Action in quo warranto by the State, on the relation of Duffy, Attorney General, against the Western Auto Supply Company for a judgment of ouster of the defendant from enjoying the franchise and privilege of engaging in the business of insurance within the state.-[Editorial Statement.]

Judgment of ouster.

[256] Syllabus by the Court.

1. The business of insurance is impressed with a public use, and its regulation, supervision and control are authorized and required to protect the general public and safeguard the interests of all concerned.

2. Insurance, as related to property and liability, is a contract by which one party promises, upon a consideration, to compensate or reimburse the other if he shall suffer loss from a specified cause, or to guarantee or indemnify or secure him against loss from that cause.

3. A warranty promises indemnity against defects in an article sold, while insurance indemnifies against loss or damage resulting from perils outside of and unrelated to defects in the article itself.

4. A contract whereby the vendor of automobile tires undertakes to guarantee the tires sold against defects in material or workmanship without limit as to time, mileage or service, and further expressly guarantees them for a specified period against ‘blowouts, cuts, bruises, rim-cuts, under-inflation, wheels out of alignment, faulty brakes or other road hazards that may render the tire unfit for further service (except fire or theft),’ or contracts to indemnify the purchaser ‘should the tire fail within the replacement period’ specified, without limitation as to cause of such ‘failure,’ is a contract ‘substantially amounting to insurance’ within the provisions of Section 665, General Code, which requires such guarantor or insurer to comply with the laws of the state authorizing and regulating the business of insurance.

[257] This is an action in quo warranto brought in this court by the attorney general against Western Auto Supply Company, a corporation organized under the laws of the state of Missouri and duly licensed to transact business in this state pursuant to the provisions of Section 8625-1 et seq., General Code. The respondent is engaged in the sale of automobile parts, accessories and equipment, and pneumatic rubber tires for automobiles, in various locations in the state. It is charged that, in connection with such sales of pneumatic rubber tires, the respondent guarantees them against defects in material or workmanship without limit as to time, mileage or service and, in addition thereto, guarantees such tires for a stipulated period against any condition which shall render the tire sold by the respondent unfit for further service, whether such condition results from defective work or material, from ordinary wear and tear, or from injuries however caused, and that the respondent enters into other agreements in and about the sale of such tires in the form of a guarantee which constitutes the exercise of a franchise, privilege or right in contravention of the insurance laws of this state. The relator seeks a judgment of ouster of such company from ‘enjoying the franchise and privilege of engaging in the business of insurance within this state and from doing each and all of the acts hereinabove complained of.’ Issue was made by answer and the case was submitted to the court upon an agreed statement of facts, which, being quite voluminous, will not be set out in detail but only the portions thereof essential to present the legal question involved.

The respondent operates retail stores in several cities in this state where, along with certain other articles of merchandise, it sells pneumatic rubber tires for automobiles, which tires bear various trade names and are of standard quality of material and workmanship. Two printed forms of so-called ‘guarantee’ were employed by the company. Both of them served to guarantee the tire sold for a specified period which varied with the grade of tire which was indicated by the trade name, and also depended upon whether the tire was to be used on a passenger or commercial car. One form was a specific guarantee for the period stated therein ‘against blowouts, cuts, bruises, rim-cuts, under-inflation, wheels out of alignment, faulty brakes or other road hazards that may render the tire unfit for further service (except fire and theft).’ It then provided that ‘In the event that the tire becomes unserviceable from the above conditions, we will (at our option) repair it free of charge, or replace it with a new tire of the same make at any of our stores, charging .....th of our current price for each month which has elapsed since the date of purchase. The new tire will be fully covered by our regular guarantee in effect at time of adjustment. Furthermore: every tire is guaranteed against defects in material or workmanship without limit as to time, mileage or service.’ In the blank spaces were inserted the trade name of the tire, the period covered by the guarantee and the fractional part thereof represented by a single month's wear.

The other form constituted a guarantee ‘to wear’ for not less than the period therein specified, and then provided as follows: ‘Should the tire fail within the replacement period, return it to the nearest Western Auto Store and we will either repair it free or replace it with a new tire, charging you a proportionate part of the current price for each month you have had the tire.'

In some instances these statements of guarantee were supplemented by written statements in catalogue or otherwise and by oral statements made to purchasers, but all in purpose and effect were substantially the same. It was further stipulated as follows: ‘All pneumatic tires, regardless of the quality of material and workmanship, are subject to failure in varying degrees by cuts, bruises, breaks, blow-outs, rim-cuts, underinflation, wheels out of alignment, faulty brakes and collision, as well as other road hazards not herein specifically enumerated.'

Herbert S. Duffy, Atty. Gen., Herman G. Kreinberg, of Cleveland, and C. G. Roetzel, of Akron, for relator.

Tolles, Hogsett & Ginn and P. J. Mulligan, all of Cleveland, and James M. Butler and Sol Morton Isaac, both of Columbus, for respondent.

MATTHIAS, Judge.

The sole question presented by the record is whether these oral or written agreements or statements or either of them as employed by the respondent in connection with its sale of automobile tires constitutes insurance. [258] It is contended by the relator that in the respect complained of the respondent is engaged in the business of insurance in violation of Section 665, General Code. Its provisions are as follows:

'No company, corporation, or association, whether organized in this state or elsewhere, shall engage either directly or indirectly in this state in the business of insurance, or enter into any contracts substantially amounting to insurance, or in any manner aid therein, or engage in the business of guaranteeing against liability, loss or damage, unless it is expressly authorized by the laws of this state, and the laws regulating it and applicable thereto, have been complied with.

'No person, firm, association, partnership, company and/or corporation shall publish or distribute, receive and print for publication or distribution any advertising matter wherein insurance business is solicited unless such advertiser has complied with the laws of this state regulating the business of insurance, and a certificate of such compliance is issued by the superintendent of insurance.

'Whoever violates the provisions of this section with reference to advertising, shall be deemed guilty of a misdemeanor and upon conviction thereof, shall be fined not less than one hundred dollars nor more than five hundred dollars for each offense.'

The relator concedes that any agreement in the sale of any product which is a warranty against defects in material or workmanship is not insurance, but contends that any agreement which goes further than to guarantee the material and workmanship is violative of the insurance laws of the state, and particularly of the section above quoted. Relator contends that the guarantee agreement is more than a warranty of material and workmanship because of the stipulation that tires are subject to injury and their failure may result from cuts, bruises, blowouts and other road hazards. Relator further contends that the special guarantee of material and workmanship, unlimited as to time, shows that the general guarantee is for another and different purpose and relates to injuries sustained from exterior causes, and also that the clause, 'should the tire fail within the replacement period,' with no limitation as to cause, shifts from the buyer to the seller the risk of accidental damage or loss which is independent of and entirely unrelated to quality of material or workmanship.

The contention of the respondent is that the agreement of warranty in either of the forms it uses in the sale of its tires is intended only as a guarantee of material and workmanship and provides a method of carrying out and performing its contract of guarantee which, from its experience, has proved most satisfactory to its customers and the trade generally. It argues that in the absence of some such pre-determined method of adjustment, upon the failure of a tire to render the service expected of it if free from defects of workmanship and material, disputes between the manufacturer or dealer and the customer as to the cause of such failure are constant and annoying, and that it was by reason of the difficulties of reaching satisfactory adjustments and for the purpose of eliminating these disputes and disagreements between dealer and customer and to preserve and promote good will of the users of a product which is subject to failure from various causes often difficult of ascertainment that the type of unconditional or road hazard guarantee was adopted as the fairest, most practical and satisfactory method available.

It argues also that these agreements of guaranty have to do only with the product sold by the respondent and are a part of the sale transaction between itself and its customer, and that the undertaking is limited to a guarantee that the tire will render service for a stipulated period and that in neither of the forms employed is there any promise of financial return to the purchaser in any event, but only to repair the damaged tire without charge or to replace it upon the payment of the specified proportion of the current price covering the remainder of the stipulated period of service guaranteed.

Are such agreements of guarantee permissible as incidental to the sale of automobile tires; or do they constitute 'the business of insurance' or 'the business of guaranteeing against liability, loss or damage' or are these agreements of guarantee 'contracts substantially amounting to insurance' within the purview of Section 665, General Code, and therefore inhibited?

What is insurance? 'Broadly defined, insurance is a contract by which one party, for a compensation called the premium, assumes particular risks of the other party and promises to pay to him or his nominee a certain or ascertainable sum of money on a specified contingency. As regards property and liability insurance, it is a contract by which one party promises on a consideration [259] to compensate or reimburse the other if he shall suffer loss from a specified cause, or to guarantee or indemnify or secure him against loss from that cause.' 32 Corpus Juris, 975. It is a contract 'to indemnify the insured against loss or damage to a certain property named in the policy, by reason of certain perils to which it may be exposed.' State ex rel. Sheets, Atty. Gen., v. Pittsburgh, C., C. & St. L. Ry. Co., 68 Ohio St. 9, 30, 67 N.E. 93, 96,64 L.R.A. 405, 96 Am.St.Rep. 635;State ex rel. Physicians' Defense Co. v. Laylin, Secy. of State, 73 Ohio St. 90, 97, 76 N.E. 567.

It seems well settled that to constitute insurance the promise need not be one for the payment of money, but may be its equivalent or some act of value to the insured upon the injury or destruction of the specified property. It is well settled, also that the business of insurance is impressed with a public use and consequently its regulation, supervision and control are authorized and required to protect the general public and safeguard the interests of all concerned. We are in accord with the suggestion that business and enterprise should not be unduly restricted or interfered with but should be permitted as great freedom in the conduct and management of their affairs as is consistent with the public interest and welfare. However, our conclusion of the issue presented in this case must be determined from the provisions of our own statutes and our especial inquiry is whether the guarantees in question constitute insurance or are contracts substantially amounting to insurance.

Numerous decisions have been cited which deal with conditions and transactions so at variance with those involved in this case that they are of little assistance in reaching a conclusion of the legal question before us. It is essential that the distinction between warranty and insurance be clearly stated. Section 8392, General Code, defines an express warranty as follows: 'Any affirmation of fact or any promise by the seller relating to the goods is an express warranty if the natural tendency of such affirmation or promise is to induce the buyer to purchase the goods, and if the buyer purchases the goods relying thereon.' A warranty promises indemnity against defects in the article sold, while insurance indemnifies against loss or damage resulting from perils outside of and unrelated to defects in the article itself.

The respondent, in one of its forms of contract, specifically guarantees 'against defects in material and workmanship without limit as to time, mileage or service'; but it goes further and undertakes to indemnify the owner of such tires against all road hazards (except fire and theft) which may render his tire unfit for service. The terms employed in the guarantee are sufficiently broad to include not only damage from blow-outs, cuts and bruises, whether resulting from under-inflation, faulty brakes or misalignment, but any and every hazard, including collisions, whether resulting from negligence of the owner or another. It clearly embraces insurance upon the property of the owner, such as is authorized by the provisions of Section 9556, General Code, to be written by companies required to comply with the insurance laws of the state.

The ultimate force and effect of the contract of indemnity embraced in this guarantee may be appreciated if extended to cover not only the automobile tire but the automobile itself. Surely no one would contend that an undertaking by an automobile manufacturer to replace an automobile damaged or destroyed (excepting only by fire and theft) within a specified period after its purchase is not a contract to reimburse one if he suffers loss from a specified cause or to indemnify him against such loss.

The fact that such contract of indemnity is made only with the purchaser of the indemnitor's product does not relieve the transaction of its insurance character. When the sale is complete, title passes and the property which is the subject of insurance of indemnity belongs to the purchaser. If the contracts of indemnity involved here are not violative of the insurance laws, then every company may, in consideration of the purchase price paid therefor, furnish its product and also undertake to insure it against all hazards for a specified period. Even if such contract is an incident in the sale of merchandise and its use therein does not constitute the business of insurance, it in effect is a contract 'substantially amounting to insurance' within the restrictive provisions of Section 665, General Code.

We are unable to discern any essential difference in the character or effect of the various forms of agreement of indemnity made by the respondent and advertised in its catalogue. Each constitutes an undertaking to indemnify against failure from any cause except fire or theft and therefore covers loss or damage resulting from any and every hazard of travel, not excepting negligence of the automobile driver or another. It is [260] substantially an unconditional promise of indemnity, and that is insurance.

It follows that a judgment of ouster should issue in all respects as prayed for.

Judgment of ouster.

WEYGANDT, C. J., and DAY, ZIMMERMAN, WILLIAMS, MYERS, and GORMAN, JJ., concur.

ORDER GRANTING SUMMARY JUDGMENT

WILLIAM H. ALSUP, Magistrate Judge.

INTRODUCTION

In this action involving the Bank Secrecy Act, the government moves for summary judgment. The motion is GRANTED.

STATEMENT

The following facts are uncontested. During 2006, pro se defendant John Hom gambled online through internet accounts with PokerStars.com and PartyPoker.com (Hendon Decl., Exh. 5 at 1-2). In 2007, defendant continued to gamble online through his PokerStars account (Hendon Decl., Exh. 5 at 2). Both poker websites allowed defendant to deposit money or make withdrawals.

Defendant used his account at FirePay.com, an online financial organization that receives, holds, and pays funds on behalf of its customers, to fund his online PokerStars and PartyPoker accounts. He deposited money into his FirePay account via his domestic Wells Fargo bank account or other online financial institutions, such as Western Union. In 2006, FirePay ceased allowing United States customers to transfer funds from their FirePay accounts to offshore internet gambling sites, so defendant used Western Union and other online financial institutions to transfer money from his Wells Fargo bank account to his online poker accounts (Hom Dep. at 38, 40, 45-46, 75, 110, 116, 121-24). Defendant admits that at some points in both 2006 and 2007, the aggregate amount of funds in his FirePay, PokerStars, and PartyPoker accounts exceeded $10,000 in United States currency (Hendon Decl., Exh. 5 at 4).

After the Internal Revenue Service detected discrepancies in defendant's federal income tax returns for 2006 and 2007, it opened a Foreign Bank and Financial Accounts Report ("FBAR") examination (Hendon Decl., Exh. 15). Individuals must file an FBAR with respect to foreign financial accounts exceeding $10,000 maintained during the previous year by June 30. 31 C.F.R. 103.27(c). Defendant did not file his 2006 or 2007 FBARs until June 26, 2010 (Hendon Decl., Exh. 5, at 4). Moreover, his submitted FBAR for 2006 did not include his FirePay account (Hom Dep. at 138).

On September 20, 2011, the IRS assessed defendant with civil penalties under 31 U.S.C. 5321(a)(5) for his non-willful failure to submit FBARs, as required by 31 U.S.C. 5314, regarding his interest in his FirePay, PokerStars, and PartyPoker accounts. The IRS assessed a $30,000 penalty for 2006, which included a $10,000 penalty for each of the three accounts, and a $10,000 penalty for 2007 based solely on defendant's PokerStars account (Hendon Decl., Exh. 5, at 5). Interest and penalties continue to accrue until paid in full pursuant to 31 U.S.C. 3717. This order follows full briefing and oral argument. The Court has tried to appoint a free lawyer for defendant — but no one would take the case.

ANALYSIS

The Bank Secrecy Act of 1970 was enacted "to require certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings." United States v. Clines, 958 F.2d 578, 581 (4th Cir. 1992) (citations omitted), cert. denied, 505 U.S. 1205 (1992). To accomplish this end, the Act established reporting requirements for transactions involving foreign financial agencies. 31 U.S.C. 5314. The provisions of the Act relating to foreign financial transactions resulted from the concern of Congress that foreign financial institutions located in jurisdictions having laws of secrecy with respect to bank activity were being used extensively to violate or evade domestic criminal, tax, and regulatory requirements. California Bankers Ass'n v. Shultz, 416 U.S. 21, 27 (1974). The Act explicitly empowers the Secretary of the Treasury to determine the method in which covered persons should disclose their relationships or accounts with a foreign financial agency. 31 U.S.C. 5314.

According to the pertinent regulations, each person who is subject to the jurisdiction of the United States and has a "financial interest in, or signature authority over, a bank, securities, or other financial account in a foreign country" is required to report such relationship to the Commissioner for each year in which such relationship exists and provide this information in a reporting form prescribed by the Secretary to be filed by such persons. 31 C.F.R. 103.24. "Reports required to be filed by [Section] 103.24 shall be filed with the Commissioner of Internal Revenue on or before June 30 of each calendar year with respect to foreign financial accounts exceeding $10,000 maintained during the previous calendar year." 31 C.F.R. 103.27(c). If a person subject to the jurisdiction of the United States fails to submit an FBAR to the IRS when required to do so under 31 U.S.C. 5314, the Secretary of the Treasury may impose civil penalties. 31 U.S.C. 5321. In 2011, 31 C.F.R. 103.24 was amended and renumbered 31 C.F.R 1010.350. Section 103.24 was the version of the regulation in effect in 2006 and 2007, and the 2011 amendments did not fundamentally alter any of the reporting obligations.

For non-willful violations occurring after October 22, 2004, the amount of the civil penalty shall not exceed $10,000. 31 U.S.C. 5321(a)(5)(B). No penalty shall be imposed, however, if the violation was due to reasonable cause and the amount of the transaction or the balance in the account at the time of the transaction was properly reported. Ibid.

In sum, an individual must file an FBAR for a reporting year if: (1) he or she is a United States person; (2) he or she has a financial interest in, or signature or other authority over, a bank, securities, or other financial account; (3) the bank, securities, or other financial account is in a foreign country; and (4) the aggregate amount in the accounts exceeds $10,000 in U.S. currency at any time during the year.

1. UNITED STATES PERSON.

The first element is whether the individual is a "United States person." As both sides agree that defendant is a United States citizen "subject to the jurisdiction of the United States," this element is met (Opp. at 1). 31 C.F.R. 103.24.

2. INTEREST IN "A BANK, SECURITIES, OR OTHER FINANCIAL ACCOUNT."

The second element is whether defendant had a financial interest in, or authority over, a bank, securities, or other financial account in 2006 or 2007. Defendant does not contest in his opposition that he had a financial interest in his online FirePay, PokerStars, and PartyPoker accounts in 2006 and his online PokerStars account in 2007. Rather, defendant argues that those accounts are not a "bank or other financial accounts" for purposes of the applicable statute and regulations.

While our court of appeals has not yet answered what constitutes "other financial account[s]" under 31 C.F.R. 103.24, the Court of Appeals for the Fourth Circuit found that an account with a financial agency is a financial account under Section 5314. Clines, 958 F.2d at 582. Under Section 5312(a)(1), a "person acting for a person" as a "financial institution" or a person who is "acting in a similar way related to money" is considered a "financial agency." Section 5312(a)(2) lists 26 different types of entities that may qualify as a "financial institution." Based on the breadth of the definition, our court of appeals has held that "the term `financial institution' is to be given a broad definition." United States v. Dela Espriella, 781 F.2d 1432, 1436 (9th Cir. 1986). The government claims that FirePay, PokerStars, and PartyPoker are all financial institutions because they function as "commercial bank[s]." Section 5312(a)(2)(B). The Fourth Circuit in Clines found that "[b]y holding funds for third parties and disbursing them at their direction, [the organization at issue] functioned as a bank [under Section 5314]." Clines, 958 F.2d at 582 (emphasis added).

