Last Friday a federal district court in the Northern District of Georgia took the extraordinary step of dismissing an enforcement action brought by the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) against various payment processors due to the Bureau’s conduct during depositions despite orders from the Court to the contrary. The case is Consumer Financial Protection Bureau v. Universal Debt Solutions, LLC, et al (Case No 15-cv-859, U.S.D.C., Northern District of Georgia, Atlanta Division). insideARM has written extensively about the case. Several articles are linked below.
A copy of the court’s Order can be found here.
In April 2015, the CFPB brought suit against various debt collectors as well as their payment processors (Pathfinder Payment Solutions, Inc., Frontline Processing Corp., Global Payments, Inc., and Electronic Merchant Systems, Inc., collectively the “Payment Processors” and “Defendants”) who it was alleged, both in the CFPB’s complaint and press release, had perpetrated a debt-collection scheme which resulted in consumers paying for debts that were not owed. See insideARM April 9, 2015 article here.
The Bureau specifically alleged that the Payment Processors “ignored numerous red flags of the debt collectors’ illegal conduct” and by providing debt collectors the ability to utilize their payment processing systems in order to accept payments by credit and debit card “[they] helped legitimize the [debt] collectors’ business and facilitated millions of dollars in ill-gotten profits”. By this conduct, the Bureau alleged that the Payment Processors violated the Consumer Financial Protection Act’s (“CFPA”) prohibition against unfair, deceptive or abusive acts or practices (“UDAAP”), 12 U.S.C. §§ 5531, 5536(a).
The Payment Processors mounted a strong opposition from the outset. The District Court denied initial motions to dismiss, with the case then proceeding to the discovery phase. It was during discovery, specifically the depositions of Bureau designees, where the case began to unravel.
In August 2016, after written discovery was completed, the Payment Processors sought Rule 30(b)(6) depositions from the CFPB, seeking factual testimony which supported the claims alleged as well as identifying exculpatory facts. The CFPB objected and filed motions for protective order stating that their testimony was protected by (1) law enforcement and deliberative process privilege and (2) that the depositions sought improper mental impressions and analysis of CFPB counsel. The Court denied all the CFPB’s motions and ordered the CFPB to not only produce their witnesses but each was ordered to testify to the topics identified by the Defendants. See insideARM September 14, 2015 article.
On January 4, 2017 Pathfinder Payment Solutions, Inc., filed a Brief in Support of Motion for Rule 11 Sanctions Against Plaintiff. See insideARM January 17, 2017 article here.
The first deposition of a CFPB witness took place in April 2017. Throughout the deposition and to the extent an objection was made based upon privilege, the witness read from a prepared script, which the CFPB defined as a “memory aid.” For the most part, the script was not responsive to the question asked. The day after the first deposition, the Court held a conference call with counsel for all parties with the Payment Processors making the Court aware of the CFPB’s conduct at the deposition. The court again reminded the CFPB that “factual support for contentions in the area of inquiry… is not protected by work product.”
For the remaining depositions, the Court instructed the CFPB that they were required to produce a witness with knowledge -- meaning that a witness should be prepared to answer the questions and not read from a script. However, the subsequent depositions fared no better, with the CFPB continuing to produce witnesses who would read only from their prepared script or otherwise objecting to the question on the basis of privilege. Upon conclusion of discovery, the Payment Processors each filed Rule 37 Motions for sanctions as the result of the Bureau’s failure to cooperate with discovery as well as a blatant disregard for the Court’s instructions.
The Court’s justification for granting the motion was simple
First, the Court found that CFPB’s reliance on “memory aids” was not only improper but went far beyond refreshing the recollection of the witnesses. In addition, the Court took great exception with the fact that each witness failed to abide by the Court’s specific instructions that witnesses not only be produced but be knowledgeable and prepared to testify as to any facts that it could “reasonably identify as exculpatory.” Without any explanation or confirmation that they even undertook an inquiry, the CFPB took the position that its investigation has not yielded a single exculpatory fact. The Court found this response unreasonable, in bad faith, and an intentional failure to comply with the Court’s instructions. Finally, the Court recognized that its repeated rulings were clear on the issue of privilege, yet as the Court put it, “the CFPB has put up as much opposition as possible at every turn.” The Court found that reopening discovery would not otherwise correct the CFPB’s conduct.
Under the circumstances, striking all the claims against the Payment Processors was the only appropriate remedy.
A lawsuit brought by the CFPB is usually not the beginning of the enforcement process. Enforcement often starts with a Civil Investigation Demand (CID), a powerful tool which requires the target of a CID to produce vast amounts of documents and information with very little opportunity for objection. The CID can also require witnesses to appear and provide oral testimony. Ironically, the rules relating to investigations and oral testimony do not even permit a witness to otherwise object or refuse to answer any question (12 CFR § 1080.9(b)(2) (Rights of Witnesses in Investigations)). If a target of an investigation did not cooperate with the Bureau at the investigation stage, they would be subject to contempt proceedings which could include significant sanctions and penalties.
The Payment Processors in this matter may have spent several years under investigation prior to the filing of the CPFB’s lawsuit. Those same Defendants have certainly spent well over two years defending it. Many covered entities subject to CFPB jurisdiction simply do not have the resources to respond to an investigation and then defend a lawsuit; the cost-benefit analysis dictates the “early out.” The CFPB has been successful in extracting millions of dollars in consent orders without ever stepping foot in a court room and certainly without ever engaging in formal discovery subject to the federal rules. This case may have pulled back the curtain and exposed the Bureau’s inexperience when it comes to actually litigating a case. But at what cost for a defendant to determine that point?
It is clear that in this instance the Bureau disregarded the scope and intent of the federal rules surrounding discovery, which first and foremost is cooperation. As advocates for their client, which in this case was “millions of consumers”, the CPFB failed in their representation. Had this been a private class action, the Plaintiff’s attorney could have very well been subject to potential malpractice claims. Federal Rule 11, applicable to attorneys who come before the court, dictates that those who sign a pleading do so for a proper purpose and not to unnecessarily increase the cost of litigation. The CFPB’s conduct here was not in the best interest of consumer protection.