On August 15, Solo filed a motion to dismiss counts of the complaint (except 3 and 7). However, Solo’s lead argument seeks dismissal of the entire complaint based on the filing and prosecution of the lawsuit using funding obtained from the Federal Reserve Board in violation of Dodd-Frank Act which requires that the CFPB may only be funded out of “combined earnings of the Federal Reserve System.” Since September 2022, the Federal Reserve System has incurred substantial losses and, thus, no earnings. The Complaint states:
THIS LAWSUIT WAS FILED AND IS BEING PROSECUTED USING FUNDS OBTAINED IN VIOLATION OF THE BUREAU’S ENABLING STATUTE AND THE CONSTITUTION.
This enforcement action suffers from a fatal, threshold infirmity that requires dismissal with prejudice: it is being litigated with funds transferred to the Bureau in violation of statutory restrictions on the Bureau’s funding and, therefore, in violation of the Appropriations Clause’s mandate that “[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” U.S. Const. art. I, §9, cl. 7. Under the Dodd-Frank Act, the Bureau funds its operations by making a demand of the Federal Reserve in “the amount determined by the [Bureau’s] Director to be reasonably necessary to carry out” its operations, subject to a cap of twelve percent of the total operating expenses of the Federal Reserve. 12 U.S.C.§5497(a)(1)-(2). Those funds may come, however, only “from the combined earnings of the Federal Reserve System.” Id. §5497(a)(1) (emphasis added). The “earnings” of the Federal Reserve are its net earnings – i.e., revenues in excess of liabilities. The Supreme Court recognized as much in CFSA [v. CFPB]. It held that the Appropriations Clause applies to the Bureau’s funding, because the funds derive from the “surplus funds in the Federal Reserve System [that] would otherwise be deposited into the general fund of the Treasury.” 601 U.S. at 425 (emphasis added); see 12 U.S.C. §289(a)(3) (directing transfer of surplus funds to the Treasury). The Federal Reserve’s “surplus fund[s]” are its “net earnings.” 12 U.S.C. §289(a)(2) (emphasis added). The plain meaning of the term “earnings” (which the Dodd-Frank Act does not define) confirms this interpretation. “Earnings” means “net income” – i.e., income in excess of [expenses]. See Earnings, Oxford Dictionary of Accounting (4th ed. 2010) (defining “earnings” as “[t]he net income or profit of a business”); Nasdaq, Glossary (defining “earnings” as “[n]et income for the company during a period”);Webster’s Third New Int’l Dictionary 714 (3d ed. 2002) (defining “earnings” as [t]he balance of revenue for a specific period that remains after deducting related costs and expenses.); Merriam-Webster’s Collegiate Dictionary 391 (11th ed. 2007) (defining “earnings” as “the balance of revenue after deduction of costs and expenses”). Thus, the Bureau’s funding must come from the combined net income or profits of the Federal Reserve System.
Since September 2022, the Federal Reserve has had no net earnings or profits. Swank Decl., Ex. 2. For the year ending December 31, 2023, the Federal Reserve reported a cumulative “deferred asset” amount of $133.3 billion, which “represents the net accumulation of costs in excess of earnings.” Id., Ex. The Federal Reserve continues to operate at a loss, reporting a deferred asset of $175 billion as of last month. Id., Ex. 4 at 48. Despite its lack of earnings, the Federal Reserve has continued to transfer funds to the Bureau. Id., Ex. 5 at 4 (reporting transfer of $315 million for first quarter of FY 2024). These transfers are, as the Bureau acknowledges, the “principal[]” means by which “[t]he CFPB is funded.” Id. Thus, the Bureau filed and is prosecuting this lawsuit using funds transferred in violation of its enabling statute. The requirement that the Bureau’s funding come from the combined “earnings” of the Federal Reserve System stands in stark contrast to how Congress chose to fund the Financial Stability Oversight Council and the Office of Financial Research – both also created by the Dodd-Frank Act. For the first two years of its existence, the expenses of the Oversight Council were “treated as expenses of, and paid by, the Office of Financial Research,” 12 U.S.C. §5328, which was funded by the Federal Reserve in “an amount sufficient to cover the expenses of the Office,” id. §5345(c). Congress could have chosen to fund the Bureau from any source of revenue at the Federal Reserve’s disposal. Instead, it limited the Bureau’s funding to a specific source: the combined “earnings” of the Federal Reserve System. This is not to say that the Bureau must cease operations until the Federal Reserve returns to profitability. If the “sums available to the Bureau” from the Federal Reserve are “not … sufficient to carry out [its] authorities,” the Bureau may seek appropriations directly from Congress. 12 U.S.C. §5497(e)(1)(A). But the Bureau may not flout its enabling statute and bypass Congress by using unlawfully requisitioned funds to prosecute this enforcement action. The Court should dismiss the Complaint with prejudice.
To our knowledge, this is now the fourth time that this argument has been made within just a few weeks. For our blogs about the other cases, see here, here, and here.
We would expect to see this argument raised routinely as a defense in most, if not all, future enforcement lawsuits brought by the CFPB. To read more click here.