i

IN THE UNITED STATES DISTRICT COURT 

NORTHERN DISTRICT OF ILLINOIS

Bureau of Consumer Financial )

Protection, ) Case No. 1:20-cv-04176

)

Plaintiff, )

)

 vs. )

)

Townstone Financial, Inc. and )

Barry Sturner )

)

Defendants. )

MEMORANDUM OF LAW IN SUPPORT OF DEFENDANTS’ COMBINED MOTION 

TO DISMISS PLAINTIFF’S COMPLAINT

Date: February 8, 2021

Respectfully submitted,

/s/ Sean P. Burke 

Sean P. Burke #6277203

E. Brenda Kpotufe # 34084-49

Mattingly Burke Cohen & Biederman LLP

155 E. Market St., Suite 400

Indianapolis, IN 46204

Sean.Burke@mbcblaw.com

Brenda.Kpotufe@mbcblaw.com

Marx Sterbcow

Sterbcow Law Group

824 Elmwood Park Blvd #205

New Orleans, LA 70123

marx@sterbcowlaw.com

Attorneys for Defendant Townstone 

Financial, Inc. and Barry Sturner

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TABLE OF CONTENTS

I. Introduction..............................................................................................................................1

II. Facts Plead and Not Plead in the Complaint.......................................................................2

III. Argument..................................................................................................................................3

A. Rule 12(b)(6) Standard............................................................................................... 3

B. Reg. B and the Bureau Improperly Attempt to Expand ECOA’s Reach.............. 4

(1) The Complaint Seeks to Punish Behavior that Is Not Regulated by ECOA. ......... 4

(2) Precedent Holds that ECOA Cannot Be Extended to Reach Persons Who Are Not 

“Applicants,” And Thus, the Bureau’s Complaint Must Fail ................................. 6

(3) ECOA Does Not Mandate Advertising Practices, Demographic Hiring Quotas, or 

Disparate Impact Claims, so the Complaint Should be Dismissed......................... 8

(4) The Bureau Improperly Seeks to Use a Disparate Impact Theory of 

Discrimination under ECOA................................................................................... 9

(5) Other Courts Have Recognized that They Must Stop the Bureau From Exceeding 

Its Statutory Authority. ......................................................................................... 10

C. Even if a Claim of Potential Discouragement of “Prospective Applicants” 

Existed under ECOA, It Would Run Afoul of the First Amendment.................. 12

(1) Reg. B and the Bureau’s Enforcement Violate the First Amendment Because They 

Are Content and Viewpoint-Based Bans of Free Speech that Are Not Narrowly 

Tailored to Serve Compelling State Interests. ............................................................ 13

(2) Reg. B and the Bureau’s Enforcement Violate the First Amendment Because They 

Are Unconstitutionally Vague and Overbroad as Applied to Townstone and on Their

Face............................................................................................................................. 16

i. Reg. B Violates the First Amendment as Applied to Townstone...................... 18

ii. Reg. B Violates the First Amendment Because It Is Facially Invalid. .............. 20

D. The Bureau’s Use of Reg. B Violates the Fifth Amendment................................. 22

E. The Bureau Alleged No Other Violations of Federal Consumer Financial Law, 

and Thus, Count II Fails. ......................................................................................... 23

IV. The Complaint Should be Dismissed With Prejudice. .....................................................23

V. Conclusion ..............................................................................................................................25

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TABLE OF AUTHORITIES

CASES

Auer v. Robbins, 519 U.S. 452 (1997)............................................................................................ 6

Bartucci v. Wells Fargo Bank N.A., No. 14 CV 5302, 2015 WL 6955482 (N.D. Ill. Nov. 10,

2015)............................................................................................................................................ 7

Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007)........................................................................... 3

Brumfield v. City of Chicago, 735 F.3d 619 (7th Cir. 2013) .................................................. 5, 8, 9

Buckley v. Valeo, 424 U.S. 1 (1976)....................................................................................... 16, 21

Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984) ......... 5, 9

Citizens United v. Fed. Election Comm'n, 558 U.S. 310 (2010) .................................................. 13

Ctr. for Individual Freedom v. Madigan, 697 F.3d 464 (7th Cir. 2012) ...................................... 16

F.C.C. v. Fox Television Stations, Inc., 567 U.S. 239 (2012)....................................................... 16

FEC v. Wisconsin Right to Life, 551 U.S. 449, 567 (2007).......................................................... 16

Hawkins v. Cmty. Bank of Raymore, 761 F.3d 937 (8th Cir. 2014) ............................................... 7

Iancu v. Brunetti, 139 S. Ct. 2294, 204 L. Ed. 2d 714 (2019)...................................................... 14

Kisor v. Wilkie, 139 S. Ct. 2400, 204 L.Ed.2d 841 (2019)............................................................. 6

Lake v. Neal, 585 F.3d 1059 (7th Cir. 2009) .................................................................................. 4

Moran Foods v. Mid-Atlantic Market Development, 476 F.3d 436 (7th Cir. 2007)....................... 6

Nat'l Inst. of Family & Life Advocates v. Becerra, 138 S. Ct. 2361, 201 L. Ed. 2d 835 (2018) .. 15

New Louisiana Holdings, LLC v. Arrowsmith, No. 11 C 5031, 2012 WL 6061710 (N.D. Ill. Dec. 

4, 2012)........................................................................................................................................ 8

R.A.V. v. St. Paul, 505 U.S. 377 (1992)........................................................................................ 14

Reed v. Town of Gilbert, Ariz., 576 U.S. 155 (2015).............................................................. 13, 14

Regions Bank v. Legal Outsource PA, 936 F.3d 1184 (11th Cir. 2019)......................................... 7

RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp., LLC, 754 F.3d 380 (6th Cir. 2014). 7

Rosenberger v. Rector & Visitors of Univ. of Virginia, 515 U.S. 819 (1995).............................. 14

Skidmore v. Swift Co, 323 U.S. 134 (1944) .................................................................................... 6

Snyder v. Phelps, 562 U.S. 443 (2011)......................................................................................... 12

Texas Dep’t of Hous. and Comty. Affairs v. Inclusive Communities Project, Inc., 135 S. Ct. 2507

(2015) .................................................................................................................................... 9, 10

United States v. Williams, 553 U.S. 285 (2008) ..................................................................... 16, 22

STATUTES

15 U.S.C. § 1691(a)(1).................................................................................................................... 4

15 U.S.C. § 1691(a)(b).................................................................................................................... 4

15 U.S.C. §§ 1691–1691f ............................................................................................................... 1

REGULATIONS

12 C.F.R. § 1002.4.............................................................................................................. 5, 13, 17

12 C.F.R. Part 1002......................................................................................................................... 4

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I. Introduction.

The Bureau of Consumer Financial Protection (“Bureau”) amended its complaint (the 

“Complaint”) is an unsuccessful attempt to plead around the constitutional and statutory 

infirmities. Its new Complaint remains flawed and must be dismissed for the following 

reasons: (1) contrary to the express language used in the Equal Credit Opportunity Act 

(“ECOA”), 15 U.S.C. § 1691, et. seq., the Bureau improperly seeks to expand ECOA’s reach 

to include “prospective applicants”, to regulate behavior before a “credit transaction” ever 

takes place, to create affirmative advertising and hiring requirements based on demographics, 

and to bring a discrimination case based on an inapplicable “disparate impact” theory; (2) 

contrary to the First Amendment, the Bureau unconstitutionally seeks to regulate the content 

and viewpoint of protected speech and does so in a way that is unconstitutionally overbroad 

and vague both as applied to Townstone and on its face; and (3) the regulation the Bureau

seeks to enforce is unconstitutionally vague in violation of the Fifth Amendment’s due process 

clause both as applied and facially. 

The Bureau’s attempt to assert an individual, derivative claim against Townstone 

Financial, Inc.’s (“Townstone”) owner, Barry Sturner (“Sturner”), should also be dismissed 

because even if that claim were well taken, which is expressly denied, it only becomes relevant 

if the Bureau succeeds on its claims against Townstone, which for reasons articulated herein, it 

cannot. 

Townstone and Sturner ask this Court to dismiss the Bureau’s Complaint with 

prejudice because any further attempt to amend is futile. 

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II. Facts Plead and Not Plead in the Complaint.

Even after the Bureau amended its Complaint, it remains devoid of any factual 

allegation that Townstone behaved improperly towards any actual applicant or with respect to 

any bona fide credit transaction that falls within the purview of ECOA. Instead, the Complaint 

alleges that Townstone acted or failed to act only with regard to prospective applicants, which 

activity is not regulated under ECOA. For example, Doc. 27, ¶22 alleges: “Townstone has 

engaged in acts or practices directed at prospective applicants that, together and separately,

would discourage prospective applicants, on the basis of race, from seeking or obtaining credit

for properties within the Chicago MSA.” (See also, Doc. 27, ¶¶5, 32, 39, 41, 52, 54, and 56, 

each of which only complain about actions or inactions relating to “prospective applicants”)

(emphasis added).

1

Part of Townstone’s advertising efforts include producing the Townstone Financial 

Show, a community-based talk radio show available throughout the Chicago MSA and widely 

available on the internet. (Doc. 27, ¶29). On the show, Townstone’s team educates listeners on 

financial and real estate issues involving home purchasing and mortgage loans, answers

mortgage questions from the public, but also frequently discusses topics of public and political 

interest such as food, sports, politics, including crime and policing in Chicago.

Despite no statutory basis to regulate Townstone’s speech, the Bureau excerpts a few 

comments out of context from hundreds of broadcasting hours and alleges that those statements 

1 Townstone – as it must – treats the Bureau’s factual allegations as true for purposes of this motion only. 

Townstone disputes the Bureau’s allegations that Townstone engaged in any discriminatory behavior and provided 

the Bureau with independent, objective evidence demonstrating Townstone’s marketing efforts encourage, rather 

than discourage African-American applicants to apply to Townstone and that Townstone was not an outlier in terms 

of generating applications from majority African-American neighborhoods in Chicago. In addition, as admitted by 

the Bureau, Townstone’s marketing efforts targeted the widest possible geographic area, including all of Chicago, 

which is the polar opposite of redlining. 

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“discourage African-American prospective applicants from applying for mortgage loans, or 

making or pursuing an application, including from Townstone”. (Doc. 27, ¶¶32, 33-392

). In one 

example, there was a discussion about the crime rates on the southside of Chicago in which a

speaker equated the rush one gets from skydiving to walking through the southside at 3 a.m. in 

the morning. (Doc. 27, ¶37). The Bureau alleges that discussion somehow discouraged 

prospective African-Americans from applying for credit. The Bureau also argues that, because 

Townstone allegedly did not affirmatively target advertising specifically to African-Americans,

and because Townstone allegedly had no African-American loan officers, Townstone 

discouraged prospective African-American applicants. (Doc. 27, ¶¶40, 51).

Count III, which alleges that Sturner engaged in a fraudulent transfer, badly 

misrepresents the circumstances surrounding Sturner’s monetary transfer, the effect of the 

transfer on Townstone, and Townstone’s post-transfer behavior.3

 Nonetheless, even if the facts 

alleged were true, Count III fails because it is wholly derivative of Count I, which is improper. 

III. Argument.

A. Rule 12(b)(6) Standard.

A complaint must allege “enough facts to state a claim to relief that is plausible on its 

face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). While the Court must accept all 

2 In Paragraphs 33 and 34, the Bureau recounts statements of Townstone’s former president that were made in 

January 2014 – well beyond the five-year statute of limitations period under ECOA. The Bureau appears to include 

these dated, and wholly out of context, statements of social commentary made by a former employee as a means to 

inflame the Court, not because they can be legally actionable. 

3 While Sturner must accept the facts as true at this stage, the evidence will show that instead of trying to “hinder, 

delay, or defraud the Bureau” Sturner actually voluntarily disclosed the transfer to the Bureau and never made any 

attempt to hide it. (Doc. 27, ¶72). As the Bureau knows, prior to the transfer being made, Townstone downsized its 

business from mortgage lender to a non-depository mortgage broker, as it is much less expensive to operate a 

mortgage brokerage business and there are lower net worth requirements mortgage brokers. Accordingly, it was 

perfectly appropriate for Sturner to lower his capital investment in his business. Townstone remains a going 

concern, was never insolvent, and Sturner does not pay Townstone’s bills personally. Finally, as reflected in its 

second Motion to Dismiss, Townstone and Sturner do not believe that Townstone will incur financial obligations to 

the Bureau based on the Bureau’s Complaint. 

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well-pled factual allegations in the Complaint as true, the factual allegations in the Bureau’s 

Complaint do not raise a right to relief above the speculative level and should be dismissed. 

Lake v. Neal, 585 F.3d 1059, 1060 (7th Cir. 2009). 

B. Reg. B and the Complaint Improperly Attempt to Expand ECOA’s Reach. 

(1) The Complaint Seeks to Punish Behavior that Is Not Regulated by ECOA.

ECOA never mentions and explicitly does not regulate behavior relating to prospective 

applicants. Rather, ECOA makes it “unlawful for any creditor to discriminate against any 

applicant with respect to any aspect of a credit transaction . . . on the basis of race, color, 

religion, national origin, sex or marital status, or age...” 15 U.S.C. § 1691(a)(1) (emphasis 

added). ECOA defines the term “applicant” to mean “any person who applies to a creditor 

directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly 

by use of an existing credit plan for an amount exceeding a previously established credit 

limit.” 15 U.S.C. § 1691(a)(b). There is no ambiguity in ECOA’s reach. Under the heading 

“Scope of prohibition”, ECOA unambiguously prohibits discrimination against an “applicant”, 

or a “person who applies” for credit. 15 U.S.C. § 1691(a). There is no language in this section 

of ECOA that regulates any behavior relating to relating to prospective “applicants” who have 

not yet applied for credit. While ECOA Section 1691 uses the word “applicant” twenty-six 

(26) times, it never once uses the phrase prospective applicant or proscribes any conduct prior 

to the filing of an application. 

ECOA’s implementing regulation – Regulation B at 12 C.F.R. Part 1002 (“Reg. B”) –

improperly expands ECOA’s reach to include not just “applicants” but “prospective 

applicants”, i.e., individuals who have not applied and may never apply for credit. Reg. B goes 

even further by prohibiting “Discouragement” of “prospective applicants”: 

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(b) Discouragement. A creditor shall not make any oral or written statement, in 

advertising or otherwise, to applicants or prospective applicants that would 

discourage on a prohibited basis a reasonable person from making or pursuing an 

application.

12 C.F.R. § 1002.4.

The Complaint seeks to further expand ECOA by claiming that ECOA affirmatively

mandates specific targeted advertising to certain racial and ethnic groups, requires affirmative 

action-like hiring practices, and dictates that certain amounts of African-American applications

are received. (Doc. 27, ¶¶40, 51). By attempting to extend ECOA’s reach beyond the express 

and unambiguous language of the statute, Reg. B and the Bureau’s Complaint overreach.

When a statue is unambiguous, agency regulations, or statutory interpretations are not 

entitled to deference. Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 

U.S. 837, 842-43 (1984) (“If the intent of Congress is clear, that is the end of the matter; for 

the court, as well as the agency, must give effect to the unambiguously expressed intent of 

Congress.”); Brumfield v. City of Chicago, 735 F.3d 619, 626 (7th Cir. 2013) (“if the statute is 

unambiguous on the question, we give effect to the unambiguous statutory language and the 

inquiry goes no further.”). If the statute is ambiguous, “the second step is to determine whether 

the agency has promulgated a reasonable interpretation of the statute; if so, we defer to that 

interpretation.” Brumfield, 735 F.3d at 626.

To the extent Reg. B and/or the Bureau attempt to regulate behavior relating to 

“prospective applicants”, no deference should be given to Reg. B or the Bureau’s 

interpretation thereof. Even if there were some ambiguity regarding the term “applicant,” there 

is no reasonable, or even plausible interpretation of “applicant” that could expand it to include 

all “prospective applicants” or non-applicants who have not yet started to engage in any “credit 

transaction”. Similarly, the Bureau’s interpretation in Reg. B is not deserving of deference, 

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because “Discouragement” – a term that is not defined or even mentioned in ECOA – is not 

reasonably included within the unambiguous term “discrimination”.

From a policy perspective, the scope of liability created by an expansion of ECOA to 

include the vague term “prospective applicants”, which theoretically includes the entire world

is unreasonable and unworkable. Such an absurd result could not have been intended by 

Congress.

4 It also makes no sense that Congress, by banning discrimination to applicants, 

would have intended the Bureau to regulate all industry statements to unilaterally determine if 

there were ever any “Discouragement” to any potential homeowner. The Complaint exceeds 

the Bureau’s statutory jurisdiction, limitations, and authority, is contrary to Townstone’s 

constitutional rights and privileges, and thus, is unlawful and void under the Administrative 

Procedures Act, 5 U.S.C. § 706 (“APA”).

(2) Precedent Holds that ECOA Cannot Be Extended to Reach Persons Who Are 

Not “Applicants,” And Thus, the Bureau’s Complaint Must Fail. 

Multiple circuits, including the Seventh Circuit, have rejected attempts to expand 

ECOA’s reach beyond “applicants,” based on the express, unambiguous language used in the 

statute. The Seventh Circuit refused an attempt to expand the definition of “applicant” in 

Moran Foods v. Mid-Atlantic Market Development, 476 F.3d 436 (7th Cir. 2007). There, the 

Court did not allow an expansion of “applicant” to include guarantors of credit applications, 

who were included within the version of Reg. B in effect at the time. The Seventh Circuit had 

no trouble finding this regulatory expansion had no basis in the statute. Id. at 441. The Court 

succinctly stated, “there is nothing ambiguous about ‘applicant’ and no way to confuse an 

4 In addition, where Reg. B or the Bureau’s interpretation of ECOA fails the test for Chevron deference, it also fails 

the test enunciated by the Supreme Court for Auer deference to an agency’s interpretation of its own rules, because 

the Bureau’s interpretation of Reg. B is unreasonable and creates “unfair surprise”. Kisor v. Wilkie, 139 S. Ct. 2400, 

204 L.Ed.2d 841 (2019); Auer v. Robbins, 519 U.S. 452 (1997). Similarly, because such interpretations are 

unreasonable, they are also not deserving of Skidmore deference. See Skidmore v. Swift Co, 323 U.S. 134 (1944).

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applicant with a guarantor.” Id. at 441. The Court also noted the parade of horribles that would 

occur if the term “applicant” were stretched to include guarantors, and explained that “the 

Congress that enacted the Act would have been unlikely to accept” the “vistas of liability” that 

would accompany such an interpretation. Id.

Other circuits that have addressed this issue similarly declined to expand the statutory 

definition of “applicant”. Hawkins v. Cmty. Bank of Raymore, 761 F.3d 937, 942 (8th Cir. 

2014) (“because the text of the ECOA is unambiguous regarding whether a guarantor 

constitutes an applicant, we will not defer to the Federal Reserve’s interpretation of applicant, 

and we conclude that a guarantor is not protected from marital-status discrimination by the 

ECOA.”), aff’d, 136 S. Ct. 1072, 194 L. Ed. 2d 163 (2016); Regions Bank v. Legal Outsource 

PA, 936 F.3d 1184, 1193 (11th Cir. 2019) (“we agree with the Seventh and Eighth Circuits 

that the ordinary meaning of ‘applicant’ does not encompass a guarantor, we hold that no 

deference is due”). 

Even the Sixth Circuit, which held that “applicant” could be read to include a guarantor, 

did so only because a guarantor actually appears on a credit application. RL BB Acquisition, 

LLC v. Bridgemill Commons Dev. Grp., LLC, 754 F.3d 380, 385 (6th Cir. 2014) (noting that the 

definition of “applicant” could “encompass all those who offer promises in support of an 

application—including guarantors, who make formal requests for aid in the form of credit for a 

third party.”) (emphasis added). Thus, even under the Sixth Circuit’s logic, “applicant” cannot 

be stretched to include “prospective applicants” because there is no actual application. Id.

Courts in this district routinely require an actual application as a prerequisite to stating 

an ECOA claim. In Bartucci v. Wells Fargo Bank N.A., No. 14 CV 5302, 2015 WL 6955482, 

at *2 (N.D. Ill. Nov. 10, 2015), the court stated that, “[t]o survive a 12(b)(6) motion to dismiss 

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an ECOA claim, Plaintiff must allege that he was an applicant, as defined by the ECOA, and 

that Defendant treated him less favorably because of his national origin or age.” See also New 

Louisiana Holdings, LLC v. Arrowsmith, No. 11 C 5031, 2012 WL 6061710, at *5 (N.D. Ill. 

Dec. 4, 2012) (“[t]o state a prima facie claim of discrimination under the ECOA, plaintiffs 

must allege that they were applicants, as defined by the ECOA”.)

The Complaint only makes allegations about Townstone’s interactions with 

prospective applicants who are not governed by ECOA. This attempted expansion of 

“applicant” is inconsistent with ECOA and case law interpreting the same. Because the term 

“applicant” is unambiguous and does not include “prospective applicants”, this Court should 

dismiss the Complaint.

(3) ECOA Does Not Mandate Advertising Practices, Demographic Hiring Quotas,

or Disparate Impact Claims, so the Complaint Should be Dismissed.

The Complaint should also be dismissed because it attempts to improperly expand 

ECOA to impose: (1) affirmative requirements to target advertising to specific racial or ethnic 

groups; (2) a hiring quota for certain racial or ethnic groups; and (3) a disparate impact theory 

that would require business to have success with specific racial or ethnic groups. Because none 

of these affirmative requirements can be found in ECOA, or even Reg. B, the Bureau’s attempt 

to impose such requirements through litigation should fail. Brumfield, 735 F.3d at 626 (“if the 

statute is unambiguous on the question, we give effect to the unambiguous statutory language 

and the inquiry goes no further.”).

The Complaint – apparently through Reg. B’s “Discouragement” definition – seeks to 

expand ECOA and hold Townstone accountable for not affirmatively targeting advertising to 

African-Americans, (Doc. 27, ¶40), and/or for not hiring African-American loan officers.

(Doc. 27, ¶51). The Complaint also seeks to interpret ECOA and Reg. B in a manner that 

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would create an affirmative requirement to have a certain amount of business success with 

certain racial or ethnic demographic groups to avoid a claim of an ECOA violation. (Doc. 27, 

¶¶45-50). Nothing in ECOA or Reg. B. creates these requirements or supports a cause of 

action for violating any such non-existent requirements.

ECOA’s scope is unambiguously limited to regulating behavior between creditors and 

applicants. Chevron, 467 U.S. at 842-43 (“If the intent of Congress is clear, that is the end of 

the matter; for the court, as well as the agency”); Brumfield, 735 F.3d at 626. The Bureau’s 

interpretation is outside of the authority of ECOA and violates the APA, making it unlawful 

and void. Rather than seeking amendments to ECOA, or even engaging in a “notice and 

comment” process to amend Reg. B, the Bureau attempts to expand ECOA’s obligations on a 

case-by-case basis through litigation. Not only is this tactic prohibited by the clear, 

unambiguous language used in ECOA, but it would create a predictably unpredictable

situation in which mortgage lenders would have no idea if they were ever running afoul of the

Bureau’s newly-created affirmative obligations under ECOA.

5

(4) The Bureau Improperly Seeks to Use a Disparate Impact Theory of 

Discrimination under ECOA.

