WASHINGTON (CN) - Morgan Drexen, a California-based purveyor of "legal support services," has sued the Consumer Financial Protection Bureau, claiming the new federal agency seeks to collect unconstitutionally protected attorney-client material, including personal financial information.
The lawsuit comes two months after Wisconsin ordered Morgan Drexen to pay $6.1 million in fines and restitution and ordered it to get out of the state.
The Wisconsin Department of Financial Institutions claimed Morgan Drexen violated consumer protection laws on debt negotiation, overcharged and operated without a license. It ordered the company to stop operating in the state, according to the Milwaukee Journal Sentinel.
"Morgan Drexen delivers legal support services to America's Law Firms," the Costa Mesa-based company says on its Internet home page.
"Morgan Drexen Integrated Systems, or MDIS, is a cloud-based computing platform that allows a virtually paperless workflow for America's law firms," the based company says. "The attorneys who benefit from using our platforms tell us the efficiencies we create allow them to service their clients faster and at a fraction of what it would cost to employ a full staff.
"We can answer your phones, schedule appointments with your clients - we even have paralegals on staff to assist your law firm as needed. You, the lawyer, are always in charge - we work at your direction, following your protocols, rules of conduct and laws in your state."
Morgan Drexen vowed to appeal the Wisconsin order, saying it's not a debt adjustment services company, but an outsourcing company for administrative and support services for attorneys, so it doesn't need a license.
"It's been our position that this rule doesn't apply to us," Morgan Drexen general counsel Jeffrey Katz told the Journal-Sentinel in May.
Now Morgan Drexen has taken on a bigger adversary, the Consumer Financial Protection Bureau, formed in the aftermath of the 2008 financial crisis, and still facing Republican-led opposition in Congress.
Co-plaintiff in this case Kimberly Pisinski, a Connecticut attorney who buys services from Morgan Drexen.
"Plaintiffs bring this action because CFPB's structure insulates it from political accountability and internal checks and balances in violation of the United States Constitution," the complaint states. "Unbridled from constitutionally required accountability, CFPB has engaged in ultra vires
and abusive practices, including attempts to regulate the practice of law (a function reserved for state bars), attempts to collect attorney-client protected material, and overreaching demands for, and mining of, personal financial information of American citizens, which has prompted a Government Accountability Office ('GAO') investigation, commenced on July 12, 2013.
"Serious constitutional questions have been raised about CFPB's structure and insulation from mandatory checks and balances, but to date, no court has passed on these questions. CFPB obtained its first Senate-confirmed Director only days ago on July 16, 2013. CFPB has threatened plaintiffs with legal action and has used improper and coercive tactics against plaintiffs.
"Plaintiffs seek an order halting these tactics and declaring CFPB's structure to be unconstitutional, and declaring unconstitutional the provisions of the Dodd-Frank Act creating and empowering the CFPB."
In March 2012, the CFPB "issued a civil investigative demand ('CID') to Morgan Drexen, seeking various categories of information," the complaint states.
"The information sought by CFPB is relevant to Morgan Drexen's business and its relationship with attorneys that provide debt settlement services that are ancillary to their legal representation."
Morgan Drexen claims that it cooperated with the investigation, but in April this year, the CFPB told it that "CFPB was considering enforcement action against Morgan Drexen."
The CFPB claimed that Morgan Drexen violates the Telemarketing Sales Rule because the bureau "considers the attorneys' hour rates for bankruptcy services as 'upfront' fees, apparently because the attorneys also perform ancillary debt-settlement services," according to the complaint.
Morgan Drexen says it responded with a letter saying "that CFPB did not have jurisdiction over the law practice of the attorneys supported by Morgan Drexen; that the fees charged by the attorneys supported by Morgan Drexen for bankruptcy services are not collected in connection with debt settlement and are thus not 'upfront fees' prohibited by the TSR; and that CFPB could not prohibit Morgan Drexen from supporting attorneys who provide services in parallel with debt settlement because this would be tantamount to an outright ban on commercial speech in violation of the First Amendment."
Morgan Drexen claims that the "Dodd-Frank Act's open-ended grant of power over what CFPB deems to be 'unfair,' 'deceptive,' or 'abusive' practices is exacerbated by CFPB's discretion under Section 1022(b)(3) to unilaterally exempt any class of covered person, service providers, or consumer financial products or services from the scope of any rule promulgated under Title X."
It claims that "Congress has no power of the purse over CFPB, because the Dodd-Frank Act authorizes CFPB to fund itself by unilaterally claiming funds from the Federal Reserve Board."
Attorney Randall Miller, who represents the plaintiffs, said an attorney cannot release such client information.
"It really raises a different point which is that if there's an attempt to regulate the practice of law, that's a function of the states and the state bar, and we are concerned that the federal agency here, the CFPB, is introducing upon an area that's traditionally left to the states," Miller said at a press conference after filing the complaint.
Pisinski said in a statement: "At some point, this agency, which has expansive powers to write its own rules, needs to be reeled in. Americans facing bankruptcy have enough to deal with without having the personal, privileged details of their financial troubles seized by the federal government for an unknown purpose."
The plaintiffs claim in their lawsuit that the Government Accountability Office is investigation the CFPB for its "data collection practices."
Sen. Mike Crapo, R-Idaho, asked for the investigation in April.
The U.S. Senate confirmed Richard Cordray as director of the bureau by 66-34 vote on July 16, after a two-year Republican blockade.
The plaintiffs seek a declaration that the Consumer Financial Protection Bureau was unconstitutionally created and empowered by the Dodd-Frank Act.
Their lead counsel Randall Miller is with Venable LLP, of Tysons Corner, Va.