Petition for Writ of Certiorari — Integrity Advance, LLC, et al., Petitioners v. Consumer Financial Protection Bureau
Supreme Court briefMar 1, 2023
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No. 22-
In the Supreme Court of the United States
________________________
INTEGRITY ADVANCE, LLC AND
JAMES R. CARNES,
Petitioners,
v.
CONSUMER FINANCIAL PROTECTION BUREAU,
Respondent.
_____________
On Petition for Writ of Certiorari to the
United States Court of Appeals
for the Tenth Circuit
________________________
PETITION FOR WRIT OF CERTIORARI
________________________
Scott J. Bloch
Law Offices of
Scott J. Bloch, P.A.
1025 Connecticut Ave.
N.W. Ste. 1000
Washington, D.C. 20036
(202) 496-1290
scott@scottblochlaw.com
Stephen R. McAllister
Counsel of Record
Timothy J. Storino
Michael T. Vangel
Parker B. Bednasek
Dentons US LLP
4520 Main St., Ste. 1100
Kansas City, MO 64111
(816) 460-2516
stephen.mcallister@dentons.com
Counsel for Integrity Advance,
LLC and James R. Carnes
i
QUESTIONS PRESENTED
1. When this Court in Lucia v. SEC, 138 S. Ct.
2044 (2018) instructed that an agency must hold a
“new hearing” before a new and properly appointed
official in order to cure an Appointments Clause
violation, whether the Court intended the agency
actually hold a new hearing, as the opinion plainly
states, or whether a “new hearing” meant only to
conduct a cold review of the paper record of the first,
tainted hearing, without any additional discovery or
new testimony, as the Consumer Financial Protection
Bureau Administrative Law Judge did here and as the
Tenth Circuit affirmed.
2. Whether an agency funding structure
circumventing the Appropriations Clause violates the
separation of powers, thus invalidating prior agency
action taken under the unconstitutional funding
structure.
ii
CORPORATE DISCLOSURE STATEMENT
Integrity Advance, LLC states that it is a wholly
owned subsidiary of Hayfield Investment Partners,
LLC. No publicly traded corporation currently owns
10% or more of Integrity Advance’s stock.
iii
STATEMENT OF RELATED PROCEEDINGS
This case arises from the following proceedings in
the United States Court of Appeals for the Tenth
Circuit and the Consumer Financial Protection
Bureau:
Integrity Advance, LLC v. CFPB, 48 F.4th
1161 (10th Cir. 2022);
Integrity Advance, LLC, CFPB No. 2015CFPB-0029 (Jan. 11, 2021); and
CFPB v. Integrity Advance, LLC, No. 21mc-206-JWL, 2021 U.S. Dist. LEXIS
142205 (D. Kan. July 30, 2021).
There are no other proceedings in state or federal
trial or appellate courts directly related to this case
within the meaning of Rule 14.1(b)(iii).
iv
TABLE OF CONTENTS
Page(s)
QUESTIONS PRESENTED ........................................ i
CORPORATE DISCLOSURE STATEMENT ............ ii
STATEMENT OF RELATED PROCEEDINGS ....... iii
PETITION FOR WRIT OF CERTIORARI ................ 1
OPINIONS BELOW ................................................... 1
JURISDICTION.......................................................... 1
STATUTORY AND REGULATORY PROVISIONS
INVOLVED ............................................................ 2
STATEMENT OF THE CASE.................................... 2
1.
Factual Background. ........................................ 2
2.
Procedural History. .......................................... 3
a. The Tainted Proceedings—ALJ McKenna .. 3
b. The “Cured” Proceedings—ALJ Kirby ......... 5
3.
Tenth Circuit Decision. .................................... 7
REASONS FOR GRANTING THE WRIT ................. 7
I. The “new hearing” that satisfies Lucia’s
remedy requirement is an important,
unsettled question of federal law. ................. 10
A. ALJs apply Lucia in a wildly
inconsistent fashion. ................................... 11
B. Lucia’s remedy should provide parties
an incentive to raise separation of powers
arguments by providing them actual and
meaningful relief. ....................................... 19
v
C. This case is an ideal vehicle to
determine the remedy Lucia requires. ...... 25
II. Whether the CFPB’s structure is
unconstitutional under the Appropriations
Clause—thus invalidating agency actions
taken under that structure—is an important,
unsettled question of federal law meriting this
Court’s review................................................. 32
A. The CFPB’s funding structure presents
an important, unsettled question of federal
law. ……………………………………………..33
B. The Circuits have split over the
constitutionality of the CFPB’s funding
structure. .................................................... 35
C. This case is an ideal vehicle to decide
whether the CFPB’s funding structure
violates the Appropriations Clause. .......... 37
CONCLUSION.......................................................... 40
APPENDIX
Appendix A
Integrity Advance, LLC v. Consumer Financial
Protection Bureau, 48 F.4th 1161
(10th Cir. 2022) .............................................. 1a
vi
Appendix B
Final Order – Integrity Advance, LLC, CFPB
No. 2015-CFPB-0029 (Jan. 11, 2021) .......... 33a
Appendix C
Decision of the Director – Integrity Advance,
LLC, CFPB No. 2015-CFPB-0029
(Jan. 11, 2021) .............................................. 38a
Appendix D
Order Denying in Part Respondents’ Motion to
Open Record for a New Hearing – Integrity
Advance, LLC, CFPB No. 2015-CFPB-0029
(Apr. 24, 2020) ............................................ 120a
Appendix E
Order Denying Further Discovery on Statute
of Limitations Issue – Integrity Advance, LLC,
CFPB No. 2015-CFPB-0029
(Oct. 28, 2019) ............................................ 143a
Appendix F
Order Denying Petition for Rehearing En Banc
– Integrity Advance, LLC v. Consumer
Financial Protection Bureau, No. 219521
(10th Cir. 2022) .......................................... 165a
Appendix G
Appropriations Clause – U.S. Constitution,
Art. I § 9, cl. 7 ............................................. 166a
vii
Appendix H
Title X – Dodd-Frank Wall Street Reform and
Consumer Protection Act –
CFPB Funding; penalties and fines –
12 U.S.C. § 5497 ......................................... 167a
viii
TABLE OF AUTHORITIES
Page(s)
Cases
Arthrex, Inc. v. Smith & Nephew, Inc.,
941 F.3d 1320 (Fed. Cir. 2019)...................... 14–15
Bethesda Hosp. Ass’n. v. Bowen,
485 U.S. 399 (1988) ............................................. 38
Calcutt v. FDIC,
37 F.4th 293 (6th Cir. 2022) ............................ 8, 14
Carr v. Saul,
141 S. Ct. 1352 (2021) ......................................... 38
CFPB v. FirstCash, Inc.,
No. 21-cv-1251, Doc. 67 (N.D. Tex.
Nov. 4, 2022) ........................................................ 36
CFPB v. MoneyGram Int’l, Inc.,
No. 22-cv-3256, Doc. 52 (S.D.N.Y.
Dec. 9, 2022) ........................................................ 36
CFPB v. Nationwide Biweekly Admin.,
Inc., Nos. 18-15431, 18-15887, 2023
WL 566112 (9th Cir. Jan. 27, 2023) .................... 36
CFPB v. Progrexion Marketing, Inc.,
No. 19-cv-298, Doc. 484 (D. Utah
Oct. 21, 2022) ....................................................... 36
CFPB v. TransUnion, No. 22-cv-1880,
Doc. 45 (N.D. Ill. Oct. 20, 2022) .......................... 36
ix
Cmty. Fin. Servs. Ass’n of Am., Ltd. v.
CFPB, 51 F.4th 616 (5th Cir. 2022) .............. 35–37
Collins v. Yellen,
141 S. Ct. 1761 (2021) ......................................... 37
In the Matter of Cornelius Campbell
Burgess, No. FDIC-14-0307, 2020
WL 13157330 (O.C.C. Mar. 2, 2020) ................... 15
In re Cricket Hollow Zoo Inc.,
78 Agric. Dec. 137, 2019 WL 2345420
(U.S.D.A. Feb. 22, 2019) ................................ 16–17
Davis v. Ayala,
576 U.S. 257 (2015) ............................................. 23
Davis v. United States,
512 U.S. 452 (1994) ............................................. 38
In the Matter of Edward M. Daspin,
No. 3-16509, 2020 WL 4463315
(S.E.C. Aug. 3, 2020) ..................................... 12, 29
In the Matter of Fang Fang,
No. 17-006, 2020 WL 13157346
(O.C.C. Aug. 4, 2020) ........................................... 15
Flowers v. Mississippi,
139 S. Ct. 2228 (2019) ................................... 23–24
Free Enter. Fund v. PCAOB,
561 U.S. 477 (2010) ............................................. 35
x
Hoerle v. Comm’r of Soc. Sec.,
No. 2:21-cv-11605, 2022 WL 2442203
(E.D. Mich. June 16, 2022) ...................... 19, 21, 26
Kansas v. Marsh,
548 U.S. 163 (2006) ............................................... 8
Landry v. FDIC,
204 F.3d 1125 (D.C. Cir. 2000)............................ 22
In the Matter of Laurie Bebo,
No. 3-16293, 2020 WL 4784633
(S.E.C. Aug. 13, 2020) ................................... 17, 30
Lebron v. Nat’l R.R. Passenger Corp.,
513 U.S. 374 (1995) ....................................... 31, 38
Lucia v. SEC,
138 S. Ct. 2044 (2018) ..........1, 3–11, 13–32, 36–37
Marbury v. Madison,
5 U.S. (1 Cranch) 137 (1803) ................................. 7
Mathews v. Eldridge,
424 U.S. 319 (1976) ............................................. 28
Mont. Nat’l Bank of Billings v.
Yellowstone Cnty.,
276 U.S. 499 (1928) ............................................. 38
Motor & Equip. Mfrs. Ass’n, Inc. v. EPA,
627 F.2d 1095 (D.C. Cir. 1979)............................ 39
N. Wind, Inc. v. Daley,
200 F.3d 13 (1st Cir. 1999) .................................. 39
xi
Nelson v. Adams USA, Inc.,
529 U.S. 460 (2000) ............................................. 31
Nguyen v. United States,
539 U.S. 69 (2003) ............................................... 22
Orr v. Orr,
440 U.S. 268 (1979) ............................................. 31
PHH Corp. v. CFPB, 881 F.3d 75 (D.C.
Cir. 2018) ............................................................. 35
In re Philip Tremble, No. 15-0097, 2019
WL 2345419 (U.S.D.A. Feb. 19,
2019)..................................................................... 18
Rice v. Collins,
546 U.S. 333 (2006) ....................................... 23, 28
In the Matter of Saul Ortega,
AA-EC-2017, 2020 WL 13157342
(O.C.C. June 16, 2020) ........................................ 15
Seila Law LLC v. CFPB,
140 S. Ct. 2183 (2020) ..............6, 10, 27, 32–35, 37
In re Stearns Zoological Rescue & Rehab
Center Inc., No. 15-0146, 2020 WL
836672 (U.S.D.A. Feb. 7, 2020) ........................... 17
In the Matter of Traci J. Anderson, CPA,
No. 3-16386, 2020 WL 260282
(S.E.C. Jan. 10, 2020) .................................... 12, 29
xii
United States v. Arthrex,
141 S. Ct. 1970 (2021) ......................................... 14
Weaver v. Massachusetts,
137 S. Ct. 1899 (2017) ................................... 21–22
Constitutional Provisions
U.S. Const. art. I, § 9, cl. 7........................................ 33
Statutes
12 U.S.C.
§ 5497 ..................................................................... 2
§ 5497(a)(1–2) ...................................................... 34
28 U.S.C.
§ 1254(1) ................................................................. 2
Rules and Regulations
Social Security Ruling 19-1p, 84 Fed.
Reg. 9582-02, 2019 WL 1202036
(Mar. 15, 2019)..................................................... 13
Other Authorities
CFPB, Funds transfer requests,
https://www.consumerfinance.gov/ab
out-us/budget-strategy/fundstransfer-requests/ (last visited Feb.
27, 2023) ............................................................... 34
xiii
Elizabeth Earle Beske, Litigating the
Separation of Powers, 73 Ala. L. Rev.
823 (2022) ............................................................ 20
Eloise Pasachoff, The President's
Budget As A Source of Agency Policy
Control, 125 Yale L.J. 2182 (2016) ..................... 33
The Federalist No. 48 (James Madison) ............ 32, 33
George C. Christie, Judicial Review of
Finding of Fact Nw. L. Rev. 14
(1992) ............................................................. 23–24
Kent Barnett, To the Victor Goes the
Toil—Remedies for Regulated Parties
in Separation-of-Powers Litigation,
92 N.C. L. Rev. 481 (2014) ............................ 20, 26
Memorandum from the Office of the
Solicitor General to Agency General
Counsels (July 23, 2018) ..........8–11, 19, 25, 27–29
Petition for Writ of Certiorari, Calcutt v.
FDIC, No. 22-714 (Jan. 30, 2022) ....................... 14
1
PETITION FOR WRIT OF CERTIORARI
Integrity Advance, LLC, and James R. Carnes
respectfully petition for a writ of certiorari to review
the judgment of the United States Court of Appeals
for the Tenth Circuit, which affirmed the final
decision of the Consumer Financial Protection Bureau
(“CFPB” or the “Bureau”) denying Integrity Advance
and Carnes a “new hearing,” contrary to this Court’s
decision in Lucia v. SEC, and instead imposing almost
$40 million in restitution and $12.5 million in fines
based on a cold review of a paper record of the prior
proceeding.
OPINIONS BELOW
The Tenth Circuit’s order and opinion affirming
the Bureau’s order are available at Integrity Advance,
LLC v. CFPB, 48 F.4th 1161 (10th Cir. 2022). See also
App. 1a–32a. The Bureau’s final decision and order
are available at Integrity Advance, LLC, CFPB No.
2015-CFPB-0029 (Jan. 11, 2021). See also App. 33a–
37a.
JURISDICTION
The Tenth Circuit issued its decision on September
15, 2022, and denied a timely petition for rehearing
and rehearing en banc on November 1, 2022. Integrity
filed a timely request for an extension of time to file a
petition for writ of certiorari with Justice Gorsuch,
which Justice Gorsuch granted, extending the
deadline for filing the petition to March 1, 2023. This
Court has jurisdiction under 28 U.S.C. § 1254(1).
2
STATUTORY AND REGULATORY
PROVISIONS INVOLVED
Relevant provisions of the United States
Constitution are reproduced in the appendix at App.
166a. Relevant provisions of Title X of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, 12
U.S.C. § 5497, are reproduced in the appendix at App.
167a–176a.
STATEMENT OF THE CASE
1. Factual Background.
Integrity Advance, LLC was an online financial
services company. Beginning in May 2008, Integrity
Advance operated as a non-bank institution licensed
and regulated under Delaware law that offered shortterm, small-dollar loans to consumers nationwide.
These loans typically ranged in value from $100 to
$1,000. Integrity Advance did not offer any other
financial products during this time and ceased
making these loans in December 2012. James Carnes
was the CEO of Integrity Advance’s parent company,
which made him the de facto CEO of Integrity
Advance.
The CFPB’s then-and-first Director Richard
Cordray announced in January 2012 that, following
state-level investigations and consumer complaints,
the CFPB was launching an examination of the
payday lending industry at large. The following day,
the CFPB and the Federal Trade Commission (“FTC”)
entered a memorandum of understanding to share
3
information and resources as
investigated industry participants.
the
agencies
By March 2012, high-level CFPB officials were
searching the FTC’s databases for consumer
complaints regarding Integrity Advance. The CFPB
issued a civil investigative demand to Integrity
Advance on January 7, 2013. Nearly two years later,
in November 2015, the CFPB commenced formal
proceedings against Integrity Advance by filing a
Notice of Charges.
2. Procedural History.
In the years since the CFPB initiated enforcement
proceedings against petitioners, this Court has issued
several important opinions directly affecting this
matter, including the CFPB’s structure and
leadership, and the appointment of administrative
law judges (“ALJs”). The proceedings below were
delayed at several junctures before this matter was
remanded to a new ALJ for a new hearing, ostensibly
to comply with this Court’s instructions in Lucia. But
the second ALJ never held a hearing, let alone a new
one. After a perfunctory review of the record, she
recommended adopting all the pertinent findings and
conclusions of the prior ALJ, which the Director
affirmed. But the remedy required here, explicitly
stated in Lucia, is clear: an actual new hearing before
a constitutionally appointed ALJ, not a paper review
of a tainted record.
a. The Tainted Proceedings—ALJ McKenna
The CFPB initiated its enforcement action against
Integrity with its 2015 Notice of Charges. The CFPB
4
had no in-house ALJ, so it called upon U.S. Coast
Guard ALJ Parlen McKenna (“ALJ McKenna”) to
oversee the proceedings. Integrity filed a Motion to
Dismiss the Notice of Charges, which was denied—
rejecting both Integrity’s separation of powers and
statute of limitations arguments.
In July 2016, ALJ McKenna presided over a threeday evidentiary hearing that featured sworn
testimony from eight witnesses, including Carnes.
Following the hearing—and Integrity’s renewed
arguments that the CFPB’s unconstitutional
structure and the relevant statutes of limitations
should have barred the action—ALJ McKenna ruled
that the CFPB had proved six counts in its Notice of
Charges. He issued a Recommended Decision that
proposed to hold Integrity Advance and Carnes jointly
and severally liable for $38 million in restitution, plus
an additional $13.5 million in combined civil
penalties. All parties appealed.
The CFPB stayed the appeal for two years to await
guidance from the courts. In July 2018, following this
Court’s decision in Lucia v. SEC, 138 S. Ct. 2044
(2018)—which held that the proper remedy for an
Appointments Clause violation is a “new hearing
before a properly appointed official” who did not hear
the case previously, id. at 2055—then-CFPB Acting
Director Mick Mulvaney reopened the Integrity
Advance proceedings.
The following year, the CFPB’s new Director
Kathleen Kraninger determined that ALJ McKenna
had not been properly appointed. Director Kraninger
further determined that the CFPB’s now full-time, in-
5
house ALJ Christine Kirby (“ALJ Kirby”) had been
properly appointed by former Director Cordray. To
cure the Lucia error, Director Kraninger remanded
the matter to ALJ Kirby.
b. The “Cured” Proceedings—ALJ Kirby
Director Kraninger remanded the Integrity matter
“for a new hearing and recommended decision.” She
instructed that ALJ Kirby “give no weight to, nor
presume the correctness of, any prior opinions, orders,
or rulings issued by [ALJ] McKenna.”
ALJ Kirby requested a status update from the
parties to determine “what preliminary issues need to
be addressed before we proceed to a formal hearing.”
The CFPB indicated its intent to pursue its 2015
Notice of Charges; Integrity and Carnes indicated
their intent to file a Motion to Dismiss, as well as to
seek additional discovery for their statute of
limitations defense, which had never been resolved on
the merits.1
ALJ Kirby subsequently notified the parties she
would not consider any issues not raised in the first
hearing and a de novo review of the record would
satisfy Lucia, basing her decision largely on the
remedy granted in a pre-Lucia D.C. Circuit case.