The Complaint repeatedly alleges that Townstone did not have enough success with 

African-American applicants when compared to its alleged peers. These disputed allegations 

are irrelevant because there is no “disparate impact” theory of discrimination ECOA.6 Instead 

of basing their allegations on direct discrimination against applicants or even prospective 

5 For example, the Complaint does not address how much targeted advertising to African-Americans is enough, how 

many African-American loan officers must be hired, or how much “business success” is necessary to be compliant 

with ECOA. 

6 In contrast to a “disparate treatment” claim in which the plaintiff must prove a discriminatory intent, a “disparate 

impact” claim can be proven without evidence intent based on a neutral practice’s disproportionately adverse effect 

on minorities that are otherwise unjustified by a legitimate rationale. See Texas Dep’t of Hous. and Comty. Affairs 

v. Inclusive Communities Project, Inc., 135 S. Ct. 2507, 2513 (2015).

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applicants, the Bureau bases its ECOA claim on the alleged disproportionate effects or 

disparate impact of Townstone’s marketing practices. 

The Bureau’s pursuit of a “disparate impact” claim under ECOA must fail because 

ECOA does not contain any of the required results-oriented statutory language. Disparate 

impact claims are only authorized if the enabling statute allows them. For instance, the Fair 

Housing Act (“FHA”) includes results-oriented language (which makes it illegal, in pertinent 

part, to “otherwise make unavailable...a dwelling”) and therefore supports the disparate 

impact theory of liability. 42 U.S.C. § 3604(a); Texas Dep’t of Hous. and Comty. Affairs v. 

Inclusive Communities Project, Inc., 135 S. Ct. 2507, 2518 (2015) (“results-oriented language

counsels in favor of recognizing disparate-impact liability”). Unlike the FHA, ECOA does not 

include any such results-oriented language, and thus, disparate impact theory is unavailable. 

See also Unsafe at Any Bureaucracy, Part III: The Bureau’s Vitiated Legal Case Against 

Auto-Lenders, Report Prepared by the Republican Staff of the Committee on Financial 

Services, U.S. House Of Representatives, Hon. Jeb Hensarling, Chairman, 115th Congress, 

First Session (Jan. 18, 2017), available at https://republicansfinancialservices.house.gov/uploadedfiles/1-18-17_cfpb_indirect_auto_staff_report_iii.pdf.

This Court should reject the Bureau’s attempt to expand ECOA to allow for a disparate 

impact theory of liability.

(5) Other Courts Have Recognized that They Must Stop the Bureau From Exceeding 

Its Statutory Authority.

In multiple other cases, courts found it necessary to prevent the Bureau from exceeding 

its statutory or regulatory authority. For example, a recent federal court in the District of 

Columbia held that the Bureau’s positions in support of expanding their authority lacked merit. 

PayPal v. the Consumer Financial Protection Bureau, et. al, Civil Case No.19-3700 (Dist. 

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Col. Dec. 30, 2020). There, PayPal challenged the Bureau’s interpretation of certain portions 

of the Dodd-Frank Act, namely the Electronic Funds Transfer Act (“EFTA”), 15 U.S.C. 

§1693(b), and the Truth in Lending Act (“TILA”), 15 U.S.C. §1601. EFTA gives the Bureau 

the authority to “issue model clauses for optional use by financial institutions.” Id. (Emphasis 

added). Under the auspices of ETFA, the Bureau created a mandatory form that required

certain language be used and required a thirty-day restricted period for certain credit 

transactions. Pursuant to TILA, which regulates the type of disclosures that must be made to 

consumers, the Bureau created restrictions on the type of credit offered. 

In siding with PayPal on both issues, the court repeatedly looked no further than the 

language of the enabling statute. Because EFTA only allows for optional forms and because 

TILA only allows the Bureau to regulate disclosures, the court found that the Bureau’s actions 

– in creating a mandatory form and making a substantive guideline rather than a disclosure 

requirement – well exceeded their authority. Id. at 9. In finding that the Bureau’s actions were 

inconsistent with the statutory language, the court emphatically held “the plain language of the 

statute forbids it!” Id. When the Bureau argued that it was simply effectuating TILA’s purpose, 

the judge was unimpressed: “The Bureau cannot simply rely on the overarching purpose of the 

statute without giving credence to how Congress intended the agency to fulfill the statute’s 

purpose.” Id. at 19.

Similarly, in PHH Corp. v. CFPB, 839 F.3d 1, 44 (D.C. Cir. 2016), aff’d in part, rev’d 

in part on other grounds, 881 F.3d 75 (D.C. Cir. 2018), the D.C. Circuit rejected a Bureau 

interpretation of the Real Estate Settlement Procedures Act in a case in which the agency 

sought over $100 million in damages. In PHH, the D.C. Circuit held that the Bureau’s 

interpretation of the statute was not entitled to any Chevron deference. Id. at 43. In the D.C. 

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Circuit’s three-judge panel opinion, which was later affirmed en banc, the court rejected the

Bureau’s interpretation and noted that it was “not a close call,” because the statute uses

“nothing” and “[n]othing means nothing.” Id. at 41. The court stated that “the CFPB’s 

interpretation flouts not only the text of the statute but also decades of carefully and repeatedly 

considered official government interpretations.” PHH Corp., 839 F.3d at 42.

Here, as in PayPal and PHH, the Bureau’s actions exceed the statutory language and 

its express direction from Congress. ECOA gives the Bureau the power to prevent 

discrimination against “applicants” engaged in a “credit transaction.” The Complaint, which 

attempts to prohibit “Discouragement” of “prospective applicants,” create of affirmative 

minority hiring quotas, target demographic-based advertising requirements, and add a

“business success” test, far exceeds the Bureau’s statutory authority under ECOA. Because the 

Bureau’s Complaint exceeds its statutory authority in multiple ways, Townstone asks this 

Court to dismiss the Bureau’s ECOA count (Count I) and its companion Count II. 

C. Even if a Claim of Potential Discouragement of “Prospective Applicants” 

Existed under ECOA, It Would Run Afoul of the First Amendment.

The First Amendment states that “Congress shall make no law...abridging the freedom 

of speech”. “[S]peech on ‘matters of public concern’...is ‘at the heart of the First Amendment’s 

protection.’” Snyder v. Phelps, 562 U.S. 443, 451 (2011). “Speech on public issues occupies the 

highest rung of the hierarchy of First Amendment values and is entitled to special protection.”

Id.

The statements upon which the Bureau seeks to punish Townstone directly reflect on the 

public issue of crime in Chicago and the benefits of policing, two very real issues as recognized 

by commentators and citizens from across the political spectrum. Townstone – a Chicago-based 

business – is well versed in these issues and has every right to comment upon them. Citizens 

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United v. Fed. Election Comm'n, 558 U.S. 310 (2010) (recognizing that corporations have free 

speech rights). Because Townstone’s speech is tantamount to political speech, it cannot be 

suppressed by the government. Id. at 319 (“[t]he Government may regulate corporate political 

speech through disclaimer and disclosure requirements, but it may not suppress that speech”).

Despite these realities, the Bureau seeks to punish Townstone’s exercise of its First 

Amendment rights by citing violations of ECOA and Reg. B. These efforts must fail because 

Townstone’s political speech cannot be suppressed, and for at least two reasons: (1) Reg. B and 

the Bureau’s enforcement of it violate the First Amendment because they are content and 

viewpoint-based prohibitions on speech; and (2) Reg. B and the Bureau’s enforcement of it 

violate the First Amendment because they are constitutionally overbroad and vague as applied 

to Townstone and on their face. 

(1) Reg. B and the Bureau’s Enforcement Violate the First Amendment Because

They Are Content and Viewpoint-Based Bans of Free Speech that Are Not 

Narrowly Tailored to Serve Compelling State Interests.

Reg. B and the Bureau’s enforcement of Regulations B impose impermissible content 

and viewpoint-based restrictions on Townstone’s speech. These realities are apparent on the face 

of Reg. B’s prohibition on “Discouragement” – “A creditor shall not make any oral or written 

statement. . . that would discourage”. 12 C.F.R. § 1002.4. 

Reg. B plainly “applies to particular speech because of the topic discussed or the idea or 

message expressed.” Reed v. Town of Gilbert, Ariz., 576 U.S. 155, 155 (2015). Content-based 

laws, like Reg. B “are presumptively unconstitutional and may be justified only if the 

government proves that they are narrowly tailored to serve compelling state interests.” Id. at 163.

Viewpoint discriminatory laws, like Reg. B, are “an egregious form of content discrimination.” 

Rosenberger v. Rector & Visitors of Univ. of Virginia, 515 U.S. 819, 829 (1995). “When the 

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government targets not subject matter, but particular views taken by speakers on a subject, the 

violation of the First Amendment is all the more blatant.” Id. (citing R.A.V. v. St. Paul, 505 U.S. 

377, 391 (1992)). The Supreme Court has been particularly emphatic about striking down 

viewpoint discrimination as Justice Alito explained in his concurring opinion in Iancu v. 

Brunetti, 139 S. Ct. 2294, 2302, 204 L. Ed. 2d 714 (2019) where he stated: 

Viewpoint discrimination is poison to a free society. * * * At a time when free 

speech is under attack, it is especially important for this Court to remain firm on 

the principle that the First Amendment does not tolerate viewpoint discrimination. 

We reaffirm that principle today.

Id.

Reg. B is content-based because a violation turns on the content of a statement – one only 

has to look at the Complaint, which literally complains about the content of several of 

Townstone’s statements. (Doc. 27, ¶¶33-40). Moreover, because Reg. B prevents only

“discouragement”, the regulation is viewpoint based. Accordingly, the burden is on the Bureau

to demonstrate that Reg. B and its efforts further a compelling interest and are narrowly tailored 

to achieve that interest. Reed, 576 U.S. at 171. 

In a possible attempt to support the Bureau’s position, the Complaint references ECOA’s 

purpose: “to promote the availability of credit to all creditworthy applicants without regard to 

race, color, religion, national origin, sex, marital status, or age.” 12 C.F.R. § 202.1. In R.A.V., the 

Supreme Court found that helping “to ensure the basic human rights of members of groups that 

have historically been subjected to discrimination” was a compelling interest, but nevertheless 

struck St. Paul’s cross-burning ordinance. R.A.V., 505 U.S. at 395. As in R.A.V., while the 

Bureau’s interpretation of ECOA and Reg. B may be well intended, like St. Paul in R.A.V., the 

Bureau cannot demonstrate that this content and viewpoint-based Regulation and the Bureau’s 

further interpretation of the same is narrowly tailored to meet ECOA’s purpose. In R.A.V., the 

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Court explained, “Let there be no mistake about our belief that burning a cross in someone’s 

front yard is reprehensible. But St. Paul has sufficient means to prevent such behavior without 

adding the First Amendment to the fire.” Id. at 396.

Even if banning Townstone’s speech could be considered furthering ECOA’s stated 

goals, there are more effective, constitutionally permissible ways to achieve that goal. For

example, the federal government can and does create programs that assist applicants and 

prospective applicants from protected classes in obtaining credit.7

The Bureau claims Townstone violated ECOA by engaging in political speech and social 

commentary and by not engaging in targeted advertising to African-Americans in Chicago. 

There can be no such prohibition on political speech or affirmative obligation to speak under 

ECOA because either would flagrantly violate the First Amendment. In its original and now its 

amended Complaint, the Bureau is unable to meet its burden to show that punishing Townstone’s 

speech is narrowly tailored to achieve its compelling interest. Rather than preventing Townstone

from speaking on public issues or requiring Townstone to speak, the Government could embark 

on educational programs that “promote the availability of credit to all creditworthy applicants 

without regard to race, color, religion, national origin, sex, marital status, or age.” See, e.g., Nat'l 

Inst. of Family & Life Advocates v. Becerra, 138 S. Ct. 2361, 2376, 201 L. Ed. 2d 835 (2018)

(noting that rather than requiring certain crisis pregnancy centers to place certain notices, 

California itself “could inform low-income women about its services ‘without burdening a 

speaker with unwanted speech.’”) (internal citations omitted). Because the Bureau cannot meet 

its burden, the Complaint should be dismissed.

7 E.g., Reg. B already permits “special purpose credit programs.” 12 C.F.R. § 1002.8.

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(2) Reg. B and the Bureau’s Enforcement Violate the First Amendment Because 

They Are Unconstitutionally Vague and Overbroad as Applied to Townstone 

and on Their Face. 

If the federal government intends on regulating speech, including political speech, the 

Supreme Court mandates precision to assure the appropriate “breathing room” to prevent “chill” 

through the doctrines of vagueness and overbreadth. In Buckley v. Valeo, 424 U.S. 1 (1976), the 

Supreme Court explained that the First Amendment regulation requires specificity and 

objectivity, “‘[b]ecause First Amendment freedoms need breathing space to survive, government 

may regulate in the area only with narrow specificity.’” Id. at 41 n.48 (internal citations 

omitted)). This is because “‘vague laws may not only ‘trap the innocent by not providing fair 

warning’ or foster ‘arbitrary and discriminatory application’ but also operate to inhibit protected 

expression by inducing ‘citizens to ‘“steer far wider of the unlawful zone.’” Id. (citations 

omitted). 

In the context of First Amendment challenges, “vagueness and overbreadth are two sides 

of the same coin, and the two sorts of challenges are often conceived of as ‘alternative and often 

overlapping’ theories for relief on the same claim.” Ctr. for Individual Freedom v. Madigan, 697 

F.3d 464, 479 (7th Cir. 2012) (internal citations omitted). The void-for-vagueness doctrine 

protects against any law that “fails to provide a person of ordinary intelligence fair notice of what 

is prohibited or is so standardless that it authorizes or encourages seriously discriminatory 

enforcement.” F.C.C. v. Fox Television Stations, Inc., 567 U.S. 239, 253 (2012) (internal 

citations omitted). The overbreadth doctrine prohibits laws that restrict “a substantial amount of 

protected speech.” United States v. Williams, 553 U.S. 285, 292 (2008). 

In FEC v. Wisconsin Right to Life, 551 U.S. 449, 567 (2007) (“WRTL-II”), the Supreme 

Court outlined how courts should safeguard political speech in as-applied challenges. Courts 

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must (i) reject intent-and-effect tests, (ii) focus on the actual words at issue, (iii) restrict 

burdensome discovery and litigation to prevent “chilling speech through the threat of 

burdensome litigation,” (iv) “eschew ‘the open-ended rough-and-tumble of factors, which 

“invit[es] complex argument in a trial court and a virtually inevitable appeal,’” and (v) “give the 

benefit of any doubt to protecting rather than stifling speech.” 551 U.S. at 469 (internal citations 

omitted). WRTL-II also mandates that if the challenged communication can be interpreted as 

doing something other than violating the First Amendment it must be so interpreted: “[A] court 

should find that an ad is the functional equivalent of express advocacy only if the ad is 

susceptible of no reasonable interpretation other than as an appeal to vote for or against a 

specific candidate.” Id. at 469-70 (emphasis added). Put differently, where the First Amendment 

is implicated, the tie goes to the speaker, not the censor. Id. at 474. 

A “statute is facially overbroad only when ‘it prohibits a substantial amount of protected 

speech,’ Id. and unconstitutionally vague only when its ‘deterrent effect on legitimate expression 

is ... both real and substantial.’ Young v. American Mini Theatres, Inc., 427 U.S. 50, 60, 96 S. Ct. 

2440, 49 L.Ed.2d 310 (1976).” Ctr. for Individual Freedom, 697 F.3d at 470. 

Reg. B’s “Discouragement” provision, in its use of vague terms such as “or otherwise”, 

“prospective applicants”, “discourage,” and “pursue,” is both vague and overbroad such that it 

should not be applied to Townstone or any creditor:

(b) Discouragement. A creditor shall not make any oral or written statement, in 

advertising or otherwise, to applicants or prospective applicants that would 

discourage on a prohibited basis a reasonable person from making or pursuing

an application.

12 C.F.R. § 1002.4 (emphasis added). 

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i. Reg. B Violates the First Amendment as Applied to Townstone.

The Bureau’s allegations in the Complaint demonstrate Reg. B’s vagueness and 

overbreadth as applied to Townstone. Initially, the Bureau alleges discouragement, in large part, 

based upon statements made on the Townstone Financial Show. The Bureau reads Townstone’s 

statements and encourages this Court to read those statements in the most hostile way possible to 

portray them as being about race instead of crime or other societal issues. But the Supreme Court

holds that tests restricting political speech must be speech-protective with the benefit of any 

doubt always going to free speech. Accordingly, if there is another possible reading of the 

statements, e.g., that they are about crime, they cannot be deemed to be about race or 

discouraging towards a member of that race. And each statement in the Complaint can be read as 

about something besides race (let alone “discouraging” activity based on race).

The Complaint specifically criticizes Townstone for comparing the rush received from 

skydiving to wandering the streets of the southside of Chicago in the middle of the night. (Doc. 

27, ¶37). This comment is comparing the adrenalin rush many seek out from certain sports or 

activities, such as skydiving, and the adrenalin rush that would come from the common fear of 

walking in the dark in an area with a high crime rate. The statement is clearly about crime and 

does not mention race. And, if it can be read as being about something other than race, as it can 

be, it must be so read.

Similarly, the discussion of weekends being called “Hoodlum Weekend” is clearly about 

crime and the need for police to keep order. (Doc. 27, ¶35). “Hoodlum” typically refers to a “a 

violent person” or a “member of a group of criminals.” See

https://dictionary.cambridge.org/dictionary/english/hoodlum. The statement’s words (which must 

be the focus under First Amendment tests) do not address race, but the real problem of crime. 

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The Complaint even complains about comments made a Townstone former employee 

that are encouraging the selling and buying of homes (“it’s a great time to buy. . . it’s a great 

time to sell”) and discussing preparations that should be made prior to putting a home on the 

market. (Doc. 27, ¶34). Those preparations included changing the light fixtures, painting the 

house, and a joking reference to taking down the Confederate flag. (Id.).8 While the Bureau 

apparently feels that this discussion discourages African-American applications, Townstone is 

puzzled how statements encouraging consumers to buy and sell now and to take down the 

Confederate flag – a symbol that may make African-Americans uncomfortable – to make a home 

more desirable to African-Americans can somehow be heard to discourage African-American

credit applications. This example convincingly demonstrates how speech can be construed 

differently by different people and evidences the vagaries of policing Townstone’s alleged 

“discouragement”. 

The Bureau’s attempt to read Townstone’s statements to be about race, when they can, 

and should be read as being about something else, (e.g., crime, support of police, and potential 

offensiveness of certain symbols, the historical nickname used by local residents for a grocery 

store) must be rejected as an overreaching attempt to regulate speech about political issues.

Townstone was exercising its right to speak on issues of public concern on its show. As the 

Bureau states in its Complaint, the Townstone Financial Show did not discriminate 

geographically and was heard across the entire Chicago MSA, including the Southside, and was 

widely available on the internet. (Doc. 27, ¶29). As alleged by the Bureau, the Townstone 

Financial Show was designed to create interest in Townstone and to solicit potential credit 

8 The instructions to “change the light fixtures” and “paint from top to bottom” were included in the Bureau’s 

original complaint. (Doc. 1, ¶37). To the extent the Bureau attempts to save its complaint by removing context in 

the hopes that a stand-alone comment about a Confederate flag would inflame the Court, one hopes that such efforts 

would not be rewarded. 

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applications from the largest geographical area as possible, in light of Townstone’s smallbusiness marketing budget, by providing free information to the public and showing that “no one 

values your mortgage business more than Townstone Financial.” (Doc. 27, ¶¶23-31). It is 

counterintuitive and contrary to the case law interpreting the First Amendment to interpret 

Townstone’s efforts – that were admittedly designed to encourage mortgage applications – as

simultaneously discouraging the same prospective applicants it was attempting to solicit. 

A final example of how Reg. B is unconstitutional as applied to Townstone is that

Townstone is alleged to have violated ECOA and Reg. B not only for statements it made, but 

also for statements it is alleged not to have made. The Bureau seeks to punish Townstone, which

directed ads to the entire Chicago MSA, for “not specifically target[ing] any marketing toward 

African-Americans in the Chicago MSA.” (Doc. 27, ¶41). Even if ECOA and Reg. B can be 

read to require such an affirmative requirement, ECOA and Reg. B provide no answer to the

questions of how much or the types of targeted advertising that would be necessary to comply.

This vagueness chills speech because it provides Townstone with no notice regarding what 

behavior is appropriate. 

Each of these examples demonstrates the vagueness and overbreadth of the Bureau’s 

interpretation of ECOA and Reg. B as applied to Townstone. Because Townstone is wholly 

unaware of what speech is prohibited or required to comply with its mandates, ECOA and Reg. 

B are unconstitutional as applied to it and the Bureau’s Complaint should be dismissed. 

ii. Reg. B Violates the First Amendment Because It Is Facially Invalid.

Reg. B’s “Discouragement” provision negatively impacts so much protected speech that 

it should not be applied to anyone, a facial challenge. Each of the examples above demonstrate 

the difficulty of applying this definition, not only to Townstone, but to any real-world situation. 

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Reg. B’s use of the vague terms and phrases “or otherwise”, “prospective applicants”,

“discourage”, and “pursuing an application” create significant uncertainty for the regulated 

person. The phrase “or otherwise” is as vague as the terms “relative to” and “advocating the 

election or defeat” of a candidate that were found to be problematic in Buckley. Buckley, 424 

U.S. 1 at 50-55 & n.52. While “advertising” may be reasonably clear, adding the descriptor “or 

otherwise” makes it wholly ambiguous as to what else is being regulated by Reg. B. For 

example, under the “or otherwise” phrase, a creditor could be sanctioned based on a remark 

made by one of its employees at a party attended by a “prospective applicant.” That is not what 

Congress or the First Amendment intends. 

Further, the phrase “prospective applicant” can be interpreted to mean literally anyone in 

the world who has access to the “advertising or otherwise” (even over the internet) that is the 

subject of discussion. In addition, the phrasing “pursuing an application” can be interpreted to 

mean any action that could lead to the potential submission of an application, including driving 

to a creditor’s office, such that discouraging driving could fall under this provision. The 

enormous and unknown reach of these terms will have a substantial chilling effect on speech. 

Lastly, the term “discourage” is vague and sweeps in protected content. As demonstrated 

above, one person’s encouragement may be another’s “Discouragement”. In addition, there are 

some “prospective applicants” that perhaps should be discouraged from applying for a loan for a 

myriad of reasons. If the “prospective applicant” is a member of a protected class, potential 

lenders would be disincentivized to give proper advice to or discuss underwriting standards with 

that person for fear of running afoul of ECOA. And finally, and significantly under the First 

Amendment, mortgage lenders would be afraid to engage in political discussions in public media 

for fear of the Bureau believing such statements are “discouraging.” 

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Reg. B’s “Discouragement” provision is both unconstitutionally vague and overbroad 

because it creates a “deterrent effect on legitimate expression [that] is...both real and 

substantial,” Young v. American Mini Theatres, Inc., 427 U.S. at 60, and “prohibits a substantial 

amount of protected speech, Williams, 553 U.S. at 292. For these reasons, Reg. B should not be 

applied to Townstone or similarly situated companies. 

D. The Bureau’s Use of Reg. B Violates the Fifth Amendment.

The due process clause of the Fifth Amendment states that no person shall be “deprived 

of life, liberty, or property, without due process of law.” Indeed, “a fundamental principle in our 

legal system is that laws which regulate persons or entities must give fair notice of conduct that 

is forbidden or required.” F.C.C., 567 U.S. at 253. “Even when speech is not at issue, the void 

for vagueness doctrine addresses at least two connected but discrete due process concerns first, 

that regulated parties should know what is required of them so they may act accordingly; second, 

precision and guidance are necessary so that those enforcing the law do not act in an arbitrary or 

discriminatory way.” Id. 

