NEW YORK ( TheStreet) -- One day after President Obama renominated Consumer Financial Protection Bureau Director Richard Cordray, a court ruling is casting doubt on all of Cordray's actions over the past year. A federal appeals court on Friday ruled that President Obama's three recess appointments to the National Labor Relations Board were unconstitutional, saying that the NLRB has lacked a quorum to conduct business and vacated a ruling last year by the NLRB against The Noel Corp., a soda bottler that brought the suit against the NLRB. President Obama made several recess appointments on January 4, 2012, including the appointment of Cordray as the first director of the Consumer Financial Protection Bureau (CFPB), which was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. After Senate Republicans blocked the nomination of Cordray -- formerly the state attorney general for Ohio -- for six months, with Senator minority leader Senate Minority Leader Mitch McConnell (R-Ky.) saying in November 2011 that the president hadn't "done a thing" to address his party's concerns over the new agency's "lack of transparency of accountability," President Obama in January made a recess appointment of Cordray as the new CFPB director. The recess appointments were controversial because the Senate was technically still in session, on a pro forma basis, because the House of Representatives -- which was and still is controlled by a Republican majority -- was having someone bang the gavel every three days to keep the entire U.S. Congress in session. The president didn't buy the notion of the pro forma Senate session, and made several recess appointments anyway. McConnell in a statement on Friday quoted the federal appeals court as saying that "allowing the President to define the scope of his own appointments power would eviscerate the Constitution's separation of powers," and that "an interpretation of 'the Recess' that permits the President to decide when the Senate is in recess would demolish the checks and balances inherent in the advice-and-consent requirement, giving the President free rein to appoint his desired nominees at any time he pleases, whether that time be a weekend, lunch, or even when the Senate is in session and he is merely displeased with its inaction. This cannot be the law."
McConnell himself said that "for the same reasons, this decision now casts serious doubt on whether the President's 'recess' appointment of Richard Cordray to the Consumer Financial Protection Bureau, which the President announced at the same time, is constitutional." Frank Mayer III -- a partner in the Financial Services Practice Group of Pepper Hamilton LLP in Philadelphia -- says that the ruling against the NLRB recess appointments "has significant implications for the appointment of Richard Cordray, who was appointed in the same manner, on the same day," and that there "certainly is a potential cloud over the quasi-rulemaking that this agency has been making, as there is pending litigation pending concerning the director's power in light of him being appointed in this manner." Another federal court will be deciding on the legitimacy of the president's recess appointment of Cordray, and Mayer said that "if there is a split in the circuits, ultimately it may go to the Supreme Court." Mayer also said that the outcome of the federal court cases will be very significant to non-bank financial companies, including mortgage originators and vendors, "as it undermines the validity of all CFPB regulations, as far as they are concerned." The Consumer Financial Bureau last Friday announced its final rulings on several mortgage lending sales practices, to "prevent loan originators from steering consumers into risky mortgages." Kevin Petrasic -- a partner in the Global Banking and Payments Systems practice of Paul Hastings in Washington -- says that Cordray, or whoever is eventually confirmed as the permanent director of the CFPB, may follow the example of former Office of Thrift Supervision Director Ellen Seidman, who in 1997 "essentially ratified all of the actions of the previous acting director Jonathan Fiechter out of an abundance of caution," because of a challenge to the agency's authority when the "acting director had served too long under the Vacancies Act." "This puts more emphasis on Cordray being confirmed," Petrasic says, "because the best way for the CFPB to inoculate itself from challenges to actions taken based on the recess appointment the director, is for a confirmed director to essentially ratify the actions taken by the recess-appointed director," even if it is the same person.
"This puts tremendous pressure on Cordray's nomination and creates opportunities for Republicans to insist on some sort of deal, in return for his confirmation," Petrasic says. Petrasic previously said that there could be a deal in Congress for a bill to create "a three-to-five member commission to replace the director" of the Consumer Financial Protection Bureau, "and have him become the first chairman." -- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn