases on the same day.

In the PHH action, the en banc Court will reconsider whether the CFPB’s use of a single Director violates Article II of the Constitution. Traditionally, independent agencies have been headed by a multi-member commission, and so contain sufficient constitutional checks and balances of the agencies’ power. The panel held that creation of the CFPB with a single Director vested too much power in the hands of one person who is not the president; the remedy was to sever the “for-cause” removal provision to make the Director removable by the president at will. The parties in the case have been asked to brief what the proper remedy should be if the en banc Court determines that the CFPB’s structure is unconstitutional, and if the “for-cause” removal provision is severable.

On the merits, the PHH panel found that the Real Estate Settlement Procedure Act’s (“RESPA”) safe harbor provision means what it says, and allows captive mortgage reinsurance agreements when a mortgage insurer pays reasonable market value for the service. The panel also concluded that the CFPB’s retroactive interpretation of the Department of Housing and Urban Development’s guidelines was not consistent with due process rights. Finally, the panel held that RESPA’s statute of limitations applies to actions the CFPB brings both in court and to administrative actions.

Lucia involves a potential circuit split between the D.C. and Tenth Circuits regarding the use of ALJs by the SEC. The appointment of inferior officers is governed by the Appointments Clause of the Constitution, while the hiring of employees is not. Many agencies use ALJs who have not been appointed pursuant to the Appointments Clause in administrative proceedings. The Tenth Circuit has found that SEC ALJs are inferior officers, not employees, and as such must be properly appointed. The D.C. Circuit panel in Lucia decided the opposite, holding that the SEC’s ALJs are employees not subject to the Appointments Clause.

A concurring judge in the PHH panel found that the ALJ who tried the original administrative action was an inferior officer, and was not properly appointed. The PHH ALJ had been assigned to the CFPB administrative action by the SEC’s Chief ALJ pursuant to an agreement between the SEC and the CFPB. The concurrence found that this arrangement alone violated the Appointments Clause. The parties in the PHH case were asked to submit briefing regarding the impact Lucia might have on the decision.

Oral argument for both cases will take place on May 24, 2017.

The cases are PHH Corp. v. Consumer Fin. Prot. Bureau, No. 15-1177 (D.C. Cir. Feb. 16, 2017), order available here: https://www.cadc.uscourts.gov/internet/opinions.nsf/5D0253C4E25B93FB852580C9005F3AE1/$file/15-1177-1661681.pdf

and Lucia v. Sec. Exch. and Comm., No. 15-1345 (D.C. Cir. Feb. 16, 2017), order available here: https://www.cadc.uscourts.gov/internet/opinions.nsf/0CE9017B699471A3852580C9005F3B04/$file/15-1345-1661665.pdf.