How Buckley v. Valeo May Help The CFPB

By Jason Parsont

From Columbia Law's Blue Sky Blog on Corporations and Capital Markets

On Jan. 25, the D.C. Circuit issued a controversial decision in the Noel Canning case.[1]  The Court invalidated three of President Obama’s recess appointments to the National Labor Relations Board after finding that the President overreached in making the appointments without Senate confirmation. The holding implies that the President’s recess appointment of Richard Cordray, as Director of the Consumer Financial Protection Bureau (“CFPB”), would likewise be invalid. This is of great interest to banks and others in the financial services industry who are regulated by the new agency.

In my recent post, Columbia Law Professors Weigh in on Noel Canning, available here, I relay the views and reactions of three experts in the field on the merits of the decision. This post tackles a different inquiry:  If the Supreme Court affirms Noel Canning on the same grounds, will the de facto officer doctrine or a related principle shield the validity of the past rules and orders of the CFPB?  The possibility that such work could be laid to waste is the CFPB’s most pressing dilemma.  After providing some additional background, I argue that a distinct, but related, doctrine from Buckley v. Valeo[2] may solve this problem.

Background

Much of the financial services industry and most Congressional Republicans were vehemently opposed to the creation of the CFPB in the lead up to the Dodd-Frank Act and have since undertaken a fierce campaign to undermine the agency.[3]  The quest continues:  less than a week after the Noel Canning decision came down, Republican Senators introduced two new bills to limit funding to the CFPB, add mandatory Republican representation to its leadership, and hobble its ability to prescribe rules.[4]  These events, coupled with the decision itself, are just the latest in a series threatening to reopen a regulatory gap identified in the aftermath of the 2008 financial crisis; a gap that the CFPB was created to close.

This campaign initially culminated in a showdown between Republicans and Democrats in December 2011.  With enough votes to sustain a filibuster in the Senate, Republican leaders made clear that they would prevent confirmation of any nominee for Director of the CFPB unless the full Congress passed legislation to neuter the agency.  As the President generally needs Senate confirmation to make appointments, this was no empty threat.  It would allow a minority of Senators to indefinitely postpone the functioning of a critical component of financial reform.

The President does not need Senate approval, however, during the Senate’s recess.  Accordingly, when the Senate took a five week break beginning December 17, 2011, where they agreed not to conduct business, the President declared a recess and unilaterally appointed Richard Cordray as the agency’s first Director on January 4, 2012.

In spite of the five week break, there were pro forma sessions held during it every three days – some lasting no more than 41 seconds. Senate Republicans viewed these as technically preventing a recess.  The President and his legal counsel disagreed, viewing the Senate’s functional unavailability as the very essence of a recess.

Just over a year later, on January 25, 2013, the D.C. Circuit – through a panel of three GOP-appointed judges – found in Noel Canning that a recess did not occur.  Accordingly, the President misused his recess appointments power.  If the Supreme Court affirms on the same grounds, this would not only imperil Cordray’s appointment, but more critically could jeopardize the past work of the CFPB.  This includes a series of administrative orders against Capital One, American Express, and others, and twenty-nine final rulemakings.

Why Buckley and its progeny may solve this dilemma

Whereas Noel Canning, at its core, is a separation of powers case concerning the President’s ability to make appointments without Senate confirmation, the famous case of Buckley v. Valeo, in one holding, dealt with the opposite problem:  the ability of Congress to make appointments without the participation of the President.

In Buckley, the Court reviewed a statutory procedure for appointing the six voting members of the Federal Election Commission (the “FEC”).  The statute allowed the majority of the FEC to be appointed by Congress without any participation of the President.   This procedure was found to violate the President’s appointment power.

The Buckley Court, however, was clear that the appointment defect would not negate any past acts of the FEC:

[T]he Commission’s inability to exercise certain powers because of the method by which its members have been selected should not affect the validity of the Commission’s administrative actions and determinations to this date, including its administration of those provisions, upheld today, authorizing the public financing of federal elections. The past acts of the Commission are therefore accorded de facto validity. . . .

