“Appropriations Clause” Does Not Sink The CFPB

“Appropriations Clause” Does Not Sink The CFPB

The Great Recession, the economic downtown that spanned 2008 to 2012, was the worst economic crisis in the United States since the depression of 1929 to 1939. Federal Reserve History, The Great Recession and its Aftermath.

One of the outgrowths of the Great Recession was the Consumer Financial Protection Bureau, which sought to protect consumers from unfair, predatory, or illegal conduct by financial institutions:

Title 12, Chapter 53, Subchapter V of the U.S. Code contains the legislation that created and regulates the Bureau. Legal Information Institute, Cornell University School of Law.

In or about 2020, the Community Financial Services Association of America, Limited, and others brought suit in the 5th Circuit (located in the South, and known to be quite conservative), to have the funding source of the CFPB declared unconstitutional, and thus force Congress back to the drawing board with regard to funding the organization. The underlying goal was seemingly to deny funding to the CFPB and thereby defang it as a regulatory body. The 5th Circuit held that the CFPB’s funding was unconstitutional.

However, the federal government appealed the 5th Circuit ruling, and the US Supreme Court issued his ruling in May 2024, upholding the funding of the CFPB, and thus granting a lifeline to the agency itself.

The key argument in the Supreme Court was “source and purpose” form of funding of the CFPB, by which Congress grants an appropriation of up to $600 million for enforcement of the agency’s regulations, was unconstitutionally vague, and a breach of the Appropriations Clause, Art. I, §9, cl. 7. The Community Financial Services Association of America, Limited, argued that such funding would place no restrictions on CFPB’s funding authority, and represented an abdication of funding authority by Congress, in favor of the executive branch.

At oral argument and in its written opinion, the Supreme Court pushed back, pointing out that the Customs Service, from its beginning, and the US Postal Service, had funding that either was not subject to a fixed annual limit, or had the discretion to spend within specific bounds to effect their statutory mission.

Associate Justice Thomas, writing for the majority, said that:

“In short, the origins of the Appropriations Clause confirm that appropriations needed to designate particular revenues for identified purposes. Beyond that, however, early legislative bodies exercised a wide range of discretion. Some appropriations required expenditure of a particular amount, while others allowed the recipient of the appropriated money to spend up to a cap. Some appropriations were time limited, others were not. And, the specificity with which appropriations designated the objects of the expenditures varied greatly.”

. . .

“[The CFPB’s] funding statute contains the requisite features of a congressional appropriation. The statute authorizes the Bureau to draw public funds from a particular source—“the combined earnings of the Federal Reserve System,” in an amount not exceeding an inflation-adjusted cap. 12 U. S. C. §§5497(a)(1), (2)(A)–(B). And, it specifies the objects for which the Bureau can use those funds–to “pay the expenses of the Bureau in carrying out its duties and responsibilities.” §5497(c)(1).

“[Para.] Further, the Bureau’s funding mechanism fits comfortably with the First Congress’ appropriations practice . . .

“[Para.] For these reasons, we conclude that the statute that authorizes the Bureau to draw funds from the combined earnings of the Federal Reserve System is an “Appropriatio[n] made by Law.” We therefore hold that the requirements of the Appropriations Clause are satisfied.”

[Bold and italics added]

Applying this reasoning to the CFPB, the SCOTUS held at the term “appropriation,” as understood at the time of the adoption of the Constitution, did not require Congress to a fixed figure every year. And appropriation may validly be based upon a combination of both fees generated and Congressional grant, and moreover, need not be fixed as a required expenditure every fiscal year.

In the end, the legal questions were 1) does the Appropriations Clause of the Constitution bar Congress from giving an agency an upper limit budget appropriation, stating that the agency may spend no more than $XX in the fiscal year, rather than a fixed a dollar amount, and 2) does such funding violate separation of powers, by abdicating to the executive branch the decision or the extent of funding granted to the regulatory agency.

The Supreme Court answered “no” to both questions.

Consumer Financial Protection Bureau v. Community Financial Services Association of America, Limited, Docket No. 22-448, Decided May 16, 2024

The CFPB will live to fight another day.


HOMESTEAD EXEMPTION: California Increases Protection

HOMESTEAD EXEMPTION: California Increases Protection

As of January 2021, California’s Homestead Exemption increases from a minimum of $300,000, to a maximum of $600,000. This means that many more homeowners in liquidation, Chapter 7 bankruptcy proceedings can keep their homes.
The California Civil Code will be amended as follows:
Sec. 704.730. (a) The amount of the homestead exemption is the greater of the following:
(1) The countywide median sale price for a single-family home in the calendar year prior to the calendar year in which the judgment debtor claims the exemption, not to exceed six hundred thousand dollars ($600,000).
(2) Three hundred thousand dollars ($300,000).
(b) The amounts specified in this section shall adjust annually for inflation, beginning on January 1, 2022, based on the change in the annual California Consumer Price Index for All Urban Consumers for the prior fiscal year, published by the Department of Industrial Relations.
The statute does not say whether this will apply in bankruptcy as the “automatic homestead,” or whether the debtor must file a Declaration of Homestead. Based thereon, the debtor should strongly consider filing the Declaration with the County Recorder.