So too here. Defendant admits that he opened up all three accounts in his name, controlled access to the accounts, deposited money into the accounts, withdrew or transferred money from the accounts to other entities at will, and could carry a balance on the accounts (Hom Dep. at 38, 40, 45-46, 110, 116). As FirePay, PokerStars, and PartyPoker functioned as banks, defendant's online accounts with them are reportable.

Defendant alternatively argues that his online accounts are not "other accounts" according to the current regulations. The current regulations define a reportable account as including "bank account[s] . . . [which means] a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking." 31 C.F.R. 1010.350. As explained above, FirePay, PokerStars, and PartyPoker function as institutions engaged in the business of banking. Accordingly, defendant's accounts are reportable even under the current regulations.

3. THE FINANCIAL ACCOUNT IS IN A FOREIGN COUNTRY.

The third element is whether defendant's three financial accounts are located in foreign countries. The government argues that "located in" refers to where the financial institution that created and managed the account is located, whereas defendant argues that "located in" refers to the geographic location of the funds. As defendant has provided some evidence to suggest that PokerStars has several dozen bank accounts located in the United States, he asserts that "there is a real possibility that Defendant's funds are in an American bank" (Opp. at 2-3).

This order agrees with the government. It is irrelevant where PokerStars, FirePay, or PartyPoker opened their bank accounts. Those accounts belong to them, not defendant. Rather, his accounts are digital constructs that these financial institutions, all located outside of the United States, created and maintained on his behalf. FirePay is located in and regulated by the United Kingdom (Hendon Supp. Decl., Exh 19). PokerStars and its parent company, Rational Entertainment Enterprises Ltd., are licensed and regulated by the government of the Isle of Man (Hendon Supp. Decl., Exh. 20). PartyPoker and its parent company, PartyGaming, are licenced, regulated, and headquartered in Gibraltar (Hendon Supp. Decl., Exh. 26). These are the locations of his digital accounts, regardless of where the three companies place their own funds.

The Financial Crimes Enforcement Network of the Department of the Treasury has recently provided more guidance in its response to comments on its notice of proposed 2011 amendments to the Bank Secrecy Act, stating, "an account is not a foreign account under the FBAR if it is maintained with a financial institution located in the United States." Final Regulations, 76 Fed. Reg. 10,235 (Feb. 24, 2011) (to be codified at 31 C.F.R. pt. 1010) (emphasis added); see also Michael I. Saltzman & Leslie Book, IRS Prac. & Proc. S7A-19 (Thompson Reuters ed., rev. 2d ed. Supp. 2014). The Department of Treasury's determination merits Chevron deference. Although the above statement is less than formal, Congress clearly delegated to the Department of the Treasury broad regulatory authority under 31 U.S.C. 5314 and its interpretation was issued with a "lawmaking pretense" via its notice of rulemaking. Marmolejo-Campos v. Holder, 558 F.3d 903, 908-10 (9th Cir. 2009). Here, Congress did not directly address the precise question at issue on the face of the statute and the Department of Treasury reasonably interpreted the statute in finding that an account's location is determined by the location of its host institution, not where the physical money might be stored after it is sent to financial institution. Chevron v. NRDC, 467 U.S. 837, 843, 865 (1984).

In support of his position, defendant cites to the general instructions from the 2010 FBAR form he tardily filed, which stated, "[t]he geographic location of the account, not the nationality of the financial institution in which the account is found determines whether it is an account in a foreign country." (Hendon Decl., Exh. 17 at HOM000404). That argument is unconvincing. The instructions contained within the FBAR form, as interpreted by defendant, have no legal weight because "interpretation by taxpayers of the language used in government pamphlets [cannot] act as an estoppel on the government, nor change the meaning of taxing statutes." Adler v. Commissioner, 330 F.2d 91, 93 (9th Cir. 1964). And even if the instructions had legal weight — even if they were determinative — there is no suggestion here that FirePay, PokerStars, and PartyPoker opened and maintained the defendant's accounts in the United States.

As defendant concedes, PokerStars, FirePay, and PartyPoker are all licensed and operated in foreign countries (Br. at 2, Dkt. No. 41). These foreign countries are where the companies created and maintained defendant's online accounts. Accordingly, this order finds that defendant's accounts are all located in foreign countries.

4. $10,000 REQUIREMENT.

The fourth element is that the aggregate amount in the accounts exceeds $10,000 in U.S. currency at any time during the reporting year. Here, defendant admits that there was, in aggregate, at least $10,000 at some time during both 2006 and 2007 in his online PokerStars, FirePay, or PartyPoker accounts (Hendon Decl., Exh. 5 at 4). Accordingly, this element is met.

5. AFFIRMATIVE DEFENSES.

Defendant argues that even if he is liable, the amount of penalty assessed was too high because it might contravene the "Internal Revenue Manual" (Opp. at 3). Our court of appeals, however, has foreclosed that argument by holding that "[t]he Internal Revenue Manual does not have the force of law and does not confer rights on taxpayers." Fargo v. Comm'r of Internal Revenue, 447 F.3d 706, 713 (9th Cir. 2006). Thus, defendant's argument fails.

Defendant also requests that ruling on the government's summary judgment motion be delayed to allow further discovery. Yet, defendant has not identified any additional discovery or facts that might preclude summary judgment. Panatronic USA v. AT&T; Corp., 287 F.3d 840, 846 (9th Cir. 2002). Accordingly, defendant's request is DENIED.

6. JUDICIAL NOTICE.

The government seeks judicial notice of factual documents found on the internet. Defendant opposes. While our court of appeals has not yet ruled on whether information found on the internet may be judicially noticed, other circuit courts have judicially noticed reliable internet sources, such as government websites. O'Toole v. Northrop Grumman Corp., 499 F.3d 1218, 1225 (10th Cir. 2007); Coleman v. Dretke, 409 F.3d 665, 667 (5th Cir. 2005) (per curiam); Denius v. Dunlap, 330 F.3d 919, 926-27 (7th Cir. 2003). While parties are certainly not entitled to judicial notice of all internet sources, several judges in this district have judicially noticed information found on official government webpages or other reliable internet sources. See, e.g., Paralyzed Veterans of Am. v. McPherson, 2008 U.S. Dist. LEXIS 69542, at *17-18 (N.D. Cal. Sept. 8, 2008) (Judge Saundra Brown Armstrong); Sears v. County of Monterey, 2013 U.S. Dist. LEXIS 120401, at *12-13 (N.D. Cal. Aug. 22, 2013) (Judge Lucy Koh); Gaudin v. Saxon Mortg. Servs., 2013 U.S. Dist. LEXIS 110727, at *2-3 (N.D. Cal. Aug. 3, 2013) (Judge Jon Tigar).

Accordingly, the government's request for judicial notice that FirePay, PokerStars, and PartyPoker are all foreign entities is GRANTED.

CONCLUSION

For the reasons stated above, the government's motion for summary judgment is GRANTED.

The government shall file a brief by June 10, 2014, no longer than five pages, detailing the amount of money owned by defendant up to June 10. Final judgment will be entered afterwards.

IT IS SO ORDERED.

MEMORANDUM OPINION AND ORDER

JEFFREY COLE, District Judge.

INTRODUCTION

The Securities Exchange Commission ("SEC") claims that the defendants engaged in an international boiler room scheme targeting some 1400 foreign investors. The alleged scheme took in approximately $44 million primarily through the sale of penny stock to foreign purchasers. Of the proceeds, the defendants skimmed 60% as commissions for themselves and the foreign boiler room operators whom they hired. The companies the investors were investing in realized less than 40% of the proceeds. The SEC says that the investors never saw the distribution or escrow agreements that broke down the distribution percentages. They did see the stock purchase agreements, but those documents represented that there were no commissions and that only 1% of an investment didn't go to the companies issuing the stock, but rather was for a nominal transaction fee. The foreign boiler room operators allegedly used high pressure sales tactics, false identities, and fraudulent misrepresentations to make sales while the defendants distanced themselves, concealing the extent of their involvement and claiming ignorance of the sales process.

One of the stocks being sold was Integrated Biodiesel Industries, Ltd. ("IBI"). Sales of IBI stock in this purported scheme accounted for about $15.2 million of the $44 million taken in, or approximately 35%.

The defendants are charged with having violated Section 10(b) of the Exchange Act which make it:

unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange ... [t]o use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [Securities and Exchange] Commission may prescribe....

15 U.S.C. 78j(b).

The problem with the 10(b) charges, according to the defendants, is that the issuers of the stock were foreign, the investors were foreign, and the stock sales transactions were foreign. As a consequence, say the defendants, certain counts against them cannot survive Morrison v. National Australia Bank Ltd., ___ U.S. ___, 130 S.Ct. 2869 (2010), which held that the reach of Section 10(b) of the Exchange Act is not extraterritorial. The statute protects "only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which § 10(b) applies." Id. at 2884. (Emphasis supplied). The defendants claim these were not "domestic transactions," and have moved for partial summary judgment on those claims relating to IBI.

The defendants also contend that Morrison applies to the claim in the Second Amended Complaint that charges that they failed to register as brokers under Section 15(a)'s registration requirement. Hence, they seek summary judgment on Count V.

I.

FACTUAL BACKGROUND

A.

The SEC's Theory of the Case

The facts surrounding this case and the scheme alleged in the SEC's complaint are set forth above, supra at 1, and in Judge Lefkow's earlier opinions. See SEC v. Benger, 697 F.Supp.2d 932 (N.D.Ill. 2010); SEC v. Benger, 2090 WL 1851186 (N.D.Ill. 2009). The original defendants could be segregated into three distinct groups. Stefan H. Benger ("Benger"), SHB Capital, Inc. ("SHB"), Jason B. Meyers ("Meyers"), International Capital Financial Resources, LLC ("International Capital") were collectively referred to as the Distribution Agents. Benger is the president of SHB and Meyers is the president of International Capital. The Distribution Agents are all Illinois citizens, who operated out of offices in Chicago. From there, they entered into distribution agreements with certain issuers of stock to sell shares to foreign investors. The Distribution Agents hired selling agents in various foreign countries, who, it is alleged, targeted elderly citizens, and for want of a better word, scammed them through the use of boiler room tactics. The selling agents operated outside the United States in the countries where the prospective purchasers lived.

The Distribution Agents were to receive as commissions in excess of 60% of the funds invested by the foreign purchasers. Philip T. Powers ("Powers"), Handler, Thayer & Duggan, LLC ("HTD"), Frank I. Reinschreiber ("Reinschreiber"), and Global Financial Management ("GFM"), are collectively referred to as the Escrow Agents.^[1] The SEC charges that they assisted the Distribution Agents by effectuating the sales of stock by serving as a clearing house for the receipt of the foreign investors' offers to purchase the stock and the payment for those shares and then forwarding the funds (after commissions were deducted) to IBI in Brazil. IBI would then send the stock certificates to the Escrow Agents in Chicago, who in turn would transmit the certificates to the foreign investors. CTA and Von Hase, collectively referred to as Relief Defendants, received some of those proceeds.

The Distribution Agents, through their foreign agents, offered penny stocks issued by China Voice Holding Corp., Integrated Biodiesel Industries, Ltd., Biomoda, Inc., Pharma Holdings Inc., World Energy Solutions, Inc., Revolutions Medical Corp., Earthsearch Communications, Inc., and Essential Innovations Technology (collectively, "Issuers"). All of the issuers are incorporated in or have administrative offices within the United States. The Distribution Agents entered into distribution agreements with each Issuer. The distribution agreements provided that the Distribution Agents would offer the Issuers' stock to foreign investors in exchange for sales commissions exceeding 60% of the proceeds of the investment. Each distribution agreement included an escrow agreement between one of the Escrow Agents and issuers that outlined the role of the Escrow Agent.

The Escrow Agreements provided that the specified Escrow Agent was to be compensated in the amount of $5,000 or 1% of the gross proceeds of the sale.

The Issuer was to receive an amount equal to 37 1/2 % of the proceeds from each accepted offer with the balance to be paid to the Distribution Agent. The Issuer was responsible for the costs of the Escrow Agent and any other costs and expenses of the Placement. The Distribution Agent was responsible for all other costs of the Distribution including the fees of any subagents, introducing parties or finders.

As noted earlier, the Distribution Agents did not offer the Issuers' stock directly to foreign investors. Rather, they retained foreign sales agents to make cold calls to prospective investors and to employ high-pressure tactics to secure their investment. The SEC calls them "boiler room agents." As Judge Lefkow explained in her opinions, the boiler room agents targeted elderly British and European citizens. Although many of the boiler room agents were on warning lists compiled by the United Kingdom's Financial Services Authority, they represented to prospective investors that they worked for legitimate brokerage firms in the United Kingdom. The high-pressure tactics used included falsely representing that the price of the stock being offered was about to rise sharply, urging potential investors to liquidate savings and other investments, purporting to offer discounted pricing, and, on at least one occasion, threatening to sue investors if they did not purchase the full amount of shares initially agreed upon. During the calls, the boiler room agents either failed to disclose that commissions in excess of 60 percent would be charged or told prospective investors that only nominal transaction fees would be charged.

B.

The Facts As Revealed In The Summary Judgment Submissions

IBI was formed under the laws of the sovereign country of St. Vincent and Grenadines on February 22, 2007. (Defendants' Local Rule 56.1 Statement, ¶ 6; Plaintiff's Response to Defendants' Local Rule 56.1 Statement, ¶ 6). Its principal place of business is Sao Paulo, Brazil. (Defendants' Local Rule 56.1 Statement, ¶ 7; Plaintiff's Response to Defendants' Local Rule 56.1 Statement, ¶ 7). Its only contact with the United States appears to have been a mailbox in Baltimore, Maryland. (Plaintiff's Local Rule 56.1 Statement of Additional Facts, ¶ 5; Defendants' Reply to Plaintiff's Statement, ¶ 5). It used the mailbox address in its communications with investors. (Plaintiff's Response to Defendants' Local Rule 56.1 Statement, ¶ 7; Plaintiff's Ex. R). IBI announced it would be opening an office in a January 2008 press release (Plaintiff's Ex. I), but it never opened an office or entered into a lease for space. (Defendants' Reply to Plaintiff's Statement, ¶ 5; Defendants' Ex. B).

No shares of IBI stock have ever been registered with the SEC, ever traded on any market or stock exchange in the United States, or ever quoted on any quotation facility, including without limitation the NASDAQ Bulletin Board or the Pink Sheets. (Defendants' Local Rule 56.1 Statement, ¶ 8; Plaintiff's Response to Defendants' Local Rule 56.1 Statement, ¶ 6). None of IBI's shareholders currently are, or have ever been, citizens or residents of the United States. (Defendants' Local Rule 56.1 Statement, ¶ 9; Plaintiff's Response to Defendants' Local Rule 56.1 Statement, ¶ 9).

IBI engaged Handler, Thayer & Duggan, LLC and later Global Financial Management, LLC to act as its escrow agent in connection with the sale of its shares in 2007 and 2008. (Defendants' Local Rule 56.1 Statement, ¶ 10; Plaintiff's Response to Defendants' Local Rule 56.1 Statement, ¶ 10). HTD was IBI's escrow agent from about June 2007 until May or June 2008. Global Financial Management, LLC became IBI's escrow agent on or about May 20, 2008. (Defendants' Local Rule 56.1 Statement, ¶ 11; Plaintiff's Response to Defendants' Local Rule 56.1 Statement, ¶ 11). Offers to purchase shares of IBI during the period 2007 to 2008 were set forth in a written agreement called the Stock Purchase Agreement ("SPA"). (Defendants' Local Rule 56.1 Statement, ¶ 12; Plaintiff's Response to Defendants' Local Rule 56.1 Statement, ¶ 12). The SPA explained that the share purchase was "an offshore transaction to be consummated and closed outside the U.S. . . . ." (Defendants' Local Rule 56.1 Statement, Ex. E, §1, ¶ 1). Under the terms of the SPA, stock purchases were made as follows:

Price denominated in dollars to be transferred to the Escrow Agent by wire transfer together with this Agreement, properly executed. The offer to purchase contained in this Agreement once submitted to the Escrow Agent will become irrevocable and binding subject only to acceptance by the Company. A certificate representing the Shares will be issued by the Company with 21days of acceptance of this Agreement and will be deposited with the Escrow Agent for transmittal to the Buyer upon transfer of the Total Consideration to the Company, (emphasis supplied). (Exhibit E — Form of IBI-SPA).

(Defendants' Local Rule 56.1 Statement, ¶ 13; Plaintiff's Response to Defendants' Local Rule 56.1 Statement, ¶ 13).

All offers to purchase shares of IBI were submitted to IBI's escrow agent (HTD or GFM) by buyers from their country of residence which was, in all cases, outside of the United States. (Defendants' Local Rule 56.1 Statement, ¶ 14; Plaintiff's Response to Defendants' Local Rule 56.1 Statement, ¶ 14). None of the purchasers were parties to the Escrow Agreement between IBI and GFM. The defendants correctly contend that they had no authority to accept or reject an offer submitted by a potential buyer of IBI shares and that all offers to purchase were subject to acceptance by IBI at its offices in Sao Paulo, Brazil. (Defendants' Local Rule 56.1 Statement, ¶ 15-16; Defendants' Ex. C, Powers Dec. ¶ 10; Ex. G, IBI/HTD Escrow Agreement; Ex. H, IBI/GFM Escrow Agreement). Of course, the escrow agreement defined the duties and responsibilities of the escrow agent, Meyers v. Rockford Systems, Inc., 254 Ill.App.3d 56, 58, 625 N.E.2d 916, 918 (2nd Dist.1993), who had no discretion to deviate from his instructions. Home Loan Center, Inc. v. Flanagan, 2012 WL 1108132, 5 (N.D.Ill. 2012).