Integrity moved to reopen the record and conduct an
actual new hearing, citing Lucia’s plain mandate.
Specifically, Integrity objected to ALJ Kirby making
witness credibility judgments from a constitutionally
1 ALJ Kirby noted this fact, but would not permit petitioners to
seek any additional discovery on the issue, and would not conduct
a new hearing.
6
tainted, cold paper record.2 ALJ Kirby declared that
the credibility concerns were “totally irrelevant,” and
decided she would “conduct a de novo review of the
record—to the extent possible.” Both petitioners and
the CFPB filed Motions for Summary Disposition.
ALJ Kirby held no hearing, heard no live
testimony, and received no evidence. She allowed no
repleading by petitioners and denied them any
additional discovery of CFPB information, including
information essential to their statute of limitations
defense.
In August 2020, ALJ Kirby issued her
Recommended Decision to grant the CFPB’s Motion
for Summary Disposition. She found that the CFPB
had proved the same six counts in its Notice of
Charges, proposed to hold Integrity and Carnes jointly
and severally liable, and proposed to more than triple
the restitution to $132 million ($38.5 million owed
jointly and severally), plus $12.5 million in combined
civil penalties. ALJ Kirby’s only change in disposition
was to recommend dramatically increased financial
liability.
Integrity appealed to Director Kraninger,
requesting an actual new hearing under Lucia.
Ultimately, Director Kraninger adopted ALJ Kirby’s
factual and legal conclusions, but reduced the
2 Integrity also moved to dismiss the matter on Appointments
Clause grounds. Once this Court issued a decision in Seila Law,
LLC v. CFPB, 140 S. Ct. 2183 (2020), ALJ Kirby denied
Integrity’s Motion to Dismiss.
7
restitution to the originally recommended amount of
$38.5 million.
3. Tenth Circuit Decision.
Integrity timely appealed the Director’s Final
Decision to the Tenth Circuit for review. Integrity’s
arguments included, among others: (1) the
rubberstamping of ALJ McKenna’s decision failed to
satisfy this Court’s instructions in Lucia for a “new
hearing” under a different ALJ; (2) the CFPB’s
unconstitutional structure rendered the 2015 Notice
of Charges unenforceable; and (3) the limitations
periods had run before the CFPB filed its Notice of
Charges. The Tenth Circuit affirmed the CFPB’s Final
Decision. Integrity requested rehearing en banc,
which the court ordered the CFPB to respond to, but
which the court ultimately denied.
REASONS FOR GRANTING THE WRIT
A constitutional injury gives an individual the
“right to resort to the laws of his country for a remedy”
because the United States is “a government of laws,
and not of men.” Marbury v. Madison, 5 U.S. (1
Cranch) 137, 163, 166 (1803). In Lucia, the Court held
the appropriate remedy for an Appointments Clause
violation regarding ALJs was a “hearing before a new
judge.” 138 S. Ct. at 2055 n.5. The Court made clear
this was the only fix for the previous, “tainted”
hearing. Id. Lucia’s remedy, however, is often reduced
to a remedy in name only, as is the case here; many
agencies and ALJs have not conducted new hearings
8
and many lower courts have endorsed this sham
remedy.
Despite the Court’s clear instruction to hold a “new
hearing,” ALJs and courts have reached divergent
conclusions as to what Lucia requires, expressing
confusion and frustration regarding the lack of
guidance. See, e.g., App. 16a (“Lucia offers little
guidance on the constitutional requirements of a ‘new
hearing.’”); Calcutt v. FDIC, 37 F.4th 293, 320 (6th
Cir. 2022) (“Lucia does not specify what features a
‘new hearing’ must contain . . . . Other decisions
addressing the remedies for Appointments Clause
violations are similarly vague.”). Thus, ALJs’
interpretations of Lucia run the gamut: from a full
redo of the proceedings to a rubberstamping of the
prior decision based on a cold review of the paper
record, and almost every variation in between. This
Court’s “principal responsibility” is to “ensure the
integrity and uniformity of federal law,” Kansas v.
Marsh, 548 U.S. 163, 183 (2006) (Scalia, J.,
concurring). Lucia’s required remedy is in need of
both, which only this Court can provide.
Indeed, the Office of the Solicitor General
recognized immediately after Lucia that this Court
“plainly contemplated more than a perfunctory
ratification of the prior ALJ’s decision.” Memorandum
from the Office of the Solicitor General to Agency
General Counsels 8 (July 23, 2018) (“Solicitor
General’s Memo”). Further, “[i]f your agency is in a
position to provide a full soup-to-nuts redo of the
administrative proceeding, that will be the safest
course.” Id. And a “new ALJ should at a minimum
9
afford the parties a new opportunity to challenge the
exclusion, admission, or weighing of particular
evidence.” Id. at 9. Especially “where credibility is at
issue, it may be advisable for the new ALJ to rehear
the disputed testimony of the relevant witnesses.” Id.
But without additional guidance from this Court,
it is now clear that Lucia’s remedy, which applies to
“all ALJs in traditional and independent agencies who
preside over adversarial administrative proceedings
and possess the adjudicative powers highlighted by
the Lucia majority,” id. at 2, is often ephemeral. Some
agencies, ALJs, and courts have heeded this Court’s
plain language and provided a de novo hearing with
new testimony, evidence, discovery, and legal
arguments. But many others have not, instead
settling for perfunctory ratification of the tainted
decision—really no remedy at all. Such a sham
remedy is exactly what happened here, and it has
happened in many other cases across the country. In
any event, consistency is needed.
The Court should grant this petition for three
reasons. First, the scope of Lucia’s “new hearing”
remedy is an important and apparently unsettled
question of federal law. ALJs, agencies, and courts
across the country interpret Lucia in a wildly
inconsistent fashion. Second, the notion Lucia does
not require a genuinely “new” de novo proceeding is
necessarily wrong because a sham “remedy” provides
parties no incentive to litigate Appointments Clause
challenges. Third, this case is an ideal vehicle to
provide guidance on Lucia’s “new hearing” remedy.
10
I. The “new hearing” that satisfies Lucia’s
remedy requirement is an important,
unsettled question of federal law.
Precisely what Lucia’s “new hearing” remedy
entails is an important question of federal law. In
Lucia, this Court found that a litigant “who makes a
timely challenge to the constitutional validity of the
appointment of an officer who adjudicates his case is
entitled to relief.” 138 S. Ct. at 2055 (quoting Ryder v.
United States, 515 U.S. 177, 182–83 (1995)) (internal
quotation marks omitted). The “appropriate remedy
for an adjudication tainted with an appointments
violation is a new hearing before a properly appointed
official.” Id. (quoting Ryder, 515 U.S. at 183, 188)
(internal quotation marks omitted).
In order to cure the Appointments Clause
violation, a new ALJ must hear the case, considering
the matter as though it had not been adjudicated
before. Id. While Lucia directly concerned SEC ALJs,
all understand the decision applies to ALJs across the
federal government. See, e.g., Solicitor General’s
Memo 2 (“[W]e conclude that all ALJs and similarly
situated administrative judges should be appointed as
inferior officers under the Appointments Clause.”).
Fixing a constitutional defect requires a “scalpel
rather than a bulldozer.” Seila Law LLC v. CFPB, 140
S. Ct. 2183, 2210–11 (2020). Without further guidance
from this Court, no one is sure how to cure
Appointments Clause violations regarding ALJs.
11
A. ALJs apply Lucia in a wildly inconsistent
fashion.
ALJs interpreting Lucia have applied its remedy
language in a wildly inconsistent fashion. Their
interpretations fall into three categories: (1) those who
remove the taint of the unconstitutional appointment
by allowing parties to redo the hearing; (2) those who
fail to cure the taint by ratifying the tainted ALJ’s
decision; and (3) those who seek a middle ground by
relying on their own discretion in curing the violation.
Without additional guidance, parties in one
administrative proceeding before, for example, the
USDA may receive a full redo—from soup to nuts—
while parties before another agency such as the FDIC
may receive only a rubberstamped decision reeking of
unconstitutional taint. This cannot be the correct
result after Lucia.
1. Some ALJs fully cure Appointments Clause
violations.
Only the first category of Lucia interpretations is
correct: these ALJs, agencies, and courts actually cure
the Appointments Clause violation by allowing
parties to redo the tainted hearing.
Solicitor General’s Memo. The Solicitor General’s
Memorandum provides a persuasive starting point
on what a “new hearing” should entail. The
Solicitor General recognized that this Court
“plainly contemplated more than a perfunctory
ratification.” Solicitor General’s Memo 8. That
means the “safest course” would be to conduct
entirely new, “soup-to-nuts” hearings. Id. This
12
would be the safest way to “ensur[e] that the final
state of the record reflects the new ALJ’s own
judgment.” Id. at 9. But “at a minimum,” the
Solicitor General advised that a new hearing
should provide opportunities for the “parties to
contest the admission, exclusion, or weighing of
evidence.” Id. (emphasis added). Furthermore,
“where credibility is at issue,” the new ALJ should
“rehear the disputed testimony of the relevant
witness.” Id.
In the Matter of Traci J. Anderson, CPA, No. 316386, 2020 WL 260282 (S.E.C. Jan. 10, 2020). On
remand post-Lucia, the new ALJ allowed a pretrial
conference, a motion on the pleadings, and an
evidentiary hearing. Id. at *3. Particularly
important was the new ALJ’s decision to reserve
judgment on the “[a]dmission of the prior hearing
testimony [that] would arguably contravene”
Lucia’s directive for a new hearing. Id. The ALJ
also allowed the respondent to raise statute of
limitations defenses after the evidentiary hearing
concluded. Id.
In the Matter of Edward M. Daspin, No. 3-16509,
2020 WL 4463315 (S.E.C. Aug. 3, 2020). The ALJ
restarted the hearings from scratch, adopting the
safest course approach the Solicitor General
recommended. Id. at *2. Both parties submitted
proposed witness lists, issued subpoenas, and
conducted depositions for a new evidentiary
hearing. Id. The ALJ also allowed the parties to
make new motions, including dispositive ones. Id.
13
Social Security Ruling 19-1p, 84 Fed. Reg. 958202, 2019 WL 1202036 (Mar. 15, 2019). The Social
Security Administration promulgated a rule
allowing litigants who successfully challenge prior
decisions on Appointments Clause grounds the
“reasonable opportunity to file briefs or other
written statements about the facts and law
relevant to this case.” Id. at *9583. Thus, the new
ALJ would have to “consider any arguments the
claimant or representative made in writing or at
the hearing” and also “consider any additional
arguments submitted to it.” Id. at *9584.
2. Some ALJs utterly fail to cure Appointments
Clause violations.
The second category of Lucia interpretations fail to
cure the Appointments Clause violation. In this
category, ALJs, agencies, and courts allow the
previous, tainted proceeding to control the “new
hearing” in different ways. They may rely solely on the
prior record, disallow new arguments not raised in the
tainted hearing, or both. Such approaches almost
guarantee the “new” decision will be a perfunctory
ratification of the prior one (sometimes an identical
decision in all respects), falling short of Lucia’s
mandate. ALJ Kirby’s interpretation of Lucia falls in
this category, as does the Tenth Circuit’s decision
14
affirming her actions. Both are discussed in greater
depth below. See infra pp. 26–31.
Calcutt v. FDIC, 37 F.4th 293, 320 (6th Cir. 2022).3
The Sixth Circuit ratified the tainted ALJ’s
decision by permitting the ALJ’s simple review of
the paper record of the prior proceeding: “Lucia
does not specify what features a ‘new hearing’
must contain, other than a new adjudicator.” Id. at
320. The Sixth Circuit’s incorrect ruling is further
illustrated by its rationale for allowing the
respondent’s prior testimony. Because the court
determined prior testimony would likely be
admissible for impeachment purposes, the court
also accepted it for substantive purposes. Id. at
322–23.
Arthrex, Inc. v. Smith & Nephew, Inc., 941 F.3d
1320 (Fed. Cir. 2019).4 The Federal Circuit
permitted a new ALJ panel to rubberstamp the
“earlier unconstitutionally rendered decision.” Id.
at 1340. Similar to the Sixth Circuit, the court
purported to recognize the need for a new,
independent hearing under Lucia. But the Federal
A petition for writ of certiorari in Calcutt is pending. See
Petition for Writ of Certiorari, Calcutt v. FDIC, No. 22-714 (Jan.
30, 2022). The petition asks: (1) if a circuit court should remand
a case after determining the agency applied the wrong legal
standard; and (2) whether separation-of-powers challenges must
offer proof of prejudice for courts to resolve removal restrictions.
Id. at I. Those questions are different than the questions here.
4 The Court vacated and remanded this decision on other grounds
in United States v. Arthrex, 141 S. Ct. 1970 (2021). Nonetheless,
this portion of the Federal Circuit’s decision remains good law.
3
15
Circuit allowed the tainted decision here to control
the “new” proceeding. Id. The court found “no error
in the new panel proceeding on the existing written
record” and left completely to the panel’s “sound
discretion whether it should allow additional
briefing or reopen the record.” Id.
In the Matter of Fang Fang, No. 17-006, 2020 WL
13157346 (O.C.C. Aug. 4, 2020). The respondent
sought to have the proceedings “terminated” and
then “reinitiated” under Lucia. The ALJ found it
“both unnecessary and inappropriate to . . . start
again in order to correct whatever Appointments
Clause deficiencies may have existed previously.”
Instead, the new ALJ “examine[d] the [tainted]
record of the case de novo.”
In the Matter of Cornelius Campbell Burgess, No.
FDIC-14-0307, 2020 WL 13157330 (O.C.C. Mar. 2,
2020). The ALJ found Lucia to be “clear that the
‘appropriate remedy’ for an Appointments Clause
violation . . . is not dismissal of the action and
refiling of the Notice of Charges.” And, despite
other ALJs recognizing Lucia’s ambiguity, the ALJ
somehow found that “[a]t no point did the Court
appear to entertain the possibility that the action
itself was invalid and should be brought from
scratch.”
In the Matter of Saul Ortega, AA-EC-2017, 2020
WL 13157342 (O.C.C. June 16, 2020). The
respondent argued that an Appointments Clause
violation was analogous to a structural error in a
16
criminal case, requiring a completely new
proceeding. The ALJ rejected this argument and
conducted a review of the prior, cold paper record
instead.
3. Some ALJs seek a middle ground.
The third category of Lucia interpretations
includes ALJs and agencies whose remedy is to permit
limited supplementation of the tainted record. These
cases involve the exercise of basically unfettered and
unguided discretion, resulting in significant variation
from ALJ to ALJ and agency to agency.
In re Cricket Hollow Zoo, Inc., 78 Agric. Dec. 137,
2019 WL 2345420 (U.S.D.A. Feb. 22, 2019). The
new ALJ allowed the parties to “rely on the written
record for all purposes moving forward,” id. at *4,
and planned to review the proceedings “de novo to
determine whether to ratify or revise previous
substantive or procedural ALJ actions.” Id.
(emphasis in original). But the ALJ also allowed
the record to be “supplemented with any new
testimony or other evidence as may be supported
by a showing of good cause.” Id. (emphasis in
original). The ALJ thus tried to strike a balance
between completely removing the constitutional
taint while respecting the evidence and testimony
already produced, invoking a new standard of
“good cause” for supplementation of the record. Id.
In the Matter of Laurie Bebo, No. 3-16293, 2020 WL
4784633 (S.E.C. Aug. 13, 2020). The new ALJ gave
parties a choice between a “new evidentiary
hearing” or using agreed-upon “alternative
17
procedures.” Id. at *2. Under the parties’
agreement, the ALJ would “decide the matter de
novo on the existing record with the opportunity
for [respondent] to seek further discovery.” Id. The
ALJ allowed the introduction of new evidence and
a summary disposition motion raising new
constitutional and statute of limitation arguments.
Id.
In re Stearns Zoological Rescue & Rehab Center,
Inc., No. 15-0146, 2020 WL 836672 (U.S.D.A. Feb.
7, 2020). The new ALJ interpreted Lucia as
“leaving it to judges’ discretion to determine . . .
how to conduct new hearings.” Id. at *4. Although
the ALJ opined that the respondent was “entitled
to a new proceeding on the existing record,” the
respondent was “neither entitled to a new inperson hearing or an entirely new record.” Id. at
*2. The ALJ allowed challenges to the tainted
ALJ’s decisions, but found that the respondent did
not challenge any particular rulings by the tainted
ALJ. Id. Furthermore, the respondent had no
“good cause” to supplement the record when
witnesses already had been examined and the
respondent did not identify a rationale for
reexamination. Id.
In re Philip Tremble, No. 15-0097, 2019 WL
2345419 (U.S.D.A. Feb. 19, 2019). The new ALJ
planned to review the record de novo, but give the
parties an opportunity to supplement the record
with a showing of good cause. The respondent
argued for reexamining certain witnesses because
18
“it is impossible to make credibility assessments of
[a] witness from a cold written transcript.” Id. at
*2 (internal citations omitted). The ALJ found “recall[ing] witnesses to testify without good cause
would be unduly repetitious” and would provide
respondent “with a procedural advantage.” Id. at
*3. The ALJ recognized “the trier of fact is best
situated to assess credibility,” but stated that
“credibility assessments can be made on the
record.” Id.
***
While some ALJs and agencies have provided
litigants a meaningful “new hearing” remedy under
Lucia, others have done so in name only, and others
have created a mixed middle ground or even left the
remedy up to the parties to negotiate. But the most
problematic is that many ALJs endorse exactly the
opposite of what Lucia required: rubberstamping the
tainted ALJ’s decision.
The vastly differing interpretations show that this
Court’s pronouncement in Lucia—that a “new
hearing” be provided—is in obvious need of
clarification and guidance. Only this Court can
provide the necessary guidance on Lucia’s “new
hearing” remedy to ensure parties have an incentive
to bring Appointments Clause violations.
19
B. Lucia’s remedy should provide parties an
incentive to raise separation of powers
arguments by providing them actual and
meaningful relief.
The Lucia remedy should provide parties an
incentive to litigate serious separation of powers
claims. Although the Solicitor General opined that
this Court “did not elaborate on what the ‘new
hearing’ should entail,” the Solicitor General
immediately recognized the “safest course” would be
“a full soup-to-nuts redo of the administrative
proceeding.” Solicitor General’s Memo 8.
At a minimum, a new ALJ should “afford the
parties a new opportunity to challenge the exclusion,
admission, or weighing of particular evidence” to
ensure “the final state of the record reflects the new
ALJ’s own judgment.” Id. at 9. Only then would a new
hearing be “constitutionally adequate” and “avoid any
taint from the prior ALJ’s decisions.” Id. at 8. In any
event, the new ALJ’s decision must be “more than a
perfunctory ratification of the prior ALJ’s decision.”
