On August 18, Judge Kenneth M. Karas of the Southern District of New York, granted the CFPB’s petition to enforce a civil investigative demand that it issued to the Law Offices of Crystal Moroney prior to the U.S. Supreme Court’s Seila Law decision and that was subsequently ratified by Director Kraninger.

Judge Karas made his ruling orally from the bench.  However, according to reports of the oral argument before Judge Karas, the Moroney law firm had argued that despite the Supreme Court’s severance in Seila Law of the Dodd-Frank Act provision making the CFPB Director removable only “for cause,” the Bureau continued to be unconstitutional because of its funding mechanism.  The Moroney law firm contended that the CFPB’s funding through distributions it requests from the Fed rather than through the regular appropriations process violates the U.S. Constitution’s Appropriations Clause in Article I because it divests Congress of its power of the purse by allowing the Bureau to decide how much funding it receives each year.

Judge Karas is reported to have ruled that the CFPB’s funding mechanism did not violate the Appropriations Clause because Congress had established a formula setting a ceiling on how much the Bureau can obtain from the Fed in annual funding.  (A similar constitutional argument has been made by All American Check Cashing in its supplemental en banc brief filed with the Fifth Circuit.  The Fifth Circuit, on its own motion, vacated the panel’s ruling that the CFPB’s structure was constitutional and granted rehearing en banc.)

On July 2, 2020, following the Seila Law decision, the CFPB filed a Notice of Ratification stating the Director Kraninger had ratified the issuance of the CID to the Moroney law firm.  The CID was originally issued in 2017 and reissued in 2019 under Director Kraninger’s leadership.  The district court ruled that Director Kraninger could ratify her own prior invalid action.  The ruling would appear to imply that Director Kraninger’s ratification was necessary for the CID to now be valid.

In a press release about the ruling, New Civil Liberties Alliance (NCLA), which represents the Moroney law firm, stated that because Director Kraninger had conceded that the CFPB’s structure was unconstitutional before the CID was reissued in 2019, she “knew she was acting unconstitutionally” when the CID was reissued.  According to NCLA, by enforcing the CID, the district court “became the first ever to grant ratification where the ratifier knew what she was doing was unconstitutional in the first instance” and that an appeal was under consideration.

In addition to All American Check Cashing in which the en banc Fifth Circuit will be considering the validity of the CFPB’s enforcement action, the Ninth Circuit, on remand from the Supreme Court in Seila Law, will be considering the validity of the CID issued by the CFPB to Seila Law, and the Second Circuit, in RD Legal Funding, will be considering the validity of the CFPB’s enforcement action.