The SEC argues that, while the offers were subject to IBI's acceptance, there is nothing in the Share Purchase Agreement that requires acceptance to be made in Brazil. (Plaintiff's Response to Defendants' Local Rule 56.1 Statement, ¶ 16). That, is not quite accurate, but more importantly, is quite beside the point. The question is whether, under the facts of this case, the acceptances were, in fact, made in Brazil. Or more to the point, the question is, were any acceptances made in the United States, and the answer is no. The chairman and chief executive officer of IBI, Marcelo di Miranda Lopes, has declared under the penalty of perjury that reviews of offers to purchase took place in his office in Sao Paulo. (Defendants' Local Rule 56.1 Statement, Ex. B, ¶ 12). There is no evidence in the record to contradict that statement.^[2]

The SEC adds that, under the terms of the Escrow Agreement and the SPA, the Escrow Agent Defendants were authorized to receive offers and send the stock certificates to investors on behalf of IBI, and that this operated as IBI's acceptance of the offers to purchase contained in the SPAs. (Plaintiff's Response to Defendants' Local Rule 56.1 Statement, ¶ 15; Defendants' Ex. C, Powers Dec., ¶ 5). But the evidence the SEC cites in support of this legal argument — Defendants' Ex. C, Powers Dec., ¶ 5; Defendants' Exs. G & H, Escrow Agreements, Recitals; Defendants' Ex. E, SPA, ¶ 2 — says nothing about acceptance being contingent upon or effectuated by the Escrow Agents sending share certificates to the buyers.

The Defendants also contend that neither HTD nor Mr. Powers had any authority to accept or reject any offer to purchase or vary the terms of any such offer and that that right was solely reserved to IBI. Their only roles in the share purchase transactions were to receive each potential purchaser's SPA; maintain an escrow account on behalf of IBI pursuant to a written escrow agreement for funds received from potential purchasers; account for the funds received; disburse funds held in the IBI escrow account as directed by IBI in the escrow agreement and forward the stock certificate for shares purchased by a new IBI shareholder to them at their address which in each case was outside of the United States. While GFM acted as escrow agent, its role was substantially the same as HTD's was.

The SEC adds that Mr. Powers, on behalf of HTD, also worked with Defendants to prepare template contracts used in Defendants' stock offerings, and that he claimed that the Escrow Agents were "charged with protecting the rights of both the new shareholders and the Company." (Defendants' Local Rule 56.1 Statement, ¶ 17; Plaintiff's Response to Defendants' Local Rule 56.1 Statement, ¶ 17). This, too, is irrelevant under controlling Supreme Court precedent, as we shall see.

The SEC's counter is that HTD and Mr. Powers had authority to receive offers to purchase submitted by investors pursuant to terms of the Escrow Agreements and the SPAs. (Defendants' Local Rule 56.1 Statement, ¶ 18; Response to Defendants' Local Rule 56.1 Statement, ¶ 18).

III.

ANALYSIS

A.

Summary Judgment

Summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact." Fed.R.Civ.P. 56(a). While a party moving for summary judgment need not introduce evidence rendering its opponents' claims altogether impossible, the movant "always bears the initial responsibility" of showing "the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Seng-Tiong Ho v. Taflove, 648 F.3d 489, 496-97 (7th Cir.2011); Stevens v. Housing Authority of South Bend, Indiana, 663 F.3d 300, 305 (7th Cir.2011). This is done by "identifying those portions of `the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,' which it believes demonstrate the absence of a genuine issue of material fact." Celotex, 477 U.S. at 324; Logan v. Commercial Union Insurance Co., 96 F.3d 971, 979 (7th Cir.1996) ("Only after the movant has articulated with references to the record and to the law specific reasons why it believes there is no genuine issue of material fact must the nonmovant present evidence sufficient to demonstrate an issue for trial."). Facts are viewed in the light most favorable to the nonmovant, drawing all reasonable inferences in their favor. Anderson v. Donahoe, 699 F.3d 989, 994 (7th Cir.2012); Ault v. Speicher, 634 F.3d 942, 945 (7th Cir.2011).

Once "a properly supported motion for summary judgment is made," the nonmoving party bears the burden to "set forth specific facts showing that there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (internal quotation marks and citation omitted); Seng-Tiong, 648 F.3d at 496-97. Notably, any party asserting that a fact is or is not genuinely disputed must cite "to particular parts of materials in the record," or show that "an adverse party cannot produce admissible evidence to support the fact." Fed.R.Civ.P. 56(c)(1). Thus, "a party opposing a properly supported motion for summary judgment may not rest upon mere allegation or denials of his pleading." Anderson, 477 U.S. at 256; Seng-Tiong, 648 F.3d at 497. Additionally, a "court need consider only the cited materials." Fed.R.Civ.P. 56(c)(3).

B.

Summary Judgment Under Local Rule 56.1

As always, the facts underlying this summary judgment proceeding are drawn from the parties' Local Rule 56.1 submissions. "For litigants appearing in the Northern District of Illinois, the Rule 56.1 statement is a critical, and required, component of a litigant's response to a motion for summary judgment." Sojka v. Bovis Lend Lease, Inc., 686 F.3d 394, ___ (7th Cir. 2012). The party opposing summary judgment must respond to the movant's statement of proposed material facts, and that response must contain both "a response to each numbered paragraph in the moving party's statement," Local Rule 56.1(b)(3)(B), and a separate statement "consisting of short numbered paragraphs, of any additional facts that require the denial of summary judgment," Local Rule 56.1(b)(3)(C); Sojka, 686 F.3d at ___; Ciomber v. Cooperative Plus, Inc., 527 F.3d 635, 643 (7th Cir. 2008). Each response, and each asserted fact, must be supported with a reference to the record. Local Rule 56.1(b)(3)(B); Cracco v. Vitran Exp., Inc., 559 F.3d 625, 632 (7th Cir. 2009); F.T.C. v. Bay Area Business Council, Inc., 423 F.3d 627, 633 (7th Cir. 2005).

The district court is entitled to expect strict compliance with the rule. Shaffer v. American Medical Ass'n, 662 F.3d 439, 442 (7th Cir. 2011); Benuzzi v. Board of Educ. of City of Chicago, 647 F.3d 652, 654 (7th Cir. 2011). Responses and facts that are not set out and appropriately supported in an opponent's Rule 56.1 response will not be considered, see Shaffer, 662 F.3d at 442 (court need not consider any fact not contained in the parties' Rule 56.1 statements); Bay Area Business Council, 423 F.3d at 633 (court properly disregarded affidavits not referenced in 56.1 submission), and the movant's version of the facts — if compliant with the rule — will be deemed admitted. Local Rule 56.1(b)(3)(C); Rao v. BP Products North America, Inc., 589 F.3d 389, 393 (7th Cir. 2009); Montano v. City of Chicago, 535 F.3d 558, 569 (7th Cir. 2008); Cracco, 559 F.3d at 632.

C.

The Application Of Morrison To The Facts Of This Case

From the foregoing facts, it is clear that IBI shares were not quoted on any domestic exchange; thus, the question is whether, under Morrison, the IBI share purchases were "domestic transactions." ___ U.S. at ___, 130 S.Ct. at 2884. For, "the focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States. Section 10(b) does not punish deceptive conduct, but only deceptive conduct in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered.... Those purchase-and-sale transactions are the objects of the statute's solicitude. It is those transactions that the statute seeks to `regulate;' it is parties or prospective parties to those transactions that the statute seeks to `protec[t].' And...only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which § 10(b) applies."130 S.Ct. at 2883. (Citations omitted).

Morrison offered some guidance as to what constitutes a "domestic transaction." It specifically rejected the argument that the Act extends to cases where — not unlike here — "the fraud involves significant conduct in the United States that is material to the fraud's success." 130 S.Ct. at 2886. Instead, the Court focused on the sale, explaining that "[w]ith regard to securities not registered on domestic exchanges, the exclusive focus [is] on domestic purchases and sales . . . 130 S.Ct. at 2885 (emphasis in original). The Court, speaking through Justice Scalia, acknowledged that:

it is a rare case of prohibited extraterritorial application that lacks all contact with the territory of the United States. But the presumption against extraterritorial application would be a craven watchdog indeed if it retreated to its kennel whenever some domestic activity is involved in the case.

130 S.Ct. at 2884. (Emphasis in original).

And there was, indeed, domestic activity aplenty in Morrison. The case involved a class action suit by foreign investors brought against an Australian bank alleging securities fraud in connection with foreign transactions. The Australian bank had purchased a Florida mortgage servicing company whose business was receiving fees for the servicing of mortgages. The investors claimed that the Florida company manipulated its financial models to make its servicing rights appear more valuable than they really were, and that rosy picture appeared in the Australian Bank's financial statements. The Australian bank was aware of the manipulation but did nothing about. Nothing, that is, until later when it wrote down the value of the Florida company's assets significantly thereby causing its stock — which the investors had bought when the picture was rosy — to tumble. 130 S.Ct. at 2875-76. But, even though the deception had its home in the United States, the Act did not apply because the stock purchases occurred outside the country. 130 S.Ct. at 2883-86. Financial finagling in Florida was not enough to cow Judge's Scalia's rottweiler.

1.

The Section 10(b) Claims

In the SEC's view, the alleged fraud in this case has a lot more domestic moving parts than in Morrison: All the movants were in the United States and all of their conduct, which the SEC has charged aided and abetted the fraud (i.e. putting together the stock purchase agreements, receiving and distributing the proceeds, etc.), and without which the fraud could not have succeeded, occurred here. If the Second Amended Complaint does not exactly charge that had the investors known of the arguably disproportionately large, secret commissions going to the movants, they would not have purchased the stock, it is surely a reasonable inference. But, the question under Morrison is where the stock purchase transaction occurred not the locus of the bulk of the fraudulent activity. Indeed, the Court could not have been clearer in rejecting what is effectively the SEC's central thesis in this case, namely, that there is a violation under Section 10(b) where the charged fraud involves significant conduct in the United States:

The Solicitor General suggests a different test, which petitioners also endorse: "[A] transnational securities fraud violates 10(b) when the fraud involves significant conduct in the United States that is material to the fraud's success." Brief for United States as Amicus Curiae 16; see Brief for Petitioners 26. Neither the Solicitor General nor petitioners provide any textual support for this test. The Solicitor General sets forth a number of purposes such a test would serve: achieving a high standard of business ethics in the securities industry, ensuring honest securities markets and thereby promoting investor confidence, and preventing the United States from becoming a "Barbary Coast" for malefactors perpetrating frauds in foreign markets. Brief for United States as Amicus Curiae 16-17. But it provides no textual support for the last of these purposes, or for the first two as applied to the foreign securities industry and securities markets abroad. It is our function to give the statute the effect its language suggests, however modest that may be; not to extend it to admirable purposes it might be used to achieve.

If, moreover, one is to be attracted by the desirable consequences of the "significant and material conduct" test, one should also be repulsed by its adverse consequences. While there is no reason to believe that the United States has become the Barbary Coast for those perpetrating frauds on foreign securities markets, some fear that it has become the Shangri-La of class-action litigation for lawyers representing those allegedly cheated in foreign securities markets.

Morrison, 130 S.Ct. at 2886.

In sum, "`Section 10(b)...punishes not all acts of deception, but only such acts in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered.' Not deception alone, but deception with respect to certain purchases or sales is necessary for a violation of the statute." Morrison, 130 S.Ct. at 2887.

The Second Circuit's opinion in Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 62 (2nd Cir. 2012) is significant. After careful analysis, the Second Circuit arrived at the conclusion that "transactions involving securities that are not traded on a domestic exchange are domestic if irrevocable liability is incurred or title passes within the United States." Absolute Activist, 677 F.3d at 67. That is, a transaction is domestic if "the purchaser incurred irrevocable liability within the United States to take and pay for a security, or. . . the seller incurred irrevocable liability within the United States to deliver a security." 677 F.3d at 68 (emphasis supplied). See also S.E.C. v. Tourre, 2012 WL 5838794, 2 (S.D.N.Y. 2012)("It is undisputed, however, that Loreley did not acquire irrevocable liability to purchase the ABACUS notes in the United States.").

Then, following the Eleventh Circuit in Quail Cruises Ship Mgmt. Ltd. v. Agencia de Viagens CVC Tur Limitada, 645 F.3d 1307, 1310-11 (11th Cir.2011), the Second Circuit added a third option: a transaction could also be domestic if title to the shares was transferred within the United States. Id. at 68. As the Eleventh Circuit put it: "Given that the Supreme Court in Morrison deliberately established a bright-line test based exclusively on the location of the purchase or sale of the security, we cannot say at this stage in the proceedings that the alleged transfer of title to the shares in the United States lies beyond § 10(b)'s territorial reach." 645 F.3d at 1310-11.^[3]

The first two options in the Second Circuit's transaction test focus on where the buyer and the seller, respectively, incurred irrevocable liability. The answers to those questions in this case are dictated by the terms of the Share Purchase Agreements, which oddly, the SEC has chosen not to examine. (Plaintiff's Brief in Opposition, at 8-9). Under the terms of those Agreements, an investor "becomes irrevocabl[y] b[oun]d" when he "submit[s]" to the Escrow Agent what is denominated as the offer to purchase. Under the terms of the SPA, the seller is not irrevocably bound until it accepts the offer after it has been received at its office in Brazil from the escrow agent. It is the movants' position that the Share Purchase Agreement did not hinge irrevocable liability for the purchaser or the seller on receipt by the movants of the SPA — which would have put the locus in Illinois where the escrow agents were located — but on submission by the purchaser, all of whom were in foreign countries. And so, the movants say that the investors became irrevocably bound outside the United States.

The movants' position on where the seller became irrevocably bound is similar. Under the terms of the SPA, the buyer's offer to purchase was irrevocable when submitted, "subject only to acceptance by the Company." (Defendants' Local Rule 56.1 Statement, Ex. E, §1, ¶ 2). That acceptance took place, in all instances, in Brazil. IBI, then, became irrevocably bound outside the United States. IBI would then issue a certificate representing the shares and send it to the Escrow Agent Defendants, who would in turn send it to the investor who, again, was outside the United States. (Id.).

While a lot of activity went on in the United States — as was the case in Morrison — the only domestic activity that had anything to do with the transaction was the shuttling of documents back and forth by the Escrow Agents. For the SEC, those intermediaries are the domestic specters that must send Judge Scalia's watchdog, tail between its legs, scurrying back to the kennel. To get there, the SEC has to ignore the terms of the SPA, despite the fact that its terms specifically dictate when the parties agreed to become bound, and the terms of the Escrow Agreement. But even if one joins the SEC in turning a blind eye to their terms, nothing changes the conclusion that the stock transactions in this case were not domestic sales, as Morrison defines such sales.

The SEC's argument begins like this:

The place of the contract — i.e., where it is formed — is the place where the last act necessary to its completion was done. The general rule is that the place of contracting is the place of acceptance.

(Plaintiff's Brief in Opposition, at 8 (citations omitted)). Following the SEC's line of reasoning, the contract was formed in Brazil because, as we know from the undisputed facts, that was where all the acceptances occurred. That makes the sales of stock at issue foreign rather than domestic.

But, the SEC goes on:

Under the "mailbox" or "postal" rule, acceptance of an offer occurs and becomes effective upon mailing of the acceptance to the offeror, Thus, a contract is formed in the place where the acceptance is mailed by the offeror, not where it is received by the offeree.

(Plaintiff's Brief in Opposition, at 8 (citations omitted)). But if that rule were to be applied, the contract was still formed in Brazil, where IBI put its acceptances in the mail for transmission to the Escrow Agents in Illinois. See Hinc v. Lime-O-Sol Co., 382 F.3d 716, 719 (7th Cir. 2004).

Obviously, the SEC's theory doesn't work. That's why it has to wager all on the Escrow Agents, which the SEC says were either agents of IBI or dual agents. But it doesn't matter whether the Escrow Agents were agents of IBI or the investors (doubtful, at best) or both. What matters is whether they had any authority to bind IBI contractually. And the question of authority, whether express or implied, actual or apparent, is not a question the SEC deals with.

In an agency relationship, the principal can be legally bound by action taken by the agent where the principal confers actual authority on the agent. United Legal Foundation v. Pappas, 952 N.E.2d 100, 105 (1st Dist. 2011); Granite Properties Ltd. Partnership v. Granite Investment Co., 220 Ill.App.3d 711, 714, 581 N.E.2d 90, 92 (1st Dist. 1991). Actual authority can be express or implied. Pappas, 952 N.E.2d at 105. Here, there is nothing to suggest that the Escrow Agents had actual or apparent authority to bind IBI. There is no such grant of authority in the Escrow Agreements. Quite the opposite is true. Sphere Drake Ins. Ltd. v. American General Life Ins. Co., 376 F.3d 664, 672 (7th Cir. 2004)("An agent has express authority when the principal explicitly grants the agent the authority to perform a particular act."); Cf. Zannini v. Reliance Ins. Co. of Illinois, Inc., 147 Ill.2d 437, 451, 590 N.E.2d 457, 463 (1992)(agency agreement provided that agent had authority to bind principal). Mr. Powers — the Escrow Agent Defendant and member of Escrow Agent Defendant HTD — stated that he had no authority to accept or reject offers on IBI's behalf. (Defendants' Local Rule 56.1 Statement, ¶18; Ex. C, ¶ 10).

If the Escrow Agents themselves had no authority to bind IBI, and the Escrow Agent Agreements confirm this, the SEC cannot convincingly argue they had implied authority to do so. See Rasgaitis v. Waterstone Financial Group, Inc., 2012 WL 6969748, 11 (2nd Dist. 2012)(implied authority "arises when the conduct of the principal, reasonably interpreted, causes the agent to believe that the principal desires him to act on the principal's behalf"); Curto v. Illini Manors, Inc., 405 Ill.App.3d 888, 892, 940 N.E.2d 229, 233 (3rd Dist. 2010)(implied authority "may be . . . based on prior course of dealing of a similar nature between the alleged agent and principal . . . .").

The SEC contends rather conclusorily that because the Escrow Agents sent the share certificates to the investors on IBI's behalf, they were accepting in Chicago the foreign investors' offers. (Plaintiff's Response to Defendants' Local Rule 56.1 Statement, ¶18). But, under the terms of the SPA and the Escrow Agreement, all they were doing was forwarding IBI's acceptance, which had occurred previously in Brazil. The Escrow Agents clearly could not decide which offers to accept or reject and that — not sending a share certificate when told to do so — is where the power of acceptance lies. "[A]uthority must be founded upon some word or act of the principal, not on the words or acts of the agent." Hofner v. Glenn Ingram & Co., 140 Ill.App.3d 874, 881, 489 N.E.2d 311, 315 (1st Dist. 1985).

Similarly, there is nothing in the record to create a genuine issue of material fact on the question of whether the Escrow Agents had apparent authority to bind IBI or that they were doing so. Apparent authority arises when a principal creates, by its words or conduct, the reasonable impression in a third party that the agent has the authority to perform a certain act on its behalf. Reyes v. Remington Hybrid Seed Co., Inc., 495 F.3d 403, 406 (7th Cir. 2007); Weil, Freiburg & Thomas, P.C. v. Sara Lee Corp., 218 Ill.App.3d 383, 390, 577 N.E.2d 1344, 1350 (1st Dist. 1991). Here, the SPA specifically informed the investors that their offers were subject to acceptance by IBI, not by the Escrow Agents, who were performing ministerial functions under the SPA and the Escrow Agreement. The Escrow Agents' role was to receive the foreign investors' irrevocable offers and payment for the stock shares and send them to IBI in Brazil. Thereafter, their role was to forward the stock certificate to the investors after IBI accepted the offers in Brazil. There was no impression of apparent authority created here. The Escrow Agents did represent IBI for a limited purpose, but that alone does not create apparent authority to bind the company contractually. Extra Equipamentos E Exportacao Ltda. v. Case Corp., 541 F.3d 719, 726 (7th Cir. 2008).