Id.; see also, e.g., Hoerle v. Comm’r of Soc. Sec., No.
2:21-cv-11605, 2022 WL 2442203, at *16 (E.D. Mich.
June 16, 2022) (noting the new ALJ’s decision “is
identical to the older determination” which was
“drawn in significant part from the one tainted by the
improper appointment. This is exactly the result
Lucia . . . seeks to avoid.”).
The
Solicitor
General’s
contemporaneous
interpretation of Lucia’s “new hearing” remedy is
correct for two reasons. First, it provides parties an
“incentive to litigate” Appointments Clause
20
violations—a goal identified by this Court. Second, it
is the only remedy likely to ensure removal of the prior
hearing’s unconstitutional taint.
1. Providing actual and meaningful remedies
creates incentives to litigate Appointments
Clause violations.
The Court in Lucia made clear its “new hearing”
remedy was designed to “create incentives to raise
Appointments Clause challenges.” 138 S. Ct. at 2055
n.5 (cleaned up). Such incentives are vital because
“[w]ithout the prospect of a [new hearing] . . . the
individual would have insufficient skin in the game
and no reason to advance the legal claim.” Elizabeth
Earle Beske, Litigating the Separation of Powers, 73
Ala. L. Rev. 823, 826 (2022). Effective remedies are
important because they are “the means by which the
abstractions of substantive law are translated into
concrete terms.” Kent Barnett, To the Victor Goes the
Toil—Remedies for Regulated Parties in Separationof-Powers Litigation, 92 N.C. L. Rev. 481, 497 (2014).
In other words, substantive law is meaningless
without a real legal remedy because parties have no
reason to enforce it. Allowing parties to challenge
tainted evidence gives them an actual incentive to
litigate Appointments Clause violations.
Post-Lucia, ALJs should not be permitted to
simply rubberstamp tainted decisions. If they are,
parties are left with a record exclusively shaped by a
tainted ALJ. See Lucia, 138 S. Ct. at 2053. As an
empirical matter, new ALJs who simply review the
cold paper record often reach the same conclusions as
their tainted predecessors. See, e.g., App. 16a. This is
21
clear evidence of perfunctory ratification. See Hoerle,
2022 WL 2442203, at *16 (issuing the exact same
decision as the tainted ALJ is “exactly the result Lucia
. . . seeks to avoid.”). Further, Lucia required new
decisionmakers as an additional safeguard to avoid
perfunctory ratification: “the old judge would have no
reason to think he did anything wrong on the merits .
. . and so could be expected to reach all the same
judgments.” 138 S. Ct. at 2055 n.5. Limiting secondary
review to the record of the first judge, who has “no
reason to think he did anything wrong on the merits,”
similarly strips Lucia’s remedy of any meaning.
The taint from the prior proceedings cannot be
removed without a new hearing, demonstrating the
structural error of an Appointments Clause violation.
Much like an error in jury selection in a criminal trial,
an Appointment Clause violation “affects the
framework within which the trial proceeds, rather
than being simply an error in the trial process itself.”
Weaver v. Massachusetts, 137 S. Ct. 1899, 1907–08
(2017) (cleaned up). Because the entire proceedings
are inherently infected, a litigant cannot show a
causal connection between error and loss and the
structural error doctrine does not demand it, doing
away with a harmless error analysis because it
“always results in fundamental unfairness.” Id.; see
also Landry v. FDIC, 204 F.3d 1125, 1131 (D.C. Cir.
2000) (“Issues of separation of powers (including
Appointments Clause matters), seem most fit to the
doctrine [of structural error]; it will often be difficult
or impossible for someone subject to a wrongly
designed scheme to show the design—the structure—
22
played a causal role in his loss.”) (internal citations
omitted).
An ALJ, like a jury, is the factfinder, and error in
selecting the factfinder undermines the proceedings
so fundamentally that “the effects of the error are
simply too hard to measure,” requiring a new hearing.
Weaver, 137 S. Ct. at 1908; see also Nguyen v. United
States, 539 U.S. 69, 80–83 (2003) (participation of a
statutorily ineligible panel member requires “fresh
consideration . . . by a properly constituted panel.”).
Any lesser rule disincentivizes litigants from raising
Appointment Clause violations.
Without the ability to challenge tainted evidence
in a new hearing, parties have little chance of
changing the results of their initial, tainted hearings.
Petitioners are not arguing the Lucia remedy requires
a new end result. But the process remedy Lucia
requires must afford parties at least a meaningful and
actual opportunity to influence the outcome in a new
proceeding. Only such an opportunity gives parties
the incentive necessary to pursue these important
separation of powers challenges.
2. New credibility determinations, based on
hearing the witnesses actually testify anew, can
be a clear tool to cure a tainted hearing.
Allowing parties to challenge previously admitted
evidence is the best way to remove a prior ALJ’s
unconstitutional taint. ALJs “critically shape the
administrative record” because they have “nearly all
the tools of federal trial judges.” Lucia, 138 S. Ct. at
2053. In other words, ALJs essentially “conduct
23
trials.” Id. Chief among an ALJ’s trial tools is the
power to “receive evidence,” which entails hearing
witness testimony. Id. (cleaned up). When the
administrative proceedings end, ALJs typically “issue
decisions
containing
factual
findings,
legal
conclusions, and appropriate remedies.” Id. An ALJ’s
recommended decision is predicated in large part on
witness testimony and the witness’s credibility. See,
e.g., Flowers v. Mississippi, 139 S. Ct. 2228, 2244
(2019) (“the trial judge’s findings . . . largely will turn
on evaluation of credibility.”).
Factfinders (including ALJs) make credibility
determinations by “consider[ing] the factors that
underlie credibility: demeanor, context, and
atmosphere.” Rice v. Collins, 546 U.S. 333, 343 (2006)
(Breyer, J., concurring). As such, “determinations of
credibility and demeanor lie peculiarly within a
[factfinder’s] province.” Davis v. Ayala, 576 U.S. 257,
274 (2015) (emphasis added); see also George C.
Christie, Judicial Review of Finding of Fact, 87 Nw.
L. Rev. 14, 47 (1992) (“[D]eterminations of credibility
are usually treated as quintessentially within the
province of the trier of fact.”). Those reviewing a
matter “on the basis of a cold record” cannot
realistically evaluate a prior factfinder’s credibility
determination. Id. (quoting Rice, 546 U.S. at 343)
(emphasis added).
Any contrary assertion flies in the face of centuries
of judicial principles, logic, and assumptions. Perhaps
nothing is more likely to fail to remove the taint from
an unconstitutional prior proceeding than reliance
upon
the
previous
factfinder’s
credibility
24
determinations. As this Court has observed, reviewing
courts give credibility determinations “great
deference,” Flowers, 139 S. Ct. at 2244, because “when
factfinding derives from credibility judgments, as it
frequently does, acceptance is near-automatic.” Lucia,
138 S. Ct. at 2055 (emphasis added).
The error here is particularly acute for Carnes. He
testified in the tainted proceeding, and now faces over
$40 million in personal civil liability, in significant
part because the tainted ALJ disbelieved his
testimony. This is also egregious because Carnes was
denied the opportunity to present additional evidence
that would have shown he had no reason to believe
there was anything misleading or deceptive about
Integrity’s loans. Review of a cold paper record by a
new ALJ who explicitly declares she can make
credibility determinations on the basis of that record
is no remedy at all.
Some ALJs perhaps desire to defer to the tainted
ALJ’s credibility determinations—but do so in direct
conflict with what the Court ordered in Lucia. Id. at
2055 n.5. An ALJ is supposed to function as a
factfinder, just like a District Judge, to make the
findings that are fundamental to and support their
agency’s
final
decisions.
Expediency
and
rubberstamps may be valued in some circumstances,
but they are inconsistent with this Court’s decision in
Lucia.
Here, the first entire tainted hearing took three
days—three days the CFPB readily can afford to
provide once again to petitioners, and must. When
new ALJs like ALJ Kirby rely on cold paper records,
25
they necessarily give great deference to the
determinations of the tainted ALJs. The tainted ALJs’
influence pervades the proceedings—particularly for
credibility. See Solicitor General’s Memo 9 (“[W]here
credibility is at issue, it may be advisable for the new
ALJ to rehear the disputed testimony of the relevant
witnesses” so the “final state of the record reflects the
new ALJ’s own judgment.”).
And credibility determinations represent just one
subset of influence that would allow a tainted ALJ’s
decisions to pervade a “new hearing” if parties were
not allowed to challenge prior evidence. Only this
Court can provide the necessary guidance to ALJs,
agencies, and lower courts.
C. This case is an ideal vehicle to determine
the remedy Lucia requires.
The important and unsettled issue of federal law
presented here is clearly and cleanly presented. The
Court should use this case to determine what Lucia’s
“new hearing” remedy entails. This case is an ideal
vehicle for at least two additional reasons: first, the
Tenth Circuit explicitly ruled on the merits of the
issue and failed to cure the Appointments Clause
violation; second, the issue has been properly
preserved and there are no issues of forfeiture.
1. The Tenth Circuit ruled on but failed to cure
the Appointments Clause violation because it
ratified a tainted decision.
The Tenth Circuit’s decision joins the second
category of interpretations that fail to cure
Appointments Clause violations. As Lucia makes
26
clear, Integrity’s hearing before ALJ McKenna was
tainted by an Appointments Clause violation. App. 7a.
When Director Kraninger remanded the proceeding,
she directed ALJ Kirby to “give no weight to, nor
presume the correctness of, any prior opinions, orders,
or rulings issued by [ALJ] McKenna.” App. 50a. But
ALJ Kirby did the opposite: Integrity was not given a
“new hearing”; instead, ALJ Kirby decided a “de novo
review of the record” was sufficient, despite Lucia’s
“new hearing” mandate and Integrity’s protests to the
contrary. App. 128a. ALJ Kirby’s decision relied
entirely upon the constitutionally tainted hearing, and
she did nothing to cure the Appointments Clause
violation.
Indeed, ALJ Kirby’s findings were exactly the same
as ALJ McKenna’s—a sign of rubberstamping the
tainted decision. See Hoerle, 2022 WL 2442203, at *16
(an identical decision “is exactly the result Lucia . . .
seeks to avoid.”). Notably, ALJ Kirby’s only departure
was in the amount of liability, which she actually
increased by nearly $100 million. App. 6a, 9a. ALJ
Kirby’s punitive decision reflects the retaliation
feared by parties who litigate Appointments Clause
violations. See Barnett, 92 N.C. L. Rev. at 510 (“In
fact, a regulated party who challenged the CFPB on
separation-of-powers grounds expressed its fears that
parties who challenge the CFPB's constitutionality
face the threat of the CFPB bringing a retaliatory
enforcement action.”). Such retaliation further
undermines the Lucia remedy. Although Director
Kraninger later reduced the liability—likely
recognizing the retaliatory effect, if not intent, of ALJ
27
Kirby’s recommendation—to the amount initially
determined by ALJ McKenna, the Director’s
adjustment effectively reinstated the tainted decision
in its entirety. App. 10a–11a.
The Tenth Circuit endorsed ALJ Kirby’s
perfunctory ratification. The court found there was no
“bright-line rule against de novo review of a previous
administrative hearing.” App. 16a. Ironically, the
Tenth Circuit offered no authority to support why
nebulous de novo review was a preferable way to cure
Appointments Clause violations. See Seila Law LLC,
140 S. Ct. at 2210 (curing a constitutional violation
requires a “scalpel rather than a bulldozer”). The
Tenth Circuit found that ALJ Kirby’s “independent
review” was sufficient because Integrity had “a full
opportunity to present their case in the first
proceeding.” App. 16a. This holding fails to recognize
that the first hearing was tainted by the
unconstitutional appointment, giving Integrity no
chance to cure that constitutional violation.
A “full soup-to-nuts redo” of the tainted proceeding
would have been the “safest course” for ALJ Kirby to
correct this error. Solicitor General’s Memo 8. But at
minimum, Integrity and Carnes should have been
allowed a meaningful and actual opportunity to
challenge the taint of the prior hearing. They suffered
actual prejudice by not being afforded that
opportunity, including:
28
Challenge Tainted Credibility Determinations.5
ALJ Kirby’s “new hearing” relied exclusively on
tainted credibility determinations. As discussed
above,
one
of
a
factfinder’s
principal
responsibilities
is
making
credibility
determinations. Factfinders rely on “demeanor,
context, and atmosphere,” Rice, 546 U.S. at 343, all
of which require a factfinder to observe testimony
firsthand. Yet ALJ Kirby found Integrity’s
concerns about tainted credibility determinations
“totally irrelevant.” App. 130a. (emphasis added).
Instead, she found it sufficient to rely on the cold
record from the tainted hearing. ALJ Kirby thus
abandoned her duty as a factfinder. Under Lucia,
Integrity and Carnes should have had the
opportunity for new credibility determinations
based on new testimony, especially given that
credibility was a critical issue. See Solicitor
General’s Memo 9. Instead, ALJ Kirby adopted the
5 All the evidence in ALJ McKenna’s hearing was constitutionally
tainted. But “there would be little purpose,” Solicitor General’s
Memo 9, in regenerating some evidence despite the taint,
especially if the evidence is undisputed. Witness testimony,
however, and especially by petitioner Carnes who faces massive
personal liability, presents an obvious area where ALJ
McKenna’s taint is pervasive. Any meaningful Lucia remedy
must include new testimony from such a witness before the new
ALJ. Here, in fact, there were only eight total witnesses, App.
128a–129a, so it was not burdensome for ALJ Kirby and the
CFPB to conduct a completely new hearing with testimony from
all witnesses. See Mathews v. Eldridge, 424 U.S. 319, 347 (1976)
(in this Court’s due process balancing test, “public interest,”
including the “administrative burden associated with an
evidentiary hearing,” should be considered).
29
tainted determinations in toto and the Tenth
Circuit endorsed her perfunctory ratification.
Seek Further Discovery for Dispositive Arguments.
ALJ Kirby forbade petitioners from conducting any
discovery relevant to their statute of limitations
defense. App. 19a–22a. Despite being an
affirmative defense with potential to bar CFPB
proceedings in their entirety, the Tenth Circuit
affirmed ALJ Kirby’s decision, opining that further
discovery was “pointless.” App. 22a. But that is
just wrong as a matter of logic and fact. Seeking
information that only the CFPB possesses, and
which is directly relevant to and possibly
dispositive of a defense is not pointless. Only the
CFPB has information demonstrating when it
learned of alleged misconduct by petitioners, and
yet ALJ Kirby refused even to require the CFPB to
produce a privilege log asserting and identifying
legal privileges under which it refused to provide
such internal documents.
Unlike petitioners, others litigating the Lucia
remedy have been afforded precisely this
opportunity. See In the Matter of Traci J.
Anderson, CPA, 2020 WL 260282, at *3; In the
Matter of Edward M. Daspin, 2020 WL 4463315,
at *2; In the Matter of Laurie Bebo, 2020 WL
4784633, at *2. The Tenth Circuit further endorsed
perfunctory ratification when it found ALJ Kirby
made no error in refusing discovery requests on an
affirmative defense that would potentially dismiss
the case in its entirety.
30
Raise Defenses Negating Carnes’s Liability.
ALJ Kirby prevented Carnes from raising an
advice-of-counsel defense in the so-called “new
hearing.” App. 64a. Carnes’s advice-of-counsel
defense potentially would have negated the
amount of restitution and civil penalties against
Carnes. ALJ Kirby found that Carnes’s tainted
testimony from the prior hearing “sufficed on this
point.” App. 17a–18a. This defense represents
Carnes’s opportunity to negate nearly $45 million
in personal liability—yet, he was prevented from
even raising it. The Tenth Circuit affirmed ALJ
Kirby’s decision, despite Carnes citing case law
which supported his argument. App. 18a. Because
one of those two cases had been reversed, the court
found ALJ Kirby was justified in preventing
Carnes from raising the defense altogether. App.
18a.
When this Court said in Lucia that Appointments
Clause violations require a “new hearing,” it seems
very unlikely it could have meant the non-relief
petitioners here received: perfunctory ratification of a
cold record, albeit by a new decisionmaker. The Tenth
Circuit compounded the ALJ’s and CFPB’s error when
it rubberstamped ALJ Kirby’s rubberstamp review.
ALJs, agencies, and the lower courts require
additional guidance from this Court.
31
2. The challenges to the Lucia remedy in this case
were properly presented below, properly
reserved, and addressed on the merits.
Integrity raised the adequacy of the post-Lucia
hearing claim throughout the proceedings, preserving
the challenge for this Court’s plenary review. A party
may preserve a claim for this Court’s review by raising
the issue in the proceedings below. See Lebron v. Nat’l
R.R. Passenger Corp., 513 U.S. 374, 378–79 (1995).
“[T]his principle does not demand the incantation of
particular words; rather, it requires that the lower
court be fairly put on notice as to the substance of the
issue.” Nelson v. Adams USA, Inc., 529 U.S. 460, 469
(2000) (emphasis added). This Court can therefore
review issues “raised in a court below” when the issue
“was actually considered and decided” on the merits.
Orr v. Orr, 440 U.S. 268, 274–75 (1979).
Integrity preserved the Appointments Clause
issue by raising it in both of the prior proceedings
below. See App. 15a, 81a. And the Tenth Circuit
addressed the issue on the merits. This case therefore
presents a clean vehicle for addressing the Lucia
remedy question.
***
ALJs have interpreted Lucia’s remedy in wildly
inconsistent fashion along a wide spectrum of
potential options: from requiring an actual, “soup-tonuts” new hearing to simply rubberstamping the
tainted ALJ’s decision purportedly based on a cold
paper record review. Only this Court can provide the
necessary guidance on what Lucia actually requires to
32
cure an Appointments Clause violation, guidance
much needed by ALJs, agencies, and lower courts.
II. Whether the CFPB’s structure is
unconstitutional under the Appropriations
Clause—thus invalidating agency actions
taken under that structure—is an
important, unsettled question of federal law
meriting this Court’s review.
James Madison wisely observed that “a mere
demarcation on parchment of the constitutional limits
of the several departments, is not a sufficient guard
against those encroachments which lead to a
tyrannical concentration of all the powers of
government.” The Federalist No. 48 (James Madison)
(emphasis added). Yet, since its creation, the CFPB’s
unique structure has violated this basic tenet of the
nation’s constitutional arrangement: the CFPB was
created as a completely independent agency because
its Director was insulated from any meaningful
presidential supervision, and its budget was
essentially guaranteed without any congressional or
presidential support, approval, or oversight. Thus, the
CFPB was situated as effectively unanswerable to the
President or Congress.
This Court remedied the lack of presidential
control over the Director in Seila Law LLC v. CFPB,
140 S. Ct. 2183 (2020) by striking the statutory forcause removal provision with respect to the Director.
But the Court has not yet considered the CFPB’s
unique funding scheme, which is equally alarming
and “outside the [normal] appropriations process
33
[and] further aggravates the agency’s threat to
Presidential [and congressional] control,” id. at 2204,
in violation of the Appropriations Clause.
