A federal judge forced the Consumer Financial Protection Bureau to obey the same rules of discovery in civil litigation that apply to everybody else even if government officials are annoyed by them.
Judge John E. McDermott rejected a motion by CFPB. As a result, the bureau's officials were required to submit to depositions — cross-examinations of witnesses conducted under oath but outside the courtroom — in a case filed by the bureau.
The bureau's lawsuit was filed earlier this year in the U.S. District Court for the Central District of California against Morgan Drexen, Inc., which provides record storage for thousands of bankruptcy lawyers across the country.
As part of the normal discovery process, Morgan Drexen asked to depose CFPB officials who are seeking privileged lawyer-client information in thousands of cases that is stored by the California-based company.
But CFPB balked, telling the court that the bureau has an inherent right to “nondisclosure” and that “even the disclosure of purely factual material may be protected by deliberative process privilege.”
The CFPB added that “requiring the bureau to designate any individual to appear at deposition would only serve to annoy, oppress, and cause undue burden on the bureau.”
Morgan Drexen fired back, telling the court that “as a civil litigant, CFPB cannot hide behind privilege to avoid basic discovery.”
The company warned that “permitting CFPB to avoid discovery in these circumstances would deprive Morgan Drexen of its rights to confront its accuser and make Morgan Drexen into a 21st Century Sir Walter Raleigh: wrongly accused but unable to defend itself.”
McDermott's Sept. 15, 2014, order forced CFPB to provide a witness for an October deposition. Samuel Gilford, a CFPB spokesman, told the Washington Examiner that the Morgan Drexen case was the only time a bureau official has submitted to a deposition. The bureau was created by Congress in 2010.
Gilford claimed "the court did not order the deposition," but when he was asked by the Examiner about McDermott's order, the spokesman said "we'll decline to comment on ongoing litigation."
Gilford directed the Examiner to two CFPB documents that showed the bureau won settlements from at least 47 companies who paid more than $2 billion since the agency opened its doors in July 2011.
A careful reading of the documents, however, suggests that CFPB appears to win most of its cases administratively and few companies decide to challenge the bureau in court.
According to a CFPB “enforcement highlights” web page, most of its money came either from direct “CFPB orders” or court “consent orders.”
In only eight cases, including the Morgan Drexen case, did CFPB initiate lawsuits.
“There’s a lot of incentives to immediately settle when your regulator brings an enforcement action against you,” said Randy Miller, a Venable, LLP attorney representing Morgan Drexen. “There is an overwhelming incentive to settle” outside of court.
Legal observers believe CFPB’s claim of blanket immunity to depositions has little lawful basis.
“I do not think that there is legal support for the conclusion that there is a blanket prohibition on taking depositions of federal agency employees,” said Jonice Gray Tucker, a partner with BuckleySandler LLP, a Chicago-based law firm that provides legal counsel to financial service companies.
James Copland, director of the Center for Legal Policy at the Manhattan Institute in New York, said all plaintiffs, including federal agencies, should be treated identically. “I don’t think that civil enforcement action should be treated any differently due to a federal agency,” he said.
A March 14, 2013, securities enforcement and litigation update published by the WilmerHale law firm in Boston also said that once an agency goes into court, it must abide by federal discovery rules, including submitting to depositions.
The ability of both sides to depose each other, WilmerHale argued, levels the playing field. “Several recent court decisions strongly suggest that the playing field levels once the agency ends up in litigation,” the law firm wrote.
WilmerHale cited five cases since 2012 that affirmed federal agency officials aren't exempted from depositions.
Among the five was a 2012 case involving another federal agency, the U.S. Securities & Exchange Commission, titled SEC v. Merkin. Of that case, the WilmerHale update said “the court determined that 'like any party litigating in federal court, Merkin has the right to take a ... deposition from the SEC.'”
Venable's Miller said CFPB should follow the same rules that apply to any other federal plaintiff. “They are a plaintiff in civil matters so they will have to follow the rules just like any other plaintiff in a civil litigation matter,” he said.
Tucker suggested that CFPB’s aggressiveness may be a result of having “more junior staff attorneys [who] may be less experienced. In addition, some staffers are relative newcomers to consumer financial services issues.”
In addition, she said, “this can present challenges because, in making day-to-day decisions, some of the enforcement staff may not yet fully understand the businesses they are regulating or how much effort goes into responding to their requests.”
That can “result in situations where the staff take positions that are not completely reasonable, or take actions that are perceived as more aggressive than they may have intended,” she said.
The Examiner spoke to three former CFPB staff attorneys about the agency's position on depositions. All three declined to speak on the record.
John Berlau, a senior fellow at the Competitive Enterprise Institute who follows CFPB, said the bureau's claim that it is exempt from depositions shows the agency is “acting above the law. They are pushing the limits.”
The CFPB posture is hypocritical because “they are saying no, we can’t be deposed like any other party in a lawsuit. It’s just reeks of hypocrisy,” he said.