SCOTUS: Violating Bankruptcy Discharge Serves Up Creditor for Contempt

SCOTUS: Violating Bankruptcy Discharge Serves Up Creditor for Contempt

The primary purpose of the bankruptcy stay [11 USC Sec. 362] is to protect the debtor. (In re Fuel Oil Supply and Terminaling, Inc., 30 BR 360, 362 (Bankr.N.D.Tex.1983), cited in In re Globe Investment & Loan Co., Inc., 867 F.2d 556 (1989)). By stopping all collection actions against the debtor, the bankruptcy stay acts 1) as an injunction to preserve the estate, and 2) to prevent the creditors from trying to go around the bankruptcy process to collect.
Once the debtor receive the discharge (11 USC Sec. 727), creditors are no longer able to collect the discharged debts. A creditor who, despite the discharge, seeks to collect a pre-bankruptcy debt, runs the risk of a contempt citation and punishment by the federal court.
And so it was held recently by the US Supreme Court which held that a business dispute with the debtor, that had begun prior to the debtor’s filing for bankruptcy, was discharged by the bankruptcy, and no further collection activity would be allowed.
Writing for a unanimous US Supreme Court, Associate Justice Breyer opined that the business creditors, who had initiated the lawsuit against the debtor (Mr. Taggart) had no reasonable basis to believe that the bankruptcy stay, and the subsequent discharge would not act to bar the continued litigation against the debtor. The debt was considered wiped away, and the creditors actions, seen objectively, were not only impermissible, but gave rise to contempt sanctions:
“Under the fair ground of doubt standard, civil contempt therefore may be appropriate when the creditor violates a discharge order based on an objectively unreasonable understanding of the discharge order or the statutes that govern its scope.”
Taggart v. Lorenzen, ___ U.S. ___, 139 S.Ct. 1795, 1801, 204 L.Ed.2d 129 (2019).
The facts showed that the creditors had a working knowledge of the effects of bankruptcy law, and objectively should have realized that the pre-bankruptcy debt was no longer collectible. Therefore, the Supreme Court remanded the matter back to the 9th Circuit, to impose appropriate sanctions:
“We conclude that the Court of Appeals erred in applying a subjective standard for civil contempt. Based on the traditional principles that govern civil contempt, the proper standard is an objective one. A court may hold a creditor in civil contempt for violating a discharge order where there is not a “fair ground of doubt” as to whether the creditor’s conduct might be lawful under the discharge order.”
The Takeaway: Creditors Who Know that a Debtor has Filed for Bankruptcy Should Take No Action Against the Discharged Debtor, without First Having a Very Detailed, Careful Conversation with an Attorney, Lest Those Creditors End Up Held in Contempt!!

BANKRUPTCY LAW (Importance of Automatic Stay Part 2)

BANKRUPTCY LAW (Importance of Automatic Stay Part 2)

BANKRUPTCY LAW (Importance of Automatic Stay); When a debtor files for bankruptcy, 11 USC Section 362(a)(1) automatically stays any other judicial proceeding involving the debtor. The automatic stay “plays a vital role in bankruptcy. The automatic stay aids the debtor in getting a financial fresh start. The automatic stay is “one of the fundamental debtor protections provided by the bankruptcy laws.” The stay promotes stability of the bankruptcy estate for both the debtor and creditors. In re Schwartz, 954 F.2d 569, 571 (9th Cir.1992), cited in FAR OUT PRODUCTIONS, INC. v. OSKAR, 247 F.3d 986, 994-995 (2001)

BANKRUPTCY LAW (Damages for Violation of Automatic Stay)

BANKRUPTCY LAW (Damages for Violation of Automatic Stay)

Telecom provider violated automatic stat of 11 USC § 362(a)(6) by calling the debtors after they filed their bankruptcy petition and mailing a copy to the provider; and then, three months after the petition date writing to the debtors demanding immediate payment. This conduct justified actual damages, including emotional distress, punitive damages, and contempt sanctions.

IN RE FREELAND, Bankruptcy Case No. 19-32309-pcm7, US Bankruptcy Court, District of Oregon, filed 8/12/2020.

STANDING: Mortgage Liability

STANDING: Mortgage Liability

STANDING (Mortgage Liability): Bankruptcy Court erred in ruling that Debtor had no standing to challenge Nationstar in the latter’s claim under her Deed of Trust. She showed constitutional & prudential standing through demonstrating (1) injury in fact (2) causation and (3) redressability as to her interest in the note, for the purpose of her adversary action against Nationstar. (In re Baroni [Ch.11], CA 9 BAP, filed 11/10/2015 [argued and submitted at Malibu, CA])

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