A. The CFPB’s funding structure presents
an important, unsettled question of
federal law.
The CFPB’s unique funding structure renders it
almost entirely independent of any political branch’s
control, either executive or legislative. Typically,
federal agencies receive funding from congressional
appropriations in conformance with the Constitution’s
Appropriations Clause. See U.S. Const. Art. I, § 9, Cl.
7. The Appropriations Clause ensures congressional
control over the federal government’s spending, with
presidential input—as the Framers intended. See The
Federalist No. 48 (James Madison) (“[T]he legislative
department alone has access to the pockets of the
people.”). It provides both the President and Congress
with influence over otherwise “independent” agencies
by allowing the President to propose annual agency
budgets and Congress to approve or disapprove those
proposals. Most agencies must also obtain Office of
Management and Budget approval of their proposed
budgets. See generally Eloise Pasachoff, The
President’s Budget As A Source of Agency Policy
Control, 125 Yale L.J. 2182, 2223 (2016) (“[o]nly a
small subset of agencies are not affected by OMB’s
approval lever,” including the Federal Reserve
System, which is the CFPB’s funding source). And,
ultimately,
Congress
must
approve
budget
appropriations in legislation.
34
The CFPB, however, does not have to submit
budget requests through the standard appropriations
process. Instead, the Director unilaterally determines
“the amount . . . reasonably necessary to carry out the
authorities of the Bureau,” which the Federal Reserve
“shall transfer” so long as it does not exceed 12% of the
Federal Reserve’s total operating expenses. 12 U.S.C.
§ 5497(a)(1–2).
The CFPB’s unique funding mechanism amounts
to unconstitutional insulation from presidential and
congressional oversight: the agency sets its own
priorities and draws its own funds from an
independent source. This Court already has warned
that the CFPB’s “Director wields vast rulemaking,
enforcement, and adjudicatory authority over a
significant portion of the U.S. economy,” given the
agency’s broad statutory enforcement powers. Seila
Law, 140 S. Ct. at 2191. And the CFPB directly
implements that authority with its vast budget—for
example, some half-billion dollars for the first half of
2023’s fiscal year. See Funds transfer requests, CFPB,
https://www.consumerfinance.gov/about-us/budgetstrategy/funds-transfer-requests/ (last visited Feb. 27,
2023).
The CFPB’s funding arrangement is a clear threat
to the separation of powers. With control of its own
purse strings, the CFPB can independently and
without check determine what policies it pursues,
what industries and individuals it investigates and
prosecutes, and how much money it is willing to spend
in doing so. Neither the President nor Congress has
any authority under the Appropriations Clause to
35
direct, supervise, or influence this agency. This is an
extraordinary and unprecedented situation in our
constitutional history and tradition. The CFPB, in
theory an executive agency, must be subject to the
constitutional principle that “[t]he buck stops with the
President.” Free Enter. Fund v. PCAOB, 561 U.S. 477,
493 (2010). The CFPB’s unusual independent funding
structure raises an important question of
constitutional law which merits this Court’s review.
B. The Circuits have split over the
constitutionality of the CFPB’s funding
structure.
The Circuits are split over the constitutionality of
the CFPB’s funding structure, a situation alone
warranting an exercise of this Court’s plenary review.
The Fifth Circuit recently held that the CFPB’s
unprecedented funding mechanism violates the
Constitution, while the D.C. Circuit and the Ninth
Circuit have upheld it as an extension of the
traditional independence afforded to financial
regulators.6 Compare Cmty. Fin. Servs. Ass’n of Am.,
Ltd. v. CFPB, 51 F.4th 616 (5th Cir. 2022), cert.
granted, No. 22-448 (Feb. 27, 2023)7 with PHH Corp.
These decisions are in tension with this Court’s recent
observation that “even assuming financial institutions like the
Second Bank and the Federal Reserve can claim a special
historical status, the CFPB is in an entirely different league. It
acts as a mini legislature, prosecutor, and court.” Seila Law, 140
S. Ct. at 2202 n.8.
7
The Court granted the petition in Cmty. Fin. Servs. Ass’n of Am.,
Ltd. v. CFPB, No. 22-448 on February 27, 2023. The Court’s
grant obviously might affect the disposition of this petition. One
6
36
v. CFPB, 881 F.3d 75 (D.C. Cir. 2018) (en banc) and
CFPB v. Nationwide Biweekly Admin., Inc., Nos. 1815431, 18-15887, 2023 WL 566112 (9th Cir. Jan. 27,
2023).
This direct split of authority and the resulting
uncertainty in the law is counter-productive for both
regulators and the regulated. The CFPB now has no
authority to act in the Fifth Circuit, while it does in
the D.C. Circuit and the Ninth Circuit. But these
decisions call into question the CFPB’s authority to
act in all the other Circuits. This Circuit split already
has upended proceedings in district courts
nationwide, inserting new issues into protracted
proceedings, and causing some courts to simply stay
matters pending the resolution of this important
constitutional question. See, e.g., CFPB v.
MoneyGram Int’l, Inc., No. 22-cv-3256, Doc. 52
(S.D.N.Y. Dec. 9, 2022); CFPB v. FirstCash, Inc., No.
21-cv-1251, Doc. 67 (N.D. Tex. Nov. 4, 2022); CFPB v.
Progrexion Marketing, Inc., No. 19-cv-298, Doc. 484
(D. Utah Oct. 21, 2022); CFPB v. TransUnion, No. 22cv-1880, Doc. 45 (N.D. Ill. Oct. 20, 2022).
This issue bears directly on the CFPB’s prior
enforcement actions—including this matter—all of
which were the direct product of an unconstitutional
possibility is to “hold” this petition until that case is resolved on
the merits. Another possibility is to grant this petition
independently because it presents a certworthy issue not present
in the Fifth Circuit case as it has implications beyond the CFPB,
specifically touching upon Lucia’s remedy in all federal agencies,
as the OSG noted. The cases could proceed along parallel tracks
with the merits disposition timing coordinated by the Court.
37
funding scheme. The CFPB’s structure was void ab
initio since “the Constitution automatically displaces
any conflicting statutory provision from the moment
of the provision’s enactment.” Collins v. Yellen, 141 S.
Ct. 1761, 1788–89 (2021). And this unconstitutional
provision has “inflict[ed] compensable harm,” id., from
the years petitioners spent litigating the claims to the
CFPB’s “knee-buckling penalties.” Seila Law, 140 S.
Ct. at 2202 n.8. In this case, the CFPB’s
unaccountable funding facilitated a years-long
prosecution with an extremely harsh outcome for
petitioners. The harm the CFPB’s actions have caused
demands a “rewinding of agency action,” to undo the
improperly insulated enforcement action brought
against petitioners. Collins, 141 S. Ct. at 1801 (Kagan,
J., concurring).8
C. This case is an ideal vehicle to decide
whether the CFPB’s funding structure
violates the Appropriations Clause.
The case is an ideal vehicle to consider the
constitutionality of the CFPB’s funding structure.
Since the beginning of these proceedings, petitioners
argued the CFPB’s structure in general conflicts with
the Constitution’s separation of powers.
This Court has the prudential authority to
consider “any argument in support” of a “federal claim
8 The Fifth Circuit agreed that such a “rewinding” was the proper
remedy to a similar challenge, noting this Court’s separation-ofpowers precedent: “In considering other violations of the
Constitution’s separation of powers, the Supreme Court has
rewound the unlawful action by granting a new hearing, see
Lucia.” Cmty. Fin. Servs. Ass’n of Am., 51 F.4th at 643.
38
[once] properly presented.” Lebron v. Nat’l R.R.
Passenger Corp., 513 U.S. 374, 379 (1995) (internal
citation omitted); see also Davis v. United States, 512
U.S. 452, 464 (1994) (Scalia, J., concurring) (“[T]he
refusal to consider arguments not raised is a sound
prudential practice, rather than a statutory or
constitutional mandate, and there are times when
prudence dictates the contrary.”). Furthermore,
“parties are not limited to the precise arguments they
made below” when seeking this Court’s review.
Lebron, 513 U.S. at 379 (internal citation omitted).
And in any case, this Court has “consistently
recognized a futility exception to exhaustion
requirements,” noting that “[i]t makes little sense to
require litigants to present claims to adjudicators who
are powerless to grant the relief requested.” Carr v.
Saul, 141 S. Ct. 1352, 1361 (2021) (citing Bethesda
Hosp. Ass’n. v. Bowen, 485 U.S. 399, 405–406, (1988)
and Mont. Nat’l Bank of Billings v. Yellowstone Cnty.,
276 U.S. 499, 505 (1928)).
Where, as here, the CFPB’s ALJ “ha[d] no special
expertise” on constitutional claims, id., and she was
powerless to remedy the CFPB’s unconstitutional
appropriations structure, simplistic notions of issue
exhaustion are inapplicable. As in Lebron, petitioners
have presented one claim: the CFPB’s structure
violates the separation of powers.9 Furthermore, the
9 Were the Court to conclude petitioners did not raise this issue
at the agency level, federal courts have made exceptions to
agency exhaustion rules for “significant issues of law that are
jurisdictional in nature, constitutional in magnitude or otherwise
39
Fifth Circuit’s decision was issued after petitioners
filed their petition for rehearing and rehearing en
banc in the Tenth Circuit. Petitioners immediately
supplemented their petition to reflect the Fifth
Circuit’s decision and to highlight their separation of
powers arguments from earlier briefs.
By declining to rehear this case (either the panel
or en banc), the Tenth Circuit skirted this important
issue, leaving petitioners with no recourse but to seek
this Court’s plenary review.
so compelling as to require judicial review.” N. Wind, Inc. v.
Daley, 200 F.3d 13, 18 (1st Cir. 1999); see also Motor & Equip.
Mfrs. Ass’n, Inc. v. EPA, 627 F.2d 1095, 1115 (D.C. Cir. 1979).
The unconstitutional funding scheme issue is both jurisdictional
and constitutional, i.e., how does an ultra vires agency take any
constitutional action?
40
CONCLUSION
The petition for writ of certiorari should be
granted.
Respectfully submitted,
Scott J. Bloch
Law Offices of
Scott J. Bloch, P.A.
1025 Connecticut Ave.
N.W. Ste. 1000
Washington, D.C. 20036
(202) 496-1290
scott@scottblochlaw.com
Stephen R. McAllister
Counsel of Record
Timothy J. Storino
Michael T. Vangel
Parker B. Bednasek
Dentons US LLP
4520 Main St., Ste.1100
Kansas City, MO 64111
(816) 460-2516
stephen.mcallister
@dentons.com
Counsel for Integrity
Advance, LLC and
James R. Carnes
March 1, 2023
APPENDIX
TABLE OF CONTENTS
Page(s)
Appendix A
Integrity Advance, LLC v. Consumer Financial
Protection Bureau, 48 F.4th 1161
(10th Cir. 2022) ...............................................1a
Appendix B
Final Order – Integrity Advance, LLC, CFPB
No. 2015-CFPB-0029 (Jan. 11, 2021) ...........33a
Appendix C
Decision of the Director – Integrity Advance,
LLC, CFPB No. 2015-CFPB-0029
(Jan. 11, 2021) ...............................................38a
Appendix D
Order Denying in Part Respondents’ Motion to
Open Record for a New Hearing – Integrity
Advance, LLC, CFPB No. 2015-CFPB-0029
(Apr. 24, 2020).............................................120a
Appendix E
Order Denying Further Discovery on Statute of
Limitations Issue – Integrity Advance, LLC,
CFPB No. 2015-CFPB-0029
(Oct. 28, 2019) .............................................143a
Appendix F
Order Denying Petition for Rehearing En Banc
– Integrity Advance, LLC v. Consumer
Financial Protection Bureau, No. 219521
(10th Cir. 2022) ...........................................165a
Appendix G
Appropriations Clause – U.S. Constitution,
Art. I § 9, cl. 7 ..............................................166a
Appendix H
Title X – Dodd-Frank Wall Street Reform and
Consumer Protection Act –
CFPB Funding; penalties and fines –
12 U.S.C. § 5497 ..........................................167a
1a
APPENDIX A
48 F.4th 1161
UNITED STATES COURT OF APPEALS,
TENTH CIRCUIT.
[FILED September 15, 2022]
————
No. 21-9521
————
INTEGRITY ADVANCE, LLC; JAMES R. CARNES,
Petitioners,
v.
CONSUMER FINANCIAL PROTECTION BUREAU,
Respondent.
————
Petition for Review of an Order from the
Consumer Financial Protection Bureau
(Consumer No. 2015-CFPB-0029)
————
Richard J. Zack (Michael A. Schwartz and Christen M.
Tuttle, with him on the brief), of Troutman Pepper
Hamilton Sanders LLP, Philadelphia, Pennsylvania,
for Petitioners.
Lawrence DeMille-Wagman, Senior Litigation Associate (Stephen Van Meter, Acting General Counsel;
Steven Y. Bressler, Acting Deputing General Counsel;
and Kevin E. Friedl, Senior Litigation Counsel;
Consumer Financial Protection Bureau, with him on
the brief) Washington D.C., for Respondent.
————
2a
Before TYMKOVICH, Chief Judge, PHILLIPS, and
McHUGH, Circuit Judges.
Opinion
PHILLIPS, Circuit Judge.
Integrity Advance, LLC operated as a nationwide
payday lender offering short-term consumer loans at
high interest rates. In 2015, the Consumer Financial
Protection Bureau (“Bureau”) brought an administrative enforcement action against Integrity and its CEO,
James Carnes (collectively, “Petitioners”). The Notice
of Charges alleged violations of the Consumer Financial Protection Act (“CFPA”), the Truth in Lending Act
(“TILA”), and the Electronic Fund Transfer Act (“EFTA”).
Between 2018 and 2021, the Supreme Court issued
four decisions—Lucia v. SEC, Seila Law v. CFPB, Liu
v. SEC, and Collins v. Yellen—that bore on the
Bureau’s enforcement activity in this case. These
opinions decided fundamental issues such as the
Bureau’s constitutional authority to act and the
appointment of its administrative law judges (“ALJ”).
The series of decisions led to intermittent delays and
restarts in the Bureau’s case against Petitioners. For
instance, two different ALJs decided the present case
years apart, with their recommendations separately
appealed to the Bureau’s Director. Ultimately, the
Director mostly affirmed the recommendations of the
second ALJ.
Petitioners have appealed the Director’s final order
to our court under 12 U.S.C. § 5563(b)(4). They ask
that we vacate the order, or at least remand for a new
hearing, mainly arguing that the Director’s order didn’t
give them the full benefit of the Supreme Court’s
rulings. For the reasons below, we reject Petitioners’
various challenges and affirm the Director’s order.
3a
BACKGROUND
I. Factual Background
From 2008 to 2013, Integrity operated nationwide
as a payday lender. It was founded and run by James
Carnes, its CEO.1 The company offered short-term,
small-dollar consumer loans at high interest rates.
Integrity’s loans usually ranged from $100 to $1,000
and were its only financial product. Though the law
usually allows for non-coercive contractual arrangements between private parties, it sometimes requires
heightened disclosure for loan agreements between
parties of disparate bargaining power.
As relevant here, TILA requires loan providers to
disclose material terms about the structure of their
offered loans. Though Integrity provided borrowers
TILA disclosure documents, it misled borrowers about
the loan structure. Its disclosure documents misleadingly implied that the loans were single-payment
loans. In fact, the loans typically resulted in multipayment installment loans that automatically renewed.
So absent undoing the automatic renewal, borrowers
were left paying more in fees than Integrity had
disclosed.
In January 2012, the Bureau and the Federal Trade
Commission (“FTC”) entered a Memorandum of
Understanding by which the two agencies agreed to
share information about their enforcement activities
and any consumer complaints received. In March
2012, the Bureau searched the FTC database for
consumer complaints about Integrity. The search
1
Integrity was owned by Hayfield Investment Partners.
Carnes was technically employed by Hayfield. The Bureau tells
us that Carnes called himself Integrity’s “de facto” CEO because
Integrity had no employees of its own. Resp. Br. at 4 n.4.
4a
returned complaints revealing consumer confusion
about the true cost of Integrity’s loans. From this, the
Bureau began investigating Integrity and its loan
practices.
II. Procedural Background
A. The Bureau’s Initial Investigation
In January 2013, the Bureau sent Integrity a civil
investigative demand (“CID”) to obtain more information on Integrity’s practices, its officers, and
employees.2 Included in this requested information
were copies of Integrity’s loan documents. Nine
months later, in October 2013, Integrity produced its
initial responses to the CID. It completed production
in December 2013. In June 2014, the Bureau held an
investigative hearing and took Carnes’s testimony.
During that hearing, Carnes described his role at
Integrity and acknowledged that he had the ultimate
say over all of Integrity’s policies and procedures.
From its investigation, the Bureau concluded that
Integrity’s loan documents violated federal law. The
Bureau learned that Integrity charged a fixed price of
$30 for first-time customers for every hundred dollars
borrowed per pay period. For repeat customers,
Integrity charged $24 per hundred dollars per pay
period. Though Integrity provided each borrower TILA
disclosures, the disclosures misled borrowers into
believing that they would pay off the loan with a single
payment. But if a borrower didn’t call Integrity three
days before his or her next payment was due and
request to pay the loan in full, the loan would
2
CIDs work like civil subpoenas, and executive-branch
departments or agencies commonly issue them in their
investigations. The Bureau has statutory authority to issue CIDs
under 12 U.S.C. § 5562(c)(1).
5a
automatically default into four cycles of “autorenewal” status. Dkt. 308 at 5. If the borrower failed
to act after four renewals, the loan would enter an
“auto-workout” status. Id. This meant that Integrity
would debit the consumer’s personal banking account
for a “finance charge[ ]” plus a “principal payment of
$50.00” Id. at 4. The loan would remain in autoworkout status until it had been paid off. As an
example, the Bureau tells us that “it could take a
borrower many months to repay a $300 loan, and the
loan would cost that borrower $1065 even though
[Integrity]’s TILA disclosures listed the total of
payments as $390.” Resp. Br. at 6.
The Bureau also learned that Integrity’s loan documents required customers to provide direct automatedclearinghouse (“ACH”) withdrawals from their bank
accounts. If a customer tried to retract his or her ACH
authorization, Integrity could remotely generate paper
checks and withdraw payments directly from the
customer’s bank account.
On November 18, 2015, based on its gathered
evidence, the Bureau filed a Notice of Charges against
Petitioners. The Notice of Charges alleged that
Integrity—as the loan provider—had violated TILA
(Count I), EFTA (Count V), and CFPA (Counts II, III,
IV, VI, and VII). The Bureau also alleged that Carnes
had violated CFPA (Counts III, IV, and VII) given his
knowledge of the misleading disclosures and his role
as CEO.
a. The First Administrative Hearing
When the Bureau filed its Notice of Charges, the
CFPB lacked an in-house ALJ. So the Bureau enlisted
Parlen McKenna, an ALJ with the U.S. Coast Guard,
to hear the case. In July 2016, ALJ McKenna held a
6a
three-day evidentiary hearing. The Bureau called six
witnesses, and Petitioners called two. The parties also
introduced documentary evidence. After considering
all the evidence, ALJ McKenna ruled that the Bureau
had proved all the active counts.3 ALJ McKenna
recommended that the Director order Petitioners to
pay $38 million of restitution, jointly and severally,
plus “first-tier”4 civil penalties of $8.1 million from
Integrity and $5.4 million from Carnes. Dkt. 176 at 74,
80–81.