Reg. B’s definition of “Discouragement” is unconstitutionally vague and fails to give fair 

notice of the specific conduct that the Bureau arbitrarily interprets to be forbidden or required in 

this Complaint. There is simply no way for any creditor to know what is proscribed by the 

Bureau under Reg. B. The Bureau seeks to punish Townstone for (1) expressing political speech 

on a radio show and podcast; (2) not purchasing advertising targeting specific minority groups; 

(3) not hiring loan officers that include every specific racial or ethnic demographic in their 

market area; and (4) failing a “business success” test for which the Bureau uses secret metrics

(e.g., creditors have no prior notice of the “peer lenders” to which the Bureau will compare them, 

or the threshold for compliance). These prohibitions are nowhere in ECOA or Reg. B, nor does 

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23

the Bureau provide any guidance about how to comply with them to avoid enforcement. This is 

the epitome of vagueness and a failure of due process. In its attempt to use ECOA and Reg. B to 

punish Townstone’s actions and inactions, the Complaint violates the due process clause as 

applied to Townstone and Reg. B’s “Discouragement” provision is unconstitutionally vague on 

its face.

E. The Bureau Alleged No Other Violations of Federal Consumer Financial 

Law, and Thus, Count II Fails.

Counts II and III of the Bureau’s Complaint against Townstone and Sturner, 

respectively, must be dismissed because they are wholly derivative of its ECOA claim, which, 

as described, is fatally flawed. Count II seeks to impose liability under Consumer Financial 

Protection Act of 2010 (the “CFPA”), 12 U.S.C. § 5536(a)(1)(A). The CFPA punishes 

“covered persons” like Townstone if they violate any “Federal consumer financial law”, like

ECOA. Paragraph 61 of the Complaint expressly only mentions violations of ECOA as the 

predicate acts that would also create liability under the CFPA. (Doc. 27, ¶61). Accordingly, if 

Count I, which alleges violations of ECOA, is dismissed, the Bureau’s tag-along CFPA claim 

should also be dismissed. 

Count III alleges that Sturner improperly transferred money to himself that allegedly 

should have been available to the Bureau if the Bureau prevails on its ECOA violations, Count 

I. For the reasons stated herein, Count I should be dismissed. With no underlying liability, 

there is no reason to look beyond or unwind the transfer making Count III moot and subject to 

dismissal. Accordingly, the Bureau’s derivative second and third counts fail and should be 

dismissed. 

IV. The Complaint Should be Dismissed With Prejudice.

The Complaint should be dismissed with prejudice because the Bureau already amended 

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24

its complaint once and any future amendments would be futile. Rule 15 allows a party to amend 

its pleading as a matter of right under certain circumstances and “freely . . . when justice so 

requires.” F.R. Civ. P. 15(a)(1)-(2). 

Courts may deny a motion for leave to amend for numerous reasons, including delay, 

futility, and undue prejudice to the opposing party. Park v. City of Chicago, 297 F.3d 606, 612 

(7th Cir.2002) (citations and quotations omitted). As the Seventh Circuit recognized, courts 

“generally dismiss the plaintiff’s complaint without prejudice and give the plaintiff at least one 

opportunity to amend her complaint.” Foster v. DeLuca, 545 F.3d 582, 584 (7th Cir. 2008). 

However, “[A] motion [to amend] is always made to the sound discretion of the district court 

and the court may deny a leave to amend where the proposed amendment fails to allege facts 

which would support a valid theory of liability, ..., or where the party to amend has not shown 

that the proposed amendment has substantial merit....” Goulding v. Feinglass, 811 F.2d 1099, 

1103–04 (7th Cir. 1987).

Recognizing this authority, Townstone consented to the Bureau filing the amended 

Complaint that is now subject to this motion. A comparison of the two complaints shows that 

other than some slight reorganizing and rephrasing, and adding Count III against Mr. Sturner, 

the substance of the allegations is only minimally changed. This makes sense, of course, 

because the Bureau is complaining about events that occurred three to seven years ago. 

Townstone has been dealing with this investigation, including providing significant documents 

and sitting for multiple investigational hearings, since 2017. Townstone was forced to pass on 

potentially fruitful transactions as a result of the Bureau’s investigation and spent hundreds of 

thousands of dollars in legal fees.

Townstone and Sturner ask this Court to say enough is enough and put an end to this 

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25

saga. E.g., Verhein v. S. Bend Lathe, Inc., 598 F.2d 1061, 1063 (7th Cir. 1979) (ruling that the 

district court properly denied a plaintiff’s motion to amend its complaint since the motion for 

leave to amend failed to allege facts supporting a valid theory of the defendant’s liability and 

thus failed to cure the defect in the original complaint.) If the Court agrees with Townstone and 

Sturner that the Complaint should be dismissed for some or all of the reasons stated herein, 

Townstone and Sturner respectfully ask that that dismissal be made with prejudice.9 

V. Conclusion

For the foregoing reasons, Townstone asks the Court to dismiss the Complaint with 

prejudice.

Respectfully submitted,

/s/ Sean P. Burke

Sean P. Burke #6277203

E. Brenda Kpotufe #34084-49

Mattingly Burke Cohen & Biederman LLP

155 E. Market St., Suite 400

Indianapolis, IN 46204

Sean.Burke@mbcblaw.com

Brenda.Kpotufe@mbcblaw.com

Marx Sterbcow

Sterbcow Law Group

824 Elmwood Park Blvd #205

New Orleans, LA 70123

marx@sterbcowlaw.com

Attorneys for Defendant Townstone 

Financial, Inc. and Barry Sturner

9 Townstone and Sturner ask this Court to award them their legal and expert fees they incurred under the Equal 

Access to Justice Act, (“EAJA”), 28 U.S.C.§ 2412, which makes the federal government liable for fees where the 

demand by the agency is found substantially in excess of the decision and is unreasonable when compared with the 

decision. To the extent the Court would entertain this request Townstone and Sturner would be willing to submit 

evidence of these expenditures. 

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CERTIFICATE OF SERVICE

I hereby certify that on February 8, 2021, a copy of the foregoing was filed 

electronically. Service of this filing was also made by operation of the Court’s CM/ECF system:

Barry Reiferson

Vincent Herman 

Michael G. Salemi

Mary E. Olson

Bureau of Consumer Financial Protection

230 S. Dearborn St., Suite 1590

Chicago, IL 60604

And

1700 G Street, NW

Washington, DC 20552

/s/ Sean P. Burke______________

Sean P. Burke

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Unsafe at Any Bureaucracy, Part III:

The CFPB’s Vitiated Legal Case Against Auto-Lenders

REPORT PREPARED BY THE REPUBLICAN STAFF OF THE

COMMITTEE ON FINANCIAL SERVICES, U.S. HOUSE OF REPRESENTATIVES

HON. JEB HENSARLING, CHAIRMAN

115TH CONGRESS, FIRST SESSION

JANUARY 18, 2017

This report has not been officially adopted by the Committee on Financial Services and may not necessarily reflect the views of its Members.

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TABLE OF CONTENTS

Executive Summary

Background

Disparate Impact

• Under Current Case Law, The CFPB Cannot Make A Prima Facie Case Of Disparate 

Impact Against Auto-Financers

 The Text of the Equal Credit Opportunity Act Does Not Give Rise to Disparate 

Impact Liability

 New Case Law Shows That The CFPB Could Not Make a Prima Facie Case Against 

Indirect Auto Financers Under Inclusive Communities

o Discretion is not a “policy” and therefore cannot be used to make out a prima 

facie case of disparate impact liability

o The CFPB could not meet the robust causality standard of Inclusive 

Communities

• The CFPB’s Test For Harm In Indirect Auto Lending Makes The Same Errors The Court 

Rejected In Inclusive Communities

Rulemaking

• The CFPB Likely Violated The Administrative Procedure Act, Against Its Attorneys’ 

Advice, When Issuing Its Recent Rule Governing Auto Financers

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1

Executive Summary

This is the third installment in a series of staff reports examining the Bureau of 

Consumer Financial Protection’s (CFPB’s) Equal Credit Opportunity Act (ECOA)

enforcement actions against indirect auto financers. Part I showed, using internal CFPB 

documents, that the CFPB’s ECOA actions against auto financers were knowingly premised 

on a suspect legal theory and a fundamentally flawed statistical methodology for estimating 

the race of borrowers. Part II showed, again using internal CFPB documents, that the 

CFPB’s theory of liability for auto financers cannot meet the legal test for disparate impact.

Part III in this continuing series makes additional CFPB documents available to the 

public. These documents discuss the CFPB’s disparate-impact methodology in more detail. 

They also reveal potential legal deficiencies in the issuance of the CFPB’s major rule 

authorizing it to supervise the larger participants of the auto lending market. 

Part III also demonstrates that under recent Supreme Court precedent, if the CFPB 

were to rely upon the legal theory it deployed in previous enforcement actions against auto 

financers, its claims would not survive judicial scrutiny.

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Background

The original Staff Report entitled Unsafe at Any Bureaucracy I analyzed the 

questionable legal basis of the CFPB’s disparate-impact enforcement of ECOA against 

indirect auto financers. Since the release of that report, judicial decisions, including by the 

U.S. Supreme Court, have further demonstrated the legal insufficiency of the CFPB’s 

position. It is now apparent that the CFPB’s auto-lending enforcement actions have been 

grounded in a fundamental misapplication of the law. 

As set forth in detail in previous Committee Staff Reports, most auto dealers offer 

vehicle financing as a convenience to customers, some through indirect auto financers, 

sometimes called “indirect auto lenders,”1 which are assignee creditors that may be banks, 

captive finance companies,

2 independent finance companies, or credit unions. Prospective 

car buyers can finance their car through the dealer if they wish. After negotiating the terms 

of the financing, they execute a contract known as a “Retail Installment Sale Contract” 

(RISC) that memorializes these terms.

Either before or after entering into a RISC with a car buyer, dealers solicit

competitive bids from indirect auto financers to purchase the RISC.3 Dealers are able to 

obtain a “wholesale” interest rate for the purchase of a RISC from indirect creditors 

because of the large volume of credit applications they originate and the origination costs 

they save for the creditors. Dealers try to maintain a retail margin to cover the costs of 

their origination operation and provide a return. The difference between the retail rate 

accepted by the buyer and the wholesale rate quoted by creditors to the dealer is known as 

“dealer participation” or “dealer reserve,” and constitutes the dealer’s retail margin. 

 1 CFPB documents describe these finance companies as “indirect auto lenders,” although they are more 

appropriately described as creditors rather than lenders pursuant to state laws.

2 Captive finance companies are subsidiaries whose purpose is to provide financing to customers buying the parent 

company's product.

3 Purchasing the RISC means extending financing in exchange for the future income stream of finance payments 

made by the car buyer. The assignee becomes the owner of the RISC.

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The CFPB brought a series of disparate-impact actions against auto finance 

companies, none of which have yet been challenged in a federal court, and several of which 

ended in negotiated agreements or public settlements. Disparate impact is a controversial 

legal theory of liability. Unlike a disparate treatment case, where a “plaintiff must establish 

that the defendant had a discriminatory intent or motive, a plaintiff bringing a disparate 

impact claim challenges practices that have a disproportionately adverse effect on 

minorities and are not otherwise justified by a legitimate rationale.”4 In other words, 

disparate impact theory states that a law or regulation may prohibit a practice that is 

discriminatory in effect because it has a disproportionately negative impact on a protected 

class, even if the defendant has no intent to discriminate and the practice appears neutral 

on its face. The CFPB has collected some $200 million in penalties that the public knows of 

from companies in disparate impact enforcement actions related to ECOA, without ever 

having to set foot in federal court.5 

The CFPB has claimed that various indirect auto financers are legally liable for 

disparities in the dealer-participation on RISCs for minority borrowers relative to nonHispanic white borrowers, despite the fact that auto-dealers (not financers) set their own 

dealer participation for each RISC they retail.

6 As examined in detail in the Staff Report

entitled Unsafe at Any Bureaucracy I, the CFPB refused to consider these auto financers’ 

showings that the purported disparities were in fact correlated to and caused by relevant

 

4 Texas Dep’t of Hous. and Comty. Affairs v. Inclusive Communities Project, Inc., 135 S.Ct. 2507, 2513 (2015) 

(quoting Ricci v. DeStefano, 557 U.S. 557, 577 (2009) (internal quotation marks omitted) (hereinafter “Inclusive 

Communities, Supreme Court”); see also Unsafe at Any Bureaucracy, at 8. 5 See Consent Order, In the Matter of Toyota Motor Credit Corporation, No. 2016-CFPB-0002 (CFPB Feb. 2, 2016) 

available at http://files.consumerfinance.gov/f/201602 cfpb consent-order-toyota-motor-credit-corporation.pdf

($21.9 million); In the Matter of Fifth-Third, No. 2015-CFPB-0024 (CFPB Sept. 28, 2015), available at

http://files.consumerfinance.gov/f/201509 cfpb consent-order-fifth-third-bank.pdf ($18 million); Consent Order, In 

the Matter of American Honda Finance Corp., No. 2015-CFPB-0014 (CFPB Jul. 14, 2015), available at

http://files.consumerfinance.gov/f/201507 cfpb consent-order honda.pdf ($24 million); Consent Order, In the 

Matter of Ally Financial Inc., No. 2013-CFPB-0010 (CFPB 19 Dec., 2013), available at

http://files.consumerfinance.gov/f/201312 cfpb consent-order ally.pdf ($80 million); CFPB, Supervisory 

Highlights, 4 (Summer 2014), http://files.consumerfinance.gov/f/201409_cfpb_supervisory-highlights_autolending_summer-2014.pdf (“[T]ogether with the DOJ, the Bureau took public enforcement action against Ally 

Financial Inc. and Ally Bank (collectively, Ally) in December 2013, requiring Ally to pay $80 million to address 

harm to about 235,000 borrowers. Supervisory resolutions with several other auto lenders will account for the 

remaining approximately $56 million. . . . ”). 

6 Dealer participation is capped at a maximum of 175-250 basis points industry-wide. 

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characteristics of the RISCs’ terms and circumstances and relevant borrower credit 

characteristics, not the race of the borrower. 

Now, case law applying recent Supreme Court precedent has demonstrated again 

how weak the CFPB’s legal case is. In Texas Department of Housing and Community Affairs 

v. Inclusive Communities Project, Inc.,

7 a case involving disparate impact claims under the 

Fair Housing Act, the Supreme Court set forth rigorous legal tests for disparate-impact 

liability, including an exacting burden of proof to establish a prima facie case of disparate 

impact.8 Application of those standards to the enforcement actions brought by the CFPB 

against auto financing companies would result in almost certain dismissal of those claims. 

Disparate Impact

Under Current Case Law, The CFPB Cannot Make A Prima Facie Case Of 

Disparate Impact Against Auto Financers

The Text of the Equal Credit Opportunity Act Does Not Give Rise to Disparate Impact 

Liability

The CFPB employs a “disparate impact” theory of discrimination when enforcing 

ECOA despite the lack of a valid legal or statutory basis for doing so.9 One searches the text 

of ECOA in vain for any language giving rise to a disparate impact theory of liability. The 

Staff Report entitled Unsafe at Any Bureaucracy I highlighted the absence of any case law 

supporting the CFPB’s attempt to import disparate impact theory into ECOA, and showed 

that the operative language in other statutes that courts have construed to imply disparate-

 

7 This case considered whether the Fair Housing Act gave rise to disparate-impact liability. 8 See Inclusive Communities, Supreme Court. 9 See Consumer Financial Protection Bureau, Bureau Bulletin 2012-04 (Fair Lending) (Apr. 18, 2012), available at 

http://files.consumerfinance.gov/f/201404 cfpb bulletin lending discrimination.pdf (“[T]he CFPB reaffirms that 

the legal doctrine of disparate impact remains applicable as the Bureau exercises its supervision and enforcement 

authority to enforce compliance with the ECOA and Regulation B.”). 

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impact liability is nowhere to be found in ECOA. Yet that has not stopped the CFPB from 

charging ahead with multiple cases against auto financers under a baseless legal theory. 

In the absence of a Supreme Court case on ECOA, the CFPB has analogized to cases 

interpreting laws with different statutory text and context from ECOA, most notably, the 

Fair Housing Act (FHA). At a March 2016 hearing before the House Financial Services 

Committee, Representative Randy Hultgren explained that the Inclusive Communities

holding that disparate impact was cognizable under the FHA “rested primarily on the 

unique congressional history of FHA — history that is plainly inapplicable to ECOA.” CFPB

Director Richard Cordray responded by claiming that the FHA and ECOA “have been 

applied hand in glove for decades.”10 A review of the relevant legal landscape contradicts 

Director Cordray on this point.

In Griggs v. Duke Power and Smith v. City of Jackson, the Supreme Court inferred 

disparate impact liability from the text of the Civil Rights Act and the Age Discrimination in 

Employment Act, respectively, with the Griggs Court holding that Congress had “directed 

the thrust of the Act to the consequences of employment practices, not simply the 

motivation.”11 The Court applied the rule Griggs and Smith established to reach the same

conclusion about the FHA in the Inclusive Communities case, after examining the language 

of the FHA and holding that its “results-oriented language counsels in favor of recognizing 

disparate-impact liability.”12 

By contrast, ECOA contains no such consequences-based language, but focuses 

solely on the intent of the actor. A textual comparison of ECOA and the Fair Housing Act 

illustrates this critical distinction.

13 The FHA expressly prohibits an actor from acting in 

any way that results in any person being denied housing on the basis of race: “It shall be 

 10 The Semi-Annual Report of the Bureau of Consumer Financial Protection: Hearing Before the H. Comm. On Fin. 

Servs., 114th Cong. (2016) (statements of Rep. Hultgren and Director Cordray). 11 Griggs v. Duke Power Co., 401 U.S. 424, 432 (1971) (emphasis added); see Smith v. City of Jackson, 544 U.S. 

228 (2005). For further analysis, see Unsafe at Any Bureaucracy. 12 Inclusive Communities, Supreme Court, at 2518. 13 See Unsafe at any Bureaucracy, at 14.

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unlawful . . . [t]o refuse to sell or rent after the making of a bona fide offer, or to refuse to 

negotiate for the sale or rental of, or otherwise make unavailable or deny, a dwelling to any 

person because of race, color, religion, sex, familial status, or national origin.”14 This is the 

results-oriented statutory language the Court relied on in Inclusive Communities to hold 

that disparate impact claims were cognizable under the FHA. ECOA’s text, on the other 

hand, contains no such results-oriented provision. Instead, it prohibits an actor from

discriminating on the basis of race: “It shall be unlawful for any creditor to discriminate 

against any applicant, with respect to any aspect of a credit transaction . . . on the basis of 

race, color, religion, national origin, sex or marital status, or age. . . .”15 Due to the absence 

of results-oriented statutory language, under Inclusive Communities, disparate impact is not 

cognizable under ECOA. 

The FHA’s legislative history provides additional grounds for differentiating it from 

ECOA on the issue of disparate impact. In the case of the FHA, prior to the Supreme Court’s 

holding in Inclusive Communities, the lower courts issued a series of opinions holding that 

the FHA authorized disparate-impact liability.16 Subsequently, Congress amended the FHA 

to exempt certain activities that could only have violated the law if the FHA authorized 

disparate-impact.17 The Court in Inclusive Communities interpreted Congress’ amendment

as a ratification of those prior holdings finding disparate impact liability.18 However, 

Congress has made no such amendments to ECOA. 

New Case Law Shows the CFPB Could Not Make a Prima Facie Case Against Indirect

Auto Financers Under Inclusive Communities 

Even if ECOA authorized disparate impact enforcement actions, which it does not, 

the CFPB still could not make a legally valid case for its enforcement actions against auto 

financers. As outlined in greater detail below, in Inclusive Communities, the Supreme Court

set an exacting burden of proof to establish a prima facie case of disparate impact. On 

 14 42 U.S.C. § 3604(a). 15 15 U.S.C. § 1691(a). 16 Id. at 2520-21. 17 Id. at 2520-21. 18 Id. at 2520-21.

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remand, the district court applied that standard and ruled that discretion does not 

constitute a policy pursuant to a disparate-impact theory. The CFPB’s entire theory of 

liability against indirect auto financers is premised on the claim that individual auto 

dealers’ ability to set discretionary dealer participation constitutes a policy on the part of 

the auto financer — a theory that Inclusive Communities conclusively refutes. 

The facts underlying Inclusive Communities pertain to a housing authority in Dallas

that granted tax credits to builders of low-income housing on a discretionary basis. The 

federal government provided tax credits to the states to distribute to developers, which 

Texas did in this case through the defendant housing authority.19 Developers could then 

apply for the tax credits which could be “sold to finance construction of a housing project,”

which the housing authority granted on a discretionary basis.20 Any developers who 

received these housing tax credits were required by law to accept recipients of Section 8 

housing vouchers. 21 The plaintiff in the case alleged that the housing authority’s allocation 

of tax credits in Dallas had “a disparate impact on the location of low-income housing in the 

area.”22 Specifically, the plaintiffs alleged that the housing authority’s “use of discretion in 

the aggregate resulted in an approval rate for units located in Caucasian areas of nearly half 

the approval rate for units located in minority areas,” and that the housing authority’s

“decisions to deny or approve applications for specific applications for . . . tax credits” was 

“evidence of disparate impact.”23

The Supreme Court opinion in Inclusive Communities focused primarily on the 

parameters of a disparate impact claim. First, the Court noted the three-step burdenshifting test that the Department of Housing and Urban Development had adopted by 

regulation and the Fifth Circuit Court of Appeals applied below, as follows: (1) the plaintiff 

must “make a prima facie showing of disparate impact,” which requires meeting the

“burden of proving that a challenged practice caused or predictably will cause a 

 19 Id. at 11-12. 20 Id. at 11-12. 21 Id. at 11-12. 22 Id. at 11-12. 23 Id. at 11-12. 

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discriminatory effect”;24 (2) if the plaintiff makes out a prima facie case, “the burden shifts 

to the defendant to prov[e] that the challenged practice is necessary to achieve one or more 

substantial, legitimate, nondiscriminatory interests”;25 (3) if the defendant proves the 

practice served a legitimate interest the burden shifts back to the plaintiff to “prov[e] that 

the substantial, legitimate, nondiscriminatory interests supporting the challenged practice 

could be served by another practice that has a less discriminatory effect.”26

Turning to the heart of the case, the Court found that disparate-impact liability “has 

always been properly limited in key respects.”27 A key limitation on disparate-impact 

liability is that plaintiffs must establish a defendant’s “policy or policies caus[ed] this

disparity.”28 This requires a twofold showing: both that the defendant had a policy in place, 

and that the policy caused the disparity at issue. The holding stressed the “robust causality 

requirement” needed to show that a policy of the defendants caused the disparity.29 The 

Court emphasized two purposes of such a robust requirement. The first is to avoid 

incentivizing the use of racial quotas and causing entities to create policies that “in fact, 

tend to perpetuate race-based considerations rather than move beyond them.”30 The 

second is to “protect[] defendants from being held liable for racial disparities they did not 

create,” and “protect potential defendants against abusive disparate impact claims.”31

In addition to establishing plaintiffs’ prima facie burdens, the opinion held that

courts must give both government and private defendants “leeway to state and explain the 

valid interest served by their policies . . . analogous to the business necessity standard 

 24 Id. at 4-5; see also Inclusive Communities Project, Inc., v. Texas Dep’t of Hous. and Comty. Affairs, Nos. 12–

11211, 13–10306., slip op. (5th Cir., Mar. 24, 2014) (hereinafter “Inclusive Communities, 5th Circuit”). 25 Inclusive Communities, Supreme Court at 2514-15; see also Inclusive Communities, 5th Circuit. 26 Inclusive Communities, Supreme Court at 2514-15 (internal quotation marks and citations omitted); see also

Inclusive Communities, 5th Circuit. 27 Inclusive Communities, Supreme Court, at 2522. 28 Id. at 2523.

