11th Cir. Holds a CFPB share not excluded by res judicata on the basis of a prior consent order

The United States Court of Appeals for the Eleventh Circuit recently reversed a trial court’s decision granting summary judgment in favor of a mortgage servicer and against the federal Consumer Financial Protection Bureau (” CFPB”) on the basis of the authority of res judicata.

In that decision, the Eleventh Circuit held that the res judicata effects of a prior CFPB lawsuit that was resolved by consent judgment are measured by reference to the terms of the consent judgment and not the complaint.

A link to the review in Consumer Financial Protection Bureau v. Ocwen Financial Corporation, et al. is available at: Link to Opinion.

In 2013, the CFPB filed a lawsuit against a mortgage servicer (“Servicer”) alleging that the Servicer’s practices violated federal law. The lawsuit was resolved by settlement with a consent judgment that released Servicer from liability for the conduct alleged in the lawsuit and established a three-year period during which Servicer was required to comply with certain specified service standards enforced by through a monitoring and compliance regime.

After the terms of the consent judgment expired, CFBP filed another lawsuit against Servicer, alleging that Servicer violated various consumer protection laws between January 2014 and February 2017. The trial court granted judgment summary in favor of Servicer on res judicata grounds.

On appeal, the CFPB argued that the consent judgment, not the complaint, should have the force of res judicata and that the underlying settlement agreement showed that the parties did not intend to prevent the challenge of any conduct occurring from 2014.

The issue before the Court was whether the consent judgment was res judicata excluding the claims in the second lawsuit.

As you may recall, a claim becomes res judicata — that is, the exclusion of the claim — when “(1) there is a final judgment on the merits; (2) the decision was made by a court of competent jurisdiction; (3) the parties, or persons related to them, are identical in both suits; and (4) the same cause of action is involved in both cases. Ragsdale v. Rubbermaid, Inc., 193 F.3d 1235, 1238 (11th Cir. 1999). It was undisputed that the first three conditions were met, and only whether the fourth condition was met was in dispute.

First, the Eleventh Circuit determined whether to consider the complaint in the 2013 action or the settlement agreement that resolved it.

The Court easily resolved this issue, relying on Norfolk Southern Corp. vs. Chevron, USA, Inc., which held that when two parties settle a lawsuit, res judicata is “controlled by the settlement agreement in which the parties entered into”, not by “the original complaint”. 371 F.3d 1285, 1288 (11th Cir. 2004). In South Norfolkthe Eleventh Circuit allowed the pursuit of a second claim based on the intent of the parties encapsulated in the reasoning of the settlement agreement that a judgment based on the settlement “receives its legitimizing force from the fact that the parties therein consented”. Identifier. at 1288.

Likewise, in Original Brooklyn Water Bagel Co. vs. Bersin Bagel Grp.the Eleventh Circuit reiterated that “[w]here a case has been settled, the principles of res judicata apply to the matters specified in the settlement agreement. 817 F.3d 719, 725 (11th Cir. 2016). The Court explained that when a consent judgment is entered on the basis of the parties’ settlement agreement, the agreement becomes the judgment and the parties are bound as they would be with any other judgment. See Judgment, Black’s Law Dictionary (11th ed. 2019); see also Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 4443 (3rd ed. 2021).

Moreover, since the consent judgment is legitimized by the agreement of the parties, the scope of the foreclosure extends only up to the agreement. To see NorfolkS.371 F.3d at pages 1288-1289; Goldman versus Northrop Corp.603 F.2d 106, 109 (9th Cir. 1979); International technicians. Consultants, Inc. v. Pilkington PLC137 F.3d 1382, 1387 (9th Cir. 1998).

Thus, the Eleventh Circuit held that the consent judgment between the parties controlled the res judicata effect of the 2013 action, and the trial court erred to the extent that it held otherwise.

Having determined that the consent judgment controlled res judicata, the Court then determined the exclusive effect of the consent judgment.

The Eleventh Circuit noted that, in determining the exclusive effect of a consent judgment, it must apply principles of contract law to determine the intention of the parties. NorfolkS., 371 F.3d to 1289; see also United States vs. S. Ute Tribe or Band of Indians402 US 159, 161 (1971); Keith v. Aldridge900 F.2d 736, 740 (4th Cir. 1990) Wright & Miller, aboveat § 4443.

The Court determined that there were three ways to understand the intent of the parties: (1) the CFPB could sue Servicer for all alleged violations that occurred between January 2014 and February 26, 2017; (2) the CFPB could not sue Servicer for any alleged violations between January 2014 and February 26, 2017; or (3) the CFPB could sue Servicer only for legal violations not covered by the terms of the settlement.

The CFPB argued for the first interpretation, relying on the disclaimer clause of the settlement agreement which stated that the CFPB “disclaims any liability for conduct other than conduct related to assertive mortgage servicing practices.” or which could have been asserted in this complaint”.

CFPB asserted that the release made it clear that the parties only intended to release Servicer from any liability that arose prior to the filing of the complaint in the first action. However, the Eleventh Circuit disagreed, holding that fundamental principles of contract interpretation advised against reading a provision in isolation. To see Hegel v. First Liberty Ins. Corp.778 F.3d 1214, 1221 (11th Cir. 2015); Feaz vs. Wells Fargo Bank, NA745 F.3d 1098, 1104 (11th Cir. 2014).

Servicer argued that the agreement’s three-year service standard, monitoring and enforcement regime indicated that if legal violations covered by the standards occurred, the parties wanted the CFPB to remedy the violation by the through agreed processes and not through a separate court process.

The Eleventh Circuit found this argument more persuasive, finding that in practice the agreement would have been unenforceable if the CFPB could unilaterally decide when to invoke it or when to ignore it. The Court found that Servicer could not have intended to obtain so little security from the parties’ agreement.

Servicer also argued that the parties had agreed to an exclusive enforcement regime during the three-year term of the agreement, meaning that the CFPB could no longer initiate new legal proceedings for any violations of law that occurred. during this period.

However, the Eleventh Circuit found two problems with this argument: (1) there was no provision that stated that CFPB could not sue Servicer at all for the duration of the consent judgments; and (2) the release provision stated in part that nothing in the release “shall limit the authority of the CFPB with respect to [Servicer], except to the extent that the CFPB has expressly waived claims. The Court found that CFPB would not have agreed to let Servicer violate the law until he violated a service standard, and therefore dismissed that argument.

The Eleventh Circuit concluded that the agreement was best interpreted as creating a particular enforcement mechanism that the CFPB was required to follow for conduct covered by the consent judgment standards and oversight regime and occurring between January 2014 and February 26. 2017.

But, the court continued, the CFPB could sue Servicer to enforce violations of the law that occurred during that time and were not covered by the plan.

In the Eleventh Circuit’s view, this interpretation avoided rendering meaningless the agreement’s enforcement mechanism, while preserving the CFPB’s authority to enforce the law.

Thus, the Eleventh Circuit reversed the trial court’s decision and returned to the trial court to determine which counts of the current CFPB complaint were barred by the consent judgment between the parties.

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