3
The Bureau had earlier stipulated to dismiss Count IV with
prejudice before ALJ McKenna because it was duplicative of
Count III. See Resp. Br. at 9–10 n.8 (“[T]he parties agreed that
the consumer harm resulting from Count III was coextensive
with Count IV.”). This was because Count III alleged that
Petitioners violated CFPA because Integrity’s loan disclosures
were deceptive and Count IV alleged that they violated CFPA
because the loan disclosures were unfair. However, under the
terms of the remand from the Director, the earlier dismissal of
Count IV had no effect. Still, while the Director held that the
Bureau properly pursued Count IV before ALJ Kirby, Count IV
appears to make no difference to the ordered remedy. We assume
it does not, because Petitioners make no argument explaining
whether the revival of Count IV affects the resolution of the
issues they raise on appeal.
4
CFPA provides that “[a]ny person that violates, through any
act or omission, any provision of Federal consumer financial law
shall forfeit and pay a civil penalty[.]” 12 U.S.C. § 5565(c)(1).
CFPA establishes three tiers of penalties with statutory maximums
ranging from $5000 to $1 million (before adjustments for inflation)
for each day during which a violation continues. “A first-tier
penalty requires no showing of scienter; a second-tier penalty
applies to ‘any person that recklessly engages in a violation’ of
the CFPA; and a third-tier penalty applies to ‘any person that
knowingly violates’ the CFPA.” See CFPB v. CashCall, 35 F.4th 734,
741 (9th Cir. 2022) (citing 12 U.S.C. § 5565(c)(2)(A)–(C)).
7a
In 2016, Petitioners appealed the ALJ’s decision to
the Bureau’s Director.5 But the Director (and later the
Bureau’s Acting Director) held the appeal in abeyance
pending the Supreme Court’s decision in Lucia v. SEC,
––– U.S. ––––, 138 S. Ct. 2044, 201 L.Ed.2d 464 (2018).
That case would soon decide the constitutional status
of Securities & Exchange Commission administrative
law judges.
In June 2018, the Supreme Court ruled that the
SEC’s ALJs were constitutional officers. That meant
the Appointments Clause—U.S. Const. art. II, § 2,
cl. 2—required that the ALJs be appointed by the
President, a court of law, or a department head. Lucia,
138 S. Ct. at 2051, 2053–54. In May 2019, the Director
concluded that Lucia required that ALJ McKenna be
appointed under the Appointment Clause too. Because
he hadn’t been, the Director remanded the case to a
constitutionally appointed ALJ for a “new hearing.”
b. The Second Administrative Hearing
By the time the Supreme Court decided Lucia, the
Bureau had obtained an in-house ALJ, Christine
Kirby. She had been appointed in conformity with the
Appointments Clause. In remanding Integrity’s case
to ALJ Kirby, the Director instructed her to “give no
weight to, nor presume the correctness of, any prior
opinions, orders, or rulings issued by” ALJ McKenna.
Dkt. 308 at 8.
Though Petitioners requested a “new hearing” in
which they could further develop the record, ALJ
Kirby determined that ALJ McKenna had given the
5
Parties may appeal an ALJ’s recommendation to the Director
under 12 C.F.R. § 1081.402(a)(1). Otherwise, the Director can accept
or reject the recommendation under 12 C.F.R. § 1081.402(b).
8a
parties an adequate opportunity to present their case.
Thus, she announced her “intent[ion] to conduct a de
novo review of the record—to the extent possible.” Dkt.
269 at 5. She clarified that she “w[ould] consider the
parties’ arguments as to whether the record need[ed]
to be supplemented or whether portions of the record
that were previously admitted should be struck.” Id.
But Petitioners wanted their proceedings before ALJ
Kirby to include additional “pre-hearing discovery and
an evidentiary hearing with the opportunity for both
sides to present evidence and examine witnesses”
beyond what they had presented before ALJ McKenna.
Dkt. 295 at 12. Nevertheless, Petitioners (and the
Bureau) each moved for summary disposition on the
existing record.
In June 2020, while the summary-disposition motions
were pending, the Supreme Court decided another
case bearing on the Bureau’s enforcement activities.6
In Seila Law LLC v. CFPB, ––– U.S. ––––, 140 S. Ct.
2183, 207 L.Ed.2d 494 (2020), the Court reviewed a
challenge to the Bureau’s authority to issue a CID for
documents from the law firm of Seila Law. Id. at 2194.
The law firm had refused to comply with the CID,
based on its assertion that the Bureau was unconstitutionally structured.7 Id. Though the Bureau prevailed
6
Liu v. SEC, ––– U.S. ––––, 140 S. Ct. 1936, 207 L.Ed.2d 401
(2020), is another important case decided a week before Seila
Law. The case is relevant to Petitioners’ challenge to the
Director’s ordered remedies. Though Petitioners preserved their
arguments challenging the ordered remedies, they didn’t cite Liu
in their appeal before the Director. Nor did the Director discuss
Liu. See generally, Dkt. 308.
7
Throughout this opinion, our references to the Bureau’s
unconstitutional “structure” relate to Congress’s having limited
the President’s authority to remove the Bureau’s Director by
requiring that the removal be for cause.
9a
in the Ninth Circuit, the Supreme Court reversed. Id.
at 2195–97. It held that Congress had structured the
Bureau by making its director removable by the
President only for “inefficiency, neglect, or malfeasance” in violation of the separation of powers. Id. at
2197; see also 12 U.S.C. § 5491(c)(3) (“The President
may remove the Director for inefficiency, neglect of
duty, or malfeasance in office.”).
By the time the Supreme Court heard the case,
Congress had revised the Bureau’s structure to authorize the President to remove the Bureau’s Director
without cause. Id. at 2208. And by then, the newly,
properly appointed Director had ratified the previously issued CID.8 Id. In this circumstance, the Court
declared that the ratification issue “turn[ed] on casespecific factual and legal questions not addressed
below and not briefed[.]” Id. Thus, it remanded the
case for the Ninth Circuit “to consider whether the
civil investigative demand was validly ratified.” Id. at
2211.
In August 2020, ALJ Kirby recommended that
Petitioners be held liable on all counts. She recommended that the Director hold Integrity responsible
for $132.5 million in equitable restitution. Of this
amount, she recommended that Carnes be held
responsible for $38.4 million, jointly and severally.
ALJ Kirby spared Carnes the $95.1 million difference
for two reasons: (1) the Bureau hadn’t charged him
under all CFPA counts, and (2) the Bureau lacked
8
On remand, the Ninth Circuit held that the Director’s
ratification “remedies any constitutional injury that Seila Law
may have suffered due to the manner in which the CFPB was
originally structured.” CFPB v. Seila Law LLC, 984 F.3d 715, 718
(9th Cir. 2020). That enabled the Bureau to enforce the disputed
CID. Id. at 720.
10a
statutory authority to enforce CFPA against Carnes
until July 21, 2011, the date that the Bureau obtained
its full range of authorities under CFPA. See Dkt. 308
at 26 n.8 (identifying the effective date of most of the
Bureau’s statutory authority as July 21, 2011).9 She
also recommended that the Director impose civil
monetary penalties of $7.5 million against Integrity
and $5 million against Carnes.
Petitioners appealed ALJ Kirby’s recommendation
to the Director. Petitioners contend that they “took
exception to the Recommended Decision in its entirety,
including but not limited to, all findings of liability, all
relief recommended by the ALJ, and the ALJ’s decision
to deny [their] motion for Summary Disposition.” Op.
Br. at 9.
In January 2021, the Director adopted ALJ Kirby’s
recommendations on Petitioners’ liability. The Director
concluded that Integrity had violated TILA by using
disclosures that misled borrowers into believing that
their loans were single-payment loans, not multipayment installment loans. The Director also determined
9
In creating the Bureau, Congress afforded the agency time to
implement its statutory functions. 75 Fed. Reg. 57252, 57252
(Sept. 20, 2010). Agencies previously enforcing consumerprotection laws needed to transfer their responsibilities to the
Bureau. Id. Congress concluded that a “transfer date of July 21,
2011 . . . will provide the CFPB an appropriate period of time to
hire and assign employees to support its new functions, as well
as to plan and make important decisions necessary to build a
strong foundation for the new agency.” Id. at 57253. On this
“designated transfer date, the ‘consumer financial protection
functions’ currently carried out by the Federal banking agencies,
as well as certain authorities currently carried out by the
Department of Housing and Urban Development and the Federal
Trade Commission” were transferred to the Bureau. Id. (footnote
omitted).
11a
that Integrity had violated EFTA by requiring consumers to accept the ACH authorization as a loan
condition. The Director concluded that both Petitioners
had violated CFPA (1) by providing deceptive loan
disclosures, and (2) by using checks that Integrity
created remotely, with the consumers’ identifying
information and without authorization, to withdraw
their funds from their personal bank accounts if the
ACH authorization failed.
The Director mostly adopted ALJ Kirby’s recommended restitution award and civil penalties. The
Director reduced the restitution award against
Integrity from $132.5 million to $38.4 million, the sum
needed to compensate Petitioners’ borrowers for
harms suffered after July 21, 2011. The Director also
imposed this restitution amount jointly and severally.
But the Director departed from ALJ Kirby’s characterization of the restitution award as an equitable, not
legal, remedy.10 Instead, the Director chose both,
concluding that “[w]hether as a matter of equity or
law . . . an award of restitution is justified both to
remedy the losses consumers suffered . . . and to
deprive Respondents of the amounts that they gained
as a result of their unlawful conduct.” Dkt. 308 at 35
(emphasis added). Finally, the Director agreed with
ALJ Kirby’s recommendation to impose civil penalties
10
Addressing the Petitioners’ request for legal, not equitable,
restitution, ALJ Kirby noted that the Bureau “d[id] not cite to any
authority or cases applying this theory in the context of a CFPB
case and [Integrity and Carnes] argue that no such authority
exists.” Dkt. 293 at 79. ALJ Kirby was “not convinced that [the
Bureau’s] theory of ‘legal’ restitution is applicable to the present
matter.” Id. She concluded that she “need not decide this issue
because . . . an award of ‘equitable’ restitution is nevertheless
appropriate.” Id.
12a
of $7.5 million from Integrity and $5 million from
Carnes.
Acknowledging Seila Law, the Director ruled that in
November 2015 (when the Notice of Charges was filed)
the Bureau had been unconstitutionally structured
because of the statutory limits on the President’s
removal authority. But the Director concluded that
she could cure any associated problems by ratifying
the Notice of Charges. Thus, the Director “ratif[ied]
the Bureau’s decision to file the Notice of Charges and
to prosecute th[e] action.” Dkt. 308 at 19.
Petitioners appeal the Director’s final decision to
our court.
III. Standard of Review
“We review agency action under the Administrative
Procedure Act.” Ukeiley v. EPA, 896 F.3d 1158, 1163
(10th Cir. 2018). Our review requires us to determine
whether the agency’s actions were “arbitrary, capricious,
an abuse of discretion, or otherwise not in accordance
with the law.” WildEarth Guardians v. Conner, 920
F.3d 1245, 1256 (10th Cir. 2019) (quoting 5 U.S.C.
§ 706(2)(a)(A)). We review purely legal questions de
novo. Karki v. Holder, 715 F.3d 792, 800 (10th Cir.
2013). And we review factual findings for substantial
evidence. Forest Guardians v. U.S. Fish and Wildlife
Serv., 611 F.3d 692, 704 (10th Cir. 2010). Evidentiary
rulings and the agency’s chosen remedies are reviewed
for abuse of discretion. United Steelworkers of Am. v.
NLRB, 376 F.2d 770, 773 (D.C. Cir. 1967); Cintas
Corp. v. NLRB, 589 F.3d 905, 913 (8th Cir. 2009).
DISCUSSION
Petitioners challenge the Director’s final order on
three primary grounds. First, they argue that we
13a
should set aside the Bureau’s entire enforcement action
because the Bureau was unconstitutionally structured
when it filed its charges. Second, they argue that the
enforcement action resulted in multiple due-process
violations, chief among them being a deprivation of
their right under Lucia to a “new hearing.”11 Third,
they argue that the Director’s restitution award is
unlawful because it concerns an equitable remedy that
must account for Petitioners’ business expenses.
I. The Bureau’s Structure
Petitioners argue that an unconstitutionally structured agency lacks authority to act. And as mentioned,
Seila Law held that in 2015 the Bureau was in fact
unconstitutionally structured (as limiting the President’s
removal power) when it filed its Notice of Charges.
From this, Petitioners conclude that the Bureau’s
enforcement action against them must be set aside
entirely.
In June 2021, after Petitioners filed their opening
appellate brief, the Supreme Court rejected a similar
argument in Collins v. Yellen, ––– U.S. ––––, 141
S. Ct. 1761, 210 L.Ed.2d 432 (2021). First, after
concluding that Seila Law was “all but dispositive,”
the Court ruled that a “for cause” restriction on the
President’s ability to remove the Federal Housing
Finance Agency (“FHFA”) Director (a principal officer)
violated separation of powers. Id. at 1783–84. Next,
the Court considered whether that defect rendered the
FHFA’s prior actions void ab initio. Id. at 1787. The
Court ruled that it did not, noting that the FHFA’s
leadership had been properly appointed when they
11
Petitioners also present a handful of arguments that pertain
only to Carnes. We address these arguments in their own section
of this opinion.
14a
took the disputed actions. Id. Because “there was no
constitutional defect in the statutorily prescribed
method of appointment of that office,” the Court
concluded that “there is no reason to regard any of the
actions taken by the FHFA in relation to the [the
disputed actions] as void.”12 Id.
In addition, Collins put to rest another of Petitioners’ present arguments. In response to the argument
that the agency’s ratification of its earlier decisions
wasn’t timely, the Court in Collins ruled that an
agency need not even ratify the actions it took while
it was unconstitutionally structured. Id. at 1788. In
reaching this conclusion, the Court rejected their
claim that Seila Law said otherwise. Id. That resolves
Petitioners’ contention that the ratification here was
impermissible for occurring after the three-year limitations period for filing the Notice of Charges had
supposedly expired. See 12 U.S.C. § 5564(g)(1); see also
CashCall, 35 F.4th at 742 (“We find it unnecessary to
consider ratification because [Collins v. Yellen] has
made clear that despite the unconstitutional limitation on the President’s authority to remove the Bureau’s
Director, the Director’s actions were valid when they
were taken.”).
Still, Collins left open an avenue of relief for
potential injuries stemming from the actions of an
unconstitutionally structured agency. On the issue of
12
Just two days before issuing Collins, the Court cautioned
against any approach that would invalidate swaths of administrative decisions. See generally United States v. Arthrex, Inc.,
––– U.S. ––––, 141 S. Ct. 1970, 1986–88, 210 L.Ed.2d 268 (2021)
(reaffirming the general principle that “when confronting a
constitutional flaw in a statute, we try to limit the solution to the
problem” (quoting Ayotte v. Planned Parenthood of N. New Eng.,
546 U.S. 320, 328–29, 126 S.Ct. 961, 163 L.Ed.2d 812 (2006))).
15a
relief, the Court remanded “for further proceedings to
determine what remedy, if any, the shareholders are
entitled to receive on their constitutional claim.” 141
S. Ct. at 1770. It observed that “the possibility that the
unconstitutional restriction on the President’s power
to remove a Director of the FHFA could have such an
effect cannot be ruled out.” Id. at 1789. So the Court
concluded that a future plaintiff may be able to challenge actions taken by an unconstitutionally structured
agency by alleging “compensable harm.” Id. As possible
instances, the Court raised situations in which the
President had wanted to remove the director but was
stopped by a lower court decision or by heeding a
statute disallowing it. Id. Petitioners in our case don’t
point to any such “compensable harm” resulting from
the Bureau’s unconstitutional structure. We therefore
find no avenue of relief available to them under Collins.
We heed Seila Law’s admonition that we are to use
a “scalpel rather than a bulldozer” in remedying a
constitutional defect. See Seila Law, 140 S. Ct. at
2210–11. So, because the Director’s actions weren’t
unconstitutional, we reject Petitioners’ argument to
set aside the Bureau’s enforcement action in its entirety.
II. Petitioners’ Due-Process Claims
Petitioners next complain of what they characterize
as due-process violations. They argue that ALJ Kirby’s
proceeding fell short of the “new hearing” referenced
in Lucia. They also challenge some of the ALJ’s evidentiary rulings. We address these arguments in turn.
A. A “New Hearing” Under Lucia v. SEC
In Lucia, the Supreme Court provided a remedy for
the Appointments Clause violation, namely, a “new
hearing” before a constitutionally appointed ALJ. 138
S. Ct. at 2055. Petitioners argue that a “new hearing”
16a
must allow additional evidence and arguments—it
can’t just be a de novo review of the existing record.
Unfortunately, Lucia offers little guidance on the
constitutional requirements of a “new hearing.” In
fact, it simply cites Ryder v. United States, 515 U.S.
177, 115 S.Ct. 2031, 132 L.Ed.2d 136 (1995), for the
proposition that a new hearing is required. See Lucia,
138 S. Ct. at 2055. But Ryder doesn’t help us much
either, as it simply requires “a hearing before a
properly appointed panel” of military court judges. 515
U.S. at 188, 115 S.Ct. 2031.
We do find helpful a D.C. Circuit case applying
Ryder and rejecting an argument that a “new hearing”
must be more than de novo review by a different ALJ.
In Intercollegiate Broadcasting System, Inc. v. Copyright
Royalty Board, 796 F.3d 111 (D.C. Cir. 2015), the court
noted that appellant’s sole support for re-opening an
administrative proceeding on remand was “a single
sentence at the end of the [Ryder] opinion,” but
“[n]othing in that sentence suggests that a new
hearing would have been required if the reviewing
court had possessed de novo authority.” Id. at 120.
Petitioners have provided no support for a brightline rule against de novo review of a previous administrative hearing. Nor do we see a reason for a more
extensive hearing. The Appointments Clause violation
notwithstanding, Petitioners had a full opportunity to
present their case in the first proceeding. ALJ Kirby
independently reviewed the existing record before relying on it. And she permitted Petitioners to challenge
ALJ McKenna’s previous determinations. Ultimately,
she agreed with most of ALJ McKenna’s recommendations and rejected Petitioners’ various challenges. We
see no error.