For these same reasons, the SEC's theory regarding where the stock sale closed — where title passed — fails as well. Again, for the SEC, the Escrow Agents have unbridled authority to do everything. They not only have the power to accept offers and bind IBI, but the power to close the sales and pass title to the investors as well. But there is no support in the record for this thesis. In an attempt to show that title passed in the United States, the SEC relies on Quail Cruises Ship Management Ltd. v. Agencia de Viagens CVC Tur Limitada, 645 F.3d 1307 (11th Cir. 2011). In Quail Cruises, the plaintiff alleged it was fraudulently induced to purchase shares in a foreign company that owned the Love Boat, of 70s and 80s television fame. The district court granted the defendant's motion to dismiss under Morrison, finding that the plaintiff had failed to adequately allege that the sale was a domestic one.

The Eleventh Circuit reversed. It held that the court had to accept as true the plaintiff's allegation that "[t]he transaction for the acquisition of the Templeton stock closed in Miami, Florida on June 10, 2008, by means of the parties submitting the stock transfer documents by express courier into this District . . . ." 645 F.3d at 1310. Moreover, the court continued, "the purchase and sale agreement confirms that it was not until this domestic closing that title to the shares was transferred to [plaintiff]." Id. The court concluded that it could not "say at th[at] stage in the proceedings that the alleged transfer of title to the shares in the United States l[ay] beyond § 10(b)'s territorial reach." 645 F.3d at 1311.

Here, of course, we are beyond the pleading stage and we need not accept as true statements in the Second Amended Complaint that the stock transaction at issue closed in the United States. Indeed, under Rule 56, we cannot accept as true and rely on the allegations in the complaint. Tullis v. UMB Bank, N.A. 423 Fed.Appx. 567, 570 (6th Cir.2011). Unlike the purchase and sale agreement the court relied upon in Quail Cruise, the SPA stated that the deal was "an offshore transaction negotiated outside the United Sates (U.S.) and to be consummated and closed outside the U.S." (Defendants' Local Rule 56.1 Statement; Ex. E, §1, ¶1 (emphasis supplied)). The evidence shows that in fact the sale was consummated in Brazil — where IBI became irrevocably bound — or, perhaps, in the investors' home countries where they received their stock certificates.^[4] Nothing suggests that the Escrow Agents were invested with the power to transfer or accept title in the manner the complaint in Quail Cruises alleged the stock couriers there were.

The SEC also relies on 810 ILCS 5/8-301(a)(2), for the proposition that "delivery of stock certificate to purchaser occurs when third party acquires possession on behalf of purchaser." (Plaintiff's Brief in Opposition, at 11). The provision refers to delivery as a means of consummating a transaction, 810 ILCS 5/8-301, cmt. 1, but in this case, that occurred when IBI accepted in Brazil the purchaser's irrevocable offer which had been made in a foreign country. Moreover, when read in full, the provision does not indicate that, in all cases, delivery occurs when a third party acquires possession of the security certificate. Delivery is also said to occur "when . . . the purchaser acquires possession of the security certificate." 810 ILCS 5/8-301(a)(1). There's nothing to suggest that wasn't the case here. The subsection the SEC points to states a general rule that "a purchaser can take delivery through another person, so long as the other person is actually acting on behalf of the purchaser or acknowledges that it is holding on behalf of the purchaser." 810 ILCS 5/8-301, cmt.

2 (emphasis supplied). Nothing in the record suggests that the Escrow Agents were taking possession of or holding the certificates on behalf of the foreign investors. They were merely intermediaries delivering the certificates to the investors on behalf of IBI — the entity with whom they had the contractual relationship under the Escrow Agreement. The foreign purchasers were not parties to the agreement and, at best, could only be deemed incidental beneficiaries of the Escrow Agreement. Heritage Insurance Co. of America v. First Nat. Bank of Cicero, 629 F.Supp. 1412, 1418 (N.D.Ill. 1986).

In the end, this was a sale of shares in a foreign company to foreign investors. The sale's only connection with the United States was the fact that IBI employed escrow agents in the United States as intermediaries between it and the investors. Certainly, the SEC's allegations suggest that a good deal of questionable activity "that is material to the fraud's success," occurred in the United States. 130 S.Ct. at 2886. But in such a case, it is not the location of the fraud that is outcome determinative, but whether the sale was domestic. Only by a fairly tortured and ultimately faulty analysis can one conclude that it was.

A final note. The SEC on December 10, 2012, filed a notice of additional authority, citing S.E.C. v. Tourre, 2012 WL 5838794, 2 (S.D.N.Y. 2012). That court rejected the same kind of arguments the SEC makes here:

In opposition to the motion to dismiss, the SEC (having tacitly conceded that no "irrevocable liability" transferred to IKB in the United States, SEC v. Tourre, 790 F.Supp.2d at 158) made two arguments in support of the existence of a domestic transaction. First, the SEC argued that if the Court considered the "entire selling process," it would find sufficient domestic connection to sustain the section 10(b)/Rule 10b-5 claims. Id. The Court rejected that argument: "Morrison was clear that Section 10(b) `punishes not all acts of deception' (i.e., the selling process), `but only such acts "in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered."'" Id. (quoting Morrison, 130 S.Ct. at 2887). In other words, the "entire selling process" was an "invitation" to "return to the `conduct' and `effects' tests," which Morrison had explicitly repudiated. Id.

2012 WL 5838794, 2.

But this section of the opinion was not cited by the SEC which, instead, relied on the holding that Morrison's "domestic transaction" test was met where the parties closed their stock purchase and transferred title in the United States by submitting their transaction documents by courier to Miami. The SEC argues that the district court in Tourre held that "[t]here is no question" that the "transfer of title from the ABACUS trustee to [Goldman & [sic] Sachs Co.] at the New York based closing" is a "domestic purchase of securities." (Notice of Additional Authority, at 3)[#392].

But Tourre, carefully examined, is of no help to the SEC in this case. First, Tourre was not a summary judgment case but dealt with the adequacy of the SEC's allegations. And thus, Tourre could say that "there is no question that the SEC alleges a domestic purchase of securities...." 2012 WL 5838794, 4. But that domestic transaction was deemed insufficient as the hook for Tourre's 10b-5 note transaction which was deemed to be not a domestic transaction.

More importantly, in Tourre, given the structure of the Goldman Sachs transaction, title actually passed in the United States at the closing. The SEC does not explain how that situation is comparable to what occurred here where the purchasers became irrevocably bound in foreign countries and IBI became irrevocably bound upon acceptance at its office in Brazil of the various offers. There was no "closing" at the escrow agent's office in Illinois as there was in New York in Tourre. Title did not pass in Illinois. All that occurred was that the escrow agent, upon receipt of the stock certificates, transmitted them to the foreign purchasers. In short, what occurred here is analytically dissimilar from what occurred in Tourre. The transactions about which the SEC complains are not domestic transactions and thus are within the gravitational field created by the Supreme Court in Morrison.

2.

The SEC's Section 15(a) Claims

In Count V, the SEC charges the defendants with being brokers or dealers who were not registered with the SEC. The defendants argue that Morrison applies to the registration requirement as well, and that because the IBI sales were not domestic sales, they were not required to register. This is a question that apparently no court has addressed, so neither party is able to support their positions with any pertinent authority. The question will be dealt with in a separate opinion.

CONCLUSION

For the foregoing reasons, the defendants' motion for partial summary judgment [# 344] is GRANTED.

[1] Mr. Powers is a lawyer representing himself and is with the firm of Handler, Thayer & Duggan, LLC in Chicago. Mr. Reinschreiber is a principal of Global Financial.

[2] The SEC has overlooked the terms of the Stock purchase Agreement, the first page of which states that closing will be outside the United States (Article I,¶2), and the last page of which shows that the offer to purchase is to be accepted by Marcelo Lopes, Chairman and CEO, suite 921 San Paulo Brazil. (Defendants L.R. 56.1 Statement of Material Facts, Ex. H). In short, the escrow agent could only send the offers to purchase to Brazil for acceptance.

[3] The SEC does not argue against the application of the Second Circuit's test for the location of the transaction; in fact, it relies on Absolute Activist in its brief. (Plaintiff's Brief in Opposition, at 6-7).

[4] The SPA provided that the agreement was governed by the laws of the Commonwealth of the Bahamas. (Defendants' Local Rule 56.1 Statement, Ex. E, Article VI, ¶7). The parties have not discussed this clause or its effect on the case and have assumed Illinois law governs. Generally, the law applicable to a contract is that which the parties intended, but where the parties assume Illinois law applies the court will do so as well. Faulkenberg v. CB Tax Franchise Systems, LP, 637 F.3d 801, 809 (7th Cir.2011). That principle can conveniently be applied here even though the parties were not signatories to the SPAs, and the SEC was not a signatory to the Escrow Agreement.

87 F.3d 536 (1996)

[537] Thomas W. Kirby, Washington, DC, argued the cause for appellants, with whom Ida W. Draim was on the briefs.

Eric Summergrad, Assistant General Counsel, Securities & Exchange Commission, Washington, DC, argued the cause for appellee, with whom Richard H. Walker, General Counsel, Paul Gonson, Solicitor, and Ross A. Albert, Special Counsel, Washington, DC, were on the brief. Jacob H. Stillman, Associate General Counsel, Washington, DC, entered an appearance.

Before: WALD, GINSBURG and HENDERSON, Circuit Judges.

Opinion for the Court filed by Circuit Judge GINSBURG.

Dissenting Opinion filed by Circuit Judge WALD.

GINSBURG, Circuit Judge:

A viatical settlement is an investment contract pursuant to which an investor acquires an interest in the life insurance policy of a terminally ill person — typically an AIDS victim — at a discount of 20 to 40 percent, depending upon the insured's life expectancy. When the insured dies, the investor receives the benefit of the insurance. The investor's profit is the difference between the discounted purchase price paid to the insured and the death benefit collected from the insurer, less transaction costs, premiums paid, and other administrative expenses.

Life Partners, Inc., under the direction of its former president and current chairman [538] Brian Pardo, arranges these transactions and performs certain post-transaction administrative services. The SEC contends that the fractional interests marketed by LPI are securities, and that LPI violated the Securities Act of 1933 and the Securities Exchange Act of 1934 by selling them without first complying with the registration and other requirements of those Acts. The district court agreed and preliminarily enjoined LPI from making further sales.

LPI argues that (1) viatical settlements are exempt from the securities laws because they are insurance contracts within the meaning of the McCarran-Ferguson Act, 15 U.S.C. § 1012(b), and § 3(a)(8) of the 1933 Act, 15 U.S.C. § 77c(a)(8), and (2) the fractional interests sold by LPI are not in any event securities within the meaning of the 1933 and 1934 Acts. LPI asserts alternatively that it could modify its program so as to come within a safe harbor exemption for private offerings under SEC Rule 506, 17 C.F.R. § 230.506.

We agree with the district court that viatical settlements are not exempt from the securities laws as insurance contracts. Contrary to the district court, however, we conclude that LPI's contracts are not securities subject to the federal securities laws because the profits from their purchase do not derive predominantly from the efforts of a party or parties other than the investors; therefore, we do not reach LPI's alternative argument that it might be able to alter its operation in such a way as to be entitled to a private offering exemption.

I. Background

LPI appeals four orders of the district court. First, in August 1995 the court held that LPI violated §§ 5(a) and (c) of the Securities Act, 15 U.S.C. § 77e(a) and (c), and § 15(a) of the Securities Exchange Act, 15 U.S.C. § 78o(a), by selling unregistered securities. The court ordered LPI to bring its operations into compliance with the Acts "forthwith," but did not enjoin the company from continuing to sell viatical contracts. In the same order the court found that the SEC made out a prima facie case that LPI had materially misstated and omitted certain facts in selling securities, in violation of the anti-fraud provisions of § 10(b) of the 1934 Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and preliminarily enjoined LPI from committing securities fraud.

Second, the following month the court denied LPI's motion for a partial stay of the August order pending appeal. The district judge directed LPI to file within 20 days a report detailing the steps the company had undertaken to comply with the securities laws.

Third, in January 1996 the district court, holding that LPI had not adequately complied with its prior directives, preliminarily enjoined LPI from offering or selling unregistered fractional interests in viatical settlements. With the court's approval, the parties stipulated that the injunction would be stayed with respect to transactions then in process, and that LPI would not seek any broader stay pending our resolution of this matter.

Finally, in March 1996 the district court granted an Emergency Motion for Supplemental Provisional Relief that the SEC filed in reaction to an affidavit in which Pardo asserted that LPI had complied with the court's prior rulings and advised the court that LPI planned to resume the sale of viatical settlements. LPI interpreted a statement in the court's opinion of January 1996, to the effect that "pre-purchase activities cannot alone" subject LPI to the Securities Acts, to mean that by discontinuing its performance of post-purchase services, the company could resume its sales without violating the injunction. The district court, however, concluded that LPI's "technical changes have done little to alter the substance of the services provided to investors," and preliminarily enjoined LPI from selling fractional interests in viatical settlements "by any ... means whatsoever," pending this court's decision on appeal.

At the same time that it was issuing these three preliminary injunctions against LPI, the district court acknowledged that the company provides "valuable funds [to] AIDS patients in their final illness" and that after "an [539] apparently exhaustive two-year investigation" the SEC could produce no evidence or even allegations "that any investor, terminally ill patient, or insurance company has been defrauded, misled, or is in any way dissatisfied with an LPI viatical settlement." The Commission, however, points out that the securities laws, and in particular the disclosure requirements of the 1933 and 1934 Acts, are intended to prevent abuses before they arise. Still, that neither policyholders nor investors have complained of any abuse may help to explain why the viatical settlements industry is not more regulated. A number of states have enacted laws protecting the insureds but, according to the SEC, no state has undertaken specifically to protect investors in viatical settlements. (In all states investors are still protected by the common law of fraud, of course.)

Although some promoters of viatical settlements do register them as securities under the federal securities laws, LPI observes that registration means higher costs for investors and correspondingly lower prices for terminally ill policyholders, and objects that any significant administrative delay — even if the Commission were, for example, to permit the offeror to use one master registration and to make only a supplemental filing pertaining to each policy in which it proposes to sell fractional interests—might be fatal in this time-sensitive context. The Commission concedes that some policy-by-policy disclosure of risk factors would be required but ventures that the burden would not be prohibitive. The Commission also notes that some firms have sought and obtained an exemption from the federal securities laws for their viatical contracts; presumably a firm might also buy insurance policies for its own account or act as an agent, matching a single investor with a terminally ill insured, without running afoul of the securities laws.

That is not how LPI does business, however. LPI sells fractional interests in insurance policies to retail investors, who may pay as little as $650 and buy as little as 3% of the benefits of a policy. In order to reach its customers, LPI uses some 500 commissioned "licensees," mostly independent financial planners. For its efforts, LPI's net compensation is roughly 10% of the purchase price after payment of referral and other fees. Pardo claims that LPI is by far the largest of about 60 firms serving the rapidly growing market for viatical settlements; in 1994 the company accounted for more than half of the industry's estimated annual revenues of $300 million. The company is 95% beneficially owned by Pardo through a trust, and 5% owned by Dr. Jack Kelly, who performs medical evaluations of policyholders on LPI's behalf.

LPI was also the first company to develop a plan by which an investor could participate in a viatical settlement through an Individual Retirement Account. In order to circumvent the Internal Revenue Code prohibition upon IRAs investing in life insurance contracts, LPI structures the purchase through a separate trust established for that purpose. The IRA lends money to the trust, for which it receives a non-recourse note; the trust then uses the loan proceeds to purchase an interest in a life insurance policy, the death benefits of which collateralize the note. When the insured dies and the benefits are paid, the proceeds go to pay off the note held by the IRA.

Both LPI's program for individual investors and its IRA program have gone through three iterations during the course of this litigation. In each, LPI performed or performs a number of pre-purchase functions: Specifically, even before assembling the investors, LPI evaluates the insured's medical condition, reviews his insurance policy, negotiates the purchase price, and prepares the legal documents. The difference among the three versions is that LPI performs ever fewer (and ultimately no) post-purchase functions.

In Version I, the program that was the subject of the district court's August 1995 order, LPI or Pardo could appear, and continue to appear after the investors had purchased their interests, in an insurance company's records as the owner of a policy; LPI insists, however, that this practice was adopted not because LPI had any continuing entrepreneurial role to play but only at the urging of the insurance companies for their administrative convenience; the investor was [540] at all times the legal owner. Also, once an investor acquired an interest in a policy he could avail himself of LPI's on-going administrative services, which included monitoring the insured's health, assuring that the policy did not lapse, converting a group policy into an individual policy where required, and arranging for resale of the investor's interest when so requested and feasible.

Sterling Trust Company, an independent escrow agent acting for LPI, actually performed most of these post-purchase administrative functions. When the purchase closed, Sterling collected its own fee and that of LPI, escrowed funds for expected premium payments, and delivered the balance to the seller. Thereafter Sterling held the policy, held and disbursed all funds, ensured that all paperwork was in order, and filed the death claim. If an investor designated Sterling as the beneficiary, then Sterling also collected and distributed the death benefits. LPI had no continuing economic interest in the transaction after receipt of its fee upon the sale to the investor.

Between the district court's August 1995 and January 1996 orders, LPI implemented revised procedures in an unsuccessful effort to meet the objections raised by the SEC and upheld by the court. In this Version II, neither LPI nor Pardo appeared as the owner of record of the insurance policy; instead, the investors were at all times the owners of record and thus had a direct contractual relationship with the insurance company. Indeed, Sterling agreed to report to the SEC any attempt by LPI to exercise ownership rights over any policies. Second, LPI affirmed that both the purchase money and the benefit payments would flow through Sterling and not through LPI. Third, LPI disclosed to prospective investors that Pardo is a 95% beneficial owner of LPI and that he had previously been involved in (unrelated) disputes with three federal regulatory agencies (the SEC, the Resolution Trust Corporation, and the Federal Deposit Insurance Corporation). Fourth, investors were informed that they were not obligated to use Sterling's post-purchase services, which were being offered to them as a convenience to take or to leave. In fact, LPI furnished investors with all of the information needed to handle post-purchase activities themselves. The district court determined, however, in its order of January 1996 that these revised procedures still did not comply with the securities laws.