29 Id. at 2523. The Court highlighted in particular that “a disparate-impact claim that relies on a statistical disparity 

must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity.” Id. 30 Id. at 2524. 31 Id. at 2523-24. 

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under Title VII.”32 This leeway is because defendants must “be allowed to maintain a policy 

if they can prove it is necessary to achieve a valid interest.”33 

The Supreme Court decided Inclusive Communities in 2015 and remanded the case

to the appellate court, which in turn remanded it to the district court for disposition 

consistent with the Supreme Court’s holding. In August 2016, the District Court for the 

Northern District of Texas stated that its prior conclusion that the plaintiff had made a 

prima facie case was “reached without the benefit of the Supreme Court’s decision in this 

case,” and changed its decision in light of the Supreme Court’s holding.34 It found that the 

plaintiff could not state a prima facie case of disparate impact under the Supreme Court’s 

opinion.

Discretion is not a “policy” and therefore cannot be used to make out a prima facie case of 

disparate impact liability

The District Court held that the plaintiff had failed to meet the burden of proof the 

Supreme Court requires to show disparate impact because discretion is not a cognizable

policy under disparate-impact analysis. The District Court held that as a matter of law a 

generalized policy of discretion is not a specific policy or practice that can be said to cause 

the alleged disparity, but rather a series of “cumulative effects.”35 Indeed, it held that if “the 

plaintiff establishes a subjective policy, such as the use of discretion, has been used to 

achieve racial disparity, the plaintiff has shown disparate treatment,” not disparate 

impact.

36 Disparate impact, by contrast, requires the plaintiff to “establish[] that the 

existence of the policy itself, rather than how the policy is applied, resulted in a racial 

disparity.”37 The court went on to find that because the plaintiff was merely complaining 

 32 Id. at 2522. 33 Id. at 2523. 34 Inclusive Communities Project, Inc., v. Texas Dep’t of Hous. and Comty. Affairs, No. 3:08-CV-0546, slip op. at 3, 

32 (N.D. TX, Aug. 26, 2016) (hereinafter “Inclusive Communities, District Court”). 35 Id. at 15. 36 Id. at 18. 37 Id. at 17.

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about the “results of [the defendant]’s discretion, not the exercise of discretion,” it had 

failed to demonstrate a prima facie case of discrimination.38 

Because the CFPB’s case against indirect auto financers is premised on the claim 

that discretion is a policy,39 it would also fail under an application of the Supreme Court’s 

rigorous Inclusive Communities standard. The CFPB has pointed to auto financers’ “policy” 

of discretion whereby the dealers, not the financers, have the discretion to determine 

whether and how much dealer participation to charge.40 However, because discretion is 

not a specific policy, it cannot give rise to disparate impact liability. 

The CFPB would likely point to an ancillary point made by the District Court opinion

in an attempt to salvage its argument. The court noted that the plaintiff was properly

understood as bringing a disparate treatment claim rather than a disparate impact claim, 

because the relief the plaintiff sought was not an order eliminating the housing authority’s 

ability to exercise discretion but rather an order forcing the housing authority to exercise 

that discretion to reduce racial segregation in low-income housing.41 The CFPB would 

likely argue that because it seeks to cap the level of discretion that car dealers may 

exercise, not force auto dealers to exercise their discretion in a particular way, discretion 

constitutes a “policy” in its cases against the auto financers. 

There are several flaws in this line of reasoning. First, the court merely pointed to 

the relief sought as an illustration of the point it had already arrived at through the 

application of precedent and logic. Namely, that discretion is not in itself a policy capable 

 

38 Id. at 18.

39 See e.g. November 19, 2014, Decision Memorandum, 'Authorization to Seek a Settlement or Commence 

Litigation', at 11, (“As described above, Honda, Toyota, and Nissan each maintain a specific policy and practice that 

provides dealers discretion to mark up borrowers' interest rates above each institution's established buy rates, and 

compensates dealers for those markups.”).

40 See e.g., Consent Order, In the Matter of Toyota Motor Credit Corporation, No. 2016-CFPB-0002, ¶11 (CFPB 

Feb. 2, 2016) available at http://files.consumerfinance.gov/f/201602 cfpb consent-order-toyota-motor-creditcorporation.pdf (“With respect to non-subvented retail installment contracts, Respondent maintains a specific policy 

and practice that provides dealers discretion to mark up a consumer's interest rate above Respondent's established 

risk-based buy rate.”). 41 Inclusive Communities, District Court, at 18. 

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of creating a disparate impact, but rather an absence of a policy, and instead the ad hoc 

discretionary decisions either are motivated by an intention to treat minorities differently 

(and therefore illegal because they are disparate treatment, not disparate impact), or are 

not (and therefore are not illegal). Second, the fact that the plaintiff in Inclusive 

Communities sought to address its complaints about the “results of [the defendant]’s 

discretion” by seeking to make the defendant exercise that discretion to secure different 

results does not change the baseline conclusion that the results of discretion simply cannot 

be defined as the results of a policy. Third, none of the consent orders resolving the CFPB’s 

actions against auto financers had the effect of eliminating the discretion of a dealer to 

charge a dealer participation, but rather imposed lower ceilings on how much reserve

dealers can charge. Fourth, if anything, the fact pattern in indirect auto lending is still 

further removed from a “specific policy.” In Inclusive Communities the discretion was 

actually exercised by the defendant in the case. By contrast, indirect auto financers are not 

the parties that exercise the discretion to set dealer participation; that discretion is 

exercised by auto dealers. Thus financers’ relationship to the results of discretion is even

more attenuated than that of the housing authority in Inclusive Communities. 

Further support for the holding that discretion is not a policy comes from another

case decided by a federal district court in the aftermath of the Inclusive Communities 

Supreme Court case. In City of Los Angeles v. Wells Fargo & Co, plaintiffs alleged that Wells 

Fargo had violated the Fair Housing Act’s disparate impact prohibition by issuing 

mortgages that imposed different terms or costs on minority borrowers.42 In that case the 

plaintiff did not claim that the defendant had a policy of discretion per se, but it claimed 

that the defendant’s “inadequate monitoring policies resulted in the disparate issuance of 

[h]igh-[c]ost loans to minority borrowers.”43 The court summarized this position as an 

argument that “a lack of a policy produced the disparate impact.”44 In other words: 

discretion. The court ruled that the plaintiff failed to make a valid disparate impact claim

 42 City of Los Angeles v. Wells Fargo & Co., No. 13-09007, at 2 (C.D. Calif. Jul. 17, 2015). 43 Id. at 16. 44 Id. at 16 (emphasis in original).

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because the plaintiff could not meet Inclusive Communities’ requirement to identify an 

“actual policy” of the defendants as part of the causation showing.45 

The CFPB could not meet the robust causality standard of Inclusive Communities

The District Court in the Inclusive Communities remand case next turned to the 

question of causation. The District Court found that even if, arguendo, discretion were a 

policy, the plaintiff would still have no actionable claim against the housing authority 

because it had “not proved that it was [the defendant]’s exercise of discretion — and not 

something else — that caused” the disparity.46 So even if disparate-impact actions were 

cognizable under ECOA, and even if discretion were a policy for the purposes of making out 

a prima facie case, the CFPB still could not prove that dealer discretion to set dealer 

participation caused the alleged disparity because it cannot prove that the exercise of

discretion caused the disparities it observed. 

In the Inclusive Communities opinion, the Supreme Court articulated a “robust 

causality requirement” designed to “ensure[] that [r]acial imbalance . . . does not, without 

more, establish a prima facie case of disparate impact and thus protect[] defendants from 

being held liable for racial disparities they did not create.”47 The Court incorporated this 

protection because if it did not, “disparate-impact liability might displace valid 

governmental and private priorities,” which would in turn “set our Nation back in its quest 

to reduce the salience of race in our social and economic system,” whereas disparateimpact liability must properly be applied to “remov[e] . . . artificial, arbitrary, and 

unnecessary barriers.”48 The Court further held that if the plaintiff could not meet its 

burden to show a causal connection between a defendant’s policy and a disparate impact, it 

“should result in dismissal of this case.”49

 45 Id. at 16. 46 Inclusive Communities, District Court, at 19. The court also held that providing the requested relief of forcing the 

plaintiff to “monitor relevant data” and “correct the disproportionate issuance” of high-cost loans to minorities “is a 

roundabout way of arguing for a racial quota,” which is explicitly prohibited by the Inclusive Communities decision 

due to the Constitutional issues it would raise. Id. at 16-17. 47 Inclusive Communities, Supreme Court, at 2523 (internal quotation marks and citation omitted). 48 Id. at 2524 (internal quotation marks and citation omitted).

49 Id. at 2524; see also Inclusive Communities, District Court, at 20-21.

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Applying the Supreme Court’s “robust” causation standard, the District Court found 

that the plaintiff failed to make a prima facie case of disparate impact.50 It first noted that 

there is no evidence the statistical disparity would have been eliminated had the housing 

authority been forced to use a particular points-system for awarding tax credits rather than 

exercising discretion.51 The court then found that that the plaintiff did not show causation 

because it failed to account for “other potential causes of the statistical disparity.”52 The 

Supreme Court had recognized that in this case it “may be difficult to establish causation 

because of the multiple factors that go into investment decisions about where to construct 

or renovate housing units.”53 The District Court pointed out that there were multiple 

potential causes of the disparity alleged in the case, such as developers’ considerations, 

local governments’ preferences, and federal laws mandating preferences for low-income 

communities in awarding tax credits.54 Therefore the plaintiff failed to meet its burden to 

prove that the housing authority’s “exercise of discretion — and not other factors — caused 

the statistical disparity.”55 Because the plaintiff failed to meet its burden to show that it 

was the housing authority’s exercise of discretion that caused the disparity, it could not 

have made out a disparate impact case even if discretion were a policy as a matter of law. 

Nor could the CFPB make a sufficient showing of causation if its auto-lending 

enforcement strategy were ever exposed to scrutiny by a federal court. As the previous

Staff Reports have demonstrated, the CFPB was informed time and again of factors other 

than race that completely or almost completely accounted for the disparities in dealer 

participation the CFPB alleged it found in various indirect auto financers’ portfolios.56 

These factors included the credit score, the new or used status of the vehicle, the term of 

 50 Inclusive Communities, District Court, at 6, 10, 19, 25, 30. 51 Id. at 19. 52 Id. at 20. 53 Inclusive Communities, Supreme Court, at 2523-24; see also Inclusive Communities, District Court, at 20-21. 54 Inclusive Communities, District Court, at 19-23. 55 Id. at 21. The plaintiff attempted to prove that some of the potential factors were not causes of the disparity but its 

analysis suffered from methodological problems, such as comparing the cumulative results of annual tax credit 

awards over many years rather than comparing tax credit awards within each year against one another as the housing 

authority did when reaching its decisions. Id. at 22. 56 Unsafe at any Bureaucracy, at 38-39.

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repayment, the dealer, and the geographical area.57 The Supreme Court viewed a robust 

prima facie causality showing as a necessary step in safeguarding valid business and other 

priorities. Each of the above factors represents a potential valid business priority. For 

example, a borrower with a lower credit score may be less appealing to financers, and the 

dealer may have to expend significantly more time and effort to find him or her financing. 

Under the robust standard of causation set forth in Inclusive Communities, the CFPB must

consider each of these factors and any other relevant factors and prove that each one did 

not cause the disparity in order to meet its burden to show that a policy of the financers did

cause the disparity. However, based on its internal documents, it appears the CFPB does 

not even consider these factors when making a showing of correlation, much less 

causation. 

In order to make a valid comparison between the dealer participation charged to 

consumers of different races one should compare consumers only with other similarlysituated consumers. For example, RISCs of borrowers seeking a 5-year car repayment term

should be compared only against RISCs of other borrowers seeking the same repayment

term, not the RISCs of consumers with a 7-year repayment term, in order to tell if there is 

really a difference in dealer participation between people of different races or only 

between people who select different terms. But, as extensive internal CFPB documentation 

has revealed,58 when determining whether differences in dealer participation are 

correlated to race the CFPB does not regress out other variables to assess whether the 

differences in dealer participation are truly correlated to race or whether they are in fact 

correlated to some other relevant borrower characteristic (like geographical area, credit 

score, or term). 

Court documents demonstrate one theory the CFPB likely relied on to try to justify 

its decision to ignore these variables. The Department of Justice (DOJ) filed a complaint 

 57 Id. at 38-39. 58 See generally Unsafe at any Bureaucracy; Unsafe at any Bureaucracy II.

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(later settled) against Toyota on the basis of the CFPB’s decision to “refer[] Toyota to the 

United States Department of Justice pursuant to ECOA.”59 The complaint alleged:

The United States's and the CFPB's markup analyses focused on the interest 

rate difference between each borrower's contract rate and each borrower's 

buy rate set by Toyota. Toyota considers individual borrowers' 

creditworthiness and other objective criteria related to borrower risk in 

setting the buy rate . . . . The dealer markups charged by Toyota to consumers 

are based on dealer discretion and are separate from, and not controlled by, 

the adjustments for creditworthiness and other objective criteria related to 

borrower risk that are already reflected in the buy rate. Toyota's markup 

policy provided for dealer discretion and did not include consideration of 

these factors. Because the analysis focused on only the difference between 

each borrower's contract rate and buy rate, it did not make additional

adjustments for creditworthiness or other objective criteria related to 

borrower risk.60

In other words, the DOJ and CFPB’s analysis treated factors such as credit score, geography, 

new/used status, term of the loan, etc. as if they were irrelevant to setting dealer 

participation. The apparent rationale is that the agencies believed the factors were 

relevant only to risk-based pricing of the buy rate and were therefore already “baked in” to 

the buy rate, rendering it unnecessary or even double-counting to consider them in 

analyzing dealer participation. 

The CFPB’s internal documentation shows that this theory was applied internally as 

well. In one memorandum to Director Cordray, CFPB staff justified its decision not to 

control for relevant potentially explanatory variables by claiming: 

 59 Complaint, U.S. v. Toyota Motor Credit Corp., No. cv-16-725, ¶16 (Feb. 2, 2016, C.D. Cal.). 60 Id. at ¶20.

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Given the fact that Honda, Toyota, and [Institution C]'s buy rate on any given 

transaction already accounted for characteristics associated with the 

borrower's creditworthiness, the characteristics of the vehicle, and the 

timing, location, and structure of the deal, such factors were not included as 

controls in the analysis, which focused on dealer markups.61

This reasoning closely tracks an approach promoted by Professor Ian Ayres,

suggesting that the CFPB may be relying on or incorporating his theory in its own position. 

This theory is known as “included variable bias” theory, which is the opposite of the 

standard and accepted statistical “omitted variable bias” analysis. Ayres has written 

several articles on the subject, and served as an expert witness for the plaintiffs in a 2004 

class-action lawsuit against Honda’s financing arm, a case that was ultimately settled (prior 

to a ruling on class certification) on terms including an agreement to cap dealer 

participation at 250 basis points (2.5 percentage points).

62 For that case, Ayres wrote a 

report supporting class certification, arguing that “[i]ncluding controls for non-race factors 

that do not represent legitimate business justifications can bias the estimate of whether a 

decisionmaker's policies produced an unjustified disparate impact.”63 Whereas “omitted 

variable bias” refers to the idea that failing to control for factors other than the one being 

tested for — here, race or ethnicity — creates a statistical bias, “included variable bias” 

theory holds that “[i]t is inappropriate to control for these non-race factors in the 

regression under a disparate impact theory, because the statistician wants to see whether 

these non-race factors produce racially disparate outcomes.”64 However, this 

misunderstands the legal analysis required, which is to determine whether the defendant’s 

policy produces racially disparate outcomes, not whether other non-race factors produce 

racially disparate outcomes. 

 61 November 19, 2014, Decision Memorandum, 'Authorization to Seek a Settlement or Commence Litigation', at 13. 62 See Settlement Agreement at ¶9.1, Jan. 21, 2005, Willis et al. v. American Honda Finance Corp., class action, No. 

3-02-0490 (M.D. Tenn.); see also Docket, Willis et al. v. American Honda Finance Corp., class action, No. 3-02-

0490 (M.D. Tenn.). 

63 Expert Report Of Ian Ayres at 7, Jun. 30, 2004, Willis et al. v. American Honda Finance Corp., class action, No. 

3-02-0490 (M.D. Tenn.). 64 Id. at 6.

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Ayres further argued that in that particular case Honda’s “centralized credit scoring 

process . . . base[s] credit determinations on arms-length, non-subjective criteria” and that 

because Honda “exclusively bears the risk of non-repayment of its principal and . . . it bases 

its lending and buy-rate decisions exclusively on information that is embedded in its 

available databases, it is disingenuous to argue that dealerships (who are not bearing any 

risk of non-repayment of principal) are nonetheless making risk-based decisions.”65

Ayres’ argument ignores the fact that these factors do not only predict risk of nonrepayment of principal, but also directly reflect the origination costs dealers face when 

working to find financing for their customers. Dealers have to make a significant 

investment to obtain financing for borrowers and that investment varies depending on the 

borrower. For example, a dealer must expend significantly more time and effort to find 

financing for buyers with poor credit or buyers who wish to enter into RISCs with terms 

that are more complicated or companies are less eager to finance, such as longer 

repayment periods. The dealer has to factor in the real costs, time-cost, overhead cost, 

opportunity cost, etc. to the retail pricing decision. None of this pricing is contingent on the 

risk of non-repayment of principal, but rather on the cost of originating or retailing the 

RISC. In addition, the dealer must also price in risk in some circumstances. Where the 

dealer issues a RISC to a borrower before securing financing and then sells the RISC after 

the fact (called a “spot delivery”), the dealer must in fact price in risk of non-repayment of 

capital. And, on all RISCs the dealer must price in the risk of losing his compensation if the 

borrower defaults within the first 90 days of the loan period. 

Ayres also argued that “[u]nder a disparate impact theory, it is necessary to 

intentionally exclude (that is, "omit") non-race variables from a regression to test whether 

those variables produced a disparate racial impact.”66 This argument is convincing to a 

point, as it would seem to make little sense to control for variables that bear no reasonable 

relation to the cost or price of assigning or originating a RISC, especially if they are 

 65 Id. at 26. 66 Id. at 5.

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correlated with race or ethnicity. To use a simplistic example, a person’s eye color has no 

reasonable bearing on the ease or difficulty a dealer may have in obtaining financing for 

that person or any other cost or credit-risk factors, but it may be correlated with race or 

ethnicity, so it would be self-defeating to control for eye color in a disparate impact case 

and inappropriate to include it in the prima facie analysis. Similarly, whether the person is 

a dog or a cat owner, while having nothing to do with race, is an inapposite control because 

it has no plausible connection with the cost (including time-cost, overhead cost, risk 

pricing, etc.) of assigning a RISC.

However, Ayres took this argument past its logical extreme by arguing that in a 

disparate impact case regarding dealer reserve, the “qualified pool is simply the class of 

Honda Finance borrowers” without regressing out any non-racial characteristics. Under 

this approach, a fact-finder should “simply compare the average finance markup charged” 

to minority versus non-Hispanic white borrowers.67 His reasoning was that “Honda 

Finance’s own willingness to lend to this class is direct evidence that these borrowers were 

deemed by Honda Finance to be qualified borrowers.”68 

This argument has several flaws. First, it ignores the fact that there is not simply a 

binary choice between qualified and unqualified borrowers but a spectrum of financing 

rates and terms that various applicants will be qualified for depending on multiple 

pertinent factors, which in turn will make each applicant more or less difficult and costly 

for the dealer to obtain financing for. This in turn will affect the retail price of the RISC. 

Second, the fact that some characteristics are plainly irrelevant does not refute the point 

that many factors like those discussed above are relevant and must be controlled for to 

reach an accurate picture of whether disparate impact has in fact occurred. Third, this 

argument fails to account for the heightened burden the courts have placed on plaintiffs to 

make a prima facie case, as in Inclusive Communities. A prima facie case must prove that the 

 67 Id. at 9. 68 Id. at 9.

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plaintiff’s policy and not some other factor (such as creditworthiness, geography, etc.)

caused disparate impact. 

Moreover, even Ayres conceded that some variables should be considered in 

disparate impact analysis, even if he advocated against using such variables to analyze 

dealer participation. He argued that “a variable should be presumptively excluded from the 

statistical analysis unless the defendant can demonstrate separate from the regression that 

the variable was required and affected performance.”69 In other words, he appears to 

believe that the inclusion of variables should be the defendant’s burden, presumably falling 

under the business necessity prong of the three-step burden-shifting analysis. But this is 

inconsistent with the standard articulated by the Supreme Court in Inclusive Communities. 

Internal documentation of the CFPB’s process shows that not only did the CFPB fail 

to conduct appropriate regression analysis to make out its prima facie case under the first 

stage of the burden-shifting test, it also refused to accept the reasonable regression 

analysis proposed by auto financers under the second stage of the burden-shifting test. In a 

memorandum for the Director, the CFPB nominally considered and summarily dismissed 

potentially explanatory non-racial factors only under the first prong of the test (ultimately 

deciding not to control for such factors for the reasons discussed above) and did not even 

raise these factors under the “Legitimate Business Need” (or, stage two) section of the 

memorandum.70

Indeed, the CFPB had ample actual and constructive knowledge of such factors and 

their explanatory value. It was presented on multiple occasions with potentially 

explanatory factors along with explanations for their relevance.

71 Yet the CFPB refused to 

 69 Id. at 7 (internal quotations marks and brackets omitted). 70 November 19, 2014, Decision Memorandum, 'Authorization to Seek a Settlement or Commence Litigation', at 13, 

19. 

71 See e.g. November 19, 2014, Decision Memorandum, 'Authorization to Seek a Settlement or Commence 

Litigation', at 13, 19; January 17, 2013, Institution A PARR/NORA Submission, 3 (included in February 14, 2014 

CFPB Referral of Institution A Matter to DOJ); April_2013 Draft Memorandum, “Choice of Estimation Methods for 

Indirect Auto Lending Markup Disparities,” Draft 1, 1-2; April_2013 Draft Memorandum, “Choice of Estimation 

Methods for Indirect Auto Lending Markup Disparities,” Draft 2, 1-2.

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control for those factors.72 And, at least as early as 2007 the DOJ entered into wellpublicized consent orders settling disparate impact cases,73 which recognized seven 

variables as valid “competitive reason[s] that are consistent with ECOA” under a disparate 

impact theory and that would cause dealers to set different dealer participation.

74 Yet 

nowhere did the CFPB control for those factors either.