17a
B. Evidentiary Rulings
Petitioners raise a handful of evidentiary challenges
to the Bureau’s decision. They argue that ALJ Kirby
erred by not permitting evidence about Integrity’s
operational expenses,13 about their reliance on counsel,
and about the credibility of certain witnesses.14
Petitioners must show that the Bureau abused its
discretion by excluding this evidence. See Manna Pro
Partners, L.P. v. NLRB, 986 F.2d 1346, 1353 (10th Cir.
1993).
Petitioners’ position lacks support, as they cite no
case reversing based on similar alleged error. And
even without deferential review, Petitioners’ arguments would still fail. Petitioners argue that ALJ
Kirby prevented them from presenting their advice-ofcounsel defense. They say that this defense would
have negated the restitution award and civil penalties.
In support, they assert that Carnes “did not draft,
revise, or substantively review or approve the Loan
Agreement, but instead relied on [his] legal counsel.”
Op. Br. at 4, 35–36. But we don’t see where ALJ Kirby
prevented Carnes from presenting his defense—she
just ruled that Carnes’s testimony sufficed on this
13
We address Petitioners’ argument to present evidence of
their expenses in Section III of this opinion discussing the
Supreme Court’s decision in Liu v. SEC.
14
Petitioners also argue that it was legal error for ALJ Kirby
to deny their motion to amend their answer to challenge as vague
the Bureau’s characterization of their practices as unfair,
deceptive, or as abusive acts or practices (“UDAAP”). A UDAAP
results in the violation of the CFPA. See 12 U.S.C. § 5531(a).
Petitioners make no effort to brief this argument or explain why
it was legal error for ALJ Kirby to deny their request. So we
decline to consider it. See Adler v. Wal-Mart Stores, Inc., 144 F.3d
664, 679 (10th Cir. 1998).
18a
point. See Dkt. 269 at 9 (“Respondents state in their
brief that Respondent Carnes previously testified
that he relied upon his outside counsel to draft the
loan agreement and to ensure it complied with the
law . . . . Additional testimony . . . appears unnecessary
and, at best, would merely corroborate Carnes’ sworn
testimony.”).
Further, Petitioners’ asserted advice-of-counsel defense
isn’t relevant to the restitution award. Petitioners’
contrary argument relies on two district court cases.
But the Ninth Circuit has reversed one of their cases
on grounds that reliance on counsel is neither an
appropriate basis to deny CFPA liability nor to deny
restitution. See CashCall, Inc., 35 F.4th at 749. Nor
is advice of counsel relevant to the appropriateness
of civil penalties under 12 U.S.C. § 5565, unless
“heightened” civil penalties are imposed. See id. at
750. Petitioners weren’t subject to heightened civil
penalties.
Petitioners also challenge ALJ Kirby’s decision to
forgo live testimony despite its help in evaluating the
credibility of witnesses. But nothing requires an ALJ
to “observe a witness’[s] live testimony,” and Integrity
never “articulated sufficient grounds for [ALJ Kirby]
to recall any of the witnesses for this purpose.” See
Dkt. 269 at 7. So we find no abuse of discretion.
III. Carnes’s Due-Process Claims
Carnes alleges three due-process violations pertaining solely to himself: (1) CFPA’s statute of limitations
had expired before the November 2015 Notice of
Charges; (2) the Director wrongly upheld ALJ Kirby’s
denial of Carnes’s discovery request seeking information relating to the statute of limitations; and
(3) that ALJ Kirby granted summary disposition over
19a
Carnes’s liability despite the existence of genuine
factual disputes.15 These arguments lack merit.
A. Statute of Limitations
Petitioners argue that the Notice of Charges was
filed outside the limitations period because the Bureau
either did discover or could have discovered Carnes’s
violations more than three years before it filed its
Notice of Charges. Under CFPA, “no action may be
brought under this title more than 3 years after the
date of discovery of the violation to which an action
relates.” 12 U.S.C. § 5564(g)(1). We conclude that
§ 5564(g)(1)’s limitations period commences when the
Bureau either knows of a violation or, through reasonable diligence, would have discovered the violation.
In Merck & Co., Inc. v. Reynolds, 559 U.S. 633, 130
S.Ct. 1784, 176 L.Ed.2d 582 (2010), the Court considered “the timeliness of a complaint filed in a private
securities fraud action.” Id. at 637, 130 S.Ct. 1784. The
Court noted that “[t]he complaint was timely if filed no
more than two years after the plaintiffs ‘discover[ed]
the facts constituting the violation.’” Id. (quoting
28 U.S.C. § 1658(b)(1)). The Court held that a claim
for relief “accrues (1) when the plaintiff did in fact
discover, or (2) when a reasonably diligent plaintiff
would have discovered, ‘the facts constituting the
violation’—whichever comes first.” Id. The Court
further held that “the ‘facts constituting the violation’
include the fact of scienter, ‘a mental state embracing
intent to deceive, manipulate, or defraud.’” Id.
(citation omitted).
15
The statute-of-limitations arguments apply to Carnes alone,
because the Bureau signed tolling agreements with Integrity to
toll the limitations period.
20a
A fraud claim accrues “once a plaintiff has a ‘complete and present cause of action.’” Id. at 644, 130 S.Ct.
1784 (citation omitted). Otherwise, “a defendant’s
deceptive conduct may prevent a plaintiff from even
knowing that he or she has been defrauded.” Id. Thus,
in considering accrual, we are mindful of the Court’s
pronouncement that “unless a § 10(b) plaintiff can set
forth facts in the complaint showing that it is ‘at least
as likely as’ not that the defendant acted with the
relevant knowledge or intent, the claim will fail.” Id.
at 649, 130 S.Ct. 1784 (citation omitted). Accrual and
knowledge go together.
Importantly, the Court rejected Merck’s argument
that “facts that tend to show a materially false or
misleading statement (or material omission) are ordinarily sufficient to show scienter as well.” Id. As
support, the Court noted that “[a]n incorrect prediction about a firm’s future earnings, by itself, does not
automatically tell us whether the speaker deliberately
lied or just made an innocent (and therefore
nonactionable) error.” Id. at 650, 130 S.Ct. 1784.
The Court also rejected Merck’s argument that the
limitations period accrued when a plaintiff is on
“inquiry notice,” meaning “the point ‘at which a
plaintiff possesses a quantum of information sufficiently suggestive of wrongdoing that he should
conduct a further inquiry.’ “ Id. (citation omitted). The
Court saw nothing in the statutory limitations period
signifying “that the limitations period should occur at
some earlier moment before ‘discovery,’ when a
plaintiff would have begun investigating[.]” Id. at 651,
130 S.Ct. 1784.
Petitioners’ statute-of-limitations arguments fail
just as Merck’s did. Petitioners make a debatable
argument that by May 18, 2012, the Bureau could
21a
have learned from public information that Carnes
was Integrity’s CEO. But the limitations period still
wouldn’t have run by November 18, 2015, when the
Bureau filed its Notice of Charges. Before the limitations period would commence, the Bureau needed to
know not only that Carnes was Integrity’s CEO but
also that he had sufficient knowledge of those violations.
See CFPB v. Gordon, 819 F.3d 1179, 1193 (9th Cir.
2016). As discussed further below, the Bureau couldn’t
successfully charge Carnes personally without showing
that he “had knowledge of the misrepresentations, was
recklessly indifferent to the truth or falsity of the
misrepresentation[s], or was aware of a high probability of fraud along with an intentional avoidance of
the truth.” Id. After all, “scienter is assuredly a fact”
that the Bureau would need to prove. Merck, 559 U.S.
at 648, 130 S.Ct. 1784 (cleaned up). We reject the
argument that the receipt of consumer complaints
triggered the statute of limitations. As Merck says,
consumer complaints generally serve only as a “storm
warning” that an agency might want to start investigating. 559 U.S. at 653, 130 S.Ct. 1784.
Here, the limitations period wouldn’t have commenced earlier than October 2013, when the Bureau
received Integrity’s responses to the CIDs and deposed
Carnes. Carnes hasn’t identified what public information would have established his knowledge of
Integrity’s illegal conduct before then. Petitioners
didn’t provide the information about Carnes’s role and
knowledge until late 2013. So the Bureau’s November
2015 Notice of Charges is timely.
B. Discovery Requests
Petitioners argue that the ALJ violated their dueprocess rights by denying Carnes additional discovery
on the statute-of-limitations issue. They conclude that
22a
“[t]he Director’s denial was an abuse of discretion and,
under the circumstances, a denial of Petitioners’ due
process rights.” See Op. Br. at 31. But Petitioners cite
no authority supporting their view that the ALJ
abused her discretion. And the Bureau couldn’t have
learned of Petitioners’ violations until they complied
with the Bureau’s CID, so additional discovery would
have been pointless. Our conclusion might have been
different had Petitioners pointed us to public documents that, for example, evinced Carnes’s knowledge
of Integrity’s misleading practices. But, based on the
record before us, we reject Petitioners’ argument.
What’s more, the Bureau complied with Petitioners’
valid discovery requests. It produced the consumer
complaints and related external communications about
Petitioners. Though Petitioners argue that they should
have received the Bureau’s “internal correspondence”
too, Op. Br. at 31, the ALJ didn’t err by denying their
request. Under 12 C.F.R. § 1081.206(b)(1)(ii), “[t]he
Office of Enforcement may withhold a document if:
. . . The document is an internal memorandum, note,
or writing prepared by a person employed by the
Bureau[.]” Nonetheless, Carnes complains that he
never received a privilege log for any withheld
documents. But the ALJ needn’t order a privilege log.
See 12 C.F.R. § 1081.206(c) (“The hearing officer may
require the Office of Enforcement to produce a list of
documents or categories of documents withheld[.]”)
(emphasis added).
C. Summary Disposition
Petitioners argue that the Director erred by ruling
on summary disposition that Carnes acted with
knowledge of Integrity’s illegal practices.
23a
Under CFPA, an individual may be held liable for a
corporation’s violations if “(1) he participated directly
in the deceptive acts or had the authority to control
them and (2) he had knowledge of the misrepresentations, was recklessly indifferent to the truth or falsity
of the misrepresentation[s], or was aware of a high
probability of fraud along with an intentional avoidance of the truth.” Gordon, 819 F.3d at 1193 (citation
omitted).16
Petitioners don’t challenge the finding that Carnes
controlled Integrity—the first requirement under
Gordon. They challenge only the Director’s finding
under the second requirement of Gordon about
knowledge. We note that the Director found that
Carnes knew about Integrity’s misrepresentations
and, alternatively, found that Carnes was at least
recklessly indifferent to the misrepresentations. See
Dkt. 308 at 15 (“[T]here is ample evidence that Mr.
Carnes knew that [Integrity]’s loan agreement misrepresented the amount that consumers were likely to
pay, and also knew that consumers were likely to pay
more than the amount disclosed unless they took
affirmative action.”); see also id. at 16 (“While Mr.
Carnes asserts that as CEO he was not familiar with
the details of [Integrity]’s loan agreement, I conclude
that he was at least recklessly indifferent to those
details[.]”). Yet, Petitioners’ opening brief mentions
16
In Gordon, the Ninth Circuit adopted the test for individual
liability for a corporation’s actions used under the FTC Act. 819
F.3d at 1193 n.8. Petitioners don’t object to importing the Ninth
Circuit’s test for individual liability from Gordon. And the parties
all cite Gordon in their briefing. We thus follow the Ninth
Circuit’s articulation of the relevant test in Gordon. We note that
other courts have similarly relied on the FTC Act to interpret
CFPA. See, e.g., CFPB v. NDG Fin. Corp., No. 15-cv-5211, 2016
WL 7188792, at *17 (S.D.N.Y. Dec. 2, 2016).
24a
the words “recklessly” and “indifferent” only when
stating the legal standard. See Op. Br. at 25, 33.
Petitioners’ brief provides no basis for why the
Director’s finding of reckless indifference would be
erroneous. See Bronson v. Swensen, 500 F.3d 1099,
1104–05 (10th Cir. 2007) (parties must adequately
brief the arguments they want our court to consider).
So we hold that the Director’s order properly found
Carnes liable for being recklessly indifferent to
Integrity’s practices.
Nevertheless, the Director didn’t err in also finding
that Carnes knew about Integrity’s misrepresentations. Petitioners argue that Carnes’s reliance on
counsel precludes a finding that Carnes was sufficiently knowledgeable. They contend that the Director
improperly “disregard[ed] other evidence that Mr.
Carnes did not substantively approve the loan agreement and instead relied on outside counsel.” Op. Br. at
34. But reliance on counsel isn’t a defense to liability.
See CashCall, 35 F.4th at 749 (Under CFPA, individual liability requires knowledge of the practices that
misled consumers, not knowledge that the misleading
practices were illegal). Addressing Carnes’s review
and approval of the loans, the Director had a solid
basis to find that “[a]lthough Mr. Carnes did not
personally draft the loan agreement that [Integrity]
used for those loans, he approved its use.” Dkt. 308 at
14; see also id. (Carnes testified: “Did they have my
approval to use the loan agreement? Yes.”); id. (“Q.
And in most cases they would pay substantially more
than the amount that’s reflected in the total amounts
25a
of payments box; is that right? A. They would pay
more.”).17
In short, we find the Director’s analysis consistent
with the applicable standard in Gordon. We therefore
reject Petitioners’ arguments.18
IV. Remedies Order
Petitioners challenge the remedies order on the
basis that the ALJ and Director didn’t allow them to
present evidence of their good-faith reliance on counsel
(as to restitution and civil penalties) and evidence of
their expenses (as to the Director’s residual disgorgement order). We reject Petitioners’ challenges.
A. Evidence of Good Faith
Petitioners argue that the ALJ erred by disallowing
evidence of their good faith through their advice-ofcounsel defense. They contend that the Director
should have denied restitution or civil penalties based
on this evidence. As earlier discussed in Section II.B.
of this opinion, Petitioners’ advice-of-counsel argument
opposing restitution lacks merit. As “developing case
law,” they cite two district-court decisions from the
Ninth Circuit concluding that advice of counsel is
relevant to restitution. But since Petitioners’ briefing,
the Ninth Circuit has ruled otherwise. See CashCall,
17
Petitioners contest the illegality of Integrity’s practice of
using remotely created checks to withdraw funds from customer
accounts. We agree with the Director that Petitioners’ practice
was “unfair” under CFPA.
18
In support of their argument that Carnes didn’t know that
Integrity’s loans were misleading, Petitioners rely on the State of
Delaware’s approval of their application to do business there. But
this didn’t include a legal review of the loan document under
federal law.
26a
35 F.4th at 750–51 (finding that reliance on counsel is
not an appropriate basis for denying restitution.).
As for the civil penalties under CFPA, the Director
must consider five possible mitigating factors before
imposing a civil-penalty order. See 12 U.S.C. § 5565(c)(3).
The Director considered all these factors, including
good faith, and rejected Petitioners’ challenge to the
ALJ’s recommended civil penalties. As earlier discussed,
the ALJ considered Carnes’s own testimony on this
point and deemed that sufficient. See Section III.C.,
supra. This is all that was required.19
B. Net Profits and Business Expenses
Petitioners complain that the ALJ kept them from
introducing evidence of Integrity’s legitimate business
expenses. In their opening brief, Petitioners claim an
offset for these expenses for any “disgorgement,” but
not an offset against the restitution award itself. Op.
Br. at 39. They acknowledge that “[t]hroughout the
proceedings, the CFPB sought restitution rather than
disgorgement.” Id. After that, they note that the
Director further ordered that “the Bureau will deposit
any remaining funds in the U.S. Treasury as disgorgement” after restitution amounts are transferred to
individual consumers. Dkt. 309 at 1.
Because the Director referred to a “disgorgement”
remedy, Petitioners seek an offset for expenses on
disgorged amounts under Liu v. SEC. In that case, the
Supreme Court held that “a disgorgement award that
does not exceed a wrongdoer’s net profits and is
awarded for victims is equitable relief permissible
19
Further, Petitioners repeatedly asserted attorney-client
privilege in responding to discovery requests, which hindered
the Bureau’s ability to contest any advice-of-counsel evidence.
Petitioners don’t dispute this fact.
27a
under [28 U.S.C.] § 78u(d)(5).” 140 S. Ct. at 1940. The
Court further ruled that “courts must deduct legitimate expenses before ordering disgorgement under
§ 78u(d)(5).” Id. at 1950. But the present case differs
from Liu.
Here, the Director ordered the full $38.4 million as
both legal and equitable restitution. Petitioners
haven’t challenged that designation and have thus
waived any challenge. So we evaluate the case as one
involving a legal, not equitable, remedy. Under § 5565,
the Bureau has jurisdiction in “[a]dministrative
proceedings or court actions” “to grant any appropriate
legal or equitable relief with respect to a violation of
Federal consumer financial law, including a violation
of a rule or order prescribed under a Federal consumer
financial law.” 12 U.S.C. § 5565(a)(1). Among the
listed available remedies is “restitution.” Id. at
§ 5565(a)(2)(C).
In contrast, Liu involved a disgorgement order
under a statute allowing only equitable relief.
Certainly, the Director in Petitioners’ case did describe
as “disgorgement” any possible sums deposited in the
U.S. Treasury for borrowers the Bureau couldn’t locate
to reimburse. See Dkt. 309 at 1 (“If funds remain after
this redress has been completed, the Bureau will
deposit any remaining funds in the U.S. Treasury as
disgorgement.”). But Petitioners offer no authority
that such deposits to the U.S. Treasury become
equitable disgorgement. In fact, in Liu, the Court
declared it an “open question” whether such deposits
are “consistent with the limitations of § 78u(d)(5).” Id.
at 1948. The Court noted that “[t]he parties have
not identified authorities revealing what traditional
equitable principles govern when, for instance, the
wrongdoer’s profits cannot practically be disbursed to
28a
the victims.” Id. at 1948–49. Left in this same
circumstance, we cannot conclude that Petitioners are
entitled to an offset for legitimate business expenses
against any future, hypothetical funds collected as
legal restitution, but by the Director’s order deposited
with the U.S. Treasury as disgorgement.20 Moreover,
Liu concerned the SEC’s authority to order disgorgement under 15 U.S.C. § 78u(d)(5). That statute limits
the SEC to granting “any equitable relief that may be
appropriate or necessary for the benefit of investors.”
15 U.S.C. § 78u(d)(5). But 12 U.S.C. § 5565(a) is
broader, permitting the Bureau to pursue both equitable and legal relief.
Finally, Petitioners contest the Director’s imposition
of joint and several liability for restitution or disgorgement “without consideration or evidence of what (if
any) profits of the alleged misconduct went to Mr.
Carnes individually.” Op. Br. at 39–40. The Bureau
responds that Petitioners have waived this argument
by failing to object to its request for joint and several
liability in moving for summary disposition before ALJ
Kirby or on appeal before the Director. Petitioners
reply that the possibility of disgorgement never arose
until the Director issued her order, so they couldn’t
have objected to its joint and several nature. Even so,
Petitioners could have objected to joint and several
liability for the full restitution award of $38.4 million.
20
In their reply brief, Petitioners enlarge their argument to
assert that the Director “ordered that the entire award be
retained by the government as ‘disgorgement,’ in essence, turning
the remedy into a disgorgement award.” Reply Br. at 18 (citing
Dkt. 309 at 1). In addition to asserting a new argument in the
reply brief, Petitioners mischaracterize the record as cited, which
does not support their account of it.
29a
In that circumstance, we conclude that Petitioners
have waived this issue too.21
CONCLUSION
The Director’s order is affirmed.
PHILLIPS, Circuit Judge, concurring.
In contesting the Director’s restitution award,
Petitioners don’t challenge the Director’s approval of
restitution as a legal (as well as an equitable) remedy.
Though I agree that Petitioners have waived any such
challenge on this point, I express some reservations
about legal restitution under § 5565(a) for a case in
which the issue is preserved.
Under 12 U.S.C. § 5565, the Bureau may sue either
in federal district court or in its own administrative
tribunal to seek “appropriate legal or equitable relief”:
(a) Administrative proceedings or court actions
(1) Jurisdiction[—]The court (or the
Bureau, as the case may be) in an action
or adjudication proceeding brought under
Federal consumer financial law, shall
21
We note that in Liu, the Court addressed an argument
against imposing joint and several liability. 140 S. Ct. at 1947,
1949. The Court pointed to “the common-law rule requiring
individual liability for wrongful profits,” and commented that the
SEC’s joint and several liability “could transform any equitable
profits-focused remedy into a penalty.” Id. at 1949. But the Court
further noted that “[t]he common law did, however, permit
liability for partners engaged in concerted wrongdoing.” Id. The
Court didn’t reverse the joint and several liability. Instead, it
noted that the petitioners, a married couple, had presented no
evidence that they did not both “enjoy the fruits of the scheme.”
Id. Here, Integrity and Carnes obviously were closely related, and
as in Liu, we see nothing making joint and several liability
“unjust.” See id.
30a
have jurisdiction to grant any appropriate legal or equitable relief with respect to
a violation of Federal consumer financial
law, including a violation of a rule or
order prescribed under a Federal consumer financial law.
12 U.S.C. § 5565(a)(1) (emphasis added). In my view,
whether this statute allows a given remedy depends
on the forum and the nature of the remedy sought. I
have three reasons for questioning whether “legal
restitution” is an appropriate form of relief, especially
when the Bureau chooses to litigate in its own
administrative tribunal.
First, restitution is generally considered to be an
equitable remedy. See Adams v. Cyprus Amax Minerals
Co., 149 F.3d 1156, 1162 (10th Cir. 1998); see also
CFPB v. Consumer First Legal Grp., LLC, 6 F.4th 694,
711 (7th Cir. 2021) (rejecting the Bureau’s attempt to
recharacterize an award of equitable restitution under
12 U.S.C. § 5565 as legal restitution). When Congress
refers to a remedy that is traditionally equitable,
courts presume that the remedy maintains its equitable character. See Liu, 140 S. Ct. at 1947 (“Statutory
references to a remedy grounded in equity must,
absent other indication, be deemed to contain the
limitations upon its availability that equity typically
imposes. Accordingly, Congress’ own use of the term
‘disgorgement’ in assorted statutes did not expand
the contours of that term beyond a defendant’s net
profits—a limit established by longstanding principles
of equity.” (cleaned up)). Nothing in § 5565 empowers
the Bureau to treat the listed remedies under § 5565(a)(2)
as legal or equitable for its convenience.
Second, the Bureau’s claim to “legal restitution”
might render superfluous another remedy listed in
31a
§ 5565(a)(2). See Lockheed Martin Corp. v. Admin.
Rev. Bd., 717 F.3d 1121, 1130 (10th Cir. 2013) (“It is a
rudimentary canon of statutory construction that such
superfluities are to be avoided.”). I am uncertain how
the Bureau’s “legal restitution” differs from “payment
of damages or other monetary relief,” which is
separately listed in § 5565(a)(2)(E).
Third, allowing the Bureau to obtain “legal restitution”
in an administrative forum raises Seventh Amendment concerns, which implicates the constitutionalavoidance canon. The Seventh Amendment guarantees jury-trial rights to parties sued for legal remedies.
See Liberty Mut. Fire Ins. Co. v. Woolman, 913 F.3d
977, 992 n.14 (10th Cir. 2019) (“Though the Seventh
Amendment guarantees the right to a jury trial in
any suit involving legal rights, this guarantee doesn’t
extend to equitable rights.” (cleaned up)); see also
Lorillard v. Pons, 434 U.S. 575, 583, 98 S.Ct. 866, 55
L.Ed.2d 40 (1978) (“In cases in which legal relief is
available and legal rights are determined, the Seventh
Amendment provides a right to jury trial.” (citation
omitted)); Jarkesy v. SEC, 34 F.4th 446, 454 (5th Cir.
2022) (the Seventh Amendment applies to actions
seeking legal relief) (citing Tull v. United States, 481
U.S. 412, 107 S.Ct. 1831, 95 L.Ed.2d 365 (1987)).
Under the constitutional-avoidance canon, courts
interpret federal statutes to avoid risking constitutional concerns. See United States v. Ciapponi, 77 F.3d
1247, 1250 (10th Cir. 1996); Antonin Scalia & Bryan
A. Garner, Reading Law: The Interpretation of Legal
Texts 247–48 (2012) (explaining that the “constitutionaldoubt canon “militates against not only those interpretations that would render the statute unconstitutional
but also those that would even raise serious questions
of constitutionality.”). Interpreting § 5565(a)(2) to
encompass “legal restitution” would enable the Bureau
32a
to file actions for legal relief in its own administrative
tribunals potentially in violation of the Seventh
Amendment.
Had Petitioners not waived their challenge to legal
restitution, I would reach the issue of whether § 5565
permits legal restitution in an administrative enforcement action. If it doesn’t, and only equitable restitution
is permitted, I would require an explanation why,
under Liu, the Bureau’s administrative restitution
order wouldn’t need to be reduced by Integrity’s
legitimate business expenses.
33a
APPENDIX B
UNITED STATES OF AMERICA
Before the
CONSUMER FINANCIAL PROTECTION BUREAU
————
ADMINISTRATIVE PROCEEDING
File No. 2015-CFPB-0029
————
IN THE MATTER OF
INTEGRITY ADVANCE, LLC and JAMES R. CARNES,
————
FINAL ORDER
IT IS ORDERED that, within 30 days after service
of this Final Order, Respondents Integrity Advance
LLC and James R. Carnes must pay restitution of
$38,453,341.62. They shall make this payment by wire
transfer to the Bureau, or to the Bureau’s agent. The
Bureau may use these funds to provide redress to
consumers who borrowed money from Respondent
Integrity Advance on or after July 21, 2011, in the
amount that each consumer paid in excess of the
amount disclosed in the Total of Payments box of
Integrity Advance’s loan agreement. If funds remain
after this redress has been completed, the Bureau will
deposit any remaining funds in the U.S. Treasury as
disgorgement. Respondents will have no right to
challenge any actions that the Bureau or its representatives may take under this portion of this Order.
However, if either of the Respondents appeals this
decision pursuant to 12 U.S.C. § 5563(b)(4), Respondents
may, within 30 days after service of this Order, pay
the award of restitution into an escrow account in lieu
of making the payment to the Bureau. The escrow
account shall be held by an entity that is chosen by
Respondents and is acceptable to the Bureau. The
34a
escrow account shall be established so that if all or any
portion of the restitution award is upheld on appeal,
that amount shall be released to the Bureau within
30 days after the mandate issues on that appellate
decision. Once the mandate has issued and the Bureau
has received the portion of the restitution award to
which it is entitled, any funds remaining in escrow
shall be released to Respondents.
IT IS FURTHER ORDERED that, within 30 days
after the service of this Final Order, Respondent Integrity
Advance shall pay a civil penalty of $7,500,000 to the
Bureau by sending those funds by wire transfer to the
Bureau or to the Bureau’s agent in compliance with
the Bureau’s wiring instructions. The civil money
penalty paid under this Consent Order will be
deposited in the Civil Penalty Fund of the Bureau as
required by § 1017(d) of the CFPA, 12 U.S.C. § 5497(d).
If Integrity Advance appeals this decision pursuant to
12 U.S.C. § 5563(b)(4), Integrity Advance may, within
30 days after service of this Order, pay the civil
penalty into an escrow account in lieu of making the
payment to the Bureau. The escrow account shall be
held by an entity that is chosen by Integrity Advance
and is acceptable to the Bureau. The escrow account
shall be established so that if all or any portion of the
civil penalty is upheld on appeal, that amount shall
be released to the Bureau within 30 days after the
mandate issues on that appellate decision. Once the
mandate has issued and the Bureau has received the
portion of the restitution award to which it is entitled,
any funds remaining in escrow shall be released to
Integrity Advance.
IT IS FURTHER ORDERED that, within 30 days
after service of this Final Order, Respondent James R.
Carnes shall pay a civil penalty of $5,000,000 to the
35a
Bureau by sending those funds by wire transfer to the
Bureau or to the Bureau’s agent in compliance with
the Bureau’s wiring instructions. The civil money penalty
paid under this Consent Order will be deposited in the
Civil Penalty Fund of the Bureau as required by
§ 1017(d) of the CFPA, 12 U.S.C. § 5497(d). If Mr.
Carnes appeals this decision pursuant to 12 U.S.C.
§ 5563(b)(4), Mr. Carnes may, within 30 days after
service of this Order, pay the civil penalty into an
escrow account in lieu of making the payment to the
Bureau. The escrow account shall be held by an entity
that is chosen by Respondent and is acceptable to the
Bureau. The escrow account shall be established so
that if all or any portion of the civil penalty is upheld
on appeal, that amount shall be released to the Bureau
within 30 days after the mandate issues on that
appellate decision. Once the mandate has issued and
the Bureau has received the portion of the restitution
award to which it is entitled, any funds remaining in
escrow shall be released to Integrity Advance.
IT IS FURTHER ORDERED that Respondents
Integrity Advance and James R. Carnes, their successors
and assigns, and their officers, agents, representatives, and employees, directly or through any corporation,
subsidiary, division, or other device, shall cooperate in
assisting the Bureau in determining the identity,
location, and amount of restitution due to each
consumer entitled to redress.
SO ORDERED.
/s/ Kathleen L. Kraninger
Kathleen L. Kraninger
Director
Consumer Financial Protection Bureau
January 8, 2021
36a
CERTIFICATE OF SERVICE
I hereby certify that I have served a true and correct
copy of the Final Order upon the following parties and
entities in Administrative Proceeding 2015-CFPB0029 as indicated in the manner described below:
Via Electronic Mail to Representatives for Consumer
Financial Protection Bureau
Benjamin Clark, Esq.
1700 G Street, NW
Washington, DC 20552
benjamin.clark@cfpb.gov
Stephen C. Jacques, Esq.,
Email: stephen.jacques@cfpb.gov
Alusheyi J. Wheeler, Esq.,
Email: alusheyi.wheeler@cfpb.gov
Deborah Morris, Esq.,
Email: deborah.morris@cfpb.gov
Kevin E. Friedl, Esq., Email: kevin.friedl@cfpb.gov
Via Electronic Mail to Representatives for Respondent
Richard J. Zack, Esq.
Pepper Hamilton, Esq.
3000 Two Logan Square
Philadelphia, PA 19103
zackr@pepperlaw.com
Michael A. Schwartz, Esq.,
Email: schwarma@pepperlaw.com
Christen M. Tuttle, Esq.,
Email: tuttlec@pepperlaw.com
Saverio S. Romeo, Esq.,
Email: romeos@pepperlaw.com
37a
Digitally signed by Jameelah Morgan
Date: 2021.01.11 14:38:24 -05’00’
Jameelah Morgan
Jameelah Morgan
Docket Clerk
Office of Administrative Adjudication
Bureau of Consumer Financial Protection
Signed and dated on this 11th day of January 2021 at
Washington, D.C.
38a
APPENDIX C
UNITED STATES OF AMERICA
Before the
CONSUMER FINANCIAL PROTECTION BUREAU
————
ADMINISTRATIVE PROCEEDING
File No. 2015-CFPB-0029
————
IN THE MATTER OF
INTEGRITY ADVANCE, LLC and JAMES R. CARNES.
————
DECISION OF THE DIRECTOR
INTRODUCTION
When lenders fail to comply with all applicable
consumer protection statutes, consumers can suffer
substantial harms. Integrity Advance (IA) was a
payday lender, and it violated the law. In particular,
it failed to comply with the Truth in Lending Act
(TILA), the Consumer Financial Protection Act (CFPA),
and the Electronic Fund Transfer Act (EFTA). IA
violated TILA by making disclosures as if its loans
were single payment loans, but then structuring its
loan agreements so that the loans functioned as multipayment installment loans. IA violated the CFPA
through its unfair and deceptive loan disclosure
practices, as well as by using remotely created checks
(RCCs) to withdraw funds from the accounts of
consumers who had attempted to block access. And it
violated EFTA by conditioning its loans on repayment
by preauthorized electronic fund transfers.
The Consumer Financial Protection Bureau (Bureau)
initiated this case by filing a Notice of Charges in
39a
November 2015 naming both IA and its CEO, James
Carnes, as Respondents. In 2016, Administrative Law
Judge Parlen L. McKenna conducted a trial. However,
after he had issued his Recommended Decision (and
both Respondents and the Bureau’s Enforcement Counsel
had filed appeals), this case was put on hold pending
the Supreme Court’s decision in Lucia v. SEC, 138 S.
Ct. 2044 (2018). As a result of that decision, it was
apparent that Judge McKenna had not been appointed
in a manner that was consistent with the Constitution’s
Appointments Clause. Accordingly, in May 2019, I
directed that this case be remanded to Administrative
Law Judge Christine Kirby (ALJ), who was then the
Bureau’s Administrative Law Judge, and who had
been appointed in a manner consistent with the
Constitution. In the course of the proceedings before
Judge Kirby, both parties filed motions for summary
disposition. She resolved those motions when she
issued her Recommended Decision on August 4, 2020,
granting the motion filed by Enforcement Counsel,
and denying the motion filed by Respondents. She held
that IA had violated TILA and EFTA. She also held
that both Respondents had violated the CFPA. Respondents appealed the ALJ’s Recommended Decision, and
both parties filed briefs. Case Documents (Docs.) 295297.1 On December 8, 2020, the parties presented oral
argument.
I affirm the ALJ’s conclusion that IA violated both
TILA and EFTA. I also affirm her holding that both
Respondents violated the CFPA. With respect to the
appropriate remedy, I conclude that Respondents
should be jointly and severally liable for restitution
1
Documents on the docket of this case are available at
https://www.consumerfinance.gov/administrative-adjudication-p
roceedings/administrative-adjudication-docket/integrity-advance/.
40a
amounting to $38,453,341.62. I further hold that IA is
liable for a civil penalty of $7.5 million, and Mr.
Carnes is liable for a civil penalty of $5 million. With
respect to injunctive relief, I order that Respondents
assist the Bureau in identifying and locating the
consumers who are entitled to redress.
To the extent that the ALJ’s findings and conclusions are consistent with this decision, I adopt them as
my own.
FINDINGS OF FACT AND LEGAL BACKGROUND
The following facts are not disputed.
A. Integrity Advance and James Carnes
IA was licensed by the state of Delaware as a shortterm, small-dollar lender. Case Document (Doc.) 273
at 1. It had a single store in Delaware, but made most
of its loans online. Enforcement Counsel Exhibit
(ECX) 68at 10, 24; Doc. 173 at 42.2 These loans ranged
in amount from $100 to $1000. Doc. 56 at 2. IA offered
only one product – consumer loans – and these loans
were its sole source of revenue. Doc. 172 at 94-95. IA
made its first consumer loan in May of 2008, and its
last in December of 2012, but it continued processing
loan payments until July of 2013. Doc. 173 at 132-33,
Doc. 273 at 2. IA was a wholly owned subsidiary of
Hayfield Investment Partners, Doc. 165 at 1, but had
no employees of its own, Doc. 173 at 6. Instead, it was
operated by individuals who, for the most part, were
paid by Hayfield. Id. At the time IA began making
loans to consumers, it was operated by four Hayfield
2
In her Scheduling Conference Order (Doc. 227), the ALJ
indicated that she would rely on exhibits that were admitted
during the hearing conducted by Judge McKenna. The parties
have not objected to this, and I will rely on those exhibits as well.
41a
employees. Doc. 172 at 53. When it reached its
maximum size in 2010 or 2011, approximately 20
employees operated IA. ECX 68 at 11-12. Although
Hayfield owned other companies, most of its profits
came from IA. Doc. 172 at 114-115. IA is no longer
offering loans. ECX 68 at 9.
Respondent James Carnes was both a founder of IA
and its de facto CEO. Doc. 172 at 94. He owned more
than 50% of IA. Doc. 172 at 100-103. Mr. Carnes was
the ultimate decision maker for IA, id. at 51, and he
had the responsibility for approving everything related
to IA’s business, id. at 209. For example, he had final
say over what appeared on IA’s website, id. at 217; he
made the final decision regarding IA’s underwriting
policies, id. at 59; and he was involved in the decision
as to which call center IA would use, id. at 64. As he
explained, he had authority to make all decisions
regarding IA’s policies and procedures, Id. at 209. Mr.
Carnes’ role with respect to IA did not change throughout the time period relevant to this proceeding. Id. at
52.
B.
IA’s loans
IA provided short-term loans to consumers. Doc. 56
at 2. To get a loan, the consumer had to provide IA
with employment information, length of pay period,
and pay dates. Doc. 88B at 2. Consumers were also
required to provide an ACH authorization. ECX 2.
This authorization gave IA access to the consumer’s
bank account, thereby allowing IA to deposit the
money that the consumer borrowed directly in the
consumer’s bank account, and also allowing IA to
make withdrawals directly from that account. Nearly
all payments on IA loans were made automatically
through ACH authorization. Doc. 87D at 3.
42a
IA had a standard price for its loans. It charged new
customers $30 per hundred dollars borrowed, and it
charged repeat customers $24 per hundred dollars
borrowed. ECX 1. To illustrate, the following is a
portion of IA’s loan agreement, including the TILA
disclosure and description of the consumer’s obligation
to repay, that IA provided to a first-time borrower who
was borrowing $300:
FEDERAL TRUTH IN LENDING DISCLOUSURES
ANNUAL
PERCENTAGE
RATE
The cost of
your credit as a
yearly rate.
644.12%
FINANCE
CHARGE
The dollar
amount the
credit will
cost you.
$90.00
Amount
Financed
Total of
Payments
The amount
The amount
of credit
you will have
provided to paid after you
you or on your have made all
behalf.
payments as
$300.00
scheduled.
$390.00
Your Payment Schedule will be: One (1) payment of
$390.00 due on 7/15/2011 (“Payment Due Date”).
Security: You are giving a security interest in the
ECHECK/ACH Authorization.
