Court Tosses CFPB Suit as Discovery Sanction

Financial Services Law

A Georgia federal court judge has dismissed a lawsuit filed by the Consumer Financial Protection Bureau (CFPB or Bureau) against four payment processors as a sanction for demonstrating a “blatant disregard” for the court’s instructions.

What happened

In 2015, the CFPB filed suit against numerous individuals and entities in connection with a massive debt collection scheme. According to the Bureau’s complaint, the individuals created limited liability companies in Georgia and New York to perpetrate the operation, which allegedly used the telephone broadcast services of one of the defendants to broadcast millions of threatening and false statements to consumers in text messages and telephone calls.

When consumers provided their payment information, the debt collectors utilized several payment processors to withdraw funds from their accounts. Four payment processors were named as defendants in the action, accused of providing substantial assistance to the debt collectors’ unfair or deceptive conduct and engaging in unfair acts or practices, all in violation of the Consumer Financial Protection Act.

The payment processors pushed back. Several of the defendants served the CFPB with Federal Rule of Civil Procedure 30(b)(6) deposition notices, seeking more information about the claims against them.

Although the Bureau objected—telling the court that it had already provided the information requested, that the noticed topics included inquiries into topics protected by the law enforcement and deliberative process privilege, and that the depositions were an improper attempt to depose CFPB counsel as to mental impressions—the court allowed the depositions, as long as they stayed within the bounds of factual matters.

In an order, U.S. District Court Judge Richard W. Story was clear that certain topics were fully permissible, including the factual bases (and the source of those facts) for each and every allegation pleaded against the defendants in the CFPB’s complaint. But after just the first deposition of a Bureau employee conducted by a payment processor, the parties all ended up on a telephone conference with the court.

The defendant explained that the CFPB witness used “memory aids” to deliver rote, sometimes unresponsive answers to the questions, while the Bureau’s counsel relied heavily on privilege objections to prevent the witness from answering questions. Judge Story reiterated that factual support for contentions was an area of inquiry that was appropriate and instructed the rest of the depositions to move forward.

However, the remaining depositions largely mirrored the first. The payment processors then moved for sanctions against the Bureau pursuant to Rule 37, which grants district courts broad discretion to fashion appropriate sanctions for the violation of discovery orders.

The defendants argued that the CFPB did not present a knowledgeable witness and that the Bureau’s privilege and work product objections were highly improper and obstructed the defendants from receiving answers to questions the court had identified as fair territory. Reopening the depositions would be futile, the payment processors added, and the only appropriate sanction should be striking the claims against them.

In a scathing order, Judge Story agreed.

The court rejected the CFPB’s contention that given the volume of facts and documents in the case, testimony without memory aids was impossible.

“Reviewing the various deposition transcripts reveals … that these ‘memory aids’ are properly characterized as scripts,” he wrote, noting that on more than one occasion, the witness responded to a question by reading for roughly 40 minutes entirely from the memory aid and “the readings were often unrelated to the question asked.”

“The Court was quite clear, both in its initial order that the CFPB sit for 30(b)(6) depositions and during the April 12 telephonic conference: more was expected of the CFPB’s witness than rote answers similar to what was already available to Defendants through contention interrogatories,” the court said. “By relying almost exclusively on the memory aids, the CFPB’s witness failed to abide by the Court’s instructions.”

The Bureau witness also took the unreasonable position that the investigation had not yielded a single exculpatory fact, the judge added.

“Surely, in the mass of evidence in this case, the CFPB could find some exculpatory evidence,” the court said. “Its insistence that it could not reflects an unwillingness to comply with the Court’s instructions and a bad faith attempt to frustrate the purpose of Defendants’ depositions. At the very least, the CFPB’s refusal to testify about any exculpatory evidence amounts to a failure to present a knowledgeable witness.”

The CFPB also demonstrated “blatant disregard” for the court’s instructions by continuing to assert privilege and work product objections, “recycl[ing] many of the same arguments over and over” as it “put up as much opposition as possible at every turn.”

In light of the Bureau’s pattern of conduct, Judge Story was “not optimistic” about reopening the depositions. Instead, the court struck the counts of the complaint against the payment processors and dismissed all four from the litigation as sanctions pursuant to Rule 37.

To read the order, click here.

Why it matters

In addition to serving as a stinging rebuke to the CFPB, the Georgia federal court’s order provides incentive for other defendants in CFPB actions to push back and have the Bureau provide the legal and factual foundations of its claims, perhaps using Rule 30(b)(6) depositions or via another legal route.



pursuant to New York DR 2-101(f)

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