If, as appears to be the case, the CFPB were relying on Ayres’ theory, Inclusive 

Communities would eliminate any doubt that such analysis is insufficient to show disparate 

impact. As discussed above, both the Supreme Court and the District Court made it clear 

that in a disparate-impact suit the CFPB would have a robust initial burden, both to show 

that a disparity actually exists (here, by comparing similarly-situated borrowers) and to 

show that any disparity is caused by the policy itself and not by various market or other 

forces. Moreover, even under the burden-shifting test an auto financer would be easily able 

to show that its policy was needed to meet legitimate, non-discriminatory, interests, as 

discussed above and in previous Staff Reports.75 While the CFPB could not meet its 

heightened burden to show that the auto financers’ “policy” caused the disparate impact, 

the auto financers could show that their policy met several legitimate business interests.

If the CFPB brought such an action in federal court (setting aside the dispositive fact 

that discretion is not a policy) using the models and factors it currently considers in 

applying disparate impact, it could not set forth a case that would satisfy the standard 

established by Supreme Court precedent. Nothing less than considering all relevant

 72 See e.g. id; see also January 17, 2013, Institution A PARR/NORA Submission, 3 (included in February 14, 2014 

CFPB Referral of Institution A Matter to DOJ); April_2013 Draft Memorandum, “Choice of Estimation Methods for 

Indirect Auto Lending Markup Disparities,” Draft 1, 1-2; April_2013 Draft Memorandum, “Choice of Estimation 

Methods for Indirect Auto Lending Markup Disparities,” Draft 2, 1-2. 73 See Consent Order, United States v. Pacifico Ford, Inc., No. 2:07-cv-03470-PBT (E.D. Pa. Aug. 28, 2007); 

Consent Order, United States v. Springfield Ford, No. 2:07-cv-03469-PBT (E.D. Pa. Aug. 28, 2007). 74 Those seven reasons are: (1) “a lower cap imposed by the lender for the particular transaction;” (2) “a constraint 

on the customer’s ability to satisfy monthly payment requirements;” (3) “a statement by the customer that he or she 

has access to an equal or more favorable offer from another dealer or lender;” (4) “a special promotional offer 

extended to all customers on the same terms;” (5) “the fact that a particular transaction is eligible for . . . [a 

manufacturer] Credit or other subvened interest rates;” (6) “the fact that the transaction is eligible for . . . [the 

dealer’s] employee incentive program”; or (7) “documented inventory reduction considerations related to specific 

vehicles.” Pacifico Ford. at ¶7(b); Springfield Ford at ¶7(b). 75 See Inclusive Communities, Supreme Court, at 2514-15. 

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explanatory factors will do, i.e., the traditional “omitted variable bias” analysis advocated 

by the targets of the CFPB’s actions. The CFPB could not meet its burden of proving that 

the defendant’s “exercise of discretion — and not other factors — caused the statistical 

disparity,”76 and, even if it could, it would have to overcome the auto financers’ showings of 

a legitimate business need. 

This sheds light on yet another significant problem with the CFPB’s case that is 

related to causation, namely that causation is so attenuated here that it may not be 

sufficient to confer standing on the CFPB to sue the auto financer in the first place because 

the dealer exercises the discretion over what dealer participation to charge, not the auto 

financer.

77 The “irreducible constitutional minimum” required to show standing includes 

“a causal connection between the injury and the conduct complained of” whereby the 

injury is “fairly . . . trace[able] to the challenged action of the defendant, and not . . . th[e] 

result [of] the independent action of some third party not before the court.”78 

When the District Court in the Inclusive Communities case addressed causation, 

although it was not considering standing, it is nonetheless highly telling that the entire 

focus of its inquiry was whether the housing authority’s exercise of discretion caused the 

disparity. Car dealers exercise the discretion to set dealer participation in the auto-lending 

context, not financers. Even if there were legal grounds for the CFPB to sue, the 

appropriate defendants would be the car dealers, not the auto financers. However the 

CFPB cannot sue car dealers because the Dodd-Frank Act expressly forbids it from doing 

so.79 To circumvent this statutory prohibition, the CFPB concocted an elaborate and 

 76 Inclusive Communities, District Court, at 21. 77 The dealer has discretion to set his own dealer participation within the parameters of the common industry caps of 

175-200 basis points maximum. 78 See e.g. Lujan v. Defenders of Wildlife, 504 U.S. 555, 561-61 (Jun. 12, 1992) (internal citations and quotation 

marks omitted).

79 Dodd–Frank Wall Street Reform and Consumer Protection Act § 1029(a), 12 U.S.C. § 5519(a) (2012). It is also 

important to note that the CFPB’s case against car dealers would be plagued by all the same legal and evidentiary 

deficiencies as its case against auto financers, such as the lack of statutory authorization to pursue disparate impact 

claims, inability to make a prima facie showing of causation, and inability to rebut the legitimate business needs 

defense.

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unfounded legal theory of liability so it could go through auto financers in an attempt to 

attack the car dealers indirectly. 

The CFPB’s Test For Harm In Indirect Auto Lending Makes The Same Errors 

The Court Rejected In Inclusive Communities

The CFPB has not only pursued disparate impact actions against auto financers, it 

has forced several to settle their claims using an invalid calculus of consumer harm. As 

noted in Unsafe at Any Bureaucracy II, the CPFB’s definition of harm, which it uses to 

determine eligibility for remuneration,80 is incorrect. When distributing the funds from the 

disparate-impact settlement it reached with Ally, the CPFB considered borrowers who 

entered into RISCs financed by Ally during the relevant time period to be eligible for 

monetary relief if: (1) “at least one borrower on the contract . . . [is believed by the CFPB to 

be] African American, Black, Latino, Hispanic, of Spanish origin, Asian, Native Hawaiian, 

and/or other Pacific Islander”;81 and (2) the borrower was “identified by the . . . [CFPB and 

DOJ] as having been overcharged.”82 The CFPB defined “overcharged” as “paying more 

than the non-Hispanic white average” dealer participation.

83 The CFPB appears to have 

used this definition of “overcharged” widely in its auto-lending settlements; internal 

documents show it used this approach to quantify the costs of the alleged disparities for the 

purposes of discussing proposed settlements with at least three other auto financers.84

The same deficiency that was revealed at several points in the CFPB’s assessment of 

liability also undermines the legitimacy of its assessment of harm and recovery, namely, 

the failure to be specific. By asking only whether a minority borrower paid more than the 

 80 CFPB Staff has informed Committee staff that the CFPB did not attempt to determine whether potential claimants 

to the Ally settlement were “harmed” but merely whether they met the criteria to receive a check from the 

settlement. In light of the CFPB’s insistence that it did not assess whether the consumers it directed be mailed 

checks were actually harmed by Ally, this report notes that fact here to avoid misstating any facts.

81 Letter from Director Cordray to Chairman Hensarling (Aug. 31, 2015). 82 Id. 83 Id.; see also CFPB PowerPoint #1 at 10; CFPB PowerPoint #2 at 7; Ally Distribution Draft – Draft 1, at 1; see 

generally Ally Distribution Draft – Draft 2; Ally Distribution Draft – Draft 3; Ally Distribution Draft – Draft 4. 84 November 19, 2014, Decision Memorandum, 'Authorization to Seek a Settlement or Commence Litigation', at 3; 

June 16, 2015, Decision Memo, at 3. 

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non-Hispanic white average, the CFPB does not accurately assess whether he or she was 

actually harmed by disparate impact. An accurate assessment of harm would determine 

whether the minority borrower paid more than a similarly-situated non-Hispanic white 

borrower for the entire purchase of the car, including not only the price of financing but 

also the vehicle price, trade-in value, dealer-installed options, and “add-on” products that 

the dealer and buyer negotiate at the same time as part of the total cost of the car.85 At a 

bare minimum, an accurate inquiry would compare the dealer participation included in the 

RISC for a minority borrower against the average dealer participation for similarly-situated 

non-Hispanic white borrowers, not all non-Hispanic white borrowers. 

For example, as described above, a dealer may set a higher dealer participation for 

customers with low credit scores, because it is more difficult, time-consuming, and costly 

for the dealer to find an auto-financer who is willing to accept a RISC from a less 

creditworthy borrower. If an African-American borrower had a credit score of 780, he or 

she should be compared against non-Hispanic white borrowers with similar credit scores 

to determine whether and how much he or she was overcharged. If his or her dealer 

participation is compared with the dealer participation of all non-Hispanic white 

borrowers, and their average credit scores are closer to 550, they may have been charged 

significantly higher dealer participation. That African-American borrower therefore would 

fall at or below the non-Hispanic white average, and would be unable to recover settlement 

remuneration. Whereas, if he or she were compared with non-Hispanic white borrowers 

with equally high credit scores, it might be revealed that he or she was charged more than 

they, and was therefore entitled to receive remuneration. Conversely, if that borrower had 

a credit score of 500 and he or she was charged a higher dealer participation than the nonHispanic white average, that borrower might not be entitled to remuneration if it turned 

out that his or her dealer participation was the same or lower than the average for nonHispanic white borrowers with a similar credit score. Comparing similarly-situated 

consumers is the only way to draw meaningful conclusions, and it is the only way to satisfy 

the legal requirement to show causation. 

 85 Unsafe at Any Bureaucracy, at 20.

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It is certainly true that a borrower could be entitled to damages in excess of the 

difference between his or her dealer participation and the average for similarly-situated 

non-Hispanic white borrowers if arguendo disparate impact were cognizable under ECOA;

the statute authorizes not only actual damages but also punitive damages.86 Nonetheless, 

only a minority borrower who was actually harmed could recover damages. And, only a 

minority borrower who was charged more than the average for similarly-situated nonHispanic white borrowers could make a showing of harm. 

Fuzzy logic and false comparisons are unfortunately prevalent in the CFPB’s autolending actions. In every aspect of the CFPB’s auto-lending actions, the CFPB’s lack of rigor 

leads to unsupported and unreliable conclusions. 

Rulemaking

The CFPB Likely Violated The Administrative Procedure Act, Against Its 

Attorneys’ Advice, When Issuing Its Recent Rule Governing Auto Financers

ECOA is not the only legal standard the CFPB has likely sidestepped. It also failed to 

take steps that its attorneys advised the Director to undertake to comply with the 

Administrative Procedure Act (APA) when issuing a major rulemaking governing the larger 

participants in the auto-lending market.

The APA governs the procedures for rulemaking by federal agencies. As CFPB 

lawyers acknowledged in internal memoranda, section 553 of the APA “requires agencies 

to publish ‘notice’ of ‘either the terms or substance of the proposed rule or a description of 

the subjects and issues involved’ to ‘give interested persons an opportunity to participate 

in the rule making through submission of written data, views, or arguments.’ Courts have 

held that to satisfy the requirements of section 553 agencies must provide an opportunity 

 86 Equal Credit Opportunity Act, §1691e(a), (b). 

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for the public to comment on data and technical studies used to support a rule.”87 An 

agency must provide data supporting its conclusions, and if it fails to do so it must publish 

the data and re-open its comment period.88

The Dodd-Frank Act authorizes the CFPB to enact a rule classifying certain auto 

financers as “larger participants” in the consumer auto-lending market and subjecting them 

to supervision.

89 In October 2014, the CFPB published a proposed rule that defined “larger 

participants” in the market for automobile financing, and thereby “extend[ed] the Bureau's 

supervisory authority over larger participants of the defined automobile financing market 

. . . to supervise for compliance with the Equal Credit Opportunity Act” and other consumer 

laws,90 and “include[d] certain automobile leases in the Dodd-Frank Act definition of 

‘financial product or service’ [which] would subject those leases to the prohibition on 

unfair, deceptive, or abusive acts or practices.”91 

The CFPB’s definition of “larger participants” is based upon “quantitative 

information on the number of market participants and their number and dollar volume of 

originations” taken from Experian’s AutoCount database.92 During the comment period the 

CFPB received multiple requests for a list of the institutions that it believed the rule would 

cover and “a number of comments pertaining directly or indirectly to the Experian list.”93 

The CFPB did not respond with the requested information because it “understood that 

Experian regarded the AutoCount data and information derived from that data, including 

 87 February 10, 2015, Briefing Memorandum for the Director, “Meeting on Auto LP Rule,” at 5 (quoting 5 U.S.C. 

§§ 553(b), (c)) (citing Connecticut Light and Power Co. v. NRC, 673 F.2d 525, 530-31 (D.C. Cir. 1982) (finding that 

integral to the notice requirement is the agency's duty "to identify and make available technical studies and data that 

it has employed in reaching the decisions to propose particular rules .... An agency commits serious procedural error 

when it fails to reveal portions of the technical basis for a proposed rule in time to allow for meaningful 

commentary."); Am. Radio Relay League v. FCC, 524 F.3d 227, 236, 237 (D.C. Cir. 2008)). 88 See id.

89 See 12 CFR 1090.100 (2014). 

90 Defining Larger Participants of the Automobile Financing Market and Defining Certain Automobile Leasing 

Activity as a Financial Product or Service, 79 Fed. Reg. 60,762, 60,773 (proposed Oct. 8, 2014).

91 Id.at 60,774.

92 Id. at 60,774.

93 February 10, 2015, Briefing Memorandum for the Director, “Meeting on Auto LP Rule,” at 2-4. 

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the names of the entities the Bureau estimates would be newly subject to supervision, as 

proprietary.”94 

The public comment period on the proposed rule closed on December 8, 2014. 

Internal documents reveal that after the comment period ended, Experian informed the 

CFPB that “it had no objection to releasing the list of entity names that the Bureau 

estimated would be covered under the Bureau's proposed threshold as well as the relative 

market share for each listed entity.”95 

On February 10, 2015, CFPB attorneys wrote a memorandum to Director Cordray 

“recommend[ing] publication of the Experian non-proprietary data and reopening of the 

comment period for the Auto LP proposed rule . . . to comment on the released data,” and 

warning that “there is a cognizable risk that a court would conclude” that the APA required 

the CFPB to do so.96 After explaining the legal analysis supporting their conclusion that the 

CFPB should re-open the comment period, the attorneys outlined the possible negative 

outcomes of doing so, including the risk of “Congressional scrutiny,”97 the prospect that it 

would “raise questions about whether the four prior Larger Participant rules were 

procedurally defective since the Bureau did not solicit public comment on the identities of 

the entities that would qualify for supervision[,]”98 and the likelihood that “[t]he Bureau 

might feel the need to manage . . . expectation[s] by providing a detailed explanation in 

future rulemakings of exactly why the identities of potential larger participants are not 

being released, which might draw attention to potential limitations of the dataset utilized 

to support the rule.99

 94 Id. at 2.

95 See id. at 2, 5. The internal CFPB memo also implies that Experian never regarded this information as proprietary 

in the first instance, as the memo refers to it throughout as “non-proprietary data.” See id. at 2 (“Following the close 

of the comment period, Experian authorized the Bureau to release the requested names in order of number of 

originations and each entity's percent market share (‘Experian non-proprietary data’).”); id. at 5,7-14. 96 Id. at 2; see id. at 7-11. 97 Id. at 13. 

98 Id. at 13. 99 Id. at 12-13. 

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Despite the risk that the CFPB’s data would be exposed as inadequate if made 

transparent, the attorneys advised that: “Although it would be difficult to avoid these 

collateral consequences entirely, they, of course, do not provide a defense against § 553’s 

notice and comment requirements. Moreover, it bears note that failure to release the 

Experian non-proprietary data would create oversight risk. . . .”100

Later memoranda Committee Staff reviewed on the subject omit any mention of the 

lawyers’ conclusion that the Administrative Procedure Act required the CFPB to release the 

underlying data and reopen the comment period or the risk that greater transparency 

would expose flaws in the dataset used. A June 3, 2015 memorandum signed by Director 

Cordray and prepared by David Silberman, the Assistant Director for Research, Markets, 

and Regulations, and one of his senior counsels recommended that the Director issue and 

publish the final rule.101 Nowhere does that memorandum (or any of the other prior legal 

memoranda on the rule attached to that memorandum) mention Experian’s clarification 

that much information was non-proprietary or raise the possibility of re-opening the 

comment period. 

Although none of the documents the Committee has reviewed reflect whether 

Director Cordray responded to this legal concern, it is known that Director Cordray did

express policy misgivings about the rule. An internal memorandum to Director Cordray

from his staff states: “We understand from our meeting on February 11, 2015, that you are 

concerned that the proposed threshold . . . may be too low, given our limited supervisory 

resources and the fact that it would include participants that are responsible for a small 

percentage of market activity and that could be small businesses.”102 

Rather than provide a substantive or policy justification for the low threshold 

established by the proposed rule, CFPB staff admitted that CFPB had acted similarly before

 100 Id. at 13 (emphasis added). 101 June 3, 2015, Decision Memorandum for the Director, “Issuance and Publication of Final Rule.” 102 March 23, 2015, Briefing Memorandum for the Director, “Meeting on the Auto Finance Larger Participant Rule,” 

at 3 (attached to June 3, 2015, Decision Memorandum for the Director, “Issuance and Publication of Final Rule”).

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and informed the Director that the CFPB had used thresholds low enough to define small 

businesses paradoxically as “larger participants” in previous rulemakings: “[W]e have 

acknowledged the fact that other larger participant rules could capture small businesses, 

and in fact, estimated in the international money transfer rulemaking that 10 of 25 larger 

participants would be small businesses.”103 And, they added, the rulemaking would bolster 

the CFPB’s data-collection efforts: “the Bureau may be able to gather some information 

through supervisory activities . . . [that are] less resource-intensive . . . [so that] it may be 

able to gather information from a larger number of entities in this market each year.”104 

Despite the legal implications of failing to re-open the comment period flagged by 

his lawyers — and the policy risk of failing to alter the rule to avoid burdening small 

businesses by regulating them as “larger participants” — Director Cordray approved 

issuing the Final Rule on June 3, 2015, and signed the final rule on June 5.105 The Final Rule 

was published on June 30, 2015106 — without disclosure and public comment on the data 

underlying the rulemaking.

 103 Id. at 4. At no point in the memorandum did the lawyers revisit whether the size of the businesses affected would 

impact the Regulatory Flexibility Act analysis, which requires additional analysis of rules affecting small 

businesses. Id.; see generally September 15, 2014, Decision Memorandum for the Director, “Proposed Rule . . . and 

the Regulatory Flexibility Act” (attached to June 3, 2015, Decision Memorandum for the Director, “Issuance and 

Publication of Final Rule”).

104 Id. at 5. 105 June 3, 2015, Decision Memorandum for the Director, “Issuance and Publication of Final Rule”; Signed Final 

Rule (attached to June 3, 2015, Decision Memorandum for the Director, “Issuance and Publication of Final Rule”). 106 See Defining Larger Participants of the Automobile Financing Market and Defining Certain Automobile Leasing 

Activity as a Financial Product or Service, 80 Fed. Reg. 37496 (Jun. 30, 2015).

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2015 WL 6955482

Only the Westlaw citation is currently available.

United States District Court,

N.D. Illinois, Eastern Division.

Louis G. Bartucci, Plaintiff,

v.

Wells Fargo Bank N.A., Defendant.

Case No. 14 CV 5302

|

Signed 11/10/2015

Attorneys and Law Firms

James Matthew Pfeiffer, Pfeiffer Law Offices, P.C., Wheaton,

IL, for Plaintiff.

Lucia Nale, Charles Michael Woodworth, Michelle V. Dohra,

Mayer Brown LLP, Chicago, IL, for Defendant.

MEMORANDUM OPINION AND ORDER

Marvin E. Aspen, District Judge

*1 Presently before us is Defendant Wells Fargo Bank N.A.'s

motion to dismiss a seven-count complaint filed by Plaintiff

Louis G. Bartucci. Plaintiff's complaint alleges: (1) violation

of the Fair Housing Act (“FHA”), 42 U.S.C. § 3605; (2)

violation of the Equal Credit Opportunity Act (“ECOA”),

15 U.S.C. § 1691; (3) a claim for declaratory judgment;

(4) violation of 42 U.S.C. § 1983; (5) violation of the

Illinois Consumer Fraud and Deceptive Business Practices

Act (“ICFA”), 815 ILCS 505/2; (6) breach of the Illinois

implied covenant of good faith and fair dealing; and (7) a

claim for promissory estoppel.

Defendant moves to dismiss all counts. For the following

reasons, Defendant's motion to dismiss is granted in part, and

denied in part.

BACKGROUND

In 2007, Plaintiff obtained a loan from Defendant for the

purchase of a residential property. (Am. Compl. ¶ 6.) From

2008 to 2009, Plaintiff faced financial difficulties meeting his

mortgage payments. (Id. ¶ 8.) Plaintiff submitted paperwork

to Defendant to modify his loan under the Home Affordable

Mortgage Program (“HAMP”), a federal program that assists

eligible homeowners who face financial hardships with loan

modifications. (Id. ¶ 11.) In 2010, while Plaintiff's application

for a home loan modification was still pending, Defendant

served Plaintiff with a mortgage foreclosure complaint and

summons. (Id. ¶ 14.)

From 2010–2013, Plaintiff continued to contact Defendant in

regards to his loan modification request. (Id. ¶ 15.) Plaintiff

alleges that during the loan modification process, he disclosed

his national origin on mandatory loan paperwork. (Id. ¶ 16.)

In June 2013, Defendant denied Plaintiff's loan modification

request citing his negative net present value. (Id. ¶ 18.) Soon

thereafter, Plaintiff appealed Defendant's denial of his HAMP

modification. (Id. ¶ 19.)

Plaintiff alleges that he made several telephone calls in

2013 to Defendant's representatives concerning his loan

modification denial, but that Defendant's representatives told

Plaintiff that they could not understand him because of

his accent, that he needed to call back, and then hung up

on him without any warning. (Id. ¶ 24.) Further, Plaintiff

alleges that while attending a seminar hosted by Defendant,

a representative told Plaintiff “that he would probably have

had an easier time obtaining a loan modification if he were in

fact much younger.” (Id. ¶ 25.) On another occasion, Plaintiff

alleges that one of Defendant's representatives expressed that

Plaintiff's age factored into the denial of his loan modification

request. (Id. ¶ 47.)

STANDARD OF REVIEW

A motion to dismiss under Federal Rule of Civil Procedure

12(b)(6) is meant to test the sufficiency of the complaint,

not to decide the merits of the case. Gibson v. City of

Chi., 910 F.2d 1510, 1520 (7th Cir. 1990). To survive a

motion to dismiss, the complaint must contain a “short and

plain statement of the claim showing that the pleader is

entitled to relief.” Fed. R. Civ. P. 8(a)(2). Specifically, “a

complaint must contain sufficient factual matter, accepted as

true, to 'state a claim to relief that is plausible on its face.”'

Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S. Ct. 1937, 1949

(2009) (citing Bell Atl. Corp. v. Twombly, 540 U.S. 544,

555, 127 S. Ct. 1955, 1964– 65 (2007)). The plausibility

standard “is not akin to a 'probability requirement,' but it

asks for more than a sheer possibility that a defendant has

acted unlawfully.” Id. Thus, while a complaint need not

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give “detailed factual allegations,” it must provide more than

“labels and conclusions, and a formulaic recitation of the

elements of a cause of action.” Twombly, 540 U.S. at 545, 127

S. Ct. at 1964–65; Killingsworth v. HSBC Bank Nevada, N.A.,

507 F.3d 614, 618–19 (7th Cir. 2007). The statement must be

sufficient to provide the defendant with “fair notice” of the

claim and its basis. Twombly, 540 U.S. at 545, 127 S. Ct. at

1964 (quoting Conley v. Gibson, 355 U.S. 41, 47, 78 S. Ct. 99,

102 (1957)); Tamayo v. Blagojevich, 526 F.3d 1074, 1083 (7th

Cir. 2008). In evaluating a motion to dismiss, we must accept

all well-pleaded allegations in the complaint as true and draw

all reasonable inferences in the plaintiff's favor. Thompson v.