Prepayment: If you pay off early you will be entitled
to a refund of the unearned portion of the finance
charge.
See the terms of the Loan Agreement below for any
additional information about nonpayment, default,
and prepayment refunds.
Itemization of Amount Financed: Amount given to you
directly: $300.00. Amount paid on Loan#:xxxxxxx with
us: $390.00
PAYMENT OPTIONS: You must select your payment
option at least three (3) business days prior to your
43a
Payment Due Date by contacting us at (800) 505-6073.
At that time, you may choose;
(a) Payment in full: You may pay the Total of Payments shown above, plus any accrued fees, to satisfy
your loan in full. When you contact us and choose
this option, we will debit Your Bank Account (defined
below) for the Total of Payments plus any accrued fees,
in accordance with the ACH Authorization below; OR
(b) Renewal: You may renew your loan (that is, extend
the Payment Due Date of your loan until your next Pay
Date1) by authorizing us to debit Your Bank Account
for the amount of the Finance Charge, plus any accrued
fees. If you choose this option, your new Payment Due
Date will be your next Pay Date1, and the rest of the
terms of the Loan Agreement will continue to apply.
AUTO-RENEWAL: If you fail to contact us to confirm
your Payment Option at least three (3) business days
prior to any Payment Due Date, or otherwise fail to
pay the loan in full on any Pay Date, Lender may
automatically renew your loan as described under (b)
above, and debit Your Bank Account on the Payment
Due Date or thereafter for the Finance Charge and any
accrued fees. Your new Payment Due Date will be your
next Pay Date1, and the rest of the terms of the Loan
Agreement will continue to apply. You must contact us
at least three (3) business days prior to your new
Payment Due Date to confirm your payment option for
the Renewal. If you fail to contact us, or otherwise fail
to pay the loan in full on your new Payment Due Date,
we may automatically renew the loan until your next
Pay Date1. After your initial loan payment, you may
obtain up to four (4) Renewals. All terms of the Loan
Agreement continue to apply to Renewals. All Renewals
are subject to Lender’s approval. Under Delaware law,
if you qualify, we may allow you to enter into up to four
44a
(4) Renewals, also known as a “refinancing” or a
“rollover”. The full outstanding balance shall be due
upon completion of the term of all Renewals, unless
you qualify for Auto-Workout, as described below.
AUTO-WORKOUT. Unless you contact us to confirm
your option for Payment in Full prior to your Fourth
Renewal Payment Due Date, your loan will automatically be placed into a Workout Payment Plan. Under
the Workout Payment Plan, Your Bank Account will
automatically be debited on your Pay Date1 for accrued
finance charges plus a principal payment of $50.00,
until all amounts owed hereunder are paid in full. This
does not limit any of Lender’s other rights under the
terms of the Loan Agreement. All Workout Payment
Plans are subject to Lender’s approval
ECX 2. (Footnote “1” in the loan agreement refers to
the following sentence that appears several pages
later: “The term ‘Pay Date’ refers to the next time
following the Payment Due Date, that you receive
regular wages or salary from your employer. Because
Renewals are for at least fourteen (14) days, if you are
paid weekly, your loan will not be Renewed until the
next Pay Date that is at least fourteen days after the
prior Payment Due Date.”)
As the above example shows, IA calculated and
disclosed the annual percentage rate (APR), the finance
charge, and the total of payments based on the
assumption that the loan would be paid off in a single
payment on the consumer’s next payday. But as a
result of the way in which IA structured repayment
options, that rarely happened. Although the line captioned “Your Payment Schedule” described a onepayment loan, the “Payment Options” paragraph
described things somewhat differently. That paragraph
explained that the consumer must, at least three days
45a
prior to the payment due date, select one of two
payment options. If the consumer selected the “Payment
in full” option, then IA would debit the consumer’s
account for the full amount of the principal and
finance charge on the due date in a single payment.
If the borrower made no selection (or selected the
“renewal” option), then the loan defaulted to “autorenewal” status. The loan agreement provides that
when a loan went into auto-renewal status, IA would
debit the consumer’s account for only the finance
charge ($90 in the above example), and would then
renew the loan until the consumer’s next pay date. See
Doc. 172 at 219-220. There is no indication in the
record that IA would provide the consumer with new
TILA disclosures when it “renewed” the loan and
began withdrawing multiple payments.
At the end of this first renewal, i.e., the consumer’s
next payday, the pattern would repeat unless the
consumer took affirmative action: IA would again
debit the finance charge from the consumer’s account
and would again “renew” the loan for another term. Id.
Unless the consumer took affirmative action to stop
the process, IA would automatically renew the loan
four times. (Delaware law precludes any additional
renewals. 5 Del. Admin. Code 2210-3.1.2; see Doc. 172
at 219-220.) If the consumer continued to take no
action after four renewals, the loan would automatically switch from “auto-renewal” status into “autoworkout” status. Doc. 172 at 220. This meant that
IA would debit the consumer’s account for the finance
charge plus $50 of principal (i.e., $140 in the above
example). Doc. 88D at 239. And if the consumer continued to take no action, then IA would continue, each
subsequent payday, to debit the (declining) finance
46a
charge and $50 of principal until the loan was paid in
full. Id.
Although the loan agreement described two payment
options (Payment in full; Renewal), IA sent borrowers
a “welcome email” that described the options differently.
Doc. 91A at 24. IA sent this email after approving
loans, but before disbursing loan proceeds. Doc. 90 at
2. This email described three repayment options:
Dear CUSTOMER_FIRST_NAME,
CONGRATULATIONS! Your loan for LOAN_AMOUNT
has been approved. This email confirms your loan has
been processed. It will be sent to your bank tonight and
the funds will be available to you within 1 to 2 business
days. Your first due date will be LOAN_DUE_DATE.
Remember you have 3 options of paying the loan back:
1) YOU CAN LET THE LOAN AUTOMATICALLY
RENEW. All renewals are on your pay dates. After the
first initial payment, the next 4 renewals will only
require payment of the finance charge. Starting with the
5th renewal, in addition to the finance charge, we will
also take out $50 of principal. This will continue until
the loan is repaid in full, unless of course you select
either option 2 or 3 below. NOTE: PLEASE REMEMBER,
YOU CAN SELECT OPTIONS 2 OR 3 AT ANYTIME
DURING YOUR LOAN REPAYMENT PROCESS
2) PAY THE LOAN DOWN IN PART. If you want to
increase your payment so you pay the loan back faster,
you may do so in any amount ($50 increments
required) which will bring down the principal of your
loan. Just call us 3 business days in advance of your
pay date so we can make the change.
3) PAY THE LOAN IN FULL. Once again, just call us
three business days in advance so we may make the
47a
change on your account. If you pay your loan off before
your next pay date you only pay the finance charge for
the days the loan remains unpaid.
Thank You and Have a Great Day!
Integrity Advance
Cust Svc: (800) 505-6073
Fax: (800) 581-8148
Doc. 91A at 24. But just like the loan agreement, if the
consumer took no action, the loan would renew four
times, and then go into auto-workout status. The
following chart shows the debits that IA would deduct
from the consumer’s account (assuming a $300 loan to
a first-time borrower) if the consumer took no action:
See Doc. 1 at 6; Doc. 21 at 5. Thus, this table shows
that, if the consumer took no action with respect to the
loan, the total amount of the finance charge and the
total of payments that the consumer would ultimately
pay would far exceed the amounts disclosed on the
TILA disclosure.
To get a loan from IA, a borrower had to initial or
sign the loan agreement in seven places. See ECX 2.
48a
The borrower’s fourth signature accepted the ACH
authorization. That portion of the agreement included
the following paragraph:
You agree that we may re-initiate a debit
entry for the same amount if the ACH debit
entry is dishonored or payment is returned
for any reason. The ACH Authorizations set
forth in the Loan Agreement are to remain in
full force and effect for this transaction until
your indebtedness to us for the Total of Payments, plus any other charges or fees incurred
and described in the Loan Agreement, is fully
satisfied. You may only revoke the above
authorizations by contacting us directly. If
you revoke your authorization, you agree to
provide us with another form of payment
acceptable to us and you authorize us to
prepare and submit one of more checks drawn
on Your Bank Account so long as amounts are
owed to us under the Loan Agreement.
ECX 2. Pursuant to this paragraph, if the consumer
attempted to revoke the ACH authorization, IA could
create paper checks (remotely created checks or RCCs)
(“you authorize us to prepare and submit one or more
checks drawn on Your Bank Account”) and use them
to withdraw payments from the consumer’s account.
See Doc. 172 at 235-236. The consumer would not
prepare or sign the RCC, nor would the consumer even
see the RCC. See ECX 94 at 1-2.
C. Procedural history
1. The Notice of Charges
The Bureau’s Enforcement Counsel filed its Notice
of Charges with the Bureau’s Office of Administrative
Adjudication on November 18, 2015. Doc. 1. The Notice
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contained seven counts. Count I alleged that IA
violated TILA because it based its TILA disclosures on
the assumption that the consumer would pay off the
loan in a single payment on the consumer’s first postloan payday, even though that would happen only if
the consumer took affirmative action. Count II alleged
that IA’s violations of TILA also violated the CFPA.
Count III alleged that both IA and Mr. Carnes had
engaged in a deceptive act or practice in violation of
the CFPA because the net impression created by the
loan agreement misled consumers to believe that the
finance charge and the total of payments were lower
than the amounts consumers would actually pay.
Count IV alleged that both IA and Mr. Carnes had
prevented consumers from assessing the actual costs
of the loans they entered into, and that this was
unfair, in violation of the CFPA. Count V alleged that,
by requiring consumers to accept the ACH authorization as a condition of getting a loan, IA had conditioned
its loans and the extension of credit on repayment by
preauthorized electronic fund transfer, in violation of
EFTA and its implementing Regulation E (Reg. E).
Count VI alleged that IA’s violations of EFTA and
Reg. E also violated the CFPA. Count VII alleged that
IA and Mr. Carnes had committed an unfair practice
in violation of the CFPA when they used RCCs to
withdraw money from the accounts of consumers who
believed they did not owe money to IA.
The Notice sought a variety of remedies, including
a permanent injunction prohibiting future violations
of TILA, its implementing Regulation Z, EFTA, its
implementing Reg. E, the CFPA, and any other federal
consumer financial law. The Notice also sought an
award of restitution to compensate injured consumers,
as well as disgorgement, and a civil penalty.
50a
2. Proceedings before Judge McKenna
This matter was originally assigned to the Administrative Law Judge Office of the U.S. Coast Guard because
in 2015 the Bureau did not have an administrative law
judge of its own. Doc. 8. The matter was then heard
by Coast Guard Administrative Law Judge Parlen
McKenna. At the conclusion of several days of hearings, Judge McKenna issued his Recommended Decision.
Doc. 176. Both IA and the Bureau’s Enforcement
Counsel filed notices of appeal. Docs. 177, 178. However,
resolution of those appeals was delayed, first pending
a decision by the D.C. Circuit in PHH Corp. v. CFPB,
881 F.3d 75 (D.C. Cir. 2018), and then pending a
decision by the Supreme Court in Lucia v. SEC, 138
S. Ct. 2044 (2018). Docs. 208, 210. As a result of the
Court’s decision in Lucia, I concluded that Judge
McKenna had not been constitutionally appointed.
Doc. 216. Accordingly, I directed that the matter be
remanded to the Bureau’s Administrative Law Judge,
Christine Kirby, for a new hearing and Recommended
Decision. Id. I further directed that Judge Kirby “give
no weight to, nor presume the correctness of, any
prior opinions, orders, or rulings issued by Judge
McKenna.” Id.
3. Proceedings before
Christine Kirby
the
Bureau’s
ALJ,
On October 28, 2019, the ALJ issued an order
denying further discovery regarding Respondents’
statute of limitations argument. Doc. 238. Then, on
January 24, 2020, she issued an order denying IA’s
Motion to Dismiss. Doc. 249. Finally, she issued her
Recommended Decision on August 4, 2020. Doc. 293.
All three of these decisions are relevant to this appeal.
51a
a. Order denying further discovery
On October 28, 2019, the ALJ denied Respondents’
motion for additional discovery. Doc. 238. Respondents
had requested that the ALJ issue a subpoena requiring Enforcement Counsel to provide 1) all consumer
complaints regarding IA; 2) all external correspondence regarding IA; 3) all internal correspondence
regarding IA; and 4) any other internal documents
regarding IA. With respect to the first two requests,
the ALJ concluded that Enforcement Counsel had
already provided those documents to Respondents
when it fulfilled its obligation to make disclosures
pursuant to Bureau Rule 206, 12 C.F.R. § 1081.206.
She denied the third and fourth requests because she
concluded that Respondents were seeking documents
that were privileged and could be withheld pursuant
to Rule 206.
b. Order denying IA’s motion to dismiss
On November 15, 2019, Respondents filed a Motion
to Dismiss and/or for Summary Disposition. Doc. 239.
On January 24, 2020, the ALJ denied that motion in
its entirety. Doc. 249. First, she rejected Respondents’
argument that Enforcement Counsel were precluded
from asserting the allegations in Count IV of the
Notice of Charges. (Count IV alleged that IA’s loan disclosures were unfair in violation of the CFPA.) During
the proceedings before Judge McKenna, Respondents
and Enforcement Counsel filed a joint stipulation
agreeing to dismiss Count IV with prejudice. Doc. 127.
A week before the parties filed the stipulation, Judge
McKenna had entered an order granting in part
Enforcement Counsel’s motion for summary disposition. Doc. 111. In that order, he granted summary
disposition with respect to Count III of the Notice of
Charges, which alleged that IA’s loan agreement was
52a
deceptive. In the stipulation, the parties agreed that
the consumer harm resulting from Count III was coextensive with the harm caused by Count IV. Accordingly,
in the interest of judicial economy, the parties agreed
to the dismissal of Count IV. Judge Kirby observed
that the stipulation was based on Judge McKenna’s
order on the motion for summary disposition, and that,
pursuant to my remand (Doc. 216), I had directed that
she give no weight to that order. Because the parties
had agreed to the dismissal based on an order that no
longer has any effect, the ALJ held that Enforcement
Counsel was not precluded from pursuing the allegations in Count IV.
Next, Judge Kirby addressed Respondents’ contention that the three counts in the Notice of Charges that
applied to Mr. Carnes (Counts III, IV, and VII) were
time-barred. (Counts that apply to IA were not timebarred because Enforcement Counsel had entered into
tolling agreements with IA that tolled the statute of
limitations with respect to IA, but those agreements
did not apply to Mr. Carnes. See Docs. 200, 201.) The
relevant statute of limitations, 12 U.S.C. § 5564(g)(1),
provides that the Bureau may not bring an action
“more than 3 years after the date of discovery of the
violation.” Respondents argued that the statute of
limitations should be interpreted to run for three years
from the time the Bureau discovers, or should have
discovered, the violations. The ALJ declined to decide
whether the statute of limitations incorporates a
constructive discovery rule. Doc. 249 at 23. However,
she held that even if it did, the statute of limitations
had not expired with respect to Mr. Carnes by
November 18, 2015, when the Bureau filed its Notice
of Charges. She recognized that, prior to November 18,
2012 (three years before the Bureau filed its Notice of
Charges), the Bureau had information regarding IA’s
53a
violations. But it was only after that date that the
Bureau either knew, or should have known, of evidence
supporting the conclusion that Mr. Carnes was liable
for IA’s misrepresentations. This was, in part, because
IA took 11 months to comply with the Bureau’s civil
investigative demand. Finally, the ALJ concluded that
the CFPA’s statute of limitations also applied to the
allegations that IA violated TILA and EFTA (Counts
I, V), as well as to Counts II and VI, which alleged
CFPA violations derived from the TILA and EFTA
violations.
c. Recommended decision
On May 15, 2020, both Enforcement Counsel and
Respondents filed motions for summary disposition.
Docs. 272, 275. On August 4, 2020, the ALJ issued her
Recommended Decision granting Enforcement Counsel’s
motion and denying the one filed by Respondents. Doc.
293. With respect to the first two counts of the Notice
of Charges, the TILA count and the associated CFPA
count, the ALJ concluded that, because IA’s loans
would automatically roll over unless the consumer
took affirmative steps, the loan was actually a multipayment loan. Because IA made disclosures as if the
loan were a single payment loan, it violated TILA, and
thus also committed the associated violation of the
CFPA. Id. at 22-29.
Next, the ALJ concluded that, not only did IA’s loan
disclosures violate TILA, but they were also deceptive
and unfair (Counts III and IV). She held that the net
impression of the loan agreement was that the loan
was a single payment loan, thereby misrepresenting
the costs of the loan. She concluded that this misrepresentation of costs was material. With respect to
unfairness, she held that consumers were injured
when they paid more than they expected to pay, that
54a
they could not avoid the injury because the costs were
never revealed to them, and that IA’s disclosure practices did not benefit consumers. Id. 29-50.
Counts V and VI alleged a violation of EFTA and an
associated CFPA violation. The parties agreed that, by
signing the ACH authorization in the loan agreement,
the consumer was thereby agreeing to a preauthorized
electronic fund transfer in the form of both credits
to, and debits from, the consumer’s bank account.
The ALJ observed that there was nothing in the loan
agreement indicating that the ACH authorization was
optional. Further, IA disbursed funds electronically
and provided no alternate means whereby consumers
could receive the money they borrowed. This meant
that consumers had to sign the ACH authorization to
receive funds. As a result, the ALJ concluded that IA
had conditioned its loans on consumers’ repayment by
preauthorized electronic fund transfer, thereby violating
EFTA and the CFPA. Id. at 50-56.
The ALJ held that IA’s use of remotely created
checks (RCCs) was unfair, as alleged in Count VII. She
held that, because IA used RCCs only when consumers
attempted to block IA from accessing their bank
accounts, RCCs substantially harmed consumers. She
held that consumers could not avoid the injury caused
by the RCCs because the single sentence in the loan
agreement that authorized RCCs was unclear. She
also held that RCCs did not provide offsetting benefits
when used to collect payments for loans whose costs
were never adequately disclosed. Id. at 56-64.
The ALJ next held that Mr. Carnes could be held
liable for IA’s violations of the CFPA as alleged in
Counts III, IV, and VII. She reviewed undisputed facts
and concluded that there was overwhelming evidence
that Mr. Carnes had authority to control both IA and
55a
the practices at issue in those three counts. She also
concluded that Mr. Carnes knew and understood the
contents of the loan agreement, knew that the TILA
boxes disclosed the loans that IA offered as if they
were single payment loans, and also knew that the
vast majority of loans would default into auto-renewal
and auto-workout status. Accordingly, she held that
Mr. Carnes had both the requisite authority to control
and the knowledge sufficient to hold him liable for IA’s
violations. Id. at 64-76.
Finally, the ALJ addressed the appropriate remedy.
She held that IA should be held liable for restitution
related to its TILA violations, and that this restitution
should be used to provide redress for consumers who
borrowed from IA because they did not get the benefit
of the bargain they thought the
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