Almost twenty years later, in Ryder v. United States, the Supreme Court recognized this de facto validity doctrine to be similar to the long-recognized de facto officer doctrine.[5]  This doctrine “confers validity upon acts performed by a person acting under the color of official title even though it is later discovered that the legality of that person’s appointment or election to office is deficient.”

In Ryder, the Court considered whether the de facto officer doctrine would preserve a criminal conviction by two military appeals judges who were appointed to their position by the General Counsel of the Department of Transportation, a person who patently lacked the Constitutional authority to appoint military judges.   The Court found that the lower court, which relied on Buckley, erred in according de facto validity to the criminal convictions handed down by the wrongly appointed military judges.

On account of this holding, some have argued that Ryder represents a fundamental departure from Buckley.[6]  But Ryder itself does not suggest so drastic a move.  On the contrary, it appears more likely that Ryder does nothing more than carve out an exception to the de facto officer doctrine and that Ryder operates under a separate and distinct line of cases than Buckley.

First, the Ryder Court took great pains to separate Buckley into a different bucket. The Court makes clear that Ryder is a de facto officer doctrine case, but that Buckley was not:  Buckley did not “explicitly rel[y] on the de facto officer doctrine, though the result reached  . . . validated the past acts of public officials.”  The Court also discounts the notion that Buckley may “have implicitly applied a form of the de facto officer doctrine.”  This was the Court’s primary means of distinguishing the two cases.

Second, the Court made efforts to synthesize the two cases by citing Buckley with approval in explaining the two purposes of the Appointments Clause: separation of powers and structural integrity.[7]  Buckley falls into the former and Ryder into the latter.  This latter line of cases has a distinct history from Buckley, but they have been read in harmony with each other.[8]  The Court also stated that the lower court’s reliance on Buckley was “not without reason” and it made no effort to overrule Buckley’s holding or distinguish the case in other ways.  Although the Ryder Court chose, in that particular case, not to extend Buckley’s holding beyond its facts, it did not foreclose applying Buckley’s holding to a more similar set of facts.  Given the many factual differences between Buckley and Ryder,[9] it makes sense that they would not control each other.

Third, the Ryder Court took a distinctly different approach in seeking to harmonize its holding with its close descendents:  the factually similar de facto officer doctrine cases.  The primary point of difference was that the earlier cases involved defendants who were trying to take a second bite at the apple, whereas the defendant in Ryder raised a timely objection.  The Court found that a timely objection foils the operation of the de facto officer doctrine because “[a]ny other rule would create a disincentive to raise Appointments Clause challenges with respect to questionable judicial appointments.”  Subsequent Courts have identified the timeliness distinction as the essence of Ryder.[10]

Fourth, Courts have generally followed the outcome of Buckley in the case of administrative agencies, even when they have considered Ryder.  For example, the Supreme Courts of California and the Southern District of Florida each chose to uphold the past acts of agencies after considering both Ryder and Buckley.[11]   The Supreme Court of Illinois did the same considering only Ryder.[12] So did the district of Kansas in a closely analogous case to Noel Canning that preceded Ryder.[13]  Moreover, a review of the Shepard’s Summary of cases for Ryder does not seem to reveal any Court to date that has used Ryder to invalidate the past acts of an administrative agency.  To the contrary, it appears every Court to consider the question has accorded de facto validity to the agency’s past acts.  This may serve as the best indication of how future courts may handle the issue.

The good news for the CFPB is that, whether or not Cordray’s appointment is ultimately invalidated, there appears to be a strong basis for finding the agency’s past acts, at least to the extent that they are final, de facto valid.   Given the emphasis of Ryder on timeliness, an exception for orders and rules that have not yet been finalized and are timely challenged would make sense.  Given the political climate, this could imperil pending and future action.   Nonetheless, the Buckley line of cases may solve the CFPB’s most pressing dilemma.