Ill. Dep't of Prof'l Reg., 300 F.3d 750, 753 (7th Cir. 2002).

ANALYSIS

*2 Plaintiff brings both federal and state law claims. We will

begin with an analysis of his federal claims.

I. Plaintiff's Federal Claims

A. Count I – Violation of Fair Housing Act 42 U.S.C. §

3605

Plaintiff contends that Defendant violated § 3605 of the FHA,

which makes it “unlawful for any person or other entity whose

business includes engaging in residential real estate-related

transactions to discriminate against any person in making

available such a transaction, or in the terms of conditions

of such a transaction, because of...national origin....” 42

U.S.C. § 3605(a). A plaintiff may prove a violation of

the FHA under two theories: (1) disparate treatment or

(2) disparate impact. Daveri Development Group, LLC v.

Village of Wheeling, 934 F. Supp. 2d 987, 996 (N.D. Ill.

March 21, 2013). Here, Plaintiff alleges that Defendant

engaged in disparate treatment when it denied him a loan

modification based on his national origin. To survive a

motion to dismiss, a FHA claim must allege discrimination

related to the terms, conditions, privileges, or provisions of

services of a dwelling. Swanson v. Citibank, N.A., 614 F.3d

400, 405 (7th Cir. 2010). Specifically, Plaintiff must plead:

(1) the type of discrimination he believes occurred; (2) by

whom; (3) and when. Id. (finding that plaintiff's FHA claim

survived a motion to dismiss when she alleged that she was

discriminated against based on her race, by a named manager

at Citibank, in connection with her efforts in early 2009 to

obtain a home-equity loan). Finally, to support his disparate

treatment allegation, Plaintiff must allege that he was treated

differently than other applicants based on his national origin.

Wigginton v. Bank of America Corp., 770 F.3d 521, 522 (7th

Cir. 2014) (granting defendant's motion to dismiss FHA claim

because plaintiff failed to allege that someone else had been

treated differently).

Plaintiff alleges that Defendant violated § 3605 of the FHA

when it denied him a loan modification request because of

his national origin. (Am. Compl. ¶ 33.) Plaintiff alleges that

Defendant was aware of his national origin based on required

disclosures on various loan applications. (Am. Compl. ¶¶ 28–

30). Additionally, Plaintiff asserts that in 2013, in connection

with his HAMP loan modification request, Defendant's

representatives frequently hung up the phone on him claiming

that his accent was too difficult to understand. (Id. ¶¶ 31–

33). We find that Plaintiff's allegations are insufficient to

survive a motion to dismiss. Plaintiff fails to identify specific

individuals who hung up on him and fails to allege that he was

treated differently than other loan applicants.

Accordingly, we grant Defendant's motion to dismiss Count I.

B. Count II – Violation of Equal Credit Opportunity

Act 15 U.S.C. § 1691

Plaintiff alleges that Defendant violated § 1691 of the ECOA

that prohibits creditors from discriminating against any credit

applicant “with respect to any aspect of a credit transaction

[ +] on the basis of...national origin...or age.” 15 U.S.C. §

1691(a). To survive a 12(b)(6) motion to dismiss an ECOA

claim, Plaintiff must allege that he was an applicant, as

defined by the ECOA 1, and that Defendant treated him less

favorably because of his national origin or age. FirstMerit

Bank, N.A. v. Ferrari, 71 F. Supp. 3d 751, 755 (N.D. Ill. Oct.

16, 2014); New Louisiana Holdings, LLC v. Arrowsmith, No.

11 C 5031, 2012 WL 6061710, at *6 (N.D. Ill. Dec. 4, 2012).

*3 Similar to a FHA claim, to survive a motion to dismiss

on an ECOA claim, Plaintiff must simply present a “plausible

scenario,...even though it may not accurately describe what

actually occurred.” FirstMerit Bank, N.A., 71 F. Supp. 3d

at 755 (holding that ECOA complaint survived a motion to

dismiss when complaint alleged that Bank refused to finalize

settlement because individual was Hispanic and that Bank's

loan officer made biased comments about doing business with

Hispanics).

Plaintiff alleges that Defendant discriminated against him

based on his national origin when Defendant hung up the

phone on him and refused to provide him information

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concerning his loan because of his accent. Plaintiff alleges

that Defendant discriminated against him based on age when

Defendant's representatives told him he would have “an

easier time obtaining a loan modification if he were in fact

much younger.” (Am. Compl. ¶ 43, 47.) These allegations

present a plausible scenario in which Plaintiff was unlawfully

discriminated against based on his national origin or age.

For the reasons stated above, we deny Defendant's motion to

dismiss Count II.

C. Count III – Declaratory Judgment 28 U.S.C. § 2201

Plaintiff seeks a declaratory judgment affirming various rights

under HAMP pursuant to the Declaratory Judgment Act, 28

U.S.C. § 2201, which enables a party “to 'clarify[ +] and

settl[e] the legal relations at issue' and to 'terminate and afford

relief from uncertainty, insecurity, and controversy giving rise

to the proceeding.” Amari v. Radio Spirits, Inc., 219 F. Supp.

2d 942, 944 (N.D. Ill. Sept. 12, 2002) (citing Tempco Elec.

Heater Corp. v. Omega Eng'g, Inc., 89 F.2d 746, 747 (7th

Cir. 1995)). The purpose of the Act is “to avoid accrual of

avoidable damages to one not certain of his rights and to

afford him an early adjudication, without waiting until his

adversary should see fit to begin suit.” Nucor Corp. v. Aceros

Y Maquilas de Occidente, S.A. de C.V., 28 F.3d 572, 577 (7th

Cir. 1994) (citing Cunningham Bros., Inc. v. Bail, 407 F.2d

1165, 1167 (7th Cir. 1969)).

Federal courts may issue declaratory judgments only in cases

of “actual controversy.” Int'l Harvester Co. v. Deere & Co.,

623 F.2d 1207, 1210 (7th Cir. 1980). A justiciable “actual

controversy” exists only when a private right of action is

available. Schilling v. Rogers, 363 U.S. 666, 677, 80 S. Ct.

1288, 1296 (1960) (citing Skelly Oil Co. v. Phillips Petroleum

Co., 339 U.S. 667, 671, 70 S. Ct. 876, 879 (1950)); see

also Villasenor v. American Signature, Inc., No. 06 C 5493,

2007 WL 2025739, at *6 (N.D. Ill. July 9, 2007) (finding

that where there is no private right of action available for

an alleged statutory violation, a declaratory judgment claim

cannot proceed).

Plaintiff asks us to enter a declaratory judgment that clarifies

the parties' rights and obligations under HAMP; declares that

Plaintiff qualifies for a loan modification under HAMP; and

declares that Defendant did not properly consider Plaintiff

for a loan modification under HAMP. (Am. Compl. ¶ 58.)

The Seventh Circuit, however, has held that HAMP contains

no private right of action. Wigod v. Wells Fargo Bank, N.A.,

673 F.3d 547, 555 (7th Cir. 2012); Baginski v. JP Morgan

Chase Bank N.A., No. 11 C 6999, 2012 WL 5989295, at *3

(N.D. Ill. Nov. 29, 2012). Because the Declaratory Judgment

Act provides no relief unless there is a justiciable controversy

between the parties, and because no private right of action

exists under HAMP, we grant Defendant's motion to dismiss

Count III 2.

D. Count IV – Violation of 42 U.S.C. § 1983

*4 Plaintiff brings a fourth claim alleging that Defendant

violated 42 U.S.C. § 1983. We grant Defendant's motion to

dismiss Count IV because Plaintiff has not demonstrated that

Defendant was acting under the color of law.

Section 1983 provides that “[e]very person who, under color

of any statute, ordinance, regulation, custom, or usage, of

any State” deprives a person of his federal constitutional or

statutory rights shall be liable in an action at law. 42 U.S.C.

§ 1983. To survive a motion to dismiss a § 1983 claim, a

plaintiff must allege facts which show that the defendant

deprived him of a right secured by the Constitution or any

law of the United States and that the deprivation of that right

resulted from the defendant acting under color of law. Lekas

v. Briley, 405 F.3d 602, 606 (7th Cir. 2005) (citing Brokaw v.

Mercer Cty., 235 F.3d 1000, 1009 (7th Cir. 2000) (emphasis

added)). Non-state actors may be found to act under color of

state law when they have conspired or acted in concert with

state actors to deprive a person of his civil rights. Adickes

v. S.H. Kress & Co., 398 U.S. 144, 152, 90 S. Ct. 1598,

1605 (1970). In other words, for a private individual to act

under color of law, there must be evidence of a concerted

effort between a state actor and that private individual. Fries

v. Helsper, 146 F.3d 452, 457 (7th Cir. 1998).

Plaintiff alleges that Defendant violated 42 U.S.C. § 1983

when Defendant, acting under the color of law, denied his

requests for a loan modification because of his national origin

and age. (Am. Compl. ¶ 61.)

Plaintiff boldly alleges that the Defendant “was acting under

color of state and federal law when it denied his several

requests for loan modification” yet states no facts to support

such a claim. (Am. Compl. ¶ 61.) Plaintiff does not assert that

Defendant is a state actor or conspired or acted in concert

with state actors and therefore does not allege enough facts

to support a § 1983 claim. Accordingly, we grant Defendant's

motion to dismiss Count IV.

II. Plaintiff's State Law Claims

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A. Count V – Illinois Consumer Fraud and Deceptive

Business Practices Act

Plaintiff alleges that Defendant violated the ICFA, which

prohibits: “unfair or deceptive acts or practices, including but

not limited to the use or employment of any deception [or]

fraud....” ILCS.

The ICFA is “a regulatory and remedial statute intended to

protect consumers, borrowers, and business persons against

fraud, unfair methods of competition, and other unfair and

deceptive business practices.” Robinson v. Toyota Motor

Credit Corp., 2011 Ill. 2d 403, 416–17, 775 N.E.2d 951, 960

(2002).

The statute provides redress not only for deceptive business

practices, but also for business practices that, while not

deceptive, are unfair. Boyd v. U.S. Bank, N.A. ex rel., 787

F.Supp. 2d 747, 751 (N.D. Ill. April 12, 2011); Robinson,

2011 Ill. 2d at 417, 775 N.E.2d at 960. Plaintiff alleges that

Defendant engaged in both deceptive and unfair conduct.

(Am. Compl. ¶¶ 70–71).

The correct legal standard for a motion to dismiss under an

ICFA claim differs for claims alleging deceptive conduct and

claims alleging unfair conduct. Windy City Metal Fabricators

& Supply, Inc., v. CIT Tech. Fin. Servs. Inc., 536 F.3d 663,

659 (7th Cir. 2008). Because Plaintiff alleges both deceptive

and unfair conduct, we will analysis each component of the

claim under the appropriate standard of review.

*5 Where Plaintiff alleges deceptive conduct, the heightened

9(b) rule applies. Pirelli Armstrong Tire Corp. Retiree

Medical Benefits Trust v. Walgreen Co., 631 F.3d 436,

441(7th Cir. 2011) (citing Davis v. G.N. Mortg. Corp.,

396 F.3d 869, 883 (7th Cir. 2005)); DiLeo v. Ernst &

Young, 901 F.2d 624, 627 (7th Cir. 1990). To meet this

heightened pleading standard, plaintiff must allege the “who,

what, when, where and how” of the alleged deceptive

conduct. Pirelli Armstrong Tire, 631 F.3d at 441. More

specifically, the pleader must detail “the identity of the

person who made the misrepresentation, the time, place and

content of the misrepresentation, and the method by which

the misrepresentation was communicated to the plaintiff.”

McGann v. PNC Bank, Nat. Ass'n, No. 11 C 06894, 2013 WL

1337204, at *5 (N.D. Ill. 2013 March 29, 2013) (citing Gen.

Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074,

1078 (7th Cir. 1997); Vicom, Inc. v. Harbridge Merchant

Servs., Inc., 20 F.3d 771, 777 (7th Cir. 1994)).

To state an ICFA deceptive conduct claim, a plaintiff must

allege: “(1) a deceptive act or practice by the defendant, (2)

the defendant's intent that the plaintiff rely on the deception,

(3) the occurrence of the deception in the course of conduct

involving trade or commerce, and (4) actual damage to the

plaintiff (5) proximately caused by the deception.” Avery v.

State Farm Mut. Auto. Ins. Co., 216 Ill. 2d 100, 180, 835

N.E.2d 801, 850 (Ill. 2005). District courts have held that a

loan servicer's alleged failure to consider plaintiff's eligibility

for a HAMP modification is a sufficient predicate for an ICFA

claim. Boyd, 787 F. Supp. 2d at 752. Additionally, an ICFA

claim does not require “proof of intent to deceive;” rather, a

plaintiff only needs to allege “that the defendant committed a

deceptive or unfair act and intended that the plaintiff rely on

that act.” Wigod, 673 F.3d at 575. As to damages, courts have

held that the inability to fairly negotiate a plan to stay in the

home constitutes economic damages under the ICFA. Boyd,

787 F. Supp at 754.

Plaintiff alleges that Defendant engaged in deceptive conduct

when various representatives assured him that he would

qualify for a HAMP loan modification, provided him

differing information as to the status of his loan modification,

gave him explanations that led to dead-ends and excuses

as to why his loan modification was not being processed

or granted, and created “nonsensical tasks” for Plaintiff to

complete in order to be eligible for a loan modification. (Am.

Compl. ¶¶ 68–71.) Plaintiff alleges Defendant had “motive

[to make]...and stands to profit,” (Am. Compl. ¶ 72), from

the deceptive communications and that as a result of his

reliance on Defendant's unfair and deceptive conduct, he

incurred actual damage in the form of monetary losses and

the imminent loss of his property to foreclosure. (Id. ¶¶ 83–

84). We find that Plaintiff's allegation as to deceptive conduct

under the ICFA survive even a heightened 9(b) analysis.

Next we consider Plaintiff's allegations of unfair conduct.

Claims alleging unfair conduct under the ICFA are subject

to a Rule 8(a) notice pleading standard. Windy City Metal,

536 F.3d at 670 (“Because neither fraud nor mistake is an

element of unfair conduct under [the ICFA], a cause of action

for unfair practices under the [ICFA] need only meet the

notice pleading standard of Rule 8(a), not the particularity

requirement in Rule 9(b).”).

For conduct to be considered unfair, we consider three factors:

(1) whether the practice offends public policy; (2) whether it

is immoral, unethical, oppressive, or unscrupulous; and (3)

whether it causes substantial injury to consumers. Robinson,

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201 Ill. 2d at 417–18, 775 N.E.2d at 961. The Seventh Circuit

has held that a Plaintiff need not use the exact language in

his complaint to describe the three factors listed above. See

Windy City Metal Fabricators, 536 F.3d at 672 (holding that

plaintiff adequately stated a claim for relief when complaint

alleged conduct that could support the statutory definition of

unfairness even if the complaint did not specifically use the

words “immoral, unethical, oppressive, or unscrupulous”).

Plaintiff does not use the word “unethical,” but does allege

that Defendant's representatives promised over the telephone

that he would receive a loan modification, yet ultimately

denied him the request, (Am. Compl. ¶ 71), allegations that,

if taken as true, could be considered immoral and unethical.

*6 For the reasons stated above, we deny Defendant's

motion to dismiss Count V.

B. Count VI – Breach of the Implied Covenant of

Good Faith and Fair Dealing

Plaintiff alleges that Defendant breached the implied

covenant of good faith and fair dealing by “requiring [the

Plaintiff] to extend to meet unreasonable expectations, go

through obstacles, and falsely promise that he would get

a modification after fulfilling all tasks it demanded of

him.” (Am. Compl. ¶ 78.)

Under Illinois law, the covenant of good faith and fair dealing

is not an independent cause of action. Wilson v. Career Educ.

Corp., 729 F.3d 665, 687 (7th Cir. 2013); Brooklyn Bagel

Boys, Inc. v. Earthgrains Refrigerated Dough Prods., Inc.,

212 F.3d 373, 381 (7th Cir. 2000). Instead, the covenant only

guides the construction of explicit terms in an agreement.

Id. Plaintiff has not alleged that he entered into an explicit

agreement with Defendant or that a contract between the

parties exists. Therefore, Count VII is dismissed.

C. Count VII – Promissory Estoppel

Plaintiff also brings a state law promissory estoppel claim.

Promissory estoppel is an alternative means of obtaining

contractual relief under Illinois law. Wigod, 673 F.3d at

566. To establish the elements of a promissory estoppel

claim, the plaintiff must prove that: (1) defendant made an

unambiguous promise to plaintiff, (2) plaintiff relied on such

promise, (3) plaintiff's reliance was expected and foreseeable

by defendants, and (4) plaintiff relied on the promise to

its detriment. Id. Under Illinois law, promissory estoppel

is considered an equitable device wherein a contract may

be implied where none is found to exist for a lack of

consideration. Dumas v. Infinity Broadcasting Corp., 416

F.3d 671, 766 (7th Cir. 2005). A claim for promissory

estoppel will succeed only where all the other elements of a

contract exist. Id. Thus, in order to succeed on his claim of

promissory estoppel, Plaintiff must present written evidence

of an “unambiguous promise” which, but for the existence

of consideration, would constitute an enforceable contractual

agreement under Illinois law. Id.

Plaintiff does not present written evidence that Defendant

unambiguously promised him a loan modification. Instead,

to support his claim, Plaintiff simply alleges that Defendant

“communicated to [Plaintiff] during several telephone

conversations that [he] would be able to qualify for a loan

modification under his existing contract.” (Id. ¶ 81.) This

assertion is not specific enough to sufficiently plead that

Defendant made an unambiguous promise to Plaintiff.

Therefore, we grant Defendant's motion to dismiss Count VII.

CONCLUSION

For the aforementioned reasons, we deny Defendant's motion

to dismiss Counts II and V and grant Defendant's motion to

dismiss Counts I, III, IV, VI and VII. It is so ordered.

All Citations

Not Reported in F.Supp.3d, 2015 WL 6955482

Footnotes

1 Defendant does not argue that Plaintiff was not an applicant under the ECOA, so we focus on the second

prong of the analysis; whether Plaintiff has sufficiently alleged that he was treated less favorable based on

his national origin or age.

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2 Plaintiff broadly contends that his claim is not seeking to enforce HAMP but instead is based on civil

rights violations, specifically, Defendant's failure to provide an accounting as to how Defendant determined

ineligibility under HAMP. (See Reply-Mot. to Dismiss at 5–6.) Despite Plaintiff's blanket assertion that he

seeks a declaratory judgment based on civil rights violations, Plaintiff cites only to HAMP for both enforcement

and relief. (Am. Compl. ¶¶ 56–57.)

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2012 WL 6061710

Only the Westlaw citation is currently available.

United States District Court,

N.D. Illinois,

Eastern Division.

NEW LOUISIANA HOLDINGS, LLC; Fountain

View 215 Tenant LLC; Jackson Manor 1691 Tenant

LLC; Panola 501 GP LLC; Retirement Center

14686 Tenant LLC; Acadian 4005 Tenant LLC;

Lakewood Quarters Rehab 8225 Tenant LLC;

Regency 14333 Tenant LLC; Sherwood 2828

Tenant LLC; Lakewood Quarters Assisted 8585

Tenant LLC; Panola 501 Partners LP; Citiscape

Out Parcel Tenat LLC; Citiscape 5010 Tenant

LLC; St. Charles 1539 Tenant LLC; Woodland

Village 5301 Tenant LLC; Atrium 6555 Tenant

LLC; and Harris Schwartzberg, Plaintiffs,

v.

Richard ARROWSMITH, Defendant.

No. 11 C 5031.

|

Dec. 4, 2012.

MEMORANDUM OPINION AND ORDER

RUBEN CASTILLO, District Judge.

*1 New Louisiana Holdings, et al, 1 (“Plaintiffs”) initiated

this discrimination suit against GE Business Financial

Services, Inc. (“GE Financial”); GE Healthcare Financial

Services, Inc.; General Electric Capital Corporation; CIT

Healthcare LLC (“CIT”); Marathon Structured Finance Fund,

L.P. (“Marathon”) (collectively, the “Entity Defendants”);

and Richard Arrowsmith (“Arrowsmith”) (collectively, with

the Entity Defendants, “Defendants”). The Plaintiffs bring

claims pursuant to 42 U.S.C. § 1981 (“Section 1981”) and

the Equal Credit Opportunity Act (“ECOA”), 15 U.S.C. §

1691 et seq. (R. 1, Compl.) Presently before the Court are

Arrowsmith's motion to dismiss pursuant to Federal Rule of

Civil Procedure 12(b)(6),

2

 (R. 25, Arrowsmith's Mot.), and

Arrowsmith's amended petition for fees, (R. 58, Arrowsmith's

Am. Pet). 3 For the reasons discussed herein, the Court grants

Arrowsmith's motion to dismiss and his petition for fees.

RELEVANT FACTS

Corporate Plaintiffs consist of a network of nursing facilities

that provide long-term care to seniors. (R. 1, Compl. ¶¶

30, 32 .) Plaintiff Harris Schwartzberg (“Schwartzberg”)

and his father, Albert Schwartzberg, who is not a party to

this suit (collectively, the “Schwartzbergs”), are Jewish. (R.

1, Compl. at 2.) According to Plaintiffs, on January 18,

2006, “the Schwartzbergs, through Plaintiff New Louisiana

Holdings, LLC and its affiliates, acquired the right to operate

twelve nursing and assisted living facilities in and around

Louisiana.” (Id. at 3; id. ¶ 39.) The acquisition was effected

through a number of agreements. (Id. ¶ 40.) The purchase

of the twelve nursing facilities was financed through a term

loan that was secured by the real estate and physical assets

of the facilities. (Id. ¶¶ 40–41.) The borrowers on the term

loan (the “Term Borrowers”) are the title holders of the real

estate and physical assets of the twelve nursing facilities and

are not parties to this action. (Id. ¶ 41.) The Term Borrowers

lease the twelve nursing facilities to Corporate Plaintiffs.

(Id ) In addition to leasing the twelve nursing and assisted

living facilities, the Corporate Plaintiffs also operate the

facilities. (Id. ¶ 42.) Merrill Lynch Capital (“Merrill”), CIT,

and Marathon were the original lenders on the Term Loan.

(Id. ¶ 40.)

In a separate agreement, the original lenders entered into

a Credit and Security Agreement (the “Operating Loan”)

with Corporate Plaintiffs. (Id. ¶ 42.) The Operating Loan

contains two credit facilities: (1) a term loan in the original

principal amount of $14 million, and (2) a revolving credit

loan of up to $8 million. 4 (Id.) The Operating Loan appointed

an “Administrative Agent” and granted the Administrative

Agent discretion to make decisions regarding the revolving

loan. (Id. ¶ 45.) Originally, Merrill acted as the Administrative

Agent. (Id. ¶ 49.) In connection with Corporate Plaintiffs'

execution of the Operating Loan, Schwartzberg executed

Guaranty Agreements, (id. ¶¶ 17, 143), pursuant to which he

personally guaranteed the payment of the Operating Loan. (R.

29–3, Ex. B, Guaranty Agreement; R. 29–4, Ex. C, Amended

Guaranty Agreement.) In December 2007, GE Financial

acquired Merrill's healthcare financing business and, as a

result, assumed Merrill's position as the Administrative Agent

for the Operating Loan. 5 (Id. ¶ 50.) GE Financial designated

Arrowsmith as the individual responsible for administering

the Operating Loan. (Id. ¶ 51.)

