Serious allegations are being raised in the legal community that the Consumer Financial Protection Bureau has recruited the U.S. Trustee Program to collect bankruptcy data on its behalf to aid a controversial data-mining program.
Documents obtained by the Washington Examiner describe efforts by the CFPB to collect a decade's worth of private financial data on the consumer behavior of five million American citizens without their knowledge or consent. The CFPB data-mining campaign has alarmed privacy watchdogs.
The USTP was created by Congress in 1978 to be a rigorously neutral agency within the U.S. Department of Justice. Its attorneys are supposed to be "impartial” and to serve as a “watchdog over the bankruptcy process,” according to the agency's website.
If USTP is aiding CFPB’s data-mining program in any manner, bankruptcy authorities argue it would constitute an “unprecedented” violation of the organization's reason for being and destroy its independence.
Officials with CFPB and USTP were reluctant to respond to questions about their agencies' relationship and the data-mining program.
Concerns were first sparked on May 11, 2012, when USTP attorney J. Steven Wilkes filed an unusual discovery request before the U.S. Bankruptcy Court in Tampa, Fla.
Citing a small number of Florida-based bankruptcy cases filed before the court, Wilkes asked for millions of unrelated bankruptcy files nationwide that were in the possession of Morgan Drexen, a California-based administrative-support company serving more than 100 bankruptcy lawyers.
Wilkes asked for all Morgan Drexen cases in its system from Jan. 1, 2008, for Chapter, 7, 11, 12 or 13 proceedings, where the company “was at any time assisting an attorney for a debtor in a bankruptcy proceeding.”
Although filed in the Region 21 bankruptcy court, Wilkes' request covered the entire United States.
In its reply, the Costa Mesa-based company argued that the request was beyond the regional bankruptcy court's jurisdiction because Wilkes “seeks the production of documents and other items relating to any bankruptcy case, presumably pending in any court in the United States.”
The company argued the request was “overbroad” and “well beyond the relevancy of the matters at issue in this case.” In June 2012, the company asked federal Bankruptcy Judge Caryl E. Delano to issue a “protective order” against the request.
Last November, the judge agreed with Morgan Drexen. She sharply limited the U.S. Trustee’s access to files for only seven Florida bankruptcy cases.
Both CFPB and Morgan Drexen are now battling through competing lawsuits before federal courts in Washington, D.C., and in California.
The Wilkes request raised serious issues about the USTP’s independence and whether CFPB is trying to politicize the judicial program so it can do the bureau’s the bidding on data mining, according to bankruptcy and constitutional law experts.
Steven M. Berman, a Florida-based bankruptcy attorney for Shumaker, Loop & Kendrick, which represents Morgan Drexen in Florida, said Wilkes' request has caused legal alarms to go off outside the bankruptcy court.
Berman said he was initially confused by Wilkes’ far-reaching request, but on further reflection wondered if it might be on behalf of CFPB.
“I do remember Steven telling me something about ‘other agencies are interested or involved or looking into this’ when we had our discussions,” Berman said.
Berman’s suspicions were confirmed by a July 18, 2012, email from Wilkes that noted a separate CFPB request for documents and said his office would be interested in receiving documents that “will be produced to the CFPB.”
“Yeah, that’s pretty unusual,” Berman said of Wilkes' reference in the email to CFPB. “I’ve been a bankruptcy lawyer for 23 years. I don’t think I’ve ever had that experience.”
A month before Wilkes filed his motion before the bankruptcy court, CFPB had started a “nonpublic law enforcement investigation” against Morgan Drexen.
On April 13, 2012, CFPB requested all of the company’s internal business documents and its document management database “in which Morgan Drexen has electronic records relating to Debt Settlement.”
Morgan Drexen executives estimate the CFPB request involves millions of private documents of financially distressed Americans. The company is a software storage company that holds the documents for bankruptcy lawyers.
Berman said Wilkes' wide-ranging request clearly suggested cooperation between USTP and CFPB. “Once I saw the things that were being requested, it made sense that he wasn’t just asking for the U.S. Trustee Program because the things he was asking for were beyond their statutory jurisdiction.”
Donald A. Workman, a bankruptcy attorney for the law firm of Baker Hostetler, said the Wilkes request was unlike anything in his experience.
“I find that undertaking to be very unusual and not anything I can recall seeing remotely similar in my career,” said Workman, who was chairman of the District of Columbia Bar's bankruptcy committee for two years.
One of the reasons CFPB may have targeted Morgan Drexen is that Section 1027(e) of the Dodd-Frank Act that created the agency bars it from regulating lawyers practicing law.
Morgan Drexen isn’t a law firm, but, as a repository of files for lawyers, it could serve as a loophole to obtain attorney files.
Workman said a convenient way to gain access to the files is to use the USTP to seek the documents in the bankruptcy system.
“This is another agency looking to noodle around in people’s privacy,” he said. “One way they do that they found is to come into bankruptcy court and attempt to get all of this information that is really is extraterritorial to this agency and the U.S. Trustee."
A former federal bankruptcy judge who asked not to be named said USTP should never collect data for other agencies. “Doing the bidding of another government agency would be inconsistent with the mission of the U.S. Trustee’s role.”
A practicing bankruptcy attorney who once served as a trial lawyer for the USTP said a broad request like Wilkes' was highly unusual and could unleash major privacy concerns.
“The thing that strikes me there’s got to be a lot of privileged information in that data and that I don’t know how that’s released wholesale,” said the official who requested anonymity because his firm, which specializes in bankruptcy proceedings, often works with the USTP.
Workman said if USTP is working for CFPB, it could undermine its integrity. “I think it could adversely affect the integrity of the U.S. Trustee’s office.”
Wilkes declined to comment.
Jane Limprecht, a USTP spokesman, said that in the Morgan Drexen case, “The U.S. Trustee does not represent the Consumer Financial Protection Bureau.”
However, when asked if Wilkes had any direct contact with CFPB, she refused to respond, saying “we don’t comment on cases beyond the information on the public record.”
When asked if CFPB had any contact with USTP on the Morgan Drexen case, CFPB spokesman Michelle Person declined to comment, saying “we do not comment on pending litigation.”
Tom Fitton, president of the nonprofit government watchdog group Judicial Watch, which obtained the original CFPB data-mining documents under the Freedom of Information Act, said the agency was “out of control.”