Comments and further research in this area would be valuable.

Endnotes:

[1] Noel Canning v. National Labor Relations Board, 2013 U.S. App. LEXIS 1659 (Jan. 25, 2013).

[2] 424 U.S. 1 (1976).

[3] See generally Arthur E. Wilmarth Jr., The Financial Services Industry’s Misguided Quest to Undermine the Consumer Financial Protection Bureau, 31 Rev. Bank. and Fin. L. 881, 886-900  (Jan. 09, 2012), available at http://ssrn.com/abstract=1982149.

[4] See S.190, A bill to prohibit the use of Federal funds for certain activities of the National Labor Relations Board and the Consumer Financial Protection Bureau (introduced by Sen. Mike Johanns Jan. 31, 2013); S.205, A bill to replace the Director of the Bureau of Consumer Financial Protection with a 5-person Commission, to bring the Bureau into the regular appropriations process, to provide for a safety and soundness check, and for other purposes (introduced by Sen. Jerry Moran, Jan. 31, 2013).

[5] See Ryder v. United States, 515 U.S. 177, 183 (1995).

[6] See, e.g., Kent Barnett, The Consumer Financial Protection Bureau’s Appointment With Trouble, 60 Am. U. L. Rev. 1459, 1483, Footnote 166 (2011) (explaining that Ryder rejected “the application of a ‘de facto officer’ doctrine commonly applied to statutorily improper appointments”); see also Kevin Sholette, Note, The American Czars, 20 CORNELLJ.L. & PUB. POL’Y 219, 240 n.172 (2010) (“The Court’s unwillingness to apply the de facto officer doctrine to Appointments Clause challenges jeopardizes the validity of any actions or decisions made by improper appointees.”)

[7] The former line of cases concerns aggrandizement of one branch of the government at the expense of another.  The latter line concerns the universe of actors who can exercise the powers of either branch.  Buckley is described as a “separation of powers” case because it concerned a statutory right of Congress to minimize the President’s appointment power.  Ryder, on the other hand, is a structural integrity case because it concerned whether the General Counsel of the Department of Transportation was on the list of people who could exercise the appointment power.

[8] See e.g., Freytag v. Commissioner, 501 U.S. 868, 884-890 (1991).

[9] To illustrate some of these differences, Buckley was a civil case, whereas Ryder was a criminal case; Buckley concerned an administrative agency, whereas Ryder concerned a military court; the defect in Buckley imperiled a variety of past agency acts, whereas the defect in Ryder jeopardized only a criminal conviction; in addition, as noted in the main text, the defect in Buckley concerned a separation of powers issue, whereas the defect in Ryder concerned a structural integrity issue.

[10] See, e.g., Office of Thrift Supervision v. Paul, 985 F. Supp. 1465, 1475 (S.D. Fla. 1997) (“Ryder does provide an exception to the de facto officer doctrine, specifically when ‘one makes a timely challenge to the constitutional validity of the appointment of an officer who adjudicates his case.’”); In re Fichner, 144 N.J. 459, 471 (N.J. 1996) (“In Ryder  . . . the Supreme Court permitted a constitutional challenge to the composition of the Board of Military Review but only because the issue had been raised in a direct challenge while the case was pending before that Board.”).

[11] See Marine Forests Society v. California Coastal Com., 36 Cal. 4th 1, 57 (Cal. 2005); Office of Thrift Supervision v. Paul, supra note 30 at 1476.

[12] Daniels v. Indus. Comm’n (archibald Candy Co.), 201 Ill. 2d 160 (Ill. 2002);

[13] Franklin Sav. Ass’n v. Director of Office of Thrift Supervision, 740 F. Supp. 1535, 1542 (D. Kan. 1990), reversed on other grounds by Franklin Sav. Ass’n v. Director, Office of Thrift Supervision, 934 F.2d 1127 (10th Cir.Kan. 1991)

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