Finally, in yet a further attempt to allay the concerns of the SEC and of the district court, LPI in February 1996 unveiled Version III. Pardo would resign as president of LPI in favor of Mike Posey, the former president of Sterling. More important, LPI declared that it would no longer provide any post-purchase services to purchasers either directly or indirectly (i.e., through an agent such as Sterling). All such services would become the sole responsibility of the investor; Sterling would still be available to provide services as the agent of the investor if the investor elected to contract with Sterling for that purpose. The district court rejected this proposal in its March 1996 order.

II. Analysis

We take up first LPI's opening argument that viatical settlements are insurance contracts and therefore entitled to an exemption from the 1933 Act. Finding that argument wanting, we proceed to consider whether the fractional interests promoted by LPI are "securities" within the meaning of that Act using the three-part test prescribed in SEC v. W.J. Howey Co., 328 U.S. 293, 66 S.Ct. 1100, 90 L.Ed. 1244 (1946), in which each investor acquired an individual parcel of citrus fruit acreage together with a portion of the profits arising from the promoter's management of the citrus grove, id. at 295-96, 66 S.Ct. at 1101-02. The Supreme Court held in Howey that an investment contract is a security if the investors (1) expect profits from (2) a common enterprise that (3) depends upon the efforts of others. Id. at 298-99, 66 S.Ct. at 1102-03. Because LPI's contracts fail the third element of this test, we hold that they are not securities. Finally, we go on to address LPI's program for the sale of viatical settlements to IRAs; the issue there is whether the notes used to facilitate such purchases are themselves securities even though the underlying viatical settlements are not. We conclude that because the notes [541] do not change the economic substance of the transaction they are not securities.

These are all questions of law and we review them all de novo. See Delaware and Hudson Ry. Co. v. United Transp. Union, 450 F.2d 603, 620 (D.C.Cir.1971) ("Insofar as the action of the trial judge on a request for preliminary injunction rests on a premise as to the pertinent rule of law, that premise is reviewable fully and de novo"). Let us begin.

A. Exemption of Viatical Settlements as Insurance Contracts

If viatical settlements are insurance contracts, then they are altogether exempt from coverage under the federal securities laws. See Securities Act of 1933, 15 U.S.C. § 77c(a)(8) ("insurance ... policy ... issued by a corporation subject to the supervision of the insurance [authority] of any State" exempt from coverage). In favor of that exemption, LPI argues first that a viatical settlement redistributes risk in the same manner as does an insurance contract. The purchaser incurs a risk that the insured will live longer than anticipated, thus diminishing the present value of the death benefit; the insured is relieved of some of the financial implications of that risk (e.g., the need for funds to cover extended medical care) by taking a reduced but immediate payment. Second, invoking the McCarran-Ferguson Act, 15 U.S.C. § 1012(b), which provides that no federal law may "impair or supersede any law enacted by any State for the purpose of regulating the business of insurance," LPI maintains that its activities of selling and advertising death benefits are part of the "business of insurance," see SEC v. National Secs., Inc., 393 U.S. 453, 460, 89 S.Ct. 564, 568-69, 21 L.Ed.2d 668 (1969) (statute governing sale and advertising of policies regulates "business of insurance"), and further refers us to the district court's finding that a number of states expressly regulate viatical settlements "in the insurance sections of the state codes."

We are advised by LPI that nine states now regulate viatical settlements and that others are considering the Model Viatical Settlements Act drafted by the National Association of Insurance Commissioners. The SEC observes, however, that these regulations protect sellers (insureds), not buyers (investors). LPI rejoins that the dearth of regulations to protect buyers indicates only that the states believe that such regulation is unnecessary. Indeed, the McCarran-Ferguson Act exemption from the federal securities laws is triggered not only when a state prohibits but also when it permits an insurance activity. See American Mut. Rein. Co. v. Calvert Fire Ins. Co., 52 Ill.App.3d 922, 9 Ill.Dec. 670, 675, 367 N.E.2d 104, 109 (1977).

We agree with LPI insofar as it implies that the important question is not whether the states regulate viatical settlements. The scope for federal regulation of viatical settlements does not turn upon whether the states regulate them; federal regulation is foreclosed or not depending upon whether viatical settlements are insurance contracts within the exemption that the Congress of 1933 expressly provided for such instruments, or the marketing of fractional interests is part of the business of insurance within the meaning of the McCarran-Ferguson Act. Accordingly, we focus upon that question.

The district court concluded that LPI "does not issue insurance policies or underwrite risk or undertake the normal activities of an insurance company." The SEC adds that LPI does not engage in the quintessential insurance function of risk-pooling, i.e., transforming what is a highly uncertain outcome for the individual insured into a highly predictable outcome by insuring a large number of persons. That an insurance policy underlies the viatical settlement is, the Commission says, irrelevant; any substantial asset might have served just as well. Moreover, the Commission states that "the business of insurance" referred to in the McCarran-Ferguson Act encompasses the relationship between an insurance company and an insured; the relationship that the SEC wants to regulate is that between a promoter and its investors, and regulation of that relationship "is not insurance regulation, but securities regulation." See National Secs., 393 U.S. at 460, 89 S.Ct. at 569.

The SEC's argument on this score is much more persuasive than LPI's. The seller of a [542] viatical settlement is not foregoing current consumption in order to protect against future risk, as does the buyer of an insurance policy. Quite the contrary: he is giving up the protection of a policy already in effect, in favor of current consumption. Nor is there any evidence that the typical investor who buys an LPI viatical contract pools the financial risk that the seller will live longer than expected. To do so, the investor would have to acquire enough contracts to reduce the actuarial risk associated with the life span of each individual seller. The record gives no indication, however, that LPI's investors systematically engage in the risk-pooling that is the essential characteristic of insurance. Moreover, there is no reason to expect that state insurance commissioners would regard even the pooling of viatical contracts as a form of insurance. To the extent that regulation of insurance companies is prompted by concern over their ability to pay benefits when due, that concern is simply not applicable to investors in a viatical settlement because the insured receives payment from the investors at the outset; thereafter the investor has no further liability to the insured.

To be sure, the investor's pre-payment of the death benefit diminishes the insured's risk that he will become insolvent before he dies; but as the SEC suggests, that initial risk of insolvency could have been reduced by the insured's liquidation of any asset that he owned. For example, the buyer could just as effectively have purchased the seller's home subject to his reservation of a life estate in the property, or the buyer might have factored the seller's accounts receivable — which, like death benefits, will be paid at an uncertain future date and bear some risk of default. These arrangements — and numerous others — entail roughly the same investment risk-sharing features as the acquisition of a fractional interest in death benefits, but they do not involve an insurance contract. That the underlying asset in this case happens to be an insurance contract is, as the SEC maintains, simply irrelevant.

In short, a viatical settlement is not an insurance policy, and the business of selling fractional interests in insurance policies is no part of "the business of insurance." LPI's offering does not, therefore, qualify for the insurance exemption from the federal securities laws, and is not shielded from federal regulation by the McCarran-Ferguson Act.

B. The Three-Part Test of Howey

We turn next to the question whether the LPI contracts are properly characterized as securities within the terms of the 1933 Act. That determination is controlled by the Supreme Court's decision in Howey which, as stated above, holds that an investment contract is a security subject to the Act if investors purchase with (1) an expectation of profits arising from (2) a common enterprise that (3) depends upon the efforts of others. 328 U.S. at 298-99, 66 S.Ct. at 1102-03. To the extent practical we examine each component of the test separately.

1. Expectation of Profits

The SEC argues that the profits test requires only that "the investor could lose his investment, or that the value of his return could fluctuate," quoting Guidry v. Bank of LaPlace, 954 F.2d 278, 284 (5th Cir.1992), and that, although the death benefit that an investor gets from a viatical settlement is in a fixed dollar amount, the profitability of the investment can vary because of the uncertain interval of time between the date of investment and the date of the insured's death. The insured's life span affects profitability in two ways: First, the annualized rate of return depends upon the length of the investment. Second, unless there has been a waiver of premiums pursuant to the terms of the insurance policy, the amount of the investor's outlay for premiums depends upon the insured's life span.

Arguing against the profits test as set forth in Guidry — which, by the way, is unclear about whether possible loss and fluctuating return are sufficient or merely necessary conditions — LPI maintains that under United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 852, 95 S.Ct. 2051, 2060, 44 L.Ed.2d 621 (1975), profits must be derived from "either capital appreciation resulting from the development of the initial investment ... or a participation in earnings resulting from the use of the investors' [543] funds," neither of which obtains with respect to viatical contracts. At oral argument the SEC asserted that even under this formulation viatical settlements satisfy the profits test of Howey because they appreciate in value — presumably because the insured's death draws nearer with the passage of time, thus increasing the present value of the death benefit. The Commission's reading of Forman, however, starkly omits the requirement that the capital appreciation result "from the development of the initial investment." Id. The increased value of a viatical contract requires no "development" at all; it depends entirely upon the inexorable passage of time and the inevitable death of the insured.

On the other hand, the definition in Forman was apparently intended only to summarize the cases that had by then come before the Court — not, as LPI implies, to preempt future development upon the basis of further experience. In full context, this is what the Court said:

By profits, the Court has meant either capital appreciation resulting from the development of the initial investment, as in [SEC v. C.M. Joiner Leasing Corp., 320 U.S. 344, 349, 64 S.Ct. 120, 122, 88 L.Ed. 88 (1943)] (sale of oil leases conditioned on promoters' agreement to drill exploratory well), or a participation in earnings resulting from the use of investors' funds, as in Tcherepnin v. Knight, [389 U.S. 332, 339, 88 S.Ct. 548, 554-55, 19 L.Ed.2d 564 (1967)] (dividends on the investment based on savings and loan association's profits). In such cases the investor is "attracted solely by the prospects of a return" on his investment. Howey, supra, [328 U.S.] at 300 [66 S.Ct. at 1103-04]. By contrast, when a purchaser is motivated by a desire to use or consume the item purchased — "to occupy the land or to develop it themselves," as the Howey Court put it, ibid. — the securities laws do not apply.

421 U.S. at 852-53, 95 S.Ct. at 2060-61. If the examples of Joiner and Tcherepnin were exhaustive, then the concept of profits would exclude, for example, the return on an investment in a residential mortgage or in any form of consumer loan — neither of which ordinarily involves capital appreciation or earnings resulting from the use of the investors' funds. Both activities are undertaken in the expectation of profits, however, at least as that term is commonly understood.

The Court's general principle we think, is only that the expected profits must, in conformity with ordinary usage, be in the form of a financial return on the investment, not in the form of consumption. This principle distinguishes between buying a note secured by a car and buying the car itself.

The asset acquired by an LPI investor is a claim on future death benefits. The buyer is obviously purchasing not for consumption— unmatured claims cannot be currently consumed — but rather for the prospect of a return on his investment. As we read the Forman gloss on Howey, that is enough to satisfy the requirement that the investment be made in the expectation of profits.

2. Common Enterprise

The second element of the Howey test for a security is that there be a "common enterprise." So-called horizontal commonality — defined by the pooling of investment funds, shared profits, and shared losses — is ordinarily sufficient to satisfy the common enterprise requirement. See, e.g., Revak v. SEC Realty Corp., 18 F.3d 81, 87 (2d Cir.1994). Here, LPI brings together multiple investors and aggregates their funds to purchase the death benefits of an insurance policy. If the insured dies in a relatively short time, then the investors realize profits; if the insured lives a relatively long time, then the investors may lose money or at best fail to realize the return they had envisioned; i.e., they experience a loss of the return they could otherwise have realized in some alternative investment of equivalent risk. Any profits or losses from an LPI contract accrue to all of the investors in that contract; i.e., it is not possible for one investor to realize a gain or loss without each other investor gaining or losing proportionately, based upon the amount that he invested. In that sense, the outcomes are shared among the investors; the sum that each receives is a predetermined portion of the aggregate death benefit.

[544] LPI claims, however, that there is no pooling and therefore no shared profits or losses because each investor acquires his own interest in the policy. Moreover, there is no requirement that the entire policy be purchased. It seems to us that the pooling issue reduces to the question whether there is a threshold percentage of a policy that must be sold before an investor can be assured that his purchase of a smaller percentage interest will be consummated. If not, then each investor's acquisition is independent of all the other investors' acquisitions and LPI is correct in asserting that there is no pooling. On the other hand, if LPI must have investors ready to buy some minimum percentage of the policy before the transaction will occur, then the investment is contingent upon a pooling of capital.

When we raised this point at oral argument, the SEC contended that inter-dependency among investors was not necessary to a determination that their funds are pooled; the test, according to the Commission, is whether the funds are "commingled." In this context, however, commingling in itself is but an administrative detail; it is the interdependency of the investors that transforms the transaction substantively into a pooled investment. (Indeed, if the investments are inter-dependent, it would not matter if LPI scrupulously avoided commingling the investors' funds — for example, by passing their checks directly to the seller at the closing.) Meanwhile, counsel for LPI volunteered that the issue of selling some minimum acceptable percentage of a policy has never arisen because LPI has always attracted purchasers for the full interest being offered. He went on to acknowledge, however, that if the situation were to arise, LPI would allow the insured the option of withdrawing from the transaction. Such a practice would of course serve LPI's interest as well as that of the policyholder. Many of the post-purchase administrative functions (e.g., monitoring the insured's health, collecting the death benefit) involve costs that are seemingly invariant to the number of investors or the percentage of a policy that has been sold. Neither LPI nor the investors would be anxious to spread these costs over contracts representing much less than the full value of a policy.

Therefore, we think that pooling is in practice an essential ingredient of the LPI program; that is, any individual investor would find that the profitability if not the completion of his or her purchase depends upon the completion of the larger deal. Because LPI's viatical settlements entail this implicit form of pooling, and because any profits or losses accrue to all investors (in proportion to the amount invested), we conclude that all three elements of horizontal commonality — pooling, profit sharing, and loss sharing — attend the purchase of a fractional interest through LPI. (We need not reach, therefore, the SEC's alternate contention that the LPI program entails "strict vertical commonality" — another formulation of the common enterprise test recognized in some circuits. See, e.g., Brodt v. Bache & Co., Inc., 595 F.2d 459, 461 (9th Cir.1978).)

Although horizontal commonality is ordinarily enough to make out the common enterprise required under the Howey test, in this instance LPI argues that commonality is not a sufficient condition because it is not obvious that there is an "enterprise" in the picture. For this LPI relies heavily upon Rodriguez v. Banco Central Corp., 990 F.2d 7, 10 (1993), in which the First Circuit held that "[e]ven if bought for investment, the land itself does not constitute a business enterprise." In that case the investors purchased lots in Florida; the land had value in itself, and the seller had created no "enterprise" that would have an effect upon that value. LPI suggests that the investors in a viatical settlement likewise are buying only their fractional interest in the death benefit, not a share in a common business enterprise.

The SEC, for its part, would have us distinguish Rodriguez from the present case on the ground that here the promoter makes specific commitments effective after the investors purchase their interests. Indeed, the First Circuit did remark that "commitments and promises incident to a land transfer ... can cross over the line and make the interest acquired one in an ongoing business enterprise." Id. at 11. As the SEC's response implies, however, LPI's argument that there is no enterprise in the picture is more properly [545] addressed to the third part of the Howey test — whether profits are expected to arise from the efforts of others. We consider that question in the next section, where we take up the importance of the promoter's post-purchase commitments.

3. Profits Derived Predominantly from the Efforts of Others

The final requirement of the Howey test for an investment to be deemed a security is that the profits expected by the investor be derived from the efforts of others. In this connection, the SEC suggests that investors in LPI's viatical settlements are essentially passive; their profits, the Commission argues, depend predominantly upon the efforts of LPI, which provides pre-purchase expertise in identifying existing policyholders and, together with Sterling, provides post-purchase management of the investment. Meanwhile, LPI argues that its pre-purchase functions are wholly irrelevant and that the post-purchase functions, by whomever performed, should not count because they are only ministerial. On this view, once the transaction closes, the investors do not look to the efforts of others for their profits because the only variable affecting profits is the timing of the insured's death, which is outside of LPI's and Sterling's control.

By its terms Howey requires that profits be generated "solely" from the efforts of others. 328 U.S. at 298, 66 S.Ct. at 1102-03. Although the lower courts have given the Supreme Court's definition of a security broader sweep by requiring that profits be generated only "predominantly" from the efforts of others, see, e.g., SEC v. International Loan Network, Inc., 968 F.2d 1304, 1308 (D.C.Cir.1992); Goodman v. Epstein, 582 F.2d 388, 408 n. 59 (7th Cir.1978), they have never suggested that purely ministerial or clerical functions are by themselves sufficient; indeed, quite the opposite is true. See, e.g., SEC v. Koscot Interplanetary, Inc., 497 F.2d 473, 483 (5th Cir.1974); SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476, 482 (9th Cir.1973) (efforts of others must be "undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise"). Because post-purchase entrepreneurial activities are the "efforts of others" most obviously relevant to the question whether a promoter is selling a "security," we turn first to the distinction between those post-purchase functions that are entrepreneurial and those that are ministerial; thereafter, we consider the relevance of pre-purchase entrepreneurial services.

Ministerial versus entrepreneurial functions, post-purchase. In Version I of its program, LPI and not the investor could appear as the owner of record of the insurance policy. LPI's ownership gave it the ability, post-purchase, to change the party designated as the beneficiary of the policy, indeed to substitute itself as beneficiary. That ability tied the fortunes of the investors more closely to those of LPI in the sense that it made the investors dependent upon LPI's continuing to deal honestly with them, at least to the extent of not wrongfully dropping them as beneficiaries.

This does not, however, establish an association between the profits of the investors and the "efforts" of LPI. Nothing that LPI could do by virtue of its record ownership had any effect whatsoever upon the near-exclusive determinant of the investors' rate of return, namely how long the insured survives. Only if LPI misappropriated the investors' funds, or failed to perform its post-purchase ministerial functions, would it affect the investors' profits. Such a possibility provides no basis upon which to distinguish securities from non-securities. The promoter's "efforts" not to engage in criminal or tortious behavior, or not to breach its contract are not the sort of entrepreneurial exertions that the Howey Court had in mind when it referred to profits arising from "the efforts of others."

In Version II LPI no longer appeared as the record owner of a policy, but LPI and Sterling continued to offer the following post-purchase services: holding the policy, monitoring the insured's health, paying premiums, converting a group policy into an individual policy where required, filing the death claim, collecting and distributing the death benefit (if requested), and assisting an investor who might wish to resell his interest. LPI characterizes these functions as clerical and routine [546] in nature, not managerial or entrepreneurial, and therefore unimportant to the source of investor expectations; in sum, anyone including the investor himself could supply these services. The district court seemed to agree with LPI about the character if not the significance of most post-purchase services, for it described them as "often ministerial in nature."

