United States: Judge Punishes CFPB For Misconduct Toward Payment Processors

Last Updated: September 14 2017
Article by Dustin N. Nofziger, Jeffrey Alberts and Pinchus D Raice

In an order that could have important implications for the enforcement efforts of the Consumer Financial Protection Bureau ("CFPB") and other of the federal financial regulatory agencies, last month U.S. District Judge Richard W. Story of the Northern District of Georgia sanctioned the CFPB for willful discovery misconduct by dismissing several third party payment processors from a multi-defendant CFPB enforcement litigation. 

The order in CFPB v. Universal Debt Solutions, LLC, No. 1:15-CV-859 (N.D. Ga. Aug. 25, 2017), marks the second major setback this year for the CFPB in its efforts to pursue third party payment processors for alleged violations of the Consumer Financial Protection Act ("CFPA"). In March, a federal district judge in the District of North Dakota dismissed a CFPB lawsuit against a third party payment processor without prejudice, noting that the CFPB's complaint had failed to allege sufficient facts to show that the payment processor's allegedly unlawful acts or omissions violated industry standards or injured consumers. See CFPB v. Intercept Corp., No. 3:16-CV-144, 2017 WL 3774379, at *4 (D.N.D. Mar. 17, 2017). 

Background

The CFPB's complaint in the Universal Debt Solutions matter sought civil money penalties and injunctive and other relief against both "debt collectors" and "payment processors."  The payment processors included Global Payments, Inc., a major publicly-traded payment processor with a $14.9 billion market capitalization. The CFPB's complaint alleged that the payment processors had facilitated a scheme by the debt collectors to defraud consumers by using threats, intimidation, and harassment to collect "phantom" debts that the consumers did not owe or that did not belong to the debt collectors. After the debt collectors obtained the consumers' payment information, the CFPB alleged, the debt collectors provided that information to the payment processors, who enabled the debt collectors to accept check, card, and electronic payments and provided the debt collectors with a false patina of credibility. 

After the CFPB survived the payment processors' motion to dismiss, see CFPB v. Universal Debt & Payment Solutions, LLC, No. 1:15-CV-00859, 2015 WL 11439178, at *1 (N.D. Ga. Sept. 1, 2015), the payment processors utilized Federal Rule of Civil Procedure 30(b)(6) to serve the CFPB with corporate representative deposition notices. Rule 30(b)(6) allows a party to a lawsuit to name an organization as the deponent, and to require the organization to designate one or more knowledgeable persons to testify on specified topics on the organization's behalf. The payment processors noticed the CFPB under Rule 30(b)(6) on such topics as:

  • The facts relating to the CFPB's claim that a payment processor "knowingly" provided "substantial assistance" to the allegedly unlawful conduct of the debt collectors by approving merchant applications from the debt collectors that were "replete with indicia of fraud"; 
  • The factual bases, including the sources of those facts, for each and every allegation pleaded against a payment processor in the CFPB's complaint; and 
  • The facts that the CFPB could "reasonably identify" as "exculpatory" of a payment processor. 

The CFPB unsuccessfully objected to the 30(b)(6) depositions on the grounds that the noticed topics inquired into areas protected by the attorney work product doctrine and applicable privileges. Judge Story overruled these objections on the grounds that the noticed topics sought inquiry into factual matters, as opposed to the protected mental impressions, case strategies, and legal opinions of the CFPB's attorneys. 

Despite this ruling, as well as Judge Story's subsequent guidance, the CFPB provided 30(b)(6) witnesses for each of the payment processors' noticed depositions who were unprepared, and who responded to questions by reading (oftentimes unresponsive) written scripts for as long as 40-60 minutes at a time. The CFPB's witnesses also refused to identify any exculpatory facts, taking the position that the CFPB's extensive investigation had not yielded any exculpatory facts with respect to the payment processors.  Meanwhile, the CFPB's attorneys defending the 30(b)(6) depositions lodged frequent work product and privilege objections in an effort to prevent witnesses from answering questions about the factual bases of the CFPB's claims.

It is fair to say that these tactics infuriated Judge Story, who found that the CFPB had "blatantly" and "willfully" disregarded his repeated instructions that the CFPB's 30(b)(6) witnesses were required to answer factual questions, and found that the CFPB had "willfully" failed to present knowledgeable 30(b)(6) witnesses for each of the noticed depositions. Judge Story also characterized the CFPB's position that its extensive investigation had not yielded any exculpatory facts as reflective of a "bad faith attempt to frustrate the purposes of Defendants' depositions." As a result, Judge Story struck the counts of the CFPB's complaint against the payment processors and dismissed the payment processors from the case.

Analysis

The Universal Debt Solutions order provides a useful discovery roadmap for defendants in CFPB enforcement litigations brought in federal court. Defendants may be able to leverage Judge Story's order to require the CFPB to provide knowledgeable 30(b)(6) witnesses to answer a wide range of highly relevant factual questions, including whether the CFPB has identified any exculpatory facts. The order also represents a significant, public reprimand to the CFPB, which may think twice about bringing enforcement lawsuits in federal court where the agency will be subject to robust discovery under the Federal Rules of Civil Procedure.

The Universal Debt Solutions order may also prove useful to defendants in administrative enforcement actions, where some (but not all) of the federal financial regulatory agencies permit discovery depositions. For example, the OCC allows depositions in administrative enforcement actions of "a person, including another party, who has direct knowledge of matters that are non-privileged, relevant, and material to the proceeding, and where there is need for the deposition." 12 C.F.R. § 19.170. The Universal Debt Solutions order may provide defendants in administrative enforcement actions brought by the OCC and other federal financial regulatory agencies with powerful arguments as to the wide variety of factual questions that agency witnesses should be required to answer in such depositions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Jeffrey Alberts
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