Jessica M. Karmasek Sep. 5, 2013, 7:30pm

WASHINGTON (Legal Newsline) -- The Consumer Financial Protection Bureau last week urged a federal judge to dismiss a lawsuit filed against it by a Connecticut attorney and her outsourced support services provider, claiming that the federal agency tried to obtain sensitive bankruptcy information protected by attorney-client privilege.

The CFPB filed its motion to dismiss in the U.S. District Court for the District of Columbia Aug. 27 -- a week after filing an enforcement action against the provider, Morgan Drexen Inc., in the U.S. District Court for the Central District of California.

"Notwithstanding Morgan Drexen's efforts to beat the Bureau to the courthouse, it is in the enforcement action that Morgan Drexen should be required to present its constitutional claims," the CFPB argues in its 52-page memorandum.

"Morgan Drexen can obtain complete relief on its constitutional challenge by seeking dismissal of that action. Moreover, that court can consider Morgan Drexen's non-constitutional defenses to the Bureau's action (which are not presented here), and, if it finds them to be meritorious, can grant Morgan Drexen relief without needing to rule on the separation-of-powers question."

The agency continued, "Nor does the Bureau's now-completed investigation justify this Court's exercise of equity powers, because the Bureau's civil investigative demands -- enforceable only through court actions -- cannot cause the type of irreparable harm that equitable or declaratory relief is designed to redress.

"For these reasons, and because Plaintiffs have made no effort to demonstrate (Kimberly) Pisinski's standing to maintain this action, the Court should dismiss the complaint without reaching the merits of Plaintiffs' constitutional claim."

In July, Pisinski and Morgan Drexen sued the CFPB, also accusing it of "data mining," or the creation of usable information out of masses of stored computer entries.

The CFPB, created by the Dodd-Frank Wall Street Reform and Consumer Protection Act, is tasked with overseeing the federal financial laws that specifically protect consumers -- people who keep their money in banks and credit unions, pay for goods and services with their credit cards, and rely on loans to buy homes or pay for college, among other services.

In their lawsuit, Pisinski and Morgan Drexen contend the bureau has overreached its authority.

"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," the plaintiffs wrote in their 22-page complaint, filed July 22.

"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."

They continued, "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."

Pisinski and Morgan Drexen are rejecting the CFPB's investigative demand to hand over privileged and confidential communications, as well as sensitive financial records of thousands of financially distressed consumers who are considering filing for bankruptcy.

The agency is seeking thousands of personally identifiable documents of Pisinski's bankruptcy clients, which are not public record. The sought-after information includes names, addresses, phone numbers, amount of debt owed, source(s) and amount of income, creditors (including banks, medical service providers and non secured loans), and other financial obligations (including utilities, car insurance, rent, mortgage and child support).

The CFPB also is requesting details of when clients talked to their attorney, for how long, the medium of communication, all attorney notes, the amount paid for the attorney's services, and the nature of the client's engagement with the attorney -- which, itself, is considered privileged information.

"At some point, this agency, which has expansive powers to write its own rules, needs to be reeled in," Pisinski said in a statement.

"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."

Walter Ledda, CEO of Morgan Drexen, agreed.

The company provides third-party support services to businesses nationwide, including attorneys. Many of these attorneys advise clients considering bankruptcy protection, and go on to prepare and file thousands of bankruptcy petitions every year, he explained.

"This is an egregious overreach by the CFPB, plain and simple," Ledda said. "The company's integrity as a reliable outsourcing option for attorneys is dependent on our commitment to honoring a lawyer's obligations under the Model Rules of Professional Conduct. The lawyers demand it. Their clients count on it. We intend to honor our commitment to it."

Morgan Drexen is permitted to provide outsourced, administrative services to attorneys pursuant to Model Rule 5.3 of the American Bar Association.

According to the rule, Morgan Drexen's attorney customers must make "reasonable efforts" to ensure that the company's conduct is compatible with the professional obligations of the lawyer -- including protecting the attorney-client privilege and abstaining from disclosing confidential information.

From Legal Newsline: Reach Jessica Karmasek by email at

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