The Commission disputes the district court's characterization of post-purchase services as ministerial, but attempts to portray only one service in particular as entrepreneurial: we refer to the secondary market that LPI purportedly makes. By establishing a resale market, according to the SEC, LPI links the profitability of the investments it sells to the success of its own efforts. We find this argument unconvincing for several reasons. First, there is no evidence in the record before us that investors actually seek to liquidate their investments prior to the receipt of death benefits. Second, there is no evidence that LPI's potential assistance adds value to the investment contract; an investor could, for all that appears, get the same help with resale (if any is needed) through any one of the many firms that sell viatical settlements. Third, LPI is quite specific in warning its clients that

viatical transactions are not liquid assets. There is no established market for the resale of such policies. They should be purchased only by persons who are willing and able to hold the policy until it matures.... Life Partners' present practice is to assist in the resale of policies purchased by its clients [but] ... [t]here is no guarantee that any policy can be resold, or that resale, if it occurs, will be at any given price.

LPI's promise of help in arranging for the resale of a policy is not an adequate basis upon which to conclude that the fortunes of the investors are tied to the efforts of the company, much less that their profits derive "predominantly" from those efforts.

In Version III LPI provides no post-purchase services. All such services are the sole responsibility of the investors, who may purchase them from Sterling or not, as they choose. The district court minimized the significance of this choice, stating that "it is neither realistic nor feasible for multiple investors, who are strangers to each other, to perform post-purchase tasks without relying on the knowledge and expertise of a third party [and] the third party in this case will almost certainly be Sterling." Even if we accept this assessment, it does not alter our analysis. As we have seen, none of Sterling's post-purchase services can meaningfully affect the profitability of the investment. It is therefore of no moment whether Sterling performs those services usually or always, or whether it does so as the agent of LPI or as the agent of the investor.

In sum, the SEC has not identified any significant non-ministerial service that LPI or Sterling performs for investors once they have purchased their fractional interests in a viatical settlement. Nor do we find that any of the ministerial functions have a material impact upon the profits of the investors. Therefore, we turn to the question whether LPI's pre-purchase services count as "the efforts of others" under the Howey test.

Entrepreneurial functions, pre-purchase. LPI's assertion that its pre-purchase efforts are irrelevant receives strong, albeit implicit, support from the Ninth Circuit decision in Noa v. Key Futures, Inc., 638 F.2d 77 (1980) (per curiam). In that case, which involved investments in silver bars, the court observed that the promoter made pre-purchase efforts to identify the investment and to locate prospective investors; offered to store the silver bars at no charge for a year after purchase and to repurchase them at the published spot price at any time without charging a brokerage fee. The court concluded, however, that these services were only minimally related to the profitability of the investment: "Once the purchase ... was made, the profits to the investor depended upon the fluctuations of the silver market, not the managerial efforts of [the promoter]." Id. at 79-80.

The Tenth Circuit applied the same principle (to reach a different result) with respect to an investment in undeveloped land. McCown v. Heidler, 527 F.2d 204 (1975). In that case, the plaintiffs claimed that the parcels they had purchased were securities. In marketing the parcels to potential investors [547] the promoters had promised to make future improvements to the lots. "[W]ithout the substantial improvements pledged by [the promoters] the lots would not have a value consistent with the price which purchasers paid.... The utilization of purchase money accumulated from lot sales to build the promised improvements" could bring the scheme within the purview of the securities laws. Id. at 211.

In both Noa and McCown, the courts of appeals regarded the promoter's pre-purchase efforts as insignificant to the question whether the investments — in silver bars and parcels of land, respectively — were securities. The different outcomes trace wholly to the promoters' commitment to perform meaningful post-purchase functions in McCown but not in Noa.

In the present case, the district court distinguished Noa on the ground that, because silver is a fungible commodity, the promoter's pre-purchase efforts were inconsequential; LPI, in contrast, performed highly specialized functions in identifying and evaluating individual policies suitable for purchase by investors. Still, the district court declared (in its January 1996 opinion) that "pre-purchase activities cannot alone support a finding that investors' profits derive from the activities of LPI." Instead, the court relied upon the "pre-closing activities in addition to the post-closing activities that LPI continues to perform."

The Commission at oral argument tried to distance itself from Noa on roughly the same ground, arguing that an investor could, without great effort, independently evaluate the silver bars in that case, whereas an LPI investor would have considerably greater difficulty, especially in those instances where the terminally ill insured insists upon anonymity until the closing of the sale. LPI counters that its investors also play an active pre-purchase role in setting their own purchase criteria (such as the insured's life expectancy and the minimum acceptable risk rating of the insurer) and reviewing the insured's health profile and his insurance policy. Even if true, the district court appropriately characterized LPI's pre-purchase efforts as "undeniably essential to the overall success of the investment." The investors rely heavily, if not exclusively, upon LPI to locate insureds and to evaluate them and their policies, as well as to negotiate an attractive purchase price.

The SEC urges us to go even further than did the district court, however, in appraising the significance of LPI's pre-purchase activities insofar as they count toward "the efforts of others." The Commission reminds us that the Supreme Court did not draw a bright line distinction in Howey between pre- and post-purchase efforts, and notes that LPI may continue to perform some functions, such as preparing the preliminary agreement and evaluating the insured's policy and medical file, right up to the closing of the transaction. Therefore it would be hypertechnical, according to the Commission, to discount the importance of LPI's pre-purchase entrepreneurial functions simply because they occur before the moment of closing.

Absent compelling legal support for the Commission's theory — and the Commission actually furnishes no support at all — we cannot agree that the time of sale is an artificial dividing line. It is a legal construct but a significant one. If the investor's profits depend thereafter predominantly upon the promoter's efforts, then the investor may benefit from the disclosure and other requirements of the federal securities laws. But if the value of the promoter's efforts has already been impounded into the promoter's fees or into the purchase price of the investment, and if neither the promoter nor anyone else is expected to make further efforts that will affect the outcome of the investment, then the need for federal securities regulation is greatly diminished. While, to be sure, coverage under the 1933 Act might increase the quantity (and perhaps the quality) of information available to the investor prior to the closing, "the securities laws [are not] a broad federal remedy for all fraud." Marine Bank v. Weaver, 455 U.S. 551, 556, 102 S.Ct. 1220, 1223, 71 L.Ed.2d 409 (1982). They are concerned only with securities fraud, and the question before us is the threshold question whether a fractional interest in a viatical settlement is a security. To answer that question we look for "an investment in a [548] common venture" with profits "derived from the entrepreneurial or managerial efforts of others." Forman, 421 U.S. at 852, 95 S.Ct. at 2060.

We see here no "venture" associated with the ownership of an insurance contract from which one's profit depends entirely upon the mortality of the insured — just as the First Circuit saw no "enterprise" associated with holding land for investment in Rodriguez, 990 F.2d at 10. Nor is the combination of LPI's pre-purchase services as a finder-promoter and its largely ministerial post-purchase services enough to establish that the investors' profits flow predominantly from the efforts of others.^[1]

While we doubt that pre-purchase services should ever count for much, for present purposes we need only agree with the district court that pre-purchase services cannot by themselves suffice to make the profits of an investment arise predominantly from the efforts of others, and that ministerial functions should receive a good deal less weight than entrepreneurial activities. The SEC (like the district court) has identified no post-purchase service provided by LPI or Sterling that could fairly be characterized as entrepreneurial and combined with LPI's pre-purchase services to affect the outcome of the Howey test. Nor has the Commission pointed to a single case in which an investment vehicle was deemed a security subject to the federal securities laws although the investor did not look to the promoter (or another party) to provide significant post-purchase efforts.

In this case it is the length of the insured's life that is of overwhelming importance to the value of the viatical settlements marketed by LPI. As a result, the SEC is unable to show that the promoter's efforts have a predominant influence upon investors' profits; and because all three elements of the Howey test must be satisfied before an investment is characterized as a security, Revak, 18 F.3d at 87, we must conclude that the viatical settlements marketed by LPI are not securities.

C. The LPI Program for IRA Investments in Viatical Settlements

Finally, we must resolve the question, which the district court did not reach, whether the notes issued under the company's IRA program might be securities even though the underlying fractional interests in viatical settlements are not. In brief, the program is structured as follows: LPI establishes a separate trust for each investor's IRA; the trust borrows money from the IRA and issues a non-recourse note in exchange. The trust uses the loan proceeds to invest in a viatical contract, the death benefits of which collateralize the note. When the death benefits are ultimately paid, the trust distributes them to the IRA in satisfaction of the note.

The SEC urges that we decide whether the notes are securities by application of the "family resemblance test" of Reves v. Ernst & Young, 494 U.S. 56, 65, 110 S.Ct. 945, 951, 108 L.Ed.2d 47 (1990), pursuant to which a note is deemed to be a security unless it resembles one of a list of instruments that are not securities. Because we have already determined, however, that the underlying viatical contracts are not securities, and because the essential characteristics of the investment are no different whether the purchaser is an IRA or an individual investor, the status of the notes under the 1933 Act does not require extended analysis.

The note is used in these transactions, as the SEC itself affirms in its brief, merely in order to navigate around certain restrictions [549] in the tax code that preclude IRAs from investing in life insurance contracts. If the individual who owns the IRA wants to invest the IRA's capital in a viatical settlement, then the note is nothing more than a device by which to make that investment in a form that complies with the tax code; use of the note does not alter the substance of the transaction in any manner that would suggest a role for the securities laws that is not otherwise indicated by law. In this we follow directly the teaching of the Supreme Court: "[I]n searching for the meaning and scope of the word `security' in the Act, form should be disregarded for substance and the emphasis should be on economic reality." Tcherepnin, 389 U.S. at 336, 88 S.Ct. at 553. Applying this precept, we hold that the notes — like the viatical contracts for which they stand — are not securities.

III. Summary and Conclusion

LPI advances two arguments in support of the proposition that its viatical settlements are not subject to the federal securities laws. First, the company contends that its contracts are exempt as insurance contracts under the Securities Act of 1933 and the McCarran-Ferguson Act. For the reasons set forth in Part II.A, however, we conclude that a viatical settlement is not an insurance policy, and that the business of selling fractional interests in insurance policies is not part of "the business of insurance." We therefore reject LPI's exemption argument.

Second, LPI maintains that the fractional interests which it sells to investors are not securities within the meaning of the 1933 Act, as controlled by the Supreme Court's decision in Howey. In Parts II.B(1) and II.B(2), respectively, we conclude that LPI's contracts meet two parts of the Howey test: investors purchase the contracts with an expectation of profits; and they pool their funds, then share any profits or losses that arise. In Part II.B(3), however, we hold that fractional interests in viatical settlements, in any of the three versions marketed or proposed by LPI, are not securities. The combination of LPI's pre-purchase services as a finder-promoter and its largely ministerial post-purchase services is not enough to satisfy the third requirement in Howey: the investors' profits do not flow predominantly from the efforts of others. Finally, we hold that the notes issued to IRAs by LPI-sponsored trusts are not securities either. Looking to the substance of such transactions, we see that the notes are used solely for tax purposes, not as a means of raising capital.

Accordingly, this case is remanded to the district court with instructions to vacate the three injunctions entered against LPI in August 1995, January 1996, and March 1996.

So ordered.

WALD, Circuit Judge, dissenting.

I agree with the majority that viatical settlements are not exempt from the securities laws as insurance contracts, that notes issued under Life Partners, Inc.'s ("LPI") IRA program are not securities, and also that LPI's viatical settlements meet the first two requirements of the three-part test for an investment contract set out in SEC v. W.J. Howey Co., 328 U.S. 293, 298-99, 66 S.Ct. 1100, 1102-03, 90 L.Ed. 1244 (1946). These two requirements are that investors in viatical settlements (1) expect profits from (2) a common enterprise. I part company with the majority, however, because I believe that the third requirement of the Howey test, that (3) the expected profits be generated solely from the efforts of others, is also met here.

Several background principles should guide our analysis of whether or not the fractional interests in viatical settlements marketed by LPI satisfy Howey's third prong and therefore are securities. One such principle is that we should avoid imposing overly formal restrictions on what qualifies as a security and instead apply securities laws flexibly so as to achieve their remedial purposes. Pinter v. Dahl, 486 U.S. 622, 653, 108 S.Ct. 2063, 2081-82, 100 L.Ed.2d 658 (1988); SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195, 84 S.Ct. 275, 284, 11 L.Ed.2d 237 (1963); Baurer v. Planning Group, Inc., 669 F.2d 770, 772 (D.C.Cir. 1981). In Howey the Court stated that the definition of security "embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who [550] seek the use of the money of others on the promise of profits." Howey, 328 U.S. at 299, 66 S.Ct. at 1103. It has repeated this mantra of flexibility in subsequent cases applying the Howey test, and has consistently underscored that "form should be disregarded for substance and the emphasis should be on economic reality." Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564 (1967); United Housing Found., Inc. v. Forman, 421 U.S. 837, 848-49, 95 S.Ct. 2051, 2058-59, 44 L.Ed.2d 621 (1975).

A second principle, however, is that the securities laws do not grant federal protection to all investments, but only to that subcategory of investments that are securities. Marine Bank v. Weaver, 455 U.S. 551, 556, 102 S.Ct. 1220, 1223, 71 L.Ed.2d 409 (1982) ("Congress, in enacting the securities laws, did not intend to provide a broad federal remedy for all fraud"); Northland Capital Corp. v. Silver, 735 F.2d 1421, 1431 (D.C.Cir. 1984). Hence, although the securities laws are to be interpreted flexibly and cover many arrangements that do not superficially resemble securities, they cannot be interpreted so flexibly as to cover every type of investment. The paradigmatic instance of an investment that is not a security is the mere purchase of land with the hope that its value will naturally increase. See, e.g., Rodriguez v. Banco Cent. Corp., 990 F.2d 7, 10 (1st Cir.1993) ("[a] simple sale of land, whether for investment or use, is not a `security'").

The third and final principle is that the securities laws, and in particular the Securities Act of 1933 and the Securities Exchange Act of 1934 which are the statutes at issue here, embody the belief that information is the most important form of investor protection. The Court has remarked that "the design of the[se] statute[s] is to protect investors by promoting full disclosure of information thought necessary to informed investment decisions," and it has used this concern for ensuring adequate access to information to guide its application of the Acts. SEC v. Ralston Purina Co., 346 U.S. 119, 124-26, 73 S.Ct. 981, 984-85, 97 L.Ed. 1494 (1953); see also Capital Gains Research Bureau, 375 U.S. at 186, 84 S.Ct. at 280 ("[a] fundamental purpose, common to [the securities laws], was to substitute a philosophy of full disclosure for the philosophy of caveat emptor"); LOUIS LOSS & JOEL SELIGMAN, 1 SECURITIES REGULATION 171-94, 391-94 (3d ed.1989) (describing the disclosure philosophy of the securities laws). A new security must be registered before it can be publicly offered, which means simply that information on the security, issuer and underwriter must be submitted to the Securities and Exchange Commission ("SEC"). If there has been adequate and complete disclosure, the SEC has no power to prevent a security from being marketed because it believes the security to be too risky. LOSS, supra, at 227-29.

As the majority indicates, prior cases have established that in order for the third prong of the Howey test to be met the activities of the promoter must be of a managerial or entrepreneurial character, and not merely ministerial or clerical. Majority opinion ("Maj. op.") at 545. In the words of the Ninth Circuit, the third prong of Howey is satisfied when "the efforts by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise." SEC v. Glenn W. Turner Enters., Inc., 474 F.2d 476, 482 (9th Cir.), cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973); see also Forman, 421 U.S. at 852, 95 S.Ct. at 2060 ("touchstone of [the Howey test] is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others"). Prior cases have also held that Howey's third prong should be interpreted broadly to allow an investment contract to exist where the profits come "predominantly," but not solely, from the efforts of others. See, e.g., SEC v. International Loan Network, Inc., 968 F.2d 1304, 1308 (D.C.Cir.1992).

The key question for us is whether the third prong of the Howey test is met when the managerial activities of the promoter occur only before the investment is purchased.^[2] [551] The district court took the position there is no need for post-purchase activities to be managerial activities, provided that there are some post-purchase activities and at some point the promoter has performed managerial activities. I agree with the majority that this approach fails. Insisting that some activity must occur after purchase but allowing any activity, no matter how trivial, to satisfy this requirement violates the principle that form should not be elevated over substance and economic reality.

The majority instead takes the position that in order for Howey's third prong to be satisfied, the promoter must perform managerial and entrepreneurial activities after the investment is purchased. Maj. op. at 547-48. The net effect of the majority's position is to incorporate a bright-line rule into Howey's third prong: whatever the surrounding circumstances, an investment is not a security unless significant managerial activities by the promoter occur post-purchase. The advantage of this approach is that it offers a clear method for distinguishing between investment contracts that are securities and investment contracts that are simply investments. In that regard, it accords with the principle that the securities laws cannot be so broadly interpreted as to encompass all investments. But it does so at a substantial cost. Like the district court's approach, it elevates a formal element, timing, over the economic reality of the investors' dependence on the promoter. Even more troubling, the majority's approach undercuts the flexibility and ability to adapt to "the countless and variable schemes" that are the hallmarks of the Howey test. Howey, 328 U.S. at 299, 66 S.Ct. at 1103.

I agree that the requirement of Howey's third prong is most clearly met where the promoter engages in post-purchase activities. But I do not believe that investments based on pre-purchase managerial activities only should be categorically excluded from the coverage of the acts. Rather, I would distinguish between investments that satisfy the Howey third prong and those which do not by focusing on the kind and degree of dependence between the investors' profits and the promoter's activities. I believe that the third prong of the Howey test can be met by pre-purchase managerial activities of a promoter when it is the success of these activities, either entirely or predominantly, that determines whether profits are eventually realized. These pre-purchase activities must be directed at the sale of the investment opportunity; for example, efforts to build up a business are directed at making a business successful and therefore would not qualify, even if the ultimate aim is to sell the business to an investor. Cf. Emisco Indus. Inc. v. Pro's Inc., 543 F.2d 38, 40-41 (7th Cir.1976). In practice, this requirement may impose a time element, as activities that do not occur around the time of sale are unlikely to be found to be directed at the sale of an investment [552] opportunity. But provided the promoter's activities are so directed, the fact that the activities occurred prior to purchase would not bar the investment from qualifying as an investment contract under Howey.

On the other hand, if the realization of profits depends significantly on the post-investment operation of market forces, pre-investment activities by a promoter would not satisfy Howey's third prong. In such a situation, the realization of investor profits is fundamentally outside of the promoter's control and the investor's dependence on the promoter is more circumscribed. By the same logic, Howey's third prong would not be satisfied whenever the promoter's managerial activities occurred prior to purchase and the realization of profits depended significantly on outside forces, such as a lottery. See, e.g., SEC v. Energy Group of America, Inc., 459 F.Supp. 1234, 1240 (S.D.N.Y.1978). However, occasions where profits are determined by the operation of market forces will likely be the most common version of this situation.