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*2 The gravamen of Plaintiffs' complaint is that

Arrowsmith's anti-Semitism affected the administration of the

Operating Loan, making it difficult for Corporate Plaintiffs

to operate effectively. (Id at 24.) According to Plaintiffs,

“Arrowsmith embarked upon a campaign to harm the

Schwartzberg family and to hurt their business after he took

over as the loan administrator for the Lenders.” (Id at 3.)

Specifically, Plaintiffs allege that Arrowsmith declared a

series of defaults under both the Operating and Term Loans,

(id. ¶¶ 56–57), dramatically decreased the amount of funds

available to be borrowed through the Operating Loan, (id.

¶ 59), caused GE Financial to assess financial penalties

on Corporate Plaintiffs, (id.), and increased the amount of

required reserves thereby further reducing the amount of

funds available to be borrowed, (id. ¶¶ 62, 72–73). Plaintiffs

allege that Arrowsmith referred to the Schwartzbergs as

“those people,” (id at 4, ¶ 63), and that he was motivated to

take these actions by his anti-Semitism, (id. ¶ 66).

PROCEDURAL HISTORY

On June 2, 2011, Plaintiffs filed a six-count complaint

against Defendants in the United States District Court for

the Southern District of New York (“the New York Action”),

asserting that Arrowsmith had discriminated against them in

violation of Section 1981 and the ECOA. (R. 9–1, Ex. 1,

S.D.N.Y.Compl.) Plaintiffs also asserted claims for breach

of contract, and breach of the covenant of good faith and

fair dealing, and they sought an accounting and a declaratory

judgment. 6 (Id ) Plaintiffs filed their action in the Southern

District of New York, even though Corporate Plaintiffs agreed

in the Operating Loan to submit to the jurisdiction of state or

federal courts in Chicago, Illinois. (R. 29–2, Ex. A, Credit and

Security Agreement (Revolving Credit and Term Loan) dated

as of January 18, 2006, at 27.) On July 13, 2011, Defendants

filed a letter with Judge Naomi Reice Buchwald, the judge

in the Southern District of New York to whom Plaintiffs'

action was assigned. (R. 9–2, Ex. 2, July 13, 2011 Letter.)

In their letter, Defendants requested a pre-motion conference

in advance of filing a motion to dismiss and setting forth

the anticipated basis of that motion. (Id.; R. 9, Defs.' Mot.

for Costs Mem. at 3.) On July 21, 2011, Judge Buchwald

informed the parties via letter that the court “wish[ed] to

afford plaintiffs an opportunity to amend their complaint

within twenty (20) days[.]” (R. 9–4, Ex. 4, July 21, 2011

Letter at 2.) Judge Buchwald further stated that “having

been afforded the opportunity to amend the complaint in

response to the defendants' letter submission, plaintiffs should

not anticipate being granted a further opportunity to amend,

should [the court] find that there is merit in some or all of

the defendants' arguments .” (Id.) On July 25, 2011, Plaintiffs

voluntarily dismissed the New York Action pursuant to Rule

41(a) of the Federal Rules of Civil Procedure and did not

amend their complaint. Min. Entry, New Louisiana Holdings,

LLC v. GE Business, No. 11–3773 (July 25, 2011) ECF No. 4.

That same day, in compliance with the terms of the Operating

Loan, Plaintiffs re-filed their action against Defendants in

the Northern District of Illinois. (R.1, Compl.) The case was

randomly assigned to this Court.

*3 On July 29, 2011, Defendants moved the Court for

an order directing Plaintiffs to pay the costs and fees they

incurred in defending the suit that Plaintiffs filed in the

Southern District of New York, and for an order staying

the current action until Plaintiffs did so, pursuant to Rule

41(d) (the “Costs Motion”). (R. 8, Defs.' Mot. at 1–2.)

On August 10, 2011, the Court granted Defendants' Costs

Motion. (R. 20, Min.Entry.) The Court awarded Defendants

those costs incurred in litigating the New York Action that

were not necessary or useful to the instant action, and ordered

Defendants to file a petition for costs by August 24, 2011.

(Id.; R. 59–1, Ex. 1, Aug. 10, 2011 Tr. at 8:9–13.) On August

24, 2011, Defendants filed the court-ordered petition. (R 21,

Defs.' Pet.)

On November 16, 2011, the Entity Defendants and Plaintiffs

filed an agreed motion to dismiss the Entity Defendants,

which the Court granted on November 21, 2011. (R. 38,

Joint Mot.) The Entity Defendants were thereby dismissed

from this action with prejudice and without cost to Plaintiffs

or Entity Defendants. (R. 44, Min. Entry; R. 45, Order of

Dismissal.) On June 4, 2012, the Court dismissed as moot

Defendants' petition for costs on the grounds that the Entity

Defendants were no longer parties to the action subject to the

agreed order of dismissal. (R. 46, Min.Entry.) On June 19,

2012, Arrowsmith moved for reconsideration of the Court's

June 4 minute entry because Defendants' petition for fees was

filed on behalf of all Defendants, including Arrowsmith, and

therefore the petition for fees was not moot as to him. (R.

47, Arrowsmith's Mot. Recons.; R. 48, Arrowsmith's Mem.)

On June 28, 2012, the Court heard the motion to reconsider

and ordered Arrowsmith to submit a separate fee petition

by July 12, 2012. (R 55, Min. Entry.) On July 12, 2012,

Arrowsmith filed an amended fee petition seeking $16,269.00

in attorneys' fees incurred in litigating the New York Action

and $13,710.00 incurred in researching, drafting, and filing

the Costs Motion, for a total of $29,979.00 in attorneys' fees.

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(R 58, Arrowsmith's Am. Pet. at 1–2.) On July 23, 2012,

Plaintiffs filed a response brief in opposition to Arrowsmith's

amended fee petition. (R. 61, Pl.'s Resp.)

In the instant action, Plaintiffs assert six counts against

Defendants. The relevant counts that remain after the

dismissal of the Entity Defendants are Counts I, II, and V. 7

In Count I, Corporate Plaintiffs 8 allege that “Defendants

intentionally discriminated against [them] on the basis of their

racial identity,” in violation of Section 1981. (R. 1, Compl.¶

16.) In Count II, Corporate Plaintiffs allege that “Defendants

discriminated against [them] on the basis of their Jewish

identity with respect to the Loan Agreements[,]” through

their administration of the Operating Loan, in violation of the

ECOA. (Id. ¶ 123.) In Count V, Corporate Plaintiffs allege that

“Defendants have acted in bad faith by tailing to disclose their

calculations, methodologies, and other bases for” reducing

available funds, withholding funds in reserve accounts, and

demanding that Corporate Plaintiffs pay excessive loanrelated fees, penalties, and expenses, and Corporate Plaintiffs

accordingly request an accounting. (Id. ¶ 137.)

*4 On September 7, 2011, Arrowsmith filed a motion to

dismiss. (R. 25, Arrowsmith's Mot) Arrowsmith argues that

Plaintiffs' discrimination claims should be dismissed because

Plaintiffs have Med to sufficiently allege that they have a

racial or religious identity. (R. 24–1, Defs.' Mem. at 12–

16.) On October 11, 2011, Plaintiffs filed a response to

Arrowsmith's motion to dismiss, (R. 33, Pls.' Resp.), and on

November 1, 2011, Arrowsmith filed a reply in support of his

motion, (R. 37, Arrowsmith's Reply).

LEGAL STANDARD

A motion to dismiss pursuant to Rule 12(b)(6) “challenges

the sufficiency of the complaint to state a claim upon which

relief may be granted.” Hallinan v. Fraternal Order of Police

of Chi. Lodge No. 7, 570 F.3d 811, 820 (7th Cir.2009). When

reviewing a motion to dismiss, the Court accepte as true all

of the factual allegations pled in the complaint and draws all

reasonable inferences in favor of the nonmoving party. Id.

Pursuant to Rule 8(a)(2), a complaint must contain “a ‘short

and plain statement of the claim showing that the pleader is

entitled to relief,’ sufficient to provide the defendant with ‘fair

notice’ of the claim and its basis.” Tamayo v. Blagojevich,

526 F.3d 1074, 1081 (7th Cir.2008) (quoting Fed.R.Civ.P. 8(a)

(2); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)).

To survive amotion to dismiss, a complaint need not contain

detailed factual allegations, but must contain sufficient factual

matter that when accepted as true, states a claim to relief that

is plausible on its face. Ashcroft v. Iqbal, 556 U.S. 662, 678

(2009) (quoting Bell Atl. Corp, 550 U.S. at 570). If the factual

allegations are well-pleaded, the Court assumes their veracity

and then proceeds to determine whether they plausibly give

rise to an entitlement to relief. Id. at 679. “A claim has

facial plausibility when the plaintiff pleads factual content

that allows the court to draw the reasonable inference that

the defendant is liable for me misconduct alleged.” Id at 678.

“Plausibility” in this context does not imply that the Court

“should decide whose version to believe, or which version is

more likely than not.” Swanson v. Citibank, N.A., 514 F.3d

400, 404 (7th Cir.2010). Rather, to survive a motion to dismiss

under Rule 12(b)(6), the “plaintiff must give enough details

about the subject matter of the case to present a story that

holds together.” Id. In other words, “the court will ask itself

could these things have happened, not did they happen.” Id.

ANALYSIS

I. Motion to dismiss

In Counts I and II, Corporate Plaintiffs allege that Arrowsmith

discriminated against them on the basis of their racial and

religious identities—Jewish—in violation of Section 1981

and the ECOA. (R. 1, Compl.¶¶ 116, 123.) Specifically,

in Count I, Corporate Plaintiffs allege that they are each

“a legal identity that has acquired a racial identity,” (id. ¶

115), and that “Defendants intentionally discriminated against

[them] on the basis of their racial identity,” (id. ¶ 116). In

Count n, Corporate Plaintiffs allege that they are each “a

legal identity that has acquired a racial and religious identity

with a minority group,” (id. ¶ 120), and that “Defendants

discriminated against [them] on the basis of their Jewish

identity,” (id. ¶ 123).

*5 Arrowsmith argues that Corporate Plaintiffs' Section

1981 and ECOA claims should be dismissed “for failure

to allege adequately that Corporate Plaintiffs, the entities

asserting the claims, have a racial or religious identity.” (R.

29, Arrowsmith's Mem. at 9–10.) According to Arrowsmith,

Counts I and II are devoid of any factual support for Corporate

Plaintiffs' fundamental allegation that they have a racial

or religious identity. (Id. at 13.) Arrowsmith argues that

Corporate Plaintiffs' “sole allegation mat the entities are

members of a protected class is that [they] have acquired a

racial and religious identity with a minority group, namely

Jews.” (Id.)

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Furthermore, Arrowsmith argues that “the Complaint

contains no allegations that Arrowsmith, the only direct actor

described in the Complaint, discriminated against Corporate

Plaintiffs.” (Id. at 10.) According to Arrowsmith, the

Complaint only alleges that he referred to the Schwartzbergs

as “those people,” but “there is no support in law or in

fact that simply using the plural pronoun ‘those’ is antiSemitic.” (Id.) Additionally, Arrowsmith asserts that “while

the discrimination claims are asserted by Corporate Plaintiffs,

the conduct alleged to be discriminatory relates only to

the Schwartzbergs.” (Id.) Therefore, Arrowsmith concludes,

“without any allegation of direct discrimination against

Corporate Plaintiffs—the parties asserting the claims—the

claims must be dismissed.” (Id.)

A. Discrimination claims under Section 1981 and the

ECOA

Section 1981 prohibits discrimination in the “mak[ing] and

enforc[ment of] contracts.” 42 U.S.C. § 1981. Although

Section 1981 does not use the term “race,” the Supreme

Court has construed Section 1981 to “forbid all ‘racial’

discrimination in the making of private as well as public

contracts.” Saint Francis Coll. v. Al–Khazraji, 481 U.S.

604, 609 (1987) (citing Runyon v. McCrary, 427 U.S. 160

(1976)). To state a prima facie claim of discrimination

under Section 1981, a plaintiff must allege “that (1) he

is a member of a racial minority; (2) the defendants had

the intent to discriminate on the basis of race; and (3)

the discrimination concerned the making or enforcing of a

contract.” Pourghoraishi v. Flying J, Inc., 449 F.3d 751, 756

(7th Cir.2006) (citing Morris v. Office Max, Inc., 89 F.3d 411,

413 (7th Cir.1996)).

Similarly, the ECOA provides, in relevant part, that “[i]t

shall be unlawful for any creditor to discriminate against any

applicant, with respect to any aspect of a credit transaction ...

on the basis of race, color, religion, national origin, sex or

marital status, or age.” 15 U.S.C. § 1691(a)(1); see also 12

C.F.R. § 202.4(a). The ECOA creates a private right of action

for actual and punitive damages, equitable and declaratory

relief, and recovery of costs and attorneys' fees. 15 U.S.C. §

1691e(a)-(d). To state a prima facie claim of discrimination

under the ECOA, plaintiffs must allege that they were

applicants, as defined by the ECOA, and that defendants

treated them less favorably because of their race or religion.

16 U.S.C. § 1691(a)(1); 12 C.F.R. § 202.2(n) (“Discriminate

against an applicant means to treat an applicant less favorably

than other applicants.”); see also Estate of Davis v. Wells

Fargo Bank, 633 F.3d 529, 538 (7th Cir.2011).

*6 Therefore, under both Section 1981 and the ECOA,

a plaintiff must allege that he is a member of a protected

class who was discriminated against because of his minority

identity. The Section 1981 and ECOA counts at issue here

are brought solely by Corporate Plaintiffs. (R. 1, Compl.¶¶

114–124.) Specifically, Corporate Plaintiffs allege that they

are members of a protected minority because they have

acquired a racial and religious identity with a minority group,

namely Jews, and that Arrowsmith discriminated against

them because of their Jewish identity. (R. 1, Compl.¶¶ 115–

116, 120, 123.)

The threshold question with respect to the Section 1981

and ECOA claims is whether Corporate Plaintiffs have

acquired a racial or religious identity. In Village of Arlington

Heights v. Metropolitan Housing Development Corporation,

429 U.S. 252, 264 (1977), the Supreme Court stated in

dicta that a corporation has no racial identity and therefore

cannot be the direct target of discrimination. Since Village of

Arlington Heights, however, various federal appellate courts

have found that under some circumstances “a corporation

may have standing to allege racial discrimination.” Triad

Assocs., Inc. v. Chi. Hous. Auth., 892 F .2d 583, 591 (7th

Cir.1989) (remanding where the district court did not properly

consider the implications of post-Village of Arlington Heights

precedent), overruled on other grounds by Bd. of Cnty.

Comm'rs v. Umbehr, 518 U.S. 668, 673 (1996); see also

Thinket Ink Info. Res., Inc. v. Sun Microsystems, Inc., 368 F.3d

1053, 1058–59 (9th Cir.2004). The Supreme Court itself has

recognized that the Courts of Appeals which have considered

the issue have concluded that corporations may indeed assert

Section 1981 claims. 9 Domino's Pizza, Inc. v. McDonald,

546 U.S. 470, 473 n. 1 (2006). Although the Seventh

Circuit has not explicitly addressed the question, other federal

appellate courts have held that corporate entities may assert

Section 1981 claims in limited circumstances. See Hudson

Valley Freedom Theater, Inc. v. Heimbach, 671 F.2d 702,

705–07 (2d Cir.1982). Circumstances in which a corporate

entity may bring suit under Section 1981 include cases in

which a corporation is owned entirely by shareholders of

a single race, Amber Pyramid, Inc. v. Buffington Harbor

Riverboats, LLC, 129 Fed. App'x. 292, 294 (7th Cir.2005)

(allowing corporation owned by two African–American

sisters to maintain a suit under Section 1981), cases in which

a corporation has acquired a protected identity pursuant to a

government designation, Thinket Ink Info. Res., Inc., 368 F.3d

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at 1060 (holding that a corporate plaintiff, which was entirely

owned by African–Americans, and certified by the Unites

States Small Business Administration as a “minority-owned

business,” had standing to bring a Section 1981 action), or

cases in which a corporation is “established for the very

purpose of advancing minority interests,” Hudson Valley, 671

F.2d at 705. Other circumstances in which corporations have

been found to have an imputed racial identity are “when

the owner, majority of shareholders and/or president are

members of the specific class that is alleged to have been

discriminated against.” Contemporary Pers., Inc. v. Godiva

Chocolatier, Inc., No. 09–00187, 2009 WL 2431461, at *2

(E.D.Pa. Aug. 6, 2009) (collecting cases).

*7 Here, Corporate Plaintiffs summarily allege that they

are each legal entities that have “acquired a racial and

religious identity with a minority group protected by the

safeguards of [Section 1981 and the ECOA].” (R. 1,

Compl.¶¶ 115, 120.) The specific facts that Corporate

Plaintiffs rely upon to establish that they have acquired a

minority identity are that Harris Schwartzberg is a Jewish–

American businessman, (R. 1, Compl. at 2), and that “the

Schwartzbergs, through their affiliates, purchased nursing and

assisted living facilities with the intent of improving the

experience of the residents. Each of the facilities affiliated

with the Schwartzbergs are operated through companies,

led by qualified, licensed professionals who hire, train,

and maintain, the best available nurses, managers, and

administrators.” (Id. ¶¶ 31–32.) Corporate Plaintiffs further

allege that Arrowsmith discriminated against them on the

basis of their Jewish identity. (Id. ¶¶ 116–117, 123.)

These allegations fail to provide the Court with a factual

basis for finding that Corporate Plaintiffs have acquired a

racial or religious identity. Plaintiffs do not allege any facts

regarding the ownership structures of Corporate Plaintiffs,

whether Corporate Plaintiffs have been certified as having

minority identities by a government institution, or whether

Corporate Plaintiffs' purposes are to serve or advance Jewish

interests. For instance, the complaint does not identify

whether the Schwartzbergs are the sole shareholders or

majority shareholders of Corporate Plaintiffs. See, e.g.,

Amber Pyramid, Inc., 129 Fed. App'x, at 294. Nor does

the complaint allege any facts to demonstrate that Corporate

Plaintiffs are closely held companies owned and operated

by the Schwartzbergs. Instead, the complaint's allegations

suggest that Corporate Plaintiffs are not directly owned

by members of a protected minority group. For example,

the complaint alleges that the Schwartzbergs' affiliates, and

not the Schwartzbergs themselves, purchased nursing and

assisted living facilities, (R. 1, Compl.¶ 31.) The complaint

also alleges that Corporate Plaintiffs, who operate the

nursing and assisted living facilities, are “led by qualified,

licensed professionals,” (id. ¶ 32), and not the Schwartzbergs

themselves or anyone else that would qualify as being

a member of a protected minority. Indeed, the complaint

also suggests that the Schwartzbergs' affiliates purchased

the nursing and assisted living facilities with the intent of

improving the experience of the facilities' residents, and not

with the intent of advancing Jewish interests. (Id. ¶ 31.) The

allegations set forth by Corporate Plaintiffs are inadequate to

establish that they have acquired a racial or religious identity.

See Cholla Ready Mix, Inc. v. Civish, 382 F.3d 969, 977–

78 (9th Cir.2004) (dismissing a Section 1981 claim because

the corporate plaintiff failed to allege facts from which the

court could infer that the plaintiff had an imputed racial

identity); Prestige Rests. & Entm't Inc. v. Bayside Seafood

Rest., Inc., No. 09–23128–CIV, 2010 WL 680905, at *1, *7

n. 9 (S.D.Fla. Feb. 23, 2010) (requiring dismissal of Section

1981 claim where the corporate plaintiff simply alleged that it

was discriminated against because of its patrons' race because

the allegations were not adequate to establish that the plaintiff

had assumed a racial identity); Contemporary Pers., Inc.,

2009 WL 2431461, at *1–2 (dismissing a Section 1981 action

where the complaint failed to allege the race of the corporate

plaintiff's owner, president, or shareholders, or the racial

make-up of its workforce).

*8 Plaintiffs fail to inform the Court whether Schwartzberg

is the direct owner of Corporate Plaintiffs, the sole owner,

sole shareholder, or even majority shareholder of Corporate

Plaintiffs, and for this reason the cases relied upon by

Plaintiffs to support their argument that they have established

a racial or religious identity, are distinguishable. See, e.g.,

Bains LLC v. Arco Prods. Co., 405 F.3d 764, 770 (9th

Cir.2005) (corporation acquired an imputed racial identity

where corporation was owned entirely by Sikh shareholders);

T & S Serv. Assocs., Inc. v. Crenson, 505 F.Supp. 938, 943

(D.R.I.1981) (corporate plaintiff properly alleged Section

1981 claim where sole owner of corporate plaintiff was

African–American), vacated and remanded on other grounds,

666 F.2d 722 (1st Cir.1981); Shah v. Am. Bottling Co., Inc.,

No. 07–1042, 2008 WL 718435, at *4 (C.D.Ill. Mar. 14,

2008) (corporate plaintiff acquired an “imputed racial social

identity” from sole shareholder and operator, who was born in

India); Calderon v. SW Bell Mobile Sys., LLC, 390 F.Supp.2d

714, 717 (N.D.Ill.2005) (closely held corporation of which

a Mexican national was the majority stockholder, as well

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as the president, owner and operator, acquired an imputed

racial identity and therefore had standing to pursue a Section

1981 action); Florence Urgent Care v. Healthspan, Inc.,

445 F.Supp.2d 871, 877 (S.D.Ohio 2006) (corporate plaintiff

owned entirely by doctors of Arab descent had a racial

identity); Howard Sec. Servs., Inc. v. Johns Hopkins Hosp.,

516 F.Supp. 508, 513 (D.Md.1981) (corporation that was

wholly owned and operated by African–American plaintiff

had a cause of action under Section 1981).

Seeking to avoid this result, Plaintiffs argue that their

complaint “alleges that the Schwartzbergs are the ultimate

beneficial owners of the [Corporate Plaintiffs], and that

[Corporate Plaintiffs] acquired a racial identity from their

Jewish owners and managers.” (R. 33, Pls.' Mem. at

16.) Plaintiffs assert that “Arrowsmith saw the [Corporate

Plaintiffs] as extensions of the Schwartzbergs in all

respects, including their Jewish identity, and ‘assault [ed]’

them because of it” (Id.) Furthermore, they contend that

“GE Financial's correspondence regarding the Operating

Loan repeatedly referred to the ‘Schwartzbergs'... thereby

demonstrating that Lenders consider the Schwartzbergs and

[Corporate Plaintiffs] as one and the same.” (Id. at 16–17.)

According to Plaintiffs, “[t]hese allegations are more than

sufficient to establish that [Corporate Plaintiffs] acquired a

Jewish identity and have standing to assert claims under

Section 1981.” (Id. at 17 .) As discussed above, however,

Plaintiffs' arguments find no support in their complaint. The

Court further notes that Plaintiffs never sought leave to amend

their complaint throughout the pendency of Defendants'

motion to dismiss. The Court reminds Plaintiffs mat they

cannot amend their complaint through their opposition briefs.

Pirelli Armstrong Tire Corp. Retiree Med. Benefits Trust v.

