Banking and Finance Law Daily No federal jurisdiction over state law claims in 9/11 victim compensation litigation
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Friday, September 14, 2018

No federal jurisdiction over state law claims in 9/11 victim compensation litigation

By Nicole D. Prysby, J.D.

Modifying a previous order, a federal district court in New York held that it did not have jurisdiction over the New York Attorney General’s claims against RD Legal Funding (RD Legal) for making allegedly usurious loans in the form of cash advances to individuals who qualified for compensation under the September 11th Victim Compensation Fund of 2001 (VCF). The Consumer Financial Protection Bureau and NYAG brought claims against RD Legal, alleging violations of the Consumer Financial Protection Act and New York state law. In a June 2018 order, the court held that the CFPB’s structure is unconstitutional and it therefore lacked the authority to bring claims under the CFPA, but also concluded that the NYAG had independent authority to bring claims under the CFPA and allowed the NYAG’s claims to go forward. In the current order, the court modified that ruling and held that because the basis for its dismissal of the claims brought by the CFPB was that the enabling statute is unconstitutional and should be invalidated in its entirety, there was no statute under which the NYAG’s CFPA claims could proceed. The court also decided not to retain jurisdiction over the state law claims. Although some of the state law claims did raise a federal question, it was not a question with significance to the federal system as a whole. The court declined to exercise supplemental jurisdiction over the remaining state law claims because discovery had not yet begun and only one motion had been heard, there would be no prejudice to the parties if the NYAG refiled in state court (CFPB v. RD Legal Funding, LLC, et al., Sept. 12, 2018, Preska, L.).

Background. In a previous order partially denying a motion to dismiss on June 21, 2018, the court held that the CFPB’s structure is unconstitutional and it therefore lacked the authority to bring claims under the CFPA. The court went on to conclude that the NYAG had independent authority to bring claims under the CFPA and allowed the NYAG’s claims under the CFPA and New York law to go forward. But the court amended the June ruling with the Sept. 12, 2018, order and concluded that the NYAG’s claims should be dismissed for lack of federal jurisdiction. The court then considered whether it should retain jurisdiction over the state law claims.

Jurisdiction over state law claims. Some of the NYAG’s claims turned on the question of whether victims’ purported assignment of their monetary awards from the September 11 VCF violate the Anti-Assignment Act. The court held that although the VCF touches the federal system by being funded through taxpayer dollars at the federal level, the question of what the victims could do with their award money does not raise "broad consequences to the federal system or the nation." No constitutional issues were implicated, nor would the decision involve a determination of a federal agency’s obligation under federal law. Therefore, the question raised by the Anti-Assignment Act did not have significance to the federal system as a whole and the state law claims based on the Act did not present a substantial federal question giving rise to federal jurisdiction.

The court also declined to exercise supplemental jurisdiction over the remaining state law claims, finding that New York courts are best suited to resolve the issues involving only New York law. Discovery has not begun, so there is no significant inconvenience or prejudice to the parties if the plaintiff refiles in state court. And because the only action taken so far by the federal court was to decide a motion to dismiss, the state court would not need to duplicate efforts made by a federal court.

CFPA claims. The court dismissed the NYAG’s claims under the CFPA "without prejudice." However, the court had also concluded that the proper remedy for the constitutional issue with the CFPB’s structure was to invalidate Title X in its entirety. Therefore, stated the court, there was no statute for the NYAG to proceed under. RD Legal asserted in a September 12 letter to the court that the dismissal without prejudice was a clerical error and the CFPB claims should have been dismissed with prejudice.

The case is No. 1:17-cv-00890-LAP.

Attorneys: Hai Binh Thi Nguyen for the CFPB. Jane M. Azia, New York State Office of the Attorney General, for People of the State of New York. Eric Todd Kanefsky (Harris, O'Brien, St. Laurent & Chaudhry LLP) and Jeffrey M. Hammer (McDermott, Will & Emery) for RD Legal Funding LLC, RD Legal Funding Partners, LP and RD Legal Finance, LLC.

Companies: People of the State of New York; RD Legal Funding LLC; RD Legal Funding Partners, LP; RD Legal Finance, LLC

MainStory: TopStory CFPB DoddFrankAct EnforcementActions NewYorkNews StateBankingLaws

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