A federal judge has rejected the CFPB’s argument that the CFPA should incorporate a lower standard for “recklessness” than that to secondary liability under the Securities and Exchange Act of 1934 (“SEC Act”). On September 1, 2015, in one of the first decisions substantively interpreting standards for aiding and abetting under the CFPA, Consumer Financial Protection Bureau v. Universal Debt & Payment Solutions, LLC, No. 15 CV 00859 (N.D. Ga. Sept. 1, 2015), Judge Richard W. Story held that the standard for “recklessness” under the CFPA, as under the SEC Act, was “severe” recklessness, a higher bar than that for recklessness in civil law cases. Judge Story also adopted the standard that courts typically apply for “substantial assistance” under the SEC Act, holding that proximate cause was relevant but not a necessary element of an aiding-and-abetting claim under the CFPA.

The Complaint

The Bureau’s complaint alleged three payment-processing companies (the “Payment Processors”) aided and abetted a scheme by individuals who allegedly used improper threats and harassment to coerce individuals to pay phantom debts to their firm, Universal Debt & Payment Solutions, LLC. The Bureau claimed that by facilitating the efficient collection of consumer funds through payments by credit and debit card, the Payment Processors provided substantial assistance to Universal Debt’s and the other debt collectors’ alleged scheme to defraud consumers, and directly committed unfair acts or practices. The complaint alleged that this conduct was “knowing or reckless” because the Payment Processors approved the debt collectors’ applications to accept payments, which were “replete with indicia of fraud,” ignored their own stated policies concerning whether to approve the debt collectors’ applications, and ignored warnings from payment networks and others that the debt collectors were allegedly scheming to defraud consumers.

The Scienter Requirement: Knowledge or “Severe Recklessness”

As Judge Story noted, to date there had been no case law interpreting the CFPA’s substantial assistance provision, which states that it is unlawful for “any person to knowingly or recklessly provide substantial assistance to a covered person or service provider in violation of the provisions of section 5531 of this title [prohibiting unfair, deceptive, or abusive acts or practices].” 12 U.S.C. § 5536(a)(3). In opposing the Payment Processors’ motions, the CFPB argued that “recklessness” under the CFPA should be afforded its general common law meaning. The Restatement (Third) of Torts provides that a person acts recklessly if he or she “(a) knows of the risk of harm created by the conduct or knows facts that make the risk obvious to another in the person’s situation, and (b) the precaution that would eliminate or reduce the risk involves burdens that are so slight relative to the magnitude of the risk as to render the person’s failure to adopt the precaution a demonstration of the person’s indifference to the risk.”

Rejecting the CFPB’s argument, Judge Story held that the proper scienter standard was the higher “severe recklessness” standard previously used by the Eleventh Circuit and other courts in connection with § 20(e) of the SEC Act, which mirrors the language of 12 U.S.C. § 5536(a)(3). “Severe recklessness” requires more than common law recklessness, i.e.:

Severe recklessness is limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it.

Order at 17 (citing Woods v. Barnett Bank of Ft. Lauderdale, 765 F.2d 1004, 1010 (11th Cir. 1985)) (additional citations omitted). Thus, under Universal Debt, recklessness under the CFPA is reserved for “extreme” departures, and is more akin to constructive knowledge than ordinary civil law recklessness or negligence.

Judge Story held that “severe recklessness” is the CFPA standard, even though when the Eleventh Circuit developed the “severe recklessness” standard, the SEC Act limited aiding-and-abetting liability to “knowing” substantial assistance and did not contain the word “recklessly.” (“Recklessly” was added to Section 20(e) in 2010 as part of Dodd-Frank, along with the new CFPA provisions.) The Eleventh Circuit has explained in more recent cases, citing the legislative history of Dodd-Frank, that the addition of “recklessly” to Section 20(e) was not meant to lower the scienter requirement to that of common law recklessness but rather to correct the holding of a growing number of courts that conclude that “knowledge” meant actual knowledge and to clarify that recklessness could, in “severe” circumstances, create liability. Apparently, Judge Story agreed, choosing to apply the “severe recklessness” standard here.

Substantial Assistance: Proximate Cause Not Required

The Bureau and the Payment Processors largely agreed that the Second Circuit’s standard for “substantial assistance” liability under § 20(e) of the SEC Act also applied under § 5536(a)(3). The parties disagreed, however, on the question of whether proximate cause is an element of the claim. The court looked to SEC v. Apuzzo, 689 F.3d 204 (2d Cir. 2012), for guidance. In Apuzzo, the court held that the SEC must allege that the defendant “in some sort associated himself with the venture, that the defendant participated in it as something that he wished to bring about, and that he sought by his action to make it succeed.” Judge Story observed that while the Apuzzo court recognized that proximate cause is relevant to identifying substantial assistance, it expressly stated that proximate cause was not a distinct element of an aiding-and-abetting claim. Judge Story adopted the Apuzzo standard, and held that proximate cause is “relevant but not required” for CFPA aiding-and-abetting liability.

Judge Story further noted, as the Apuzzo court did, that the burdens of scienter and substantial assistance are inversely proportionate—that is, a high degree of actual knowledge lessens the burden in alleging substantial assistance.

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To see how Judge Story applied these standards to the Bureau’s allegations, check out his order—the punch line is that he denied the Payment Processors’ motions to dismiss, finding the CPFB’s factual allegations satisfied the aiding-and-abetting standards set forth in his opinion, including the higher bar for scienter. This may not be the long-term victory the Bureau was hoping for, though, because this first opinion interpreting the CFPA’s aiding-and-abetting provision also denied the CFPB the additional leeway it sought for asserting claims of “reckless” secondary liability.