The reason I focus on the degree of dependence between the investors' profits and the promoter's activities is twofold. First, I believe that this focus is more in keeping with the tenor of the Supreme Court's opinions applying Howey and its concern that regulation be tied to underlying economic reality instead of form. Second, I believe that distinguishing between profits realized from the promoter's activities and profits realized from the operation of market forces coheres with the belief that investors are protected by access to information. When profits depend on the intervention of market forces, there will be public information available to an investor by which the investor could assess the likelihood of the investment's success. Thus, for example, a purchaser of silver bars has access to information on the trends in silver prices, an investor in paintings can get a sense, at least generally, of how the market for artwork is faring, and a purchaser of an undeveloped lot has access to information on growth trends in the area. Obviously, the degree to which this information is actually available to an investor depends on the sophistication and education of an investor, but that is true about investments generally. Moreover, where profits depend on the operation of market forces "registration ... could provide no data about the seller which would be relevant to those market risks." SEC v. G. Weeks Securities, Inc., 678 F.2d 649, 652 (6th Cir.1982).

Where profits depend on the success of the promoter's activities, however, there is less access to protective information and the type of information that is needed is more specific to the promoter. Given the pivotal role of the promoter's activities, what the investor needs to know is not generally how this type of activity has fared but what the specific risk factors attached to the investment are and whether there is any reason why the investor should be leery of the promoter's promises. This need for information holds true in regard to investors prior to purchase as much as to investors who have committed their funds — indeed, more so, if they are to avoid over-risky investments. The majority argues that we need not be concerned about protecting investors where the profitability of an investment hinges on pre-purchase activities. Maj. op. at 548. Presumably this is because investors already have a potent weapon — they can refuse to invest in the policy. But the claim that investors need not be protected prior to committing funds has been rejected by Congress, which made the goal of ensuring that investors have adequate information before they commit their money or enter contracts the central concern of the Securities Acts. Capital Gains Research Bureau, 375 U.S. at 186, 84 S.Ct. at 280; Ralston Purina, 346 U.S. at 124-26, 73 S.Ct. at 984-85.

By far, most cases finding the Howey test to be met involve situations in which post-purchase managerial activities either occur or are promised. In Howey, for example, the promoter not only sold orchard lots but also contracted to manage the lots as an orchard after they were purchased. Howey, 328 U.S. at 299-300, 66 S.Ct. at 1103. But there is precedent supporting an approach that focuses on the degree and kind of dependence between the investors' profits and the promoter, rather than on the timing of the promoter's efforts. Contrary to the majority's [553] suggestion that pre-purchase activities may be altogether irrelevant, see Maj. op. at 548, courts frequently refer to pre-purchase as well as post-purchase activities of the promoter in finding Howey's third prong met. In Glen-Arden Commodities, Inc. v. Costantino, 493 F.2d 1027 (2d Cir. 1974), for example, the Second Circuit noted that investors' profits depended on the promoter's expertise in selecting whiskey for investors to purchase as well as on the promoter's promise to buy back the whiskey in the future. Id. at 1035; see also Gary Plastic, 756 F.2d at 240-41 (finding an investment contract where promoter both promised to maintain a secondary market for CDs — a post-purchase managerial activity — and used its market power to negotiate favorable CD rates with participating banks — a pre-purchase activity); Gordon v. Terry, 684 F.2d 736, 740 n. 4, 742-43 (11th Cir.1982), cert. denied, 459 U.S. 1203, 103 S.Ct. 1188, 75 L.Ed.2d 434 (1983) (emphasizing promoter's claimed expertise in locating bargain-priced Florida properties for investor to purchase, as well as promoter's post-purchase activities of structuring leverage scheme and utilizing personal contacts to ease resale, in denying summary judgment on question of whether investment contract existed).

Indeed, there are occasions, albeit rare, when most of the promoter's significant managerial activities occur before purchase and a court has found Howey's third prong satisfied. One such instance is SEC v. Brigadoon Scotch Distribs., Ltd., 388 F.Supp. 1288 (S.D.N.Y.1975), in which a promoter both selected coins for purchase and offered post-purchase buy-back and accounting services. While it is true that the promoter's post-purchase activities in this case qualify as managerial, the court specifically stated that the promoter's selection activities alone were sufficient to satisfy Howey's third prong because "[c]oins do not appreciate in value at the same rate and accordingly their selection is the most crucial factor in determining how much profit an investor in coins will make." See id. at 1293. Another is Bailey v. J.W.K. Properties, Inc., 904 F.2d 918 (4th Cir.1990), where the promoter selected specially bred cow embryos for investors to purchase and then raised and marketed the cows. Although the promoter's activities in raising and marketing the cows occurred post-purchase, the Fourth Circuit emphasized the promoter's pre-purchase activity of selecting and crossbreeding embryos in finding that Howey's third prong was met:

If the investment scheme had been merely to raise cattle for slaughter, the interests purchased by the plaintiffs may not have constituted investment contracts....

However, the Albemarle Farms program also involved the selection of embryos and crossbreeding. The plaintiffs had no expertise in making such selections and had an extremely limited range of alternative sources of such information.

Id. at 924-25; see also Energy Group, 459 F.Supp. at 1241 (purchase of property in expectation that it will appreciate due to promoter's expertise in selecting the property is one category of investment contract); 5B ARNOLD S. JACOBS, LITIGATION UNDER RULE 10B-5, § 38.03[b][I] at 2-212, § 38.03[b][v], at 2-258 (1996) (quoting Energy Group and arguing that promoter activities taking place concurrent with or after sale of security satisfy Howey's third prong).

Notably, I have found no case which holds, as the majority here does, that pre-purchase activities alone cannot satisfy Howey's third prong. Even the cases cited by the majority in support of its position do not argue that the pre-purchase/post-purchase line has determinative significance. Rather, the decisions in these cases appear to turn on the role that market forces as opposed to the promoter's activities play in the realization of profits. For example, Noa v. Key Futures, Inc., 638 F.2d 77 (9th Cir.1980), held that the purchase of silver bars, even with the promoter's offer to store and repurchase the silver, was not an investment contract. In reaching this decision the Ninth Circuit emphasized that "the profits to the investor depended upon the fluctuations of the silver market, not the managerial efforts of [the promoter]." Id. at 79. On the other hand, in McCown v. Heidler, 527 F.2d 204 (10th Cir. 1975), the Tenth Circuit held that sales of real estate parcels constituted investment contracts because the price of the parcels reflected the value of the promoter's development [554] activities. Id. at 211; see also SEC v. Belmont Reid & Co., Inc., 794 F.2d 1388, 1391 (9th Cir.1986) (Howey's third prong not met where primary purpose of prepayment plan involving purchase of gold coins was "to profit from the anticipated increase in the world price of gold"); Jenson v. Continental Financial Corp., 404 F.Supp. 792, 803 (D. Minn.1975) (Howey third prong is not met by commodity futures contracts because "[t]he profitability of the investment is solely dependent on the operation of the commodities market and the investors [sic] own investment decisions"). Although in Rodriguez the First Circuit focused on Howey's second prong, the existence of a common enterprise, it found the question of whether the value of the investment derives from the operation of the market or the actions of the promoters to be of critical importance. The First Circuit maintained that the sale of real estate could not constitute an investment contract where the promoter did not promise to develop the land and instead it was expected to appreciate by "natural forces," specifically economic growth spurred by the presence of Disney World. Rodriguez, 990 F.2d at 11-12.

The approach I advocate — allowing Howey's third prong to be met by pre-purchase managerial activities of a promoter when the eventual realization of profits depends predominantly on these activities and not on the market — is also supported by the line of cases applying Howey's third prong to general partnerships. The investment in these cases is a contribution of capital in return for an interest in an ongoing partnership, and thus they do not address the specific question of whether pre-purchase activities alone can create an investment contract. But these cases are relevant because they demonstrate that other courts have been concerned to apply Howey's third prong flexibly and with an eye to protecting passive investors who are at an informational disadvantage in regard to a promoter or who must rely on a promoter for some unique expertise. Since the terms of general partnership agreements usually grant all partners authority to participate in decisionmaking, investments in general partnerships would appear to fail the requirement of Howey's third prong that profits must come predominantly from the efforts of others. Instead, several courts have adopted an approach that focuses not on the terms of the partnership agreement but on the relationship between the investor and the promoter. Under this approach, a general partnership can constitute an investment contract if the agreement grants the partner little control, "the partner ... is so inexperienced and unknowledgeable in business affairs that he is incapable of intelligently exercising his partnership ... powers," or "the partner ... is so dependent on some unique entrepreneurial or managerial ability of the promoter or manager that he cannot replace the manager." Williamson v. Tucker, 645 F.2d 404, 424 (5th Cir.), cert. denied, 454 U.S. 897, 102 S.Ct. 396, 70 L.Ed.2d 212 (1981); see also Koch v. Hankins, 928 F.2d 1471, 1476-78 (9th Cir.1991)(adopting Williamson test); Matek v. Murat, 862 F.2d 720, 728 (9th Cir.1988)("access to information about the investment, and not managerial control, is the most significant factor" in applying the securities acts).

It is true that there is no clear line distinguishing when a promoter's pre-purchase activities predominate in the realization of profits and when market forces play a significant role. But I expect that in practice this distinction would not be a difficult one to make, and that the background principles of federal securities regulation would help decide close cases. I also expect that the occasions where investment profits depend predominantly on an investor's pre-purchase activities are extremely rare. As the cases above illustrate, the most common pre-purchase managerial activity is the use of some special expertise to select items for purchase. Usually, however, the purpose of this selection is to identify items "within a particular class of items which will appreciate at a faster rate than will the particular class in general." Bailey, 904 F.2d at 924 (quoting J. LONG, BLUE SKY LAW § 2.03[2][d][iii], at 2-45 to 2-46 (1986)). Since in these cases the realization of profits depends significantly on what happens in the market for that type of item, the investment would not constitute a security.

Given the paucity of cases where pre-purchase managerial activities of the promoter alone are likely to create a security, my fear [555] that the majority's approach will unduly restrict the flexibility of the Howey test might appear exaggerated. On the other hand, the difficulty with illustrating the restrictive effects of the majority's bright-line approach could be seen as a very good reason to preserve flexibility, for flexibility is what allows us to adapt our existing securities laws to address "novel schemes," schemes that we cannot easily anticipate ahead of time. At the very least, surely we should heed the concerns of the SEC, which bears primary responsibility for administering the securities laws. In its brief the SEC has urged us not to draw "a sharp line between those efforts occurring at or around the time of the investment of money, and those occurring thereafter" for fear that such a line would create a loophole in the securities laws that promoters could exploit. Appellee Br. at 41; see also Forman, 421 U.S. at 858 n. 25, 95 S.Ct. at 2063 n. 25 (noting that the views of the SEC would have been given considerable weight had the agency's position been consistent); SEC v. R.G. Reynolds Enters., Inc., 952 F.2d 1125, 1132 n. 7 (9th Cir.1991)("[w]hile the SEC's view is not conclusive, it is entitled to substantial weight").

LPI's viatical settlements represent one of the rare instances where investor profits depend predominantly on the pre-purchase managerial activities of a promoter. As the district court found, whether investors realize the profits they expect depends on whether LPI's estimation of the insured's life span is accurate. The longer the insured remains alive, the lower the investors' profits, particularly if premiums must continue to be paid. Moreover, the record clearly supports the district court's finding that investors rely on LPI's evaluation of the insured's life expectancy. LPI emphasizes the detailed assessment of the insured's medical condition that it performs in its promotional materials. LPI, Commonly Asked Questions (January, 1993), reprinted in JA-II 1342-43. While the T-cell count of a person with AIDS is an important indicator of life expectancy, LPI's reviewing physician testified that he bases his life expectancy estimates on several other factors as well, such as incidence of opportunistic infection, platelet count, pulmonary studies, etc. Testimony of Dr. John Kelly, reprinted in JA-II 1361. Potential advances in the treatment of AIDS must also be taken into account. Id., reprinted in JA-II 1360-61. Although investors can ask for a copy of the report on the insured's medical condition filed by LPI's reviewing physician, they can only review the medical information supplied by the insured and the insured's physician in LPI's offices. Testimony of Brian Pardo, reprinted in JA-IIIB 3088-89 ("Pardo Testimony"). Nor do they have any access to medical information on the insured beyond that obtained by LPI. Under a recently adopted Texas regulation, which governs LPI's viatical settlements, only a viatical settlement company or broker can contact an insured about the insured's health status. TEX. ADMIN. CODE tit. 28, § 3.10012 (1996); see also 21 Tex. Reg. 1124 (1996)(noting adoption of new regulations on viatical settlements). In any event, given the technical and complicated nature of this medical information, few investors are likely to be able to assess the reliability of LPI's life expectancy estimate.

Two other key variables affecting investor profits are the price that LPI negotiates for the sale of the policy and whether the policy is freely assignable. LPI's former president, Brian Pardo, testified that investors do not participate in price negotiations because the policy is not offered to investors for purchase until the seller and LPI have agreed on a price. Pardo Testimony, reprinted in JA-IIIB 3079. Investors thus rely on LPI, with its familiarity with going rates and prominence as a major viatical company, to obtain a favorable purchase price. Any delay in obtaining benefits after the insured dies, for example if a former beneficiary or the insurance company challenges the assignment, cuts into profits. Hence, LPI's services of investigating policies, drafting valid assignment contracts, and arranging if necessary for former beneficiaries to agree to the assignment, is also very important. Commonly Asked Questions, reprinted in JA-II, 1343-44; Report of Compliance Efforts, reprinted in JA-S 4124. In addition, policy sellers in some states may have enhanced protections and revocation rights, and some states may not recognize the purchase of policies by [556] persons without an insurable interest. LPI, Draft Private Placement Memorandum for Life Partners Ltd, reprinted in JA-IIIB 3019. As a result, investors must rely on LPI's knowledge of insurance laws in the different states and LPI's tracking of proposed legislation affecting viatical settlements.

Market forces, however, do not play a significant role in determining whether profits are realized. Their only effect is indirect, in that market forces determine whether investment in policies is profitable compared to other investments. An investment in a life insurance policy might yield a less favorable rate of return than an alternative investment keyed to interest rates if interest rates were to rise dramatically. But this effect on profits is insignificant compared with the effect that LPI's life expectancy evaluation and other services have, and it is also in no way unique to viatical settlements. Every investment is subject to becoming less profitable because of background economic developments. In addition, while the course of the insured's illness determines when the insured dies, the realization of expected investor profits depends not on the timing of the insured's death per se but rather on whether the death occurs within the period estimated by LPI.

All of the activities performed by LPI occur pre-purchase, and as a result the majority holds that LPI's viatical settlements do not create an investment contract. Under my approach, since the investors' profits depend entirely on managerial activities of the promoter, the Howey test is met and LPI's viatical settlements should be subject to the securities laws. The fact that no investor appears to have been "defrauded, misled, or is in any way dissatisfied with an LPI viatical settlement," Maj. op. at 539, does not make this result unreasonable. The securities laws are intended to be prophylactic and prevent abuses before they arise. Even if LPI's practices are legitimate there is no guarantee that those of other viatical settlement brokers will be similarly above board. Moreover, there are indications that the viatical settlement industry will grow substantially in coming years, as companies begin to purchase policies from individuals terminally ill from cancer as well as AIDS. See Pamela Sherrid, Enriching the Final Days, U.S. NEWS & WORLD REP., Aug. 21, 1995 at 56, reprinted in JA-IB 483; Keith Stone, Brokers, Terminally Ill Turning Death Into Cash, L.A. DAILY NEWS, Oct. 25, 1992 at N1, reprinted in JA-II 1287-91. A significant jump in viatical sales is also expected to occur if Congress enacts legislation to clarify that the income from the sale of a life insurance policy is not taxable to the insured, as it is currently considering doing. See Albert B. Crenshaw, Tackling an Issue of Agony, WASH. POST, Sept. 1, 1995, at C1, C3, reprinted in JA-4145. The securities laws are the only currently existing regulatory scheme by which investors in viatical settlements can be protected. Although several states have enacted laws dealing with viatical settlements, these laws only protect the insured who is selling the policy and not the investor who is purchasing it. See, e.g., N.Y. INS.LAW §§ 7801-7810 (McKinney's Supp.1996); see generally VIATICAL SETTLEMENTS MODEL ACT, reprinted in JA-II 1073-88.

It is also important to bear in mind that the majority's bright-line rule will apply to all investments, not just viatical settlements. An illustration of the restrictive effect that this rule could have in other contexts can be drawn from the recent problems associated with derivatives. A derivative is a financial contract, arranged through a dealer, that derives its value by reference to an underlying asset, interest rate, exchange rate or index.^[3]See Geoffrey B. Goldman, Crafting a Suitability Requirement for the Sale of Over-the-Counter Derivatives: Should Regulators "Punish the Wall Street Hounds of Greed"?, 95 COLUM. L.REV. 1112, 1116-19 (1995). Some derivatives are traded on the [557] organized exchanges, such as the stock and commodities exchanges, but a growing portion are not; the total outstanding amount of these non-exchange derivatives, denominated "over-the-counter" derivatives, was $43.2 trillion at the end of 1995, up 17% from the $36.9 trillion outstanding at the end of 1994. See Samer Iskandar, Survey—International Capital Markets '96: A Blip in the Growth Trend, FIN. TIMES, June 10, 1996, at 7. The growing prominence of over-the-counter derivatives and the spectacular losses suffered by some investors, such as Orange County, have sparked concern that derivatives may be insufficiently regulated. See Goldman, supra, at 1119-25; J. Christopher Kojima, Product-Based Solutions to Financial Innovation: The Promise and Danger of Applying the Federal Securities Laws to OTC Derivatives, 33 AM. BUS. L.J. 259, 261-63 (1995). What regulatory options are currently available in regard to derivatives is a source of debate, and commentators disagree in particular as to whether derivatives meet the common enterprise and expectation of profits from the efforts of others requirements of the Howey test so as to qualify as investment contracts. Compare Procter & Gamble Co. v. Bankers Trust Co., 925 F.Supp. 1270, 1278 (S.D.Ohio 1996) with Kojima, supra, at 298-304. But it is at least possible to imagine a type of derivative arrangement that would meet the Howey requirements as they have existed up to now. For example, a dealer could organize a complex set of derivative transactions for a group of investors with the aim of adopting offsetting positions in different markets that would generate a certain percentage of return. The realization of profits in this situation depends predominately on the dealer's expertise in balancing positions in different markets against one another rather than on what happens in a particular market. Consequently, this type of derivative arrangement could qualify as an investment contract under the approach I have outlined, but it could not so qualify under the majority's. Since the significant managerial activity of the derivative dealer —the selection and structuring of the derivative instrument and the investigation of the parties' financial status — usually occurs before the parties enter into the transaction, the majority's approach would prevent most derivative transactions from ever constituting investment contracts. As a result, the majority's approach could seriously hamper regulators as they seek to determine how best to treat this burgeoning class of financial instruments.