Walgreen Co., 631 F.3d 436, 448 (7th Cir.2011) (noting the

“axiomatic rule that a plaintiff may not amend his complaint

in his response brief”); see also Car Carriers, Inc. v. Ford

Motor Co., 745 F.2d 1101, 1107 (7th Cir.1984) (a “complaint

may not be amended by the briefs in opposition to a motion

to dismiss”). Because Corporate Plaintiffs have failed to

sufficiently allege in their complaint that they acquired a

racial identity, the Court dismisses Counts I and II of their

complaint.

B. Action for an accounting

*9 In Count V, asserted against all Defendants,

Plaintiffs seek an accounting “regarding the management,

administration, and handling of the loans.” (R. 1, Compl.¶

137.) Defendants argue that Plaintiffs released this claim

under the terms of the Operating Loan, and that Count V

should therefore be barred. (R. 29, Arrowsmith's Mem. at

21–24; R. 37, Arrowsmith's Reply at 13–14.) An action for

an accounting is an action based in contract. 1 Am.Jur.2d

Accounts and Accounting § 8 (2012). Therefore, an action

on an account must be founded on a contract, either express

or implied. Id. Because Arrowsmith is not a party to the

loans at issue, there is no contractual basis for the requested

accounting. Accordingly, the Court dismisses Count V.

II. Petition for fees

Arrowsmith also petitions the Court for an order directing

Plaintiffs to pay him $29,979.00 in fees. (R. 58, Arrowsmith's

Am. Pet.) This amount represents the attorneys' fees incurred

by Arrowsmith in (1) litigating the New York Action, and

(2) researching, drafting, and filing the Costs Motion, which

this Court granted on August 10, 2011. (Id. at 1.) According

to Arrowsmith, his counsel incurred fees of $16,269.00 in

researching case law concerning Plaintiffs' two statutory

discrimination claims in the Second Circuit and the Southern

District of New York, and in drafting a motion to dismiss

that relied on that case law in the New York Action. (Id.

at 2.) Arrowsmith asserts that his counsel would not have

incurred these expenses if Plaintiffs had filed the action in

the Northern District of Illinois in the first instance. (Id.)

With respect to the Costs Motion, Arrowsmith asserts that

his counsel incurred fees of $13,710.00 for researching,

drafting, and filing the Costs Motion that would not have

been necessary had Plaintiffs not filed their action in New

York, voluntarily dismissed that action, and then re-filed their

action in the Northern District of Illinois. (Id. at 2.) According

to Arrowsmith, the fees his counsel seek “relate to him

individually or alternatively, to all Defendants collectively

(including him), and thus, would have been incurred had Mr.

Arrowsmith been the only defendant in the action.” (Id. at 3.)

Plaintiffs present several arguments to support their position

that Arrowsmith is not entitled to attorneys' fees. (R. 61,

Pls.' Resp. at 4–13.) First, Plaintiffs argue that Arrowsmith

has not shown, as a matter of law, that he is entitled to

attorneys' fees under Esposito v. Piatrowski, 223 F.3d 497,

501 (7th Cir.2000). (Id. at 4, 6–9.) Second, Plaintiffs argue

that Arrowsmith has not established that he has incurred any

attorneys' fees. (Id. at 4, 9–10.) Plaintiffs also argue that

Arrowsmith has not established that the attorneys' fees he

seeks to recover are reasonable, (id. at 4, 11), nor has he

demonstrated that all of the work performed by the Fulbright

and Jenner attorneys was unnecessary or inapplicable to

litigating the instant suit in the Northern District of Illinois,

(id. at 4, 12–13). Alternatively, Plaintiffs request that the

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Court grant them leave to take limited discovery to determine

whether Arrowsmith incurred any of the attorneys' fees

sought and, if so, the amount of such fees. (Id. at 4.) For

the reasons discussed below, the Court awards Arrowsmith

$28,518.05 in fees.

A. Legal basis for awarding attorneys' fees

*10 Federal courts generally may not provide an award

of attorneys' fees absent a statute or contractual provision

authorizing such an award. Esposito v. Piatrowski, 223

F.3d 497, 500 (7th Cir.2000); Alyeska Pipeline Serv. Co.

v. Wilderness Soc'y, 421 U.S. 240, 257 (1975). Here,

Arrowsmith seeks the recovery of legal fees pursuant to Rule

41(d). Plaintiffs attempt to block Arrowsmith from recovering

attorneys' fees and argue that, as a matter of law, Arrowsmith

is not entitled to recovery any attorneys' fees as part of the

“costs” that Rule 41(d) contemplates. (R. 61, Pls.' Resp. at 6–

10.)

Rule 41(d) states, in relevant part: “If a plaintiff who

previously dismissed an action in any court files an action

based on or including the same claim against the same

defendant, the court ... may order the plaintiff to pay all or

part of the costs of that previous action[.]”Fed.R.Civ.P. 41(d).

Rule 41(d) refers to “costs,” but it fails to specify whether that

term includes attorneys' fees. The Advisory Committee Notes

also fail to address the question. See Esposito, 223 F.3d at 501

(noting that the Advisory Committee Notes do not indicate

whether such costs include attorneys' fees). Recognizing this

ambiguity, the Seventh Circuit reasoned in Esposito that

“[b]ecause Rule 41(d) does not refer to costs any differently

than does 18 U.S.C. § 1920, which provides the statutory

specification of allowable costs, fees may be included as

costs only where the underlying statute so provides.” Id.

Therefore, the Seventh Circuit held “that a party may recover

reasonable attorneys' fees as part of its ‘costs' under Rule

41(d) only where the underlying statute defines costs to

include attorneys' fees.” Id. Thus, Plaintiffs argue, that under

Esposito, “courts may only award attorneys fees as ‘costs'

under Rule 41(d) when the underlying statute would have

allowed for the recovery of attorneys' fees.” (R. 61, Pls.’ Resp.

at 6) (citing Esposito, 223 F.3d at 501).

Plaintiffs' argument on this point is without merit. Plaintiffs

fail to recognize that district courts have the inherent

authority to order an award of attorneys' fees under certain

circumstances, such as where a party has acted in bad faith

or inflicted unnecessary costs on the court or the defendants.

See Esposito, 223 F.3d at 500 n. 5 (“Attorneys' fees may

be awarded by order of the court under certain factual

circumstances ... One such example is the courts' inherent

authority to order a party acting in bad faith to pay for

the attorneys' fees of its adversary.”) (citing F.D. Rich Co.,

Inc. v. United States ex rel. Indus. Lumber Co., Inc., 417

U.S. 116 (1974)); Chambers v. Nasco, Inc., 501 U.S. 32,

45–46 (1991) (“a court may assess attorney's fees when a

party has acted in bad faith, vexatiously, wantonly, or for

oppressive reasons”) (citations and internal quotation marks

omitted); Mañez v. Bridgestone Firestone N. Am. Tire, LLC,

533 F.3d 578, 591 (7th Cir.2008) (noting that “courts retain

inherent power to punish the full range of litigation abuses,”

which includes punishing a party “for an act that inflict[s]

needless costs on the court and the defendants”). Esposito did

not change the long-standing rule establishing the inherent

power of district courts to award attorneys' fees. Indeed, after

reaching its holding in Esposito, the Seventh Circuit clarified

that “attorneys' fees are not a recoverable cost of litigation

under Rule 41(d) unless the substantive statute which formed

the basis of the original suit allows for the recovery of such

fees as costs (or unless such fees are specifically ordered by

the court).” 223 F.3d at 501 (emphasis added). Accordingly,

contrary to Plaintiffs' argument, the Court possesses the

inherent authority to specifically order attorneys' fees under

Rule 41(d). Here, the Court previously ordered the imposition

of such fees on Plaintiffs when it granted Defendants' Costs

Motion and requested that Defendants submit a petition for

costs. (R. 59–1, Ex. 1, Aug. 10, 2011 Tr. at 8:9–15; R. 20,

Min. Entry.) In so doing, it recognized that Plaintiffs had

unnecessarily filed their complaint in the Southern District of

New York. (R. 59–1, Ex. 1, Aug. 10, 2011 Tr. at 10:15–17.)

The Court's order is consistent with Esposito, 223 F.3d at 501,

which recognized that “awarding [attorneys'] fees as part of

costs advances the purpose of Rule 41(d), which is to deter

forum shopping and vexatious litigation.”

B. Amount of attorneys' fees

*11 Having found that Rule 41(d) is applicable, and that

the Court may impose attorneys' fees on Plaintiffs, the Court

next determines the appropriate amount of the award of

attorneys' fees. Failing to cite any case law, Plaintiffs argue

that Arrowsmith has failed to establish that he incurred any

attorneys' fees in connection with the voluntary dismissal

of the New York Action. (R. 61, Pls.' Resp. at 4, 9–10.)

According to Plaintiffs, “it appears that the Entity Defendants

incurred and paid all of the legal fees that Arrowsmith now

seeks to recover.” (Id at 9.) Plaintiffs' argument is based on

nothing more than mere speculation. As Arrowsmith points

out, the fees his counsel seek “relate to him individually or

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alternatively, to all Defendants collectively (including him),

and thus, would have been incurred had Mr. Arrowsmith

been the only defendant in the action.” (R. 58, Arrowsmith's

Am. Pet. at 3.) District courts have inherent power “to

fashion an appropriate sanction for conduct which abuses

the judicial process.” Chambers, 501 U.S. at 4445. Such

sanctions are appropriate where a litigant has “abused the

judicial process or otherwise conducted litigation in bad

faith.” Salmeron v. Enter. Recovery Sys., Inc., 579 F.3d 787,

793 (7th Cir.2009) (citing Maynard v. Nygren, 332 F.3d

462, 470–71 (7th Cir.2003)). Here, the Court has already

determined that Plaintiffs abused the judicial process, and

pursuant to its inherent authority, the Court will fashion an

appropriate sanction.

Where a case is voluntarily dismissed and re-filed by the

plaintiff, attorneys' fees are awarded to the defendant to

compensate for the unnecessary expenses incurred by the

litigation. Cauley v. Wilson, 754 F.2d 769, 772 (7th Cir.1985).

Generally, courts “should not impose any costs associated

with work that will still be useful to the defendants in

the instant litigation.” Oteng v. Golden Star Res., Ltd., 615

F.Supp.2d 1228, 1240 (D.Colo.2009) (citing Esquivel v. Arau,

913 F.Supp. 1382, 1386 (C.D.Cal.1996)); see also Westlands

Water Dist. v. United States, 100 F.3d 94, 97 (9th Cir.1996)

(remanding to the district court to consider, inter alia, whether

to condition a voluntary dismissal under Rule 41(a)(2) on

the payment of costs and attorney fees, and instructing the

district court that “if [it] decides it should condition dismissal

on the payment of costs and attorney fees, the defendants

should only be awarded attorney fees for work which cannot

be used in any future litigation on these claims.”) (citing

Koch v. Hankins, 8 F.3d 650, 652 (9th Cir.1993)); Copeland v.

Hussmann Corp., 462 F.Supp.2d 1012, 1024 (E.D.Mo.2006)

(allowing award of “attorneys' fees for any work done in the

previously dismissed case that is useless in the present case”).

1. Unnecessary work related to the New York Action

Prior to the dismissal of the New York Action, Arrowsmith

asserts that his counsel, from the law firm of Fulbright

& Jaworski L.L.P. (“Fulbright”), incurred $16,093.00 in

attorneys' fees for defending the New York Action. (R. 59,

Arrowsmith's Mem. at 3.) Arrowsmith seeks attorneys' fees

for 57 billable hours spent by his attorneys researching

the two anti-disccrimination statutes at issue and drafting a

motion to dismiss the New York Action. (Id at 5.) Arrowsmith

asserts that Sarah O'Connell, a senior associate at Fulbright,

who graduated law school in 2002 and bills her clients at an

hourly rate of $382.00, expended 6.5 hours on the New York

Action. (Id. at 4–5.) Additionally, Arrowsmith claims that

Jami Vibbert, a Fulbright associate who graduated law school

in 2007 and bills her clients at an hourly rate of $273.00,

expended 50.5 hours on the New York Action. (Id.) To support

his fee petition, Arrowsmith submitted Fulbright's invoices

for the work its associates completed while representing

Arrowsmith in the New York Action. (R. 59–2, Ex. 2, Invoice

No. 11196925.)

*12 After reviewing Fulbright's invoices, the Court first

notes that Arrowsmith has failed to precisely indicate the

billing entries for which he is seeking attorneys' fees.

Additionally, none of the billing entries indicate that the

research conducted by O'Connell and Vibbert on the two antidiscrimination statutes focused solely on the Second Circuit

or the federal district courts in New York, and the Southern

District of New York in particular. Indeed, Arrowsmith relied

on at least one case from the Second Circuit in drafting

their motion to dismiss in this case, in addition to case law

from other Circuit Courts of Appeals, which suggests that

Arrowsmiths' research of the Second Circuit precedent was

not entirely useless. The Court therefore has difficulty finding

that all of the defense's initial research for the New York

action was unnecessary and not useful in defending the instant

action. That said, O'ConneU and Vibbert spent time meeting

to discuss the research and to strategize on the motion to

dismiss in the New York Action. The strategy employed

by the defense in the New York Action is likely to have

been materially different than the strategy employed by the

defense in the instant action as the motion to dismiss had to

be filed in a different judicial venue. Therefore, the Court

will allow for the recovery of those billing entries indicating

that O'ConneU and Vibbert met and conferred regarding

the statutory discrimination arguments to be made in the

motion to dismiss in the New York Action. Specifically, the

Court allows Arrowsmith to recover attorneys' fees for two

meetings that O'Connell and Vibbert held on June 13 and June

14, for .20 hours and 1.4 hours respectively, for a total of

$1,048.00.

Vibbert also spent time researching pleading standards and

motions to dismiss pursuant to Rule 12(b)(6). Based on

the Court's experience with such matters, this research is

likely to have been focused almost exclusively on Second

Circuit precedent. Therefore, although the Court will not

aUow Arrowsmith to recover fees for time spent generaUy

researching the two anti-discrimination statutes that Plaintiffs

allege Arrowsmith violated, the Court will allow Arrowsmith

to recover one-half of the time for those billing entries

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constituting Vibber's research of pleading standards and Rule

12(b) (6) cases. Specifically, the Court allows Arrowsmith

to recover for 1.3 hours of research conducted on June 14,

1.2 hours of research conducted on June 16, 1.55 hours of

research conducted on June 20, and 2.6 hours of research

conducted on June 21, for a total of $1,815.45.

In addition, both O'Connell and Vibbert spent time drafting a

motion to dismiss intended to be filed in the Southern District

of New York, and although it is plausible that they could

have made substantially similar arguments before this Court

as those contained in their motion to dismiss for the Southern

District of New York, it is unlikely that they could have

replicated that work verbatim into a new document to be filed

before this Court. The Court will therefore allow Arrowsmith

to recover one-half of the billing entries representing the

time that O'Connell and Vibbert spent drafting or revising the

motion to dismiss. Specifically, the Court allows Arrowsmith

to recover 3.9 hours for July 14, 2.7 hours for July 15, 3.9

hours for July 18, and 4.8 hours for July 19 for Vibbert's

work. Additionally, the Court allows Arrowsmith to recover

1.7 hours for July 18, 1.85 hours for July 19, and 1.15 hours

for July 20 for O'Connell's work. Therefore, Arrowsmith

is entitled to recover $11,944.60 for the time that either

O'Connell or Vibbert spent drafting and revising a motion to

dismiss that was intended to be filed in the Southern District

of New York, but due to the change in venue had to be filed

in the Northern District of Illinois.

*13 In the exercise of its discretion, the Court finds that

Arrowsmith may recover $14,808.05 in attorneys' fees for

work that the Court determines was unnecessary and not

useful to the instant action.

2. Unnecessary work related to the Costs Motion

In addition, Arrowsmith argues that he should also be

compensated for expenses incurred in researching, drafting,

and filing the Costs Motion. (R. 58, Arrowsmith's Mot. at

2.) Following the Plaintiffs' voluntary dismissal of the New

York Action, Arrowsmith incurred $13,710.00 in attorneys'

fees for work performed by Fulbright attorneys and attorneys

from the law firm of Jenner & Block L.L.P. (“Jenner”) on the

Costs Motion. (R. 59, Arrowsmith's Mem. at 3.) Specifically,

Arrowsmith asserts that Fulbright and Jenner attorneys spent

a total of 38.4 billable hours on the Costs Motion. (Id at

6.) According to Arrowsmith, Linda Addison, a partner at

Fulbright who bills her clients at an hourly rate of $634.00,

spent 4.2 billable hours on the Costs Motion. (Id. at 4, 6.)

Arrowsmith asserts that O'Connell spent 11.8 billable hours

working on the Costs Motion and that Vibbert billed 16.8

hours for her work on the Costs Motion. (Id. at 6.) Arrowsmith

also states that Barbara Steiner, another partner at Jenner who

bills her clients at an hourly rate of $630.00, spent .6 billable

hours on the Costs Motion. (Id at 4, 6.) David Saunders, an

associate at Jenner who graduated from law school in 2007

and bills his clients at an hourly rate of $315.00, billed 5 hours

on the Costs Motion. (Id. at 5–6.)

“The Seventh Circuit teaches that attorney's fees incurred in

litigating and establishing an attorney's entitlement to fees

are generally compensable.” Holmstrom v. Metro. Life Ins.,

Co., No. 07–CV–6044, 2011 WL 2149353, at *8 (N.D.Ill.

May 31, 2011) (citing Bond v. Stanton, 630 F.2d 1231, 1235

(7th Cir.1980)). In their response to Arrowsmith's amended

petition for fees, Plaintiffs do not contest the amount of fees

sought for the Costs Motion. (R. 61, Pls.' Resp.)

The Court finds that the fees incurred by Arrowsmith in

bringing the Costs Motion are appropriate and that they

help further the purpose of Rule 41(d), which is, in part, to

prevent vexatious litigation. See Esposito, 223 F.3d at 501.

Had Plaintiffs originally filed this action in this District, or

had Plaintiffs not chosen to re-file this action, Arrowsmith

would not have had to expend time drafting the Costs Motion.

Because the invoices support his request, in the exercise of its

discretion, the Court grants Arrowsmith the attorneys' fees for

the time spent in preparing, researching, drafting, and filing

the Costs Motion. Thus, the Court awards Arrowsmith the

full $13,710.00 in attorneys' fees associated with bringing

the Costs Motion. Therefore, in the exercise of its discretion,

the Court concludes that Arrowsmith is entitled to recover

from Plaintiffs a total of $28,518.05 in costs pursuant to Rule

41(d). Since the Court grants Arrowsmith's amended petition

for fees, Plaintiffs' alternative request for limited discovery is

denied.

CONCLUSION

*14 For the foregoing reasons, the Court GRANTS

Arrowsmith's motion to dismiss (R. 25), GRANTS

Arrowsmith's motion to reconsider (R 47), and GRANTS

Arrowsmith his amended petition for fees (R. 58), in the

amount of $28,518.05. The Court directs the Clerk to enter a

final judgment in favor of defendant Arrowsmith and against

Plaintiffs.

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All Citations

Not Reported in F.Supp.2d, 2012 WL 6061710

Footnotes

1 Plaintiffs include the following entities and individual: New Louisiana Holdings, LLC; Fountain View

215 Tenant LLC; Jackson Manor 1691 Tenant LLC; Panola 501 GP LLC; Retirement Center 14686

Tenant LLC; Acadian 4005 Tenant LLC; Lakewood Quarters Rehab 8225 Tenant LLC; Regency 14333

Tenant LLC; Sherwood 2828 Tenant LLC; Lakewood Quarters Assisted 8585 Tenant LLC; Panola 501

Partners LP; Citiscape Out Parcel Tenant LLC; Citiscape 5010 Tenant LLC; St Charles 1539 Tenant LLC;

Woodland Village 5301 Tenant LLC; Atrium 6555 Tenant LLC (collectively, “Corporate Plaintiffs”); and Harris

Schwartzberg.

2 As explained below, because the Entity Defendants have been dismissed, Arrowsmith is the only remaining

defendant. The Court thus refers to Defendants' motion to dismiss as Arrowsmith's motion.

3 Also before the Court is Arrowsmith's Motion to Reconsider (R. 47), the Court's June 4, 2012 Minute Entry

(R. 46), denying as moot Defendants' Petition for Fees on the basis of an agreed order of dismissal as to the

Entity Defendante. Because the agreed order of dismissal only applied to the Entity Defendants, and not to

Arrowsmith, and because the Petition for Fees was filed on behalf of all Defendants, including Arrowsmith,

the Court grants Arrowsmith's Motion to Reconsider.

4 The limitations on what the Court may consider on a motion to dismiss pursuant to Rule 12(b)(6) are

attenuated by Rule 10(c) insofar as “documents attached to the complaint, documents that are critical to the

complaint and referred to in it, and information that is subject to proper judicial notice” may all be considered by

the Court without converting a motion to dismiss into amotion for summary judgment. Geinosky v. City of Chi.,

675 F.3d 743,745 n. 1 (7th Cir.2012) (citing Fed.R.Civ.P. 10(c)). Although Plaintiffs failed to attach a copy of

the Operating Loan to their complaint, Defendants attached the agreement to their motion to dismiss. (R. 29–

1, Ex. A, Credit and Security Agreement (Revolving Credit and Term Loan) dated as of January 18, 2006.)

Documents that defendants attach to a motion to dismiss will be considered part of the pleadings if they are

referred to in the plaintiff's complaint and are central to the plaintiff's claims. Venture Assocs. Corp. v.. Zenith

Data Sys. Corp., 987 F.2d 429, 431 (7th Cir.1993) (“[A] defendant may introduce certain pertinent documents

if the plaintiff failed to do so. Documents that a defendant attaches to a motion to dismiss are considered

part of the pleadings if they are referred to in the plaintiff's complaint and are central to her claim.”) (internal

citations omitted) (collecting cases); see also 5A Charles A. Wright & Arthur R. Miller, Federal Practice and

Procedure, § 1327 (3d ed.2012). Here, because the complaint repeatedly refers to the Operating Loan, and

because the Operating Loan is central to Plaintiffs' claims, the Court considers the Operating Loan submitted

by Defendants to be part of the pleadings.

5 The current lenders are GE Financial, CIT, and Marathon (the “Lenders”). (R. 1, Compl.¶ 50.)

6 The complaint in the New York Action contains the same causes of action and is substantially the same as

the complaint filed in the instant action. (See R. 9–6, Ex. 6, Redline.)

7 Counts III and IV are asserted against the Lenders, which consist of GE Financial, CIT, and Marathon, and

so those claims are no longer viable because they are only alleged against defendants who are no longer

parties to this suit (R. 1, Compl. ¶¶ 125–135; R. 45, Order of Dismissal.) In Count VI, Schwartzberg sought

a declaratory judgment “as to the rights and other legal relations of Harris Schwartzberg and Lenders.” (Id.

¶ 142.) Because a controversy no longer exists between Schwartzberg and the Lenders, the Court finds the

request contained in Count VI moot.

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8 According to the complaint, each of the Corporate Plaintiffs is also a borrower under the Operating Loan.

(R. 1, Compl.¶¶ 1–16, 42.) Accordingly, the complaint refers to Corporate Plaintiffs as Operating Borrowers.

(See, e.g., id. ¶ 42.)

9 Both Plaintiffs and Arrowsmith agree that the analysis of whether Plaintiffs' complaint sufficiently alleges that

Arrowsmith discriminated against them on the basis of race and/or religion for purposes of Section 1981 is

equally applicable to the ECOA claim. (R. 33, Pls.' Mem. at 22 n. 43; R. 24–1, Defs.' Mem. at 14 n. 8.)

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