I believe that the majority's position, precluding pre-purchase managerial activities of a promoter from ever satisfying the third prong of the Howey test, is unwarranted and will serve to undercut the necessary flexibility of our securities laws. An approach that allows pre-purchase activities of the promoter to satisfy the third prong when the realization of investors' profits depends predominantly on these activities offers a means of distinguishing between ordinary investments and securities that both better conforms to precedent and has a less restrictive effect on the securities laws. Therefore, I respectfully dissent.

[1] Our dissenting colleague suggests that pre-purchase managerial activities are alone sufficient if they are the predominant factor in determining whether profits are eventually realized. Dissent at 551. In support of this proposition she can find only a dictum in a district court case, SEC v. Brigadoon Scotch Distribs., Ltd., 388 F.Supp. 1288, 1293 (S.D.N.Y.1975), in which — as the dissent concedes — the promoter's managerial efforts continued post-purchase through its agreement to repurchase the coins it was selling. Indeed, the district court's holding was controlled by Glen-Arden Commodities, Inc. v. Costantino, 493 F.2d 1027 (1974), in which the Second Circuit had held that even though the "very investment to be made was in [Scotch whiskey] to be specifically selected" by the promoters, the promise by the promoters to "find buyers for the Scotch or buy it back themselves" was the primary reason for characterizing the investment as a security. Id. at 1035 (original emphasis).

[2] I agree with the majority's characterization of LPI's post-purchase activities — holding the policy, monitoring the insured's health, paying premiums, converting a group policy into an individual policy if required, and collecting and distributing the death benefit — as ministerial, but with two caveats. First, unlike the majority, I consider LPI's promise to assist in the resale of policies combined with its emphasis on the availability of resale opportunities to constitute a managerial post-purchase activity. Lifetime Funding Newsgram (January 1994), reprinted in Joint Appendix ("JA") IIIB 3182-83; Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 756 F.2d 230, 240-41 (2d Cir.1985) (stressing Merrill Lynch's promise to maintain a secondary market for resale of certificates of deposit ("CD") in finding Howey test satisfied). I agree with the majority, however, that LPI does not in general highlight the resale option but on the contrary warns investors that "[l]ife insurance policies purchased through viatical transactions are not liquid assets." LPI, Report of Compliance Efforts, reprinted in JA-S 4123; Maj. op. at 546-47. Although LPI did emphasize the possibility of resale in regard to policies with longer terms (24-36 months and 36-48 months), LPI indicated in its reply brief that it has stopped doing so and now includes the same warning about the lack of liquidity in this context as well. Reply Br. at 13 n.8.

Second, I attach greater significance than the majority does to the fact that in Version I LPI often appeared as the owner of record of the policy and not the investors. As the district court noted, this meant that creditors of LPI might be able to reach the policies were LPI to encounter financial difficulties. Consequently, the investors' profits were dependent on LPI's efforts to remain a financially viable company and not simply, as the majority claims, on LPI's "`efforts' not to engage in criminal or tortious behavior." Maj. op. at 545. But LPI no longer appears as the record owners of the policies, and therefore my disagreement with the majority on this point is not material.

[3] An example of a derivative contract is when two parties enter into an interest-rate swap: one party agrees to pay the other a fixed rate of interest applied to some dollar amount while the other agrees to pay a variable interest rate on the same amount. Depending on whether interest rates rise or fall, one party will pay the other the difference between the two measures when payments are due, but there is no exchange of the underlying dollar amount. See John C. Hull, OPTIONS, FUTURES, AND OTHER DERIVATIVE SECURITIES 111-16 (1993).

MEMORANDUM OPINION

ELLEN SEGAL HUVELLE, District Judge.

Plaintiffs State National Bank of Big Spring ("SNB" or the "Bank"), the 60 Plus Association ("60 Plus"), the Competitive Enterprise Institute ("CEI") (collectively the "Private Plaintiffs"), and the States of Alabama, Georgia, Kansas, Michigan, Montana, Nebraska, Ohio, Oklahoma, South Carolina, Texas, and West Virginia (collectively "the States") have sued to challenge the constitutionality of Titles I, II, and X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203 (July 21, 2010) (the "Dodd-Frank Act"), as well as the constitutionality of Richard Cordray's appointment as director of the Consumer Financial Protection Bureau ("CFPB" or the "Bureau").^[2] (See generally Second Amended Complaint [ECF No. 24] ("Second Am. Compl.").) Defendants, who include more than a dozen federal government officials and entities, have filed a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(1) on the grounds that plaintiffs lack Article III standing, or, in the alternative, that their claims are not ripe for review. For the reasons stated below, the Court will grant defendants' motion.

BACKGROUND

On July 21, 2010, Congress enacted the Dodd-Frank Act as "a direct and comprehensive response to the financial crisis that nearly crippled the U.S. economy beginning in 2008." S. Rep. No. 111-176, at 2 (2010). The purpose of the Act was to "promote the financial stability of the United States . . . through multiple measures designed to improve accountability, resiliency, and transparency in the financial system[.]" Id. Those measures included "establishing an early warning system to detect and address emerging threats to financial stability and the economy, enhancing consumer and investor protections, strengthening the supervision of large complex financial organizations and providing a mechanism to liquidate such companies should they fail without any losses to the taxpayer, and regulating the massive over-the-counter derivatives market." Id. The Act "creat[ed] several new governmental entities, [] eliminate[ed] others, and [] transferr[ed] regulatory authority among the agencies." (See Defendants' Motion to Dismiss [ECF No. 26-1] ("Def. Mot.") at 6.)

In this suit, plaintiffs challenge Title I of Dodd-Frank, which established the Financial Stability Oversight Council ("FSOC" or the "Council"), see 12 U.S.C. § 5321; Title II, which established the Orderly Liquidation Authority ("OLA"), see 12 U.S.C. § 5384; and Title X, which established the CFPB. See 12 U.S.C. §§ 5491, 5511.^[3] Specifically, in Count III, the Private Plaintiffs challenge the constitutionality of Title I on separation-of-powers grounds, alleging that the FSOC "has sweeping and unprecedented discretion to choose which nonbank financial companies to designate as `systematically important'" and that such "powers and discretion are not limited by any meaningful statutory directives." (Second Am. Compl. ¶ 8.) In Count I, the Private Plaintiffs challenge Title X on the grounds that it violates the separation of powers by "delegat[ing] effectively unbounded power to the CFPB, and coupl[ing] that power with provisions insulating the CFPB against meaningful checks by the Legislative, Executive, and Judicial Branches[.]" (Id. ¶ 6.) And, in Count II, the Private Plaintiffs challenge the appointment of Richard Cordray as CFPB Director as unconstitutional on the grounds that he was appointed without the Senate's advice and consent in violation of the Appointments Clause of the United States Constitution. U.S. Const. art. II, § 2, cl. 2. (See Second Am. Compl. ¶ 7.)^[4]

All plaintiffs challenge Title II on three separate grounds. In Count IV, they allege that Title II violates the separation of powers because it "empowers the Treasury Secretary to order the liquidation of a financial company with little or no advance warning, under cover of mandatory secrecy, and without either useful statutory guidance or meaningful legislative, executive, or judicial oversight." (Second Am. Compl. ¶ 9.) In Count V, they allege that Title II violates the due process clause of the Fifth Amendment, because the "[t]he forced liquidation of a company with little or no advance warning, in combination with the FDIC's virtually unlimited power to choose favorites among similarly situated creditors in implementing the liquidation, denies the subject company and its creditors constitutionally required notice and a meaningful opportunity to be heard before their property is taken — and likely becomes unrecoverable[.]" (Id. ¶ 10.) And, in Count VI, they allege that Title II violates the constitutional requirement of uniformity in bankruptcy because "[w]ith no meaningful limits on the discretion conferred on the Treasury Secretary or on the FDIC, Title II not only empowers the FDIC to choose which companies will be subject to liquidation under Title II, but also confers on the FDIC unilateral authority to provide special treatment to whatever creditors the FDIC, in its sole and unbounded discretion, decides to favor[.]" (Id. ¶ 11.)

Defendants have moved to dismiss the complaint on the grounds that plaintiffs lack Article III standing to pursue their claims, or, in the alternative, that their claims are not ripe. (See Def. Mot. at 4-5.) This is an unusual case, as plaintiffs have not faced any adverse rulings nor has agency action been directed at them. Most significantly, no enforcement action — "the paradigm of direct governmental authority" — has been taken against plaintiffs. FEC v. NRA Political Victory Fund, 6 F.3d 821, 824 (D.C. Cir. 1993). As a result, plaintiffs' standing is more difficult to parse here than in the typical case. See, e.g., Noel Canning v. NLRB, 705 F.3d 490, 492-93 (D.C. Cir. 2013) (employer challenged NLRB decision finding that it had violated the National Labor Relations Act). Furthermore, while the Bank is a regulated party under Title X, none of the plaintiffs is subject to regulation under Titles I or II. Nonetheless, plaintiffs maintain that they have standing to pursue their Title I and II claims, based, respectively, on their status as competitors and as creditors of the regulated entities.

ANALYSIS

I. LEGAL STANDARDS

Plaintiffs bear the burden of establishing that the Court has jurisdiction over their claims. See Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 104 (1998). Nonetheless, "[f]or purposes of ruling on a motion to dismiss for want of standing, [the court] must accept as true all material allegations of the complaint, and must construe the complaint in favor of the complaining party." Warth v. Seldin, 422 U.S. 490, 501 (1975). "While the burden of production to establish standing is more relaxed at the pleading stage than at summary judgment, a plaintiff must nonetheless allege `general factual allegations of injury resulting from the defendant's conduct' (notwithstanding `the court presumes that general allegations embrace the specific facts that are necessary to support the claim')."^[5]Nat'l Ass'n of Home Builders v. EPA, 667 F.3d 6, 12 (D.C. Cir. 2011). Moreover, where a court's subject matter jurisdiction is called into question, the court may, as it has done here, consider matters outside the pleadings to ensure that it has jurisdiction over the case. See Teva Pharms., USA, Inc. v. U.S. Food & Drug Admin., 182 F.3d 1003, 1006 (D.C. Cir. 1999). "For each claim, if constitutional and prudential standing can be shown for at least one plaintiff, [the court] need not consider the standing of the other plaintiffs to raise that claim." Mountain States Legal Found. v. Glickman, 92 F.3d 1228, 1232 (D.C. Cir. 1996).

A. Standing

"[T]o establish constitutional standing, plaintiffs must satisfy three elements: (1) they must have suffered an injury in fact that is `concrete and particularized' and `actual or imminent, not conjectural or hypothetical'; (2) the injury must be `fairly traceable to the challenged action of the defendant'; and (3) `it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.'" NB ex rel. Peacock v. Dist. of Columbia, 682 F.3d 77, 81 (D.C. Cir. 2012) (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992)). Where a plaintiff is seeking declaratory or injunctive relief, he "must show he is suffering an ongoing injury or faces an immediate threat of injury." Dearth v. Holder, 641 F.3d 499, 501 (D.C. Cir. 2011).

It is well-established that where "the challenged regulations `neither require nor forbid any action on the part of [the challenging party],' — i.e., where that party is not `the object of the government action or inaction' — `standing is not precluded, but it is ordinarily substantially more difficult to establish." Ass'n of Private Sector Colls. & Univs. v. Duncan, 681 F.3d 427, 457-58 (D.C. Cir. 2012) (quoting Summers v. Earth Island Inst., 555 U.S. 488 (2009)). "In that circumstance, causation and redressability ordinarily hinge on the response of the regulated (or regulable) third party to the government action or inaction — and perhaps on the response of others as well." Lujan, 504 U.S. at 562. It then "becomes the burden of the plaintiff to adduce facts showing that . . . choices [of the independent actors] have been or will be made in such a manner as to produce causation and redressibility of injury." Id. The Supreme Court recently reaffirmed its hesitation to "endorse standing theories that require guesswork as to how independent decisionmakers will exercise their judgment." Clapper v. Amnesty International, 133 S. Ct. 1138, 1150 (2013). Thus, as observed by the D.C. Circuit, "courts [only] occasionally find the elements of standing to be satisfied in cases challenging government action on the basis of third-party conduct." Nat'l Wrestling Coaches Ass'n v. Dep't of Educ., 366 F.3d 930, 940 (D.C. Cir. 2004).

B. Ripeness

"`Ripeness is a justiciability doctrine' that is `drawn both from Article III limitations on judicial power and from prudential reasons for refusing to exercise jurisdiction.'" Devia v. Nuclear Regulatory Comm'n, 492 F.3d 421, 424 (D.C. Cir. 2007) (quoting Nat'l Park Hospitality Ass'n v. Dep't of the Interior, 538 U.S. 803, 807-08 (2003)) (internal quotation marks and brackets omitted). "In assessing the prudential ripeness of a case," courts consider two factors: "the `fitness of the issues for judicial decision' and the extent to which withholding a decision will cause `hardship to the parties.'" Am. Petroleum Inst. v. EPA, 683 F.3d 382, 387 (D.C. Cir. 2012) (quoting Abbott Labs. v. Gardner, 387 U.S. 136, 149 (1967), overruled on other grounds by Califano v. Sanders, 430 U.S. 99, 105 (1977)). The underlying purpose of ripeness in the administrative context "is to prevent the courts, through avoidance of premature adjudication, from entangling themselves in abstract disagreements over administrative policies, and also to protect the agencies from judicial interference until an administrative decision has been formalized and its effects felt in a concrete way by the challenging parties." Devia, 492 F.3d at 424 (quoting Abbott Labs., 387 U.S. at 148-49). Ripeness also prevents a court from making a decision unless it absolutely has to, underpinned by the idea that if the court does not decide the claim now, it may never have to. Id.

I. TITLE I: FINANCIAL STABILITY OVERSIGHT COUNCIL ("FSOC")

A. The Statutory Provision

Title I of Dodd-Frank established the FSOC. See 12 U.S.C. § 5321. The purposes of the Council are

to identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace; [] to promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the Government will shield them from losses in the event of failure; and [] to respond to emerging threats to the stability of the United States financial system.

12 U.S.C. § 5322(a)(1). The Council has ten voting members: the Secretary of the Treasury, who serves as the Council Chairperson; the Chairman of the Federal Reserve Board; the Comptroller of the Currency; the Director of the CFPB; the Chairperson of the Securities and Exchange Commission ("SEC"); the Chairperson of the Federal Deposit Insurance Corporation ("FDIC"); the Chairperson of the Commodity Futures Trading Commission ("CFTC"); the Director of the Federal Housing Finance Agency ("FHFA"); the Chairman of the National Credit Union Administration ("NCUA") Board; and an independent member with insurance expertise appointed by the President with the advice and consent of the Senate. See 12 U.S.C. § 5321(b)(1). The Council also includes five nonvoting members. See id. § 5321(b)(3).

Title I authorizes the Council, upon a two-thirds vote of its voting members, including the affirmative vote of the Treasury Secretary, to designate certain "nonbank financial companies" as "systematically important financial institutions" or SIFIs.^[6] 12 U.S.C. §§ 5323(a)(1), (b)(1), 5365, 5366. SIFI designation is based on consideration of eleven enumerated factors leading to a determination that "material financial distress at the U.S. nonbank financial company, or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the U.S. nonbank financial company, could pose a threat to the financial stability of the United States." 12 U.S.C. § 5323(a)(1). See id. (a)(2), (b)(2). If an entity is designated as a SIFI, it "will be subject to supervision by the Federal Reserve Board and more stringent government regulation in the form of prudential standards and early remediation requirements established by the Board." (See id.) Before designating any company as a SIFI, the Council must give written notice to the company of the proposed determination. See 12 U.S.C. § 5323(e)(1). The company is entitled to a hearing at which it may contest the proposed determination. See id. § 5323(e)(2). Additionally, once the Council makes a final decision to designate a company as a SIFI, that company may seek judicial review of the determination, and a court will determine whether the decision was arbitrary and capricious. See id. § 5323(h). There is no provision for third-party challenges to SIFI designation under Title I. (See Second Am. ¶ 157.)

On April 11, 2012, following a notice-and-comment period, the Council published a "final rule and interpretive guidance . . . describ[ing] the manner in which the Council intends to apply the statutory standards and considerations, and the processes and procedures that the Council intends to follow, in making determinations under section 113 of the Dodd-Frank Act." Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies, 77 Fed. Reg. 21637 (Apr. 11, 2012). On June 3, 2013, while this motion was pending, the Council voted to make proposed determinations regarding a set of nonbank financial companies but did not release the names of the designated companies. (See Second Supplemental Declaration of Gregory Jacob [ECF No. 34-1] ("Second Jacob Decl.") ¶ 5; id., Exs. 3-4.) Those companies then had thirty days to request a hearing before a final determination would be made. (See Second Jacob Decl. ¶ 5.) American International Group, Inc. ("AIG"), Prudential Financial Inc., and the GE Capital Unit of General Electric have confirmed that they are among the designated companies. (See id. ¶ 6; id., Ex. 4.) AIG and GE Capital have chosen not to contest their designations, but Prudential has announced that it will appeal. See Danielle Douglas, Prudential enters uncharted legal realm by appealing its regulatory label, WASH. POST, July 3, 2013, at A14.

B. Count III

1. Injury-in-Fact

The Bank claims to have standing to challenge the creation and operation of the FSOC as a violation of the Constitution's separation of powers. The Bank is not a regulated party under Title I and so, while "standing is not precluded, it is . . . substantially more difficult to establish" under these circumstances. Duncan, 681 F.3d at 457-58. The Bank's theory of standing relies on an allegation of "competitor injury" arising out of the "illegal structuring of a competitive environment." Shays v. Fed. Election Com'n, 414 F.3d 76, 85 (D.C. Cir. 2005). The D.C. Circuit has "recogniz[ed] that economic actors `suffer [an] injury in fact when agencies lift regulatory restrictions on their competitors or otherwise allow increased competition' against them." Sherley v. Sebelius, 610 F.3d 69, 72 (D.C. Cir. 2010) (quoting La. Energy & Power Auth. v. FERC, 141 F.3d 364, 367 (D.C. Cir. 1998)). The Court has also applied this principle to evaluate how campaign finance regulations affect the political "market," generalizing that "any one competing for a governmental benefit should [] be able to assert competitor standing when the Government takes a step that benefits his rival and therefore injures him economically." Id.

Importantly, however, the plaintiff must allege that it is "a direct and current competitor whose bottom line may be adversely affected by the challenged government action." New World Radio, Inc. v. FCC, 294 F.3d 164, 170 (D.C. Cir. 2002) (emphasis in the original). A plaintiff's "`chain of events' injury is too remote to confer standing" where the plaintiff has not stated a "concrete, economic interest that has been perceptibly damaged" by the agency action. Id. at 172 (internal quotation marks and citation omitted) (emphasis in the original). See also KERM, Inc. v. FCC, 353 F.3d 57, 60-61 (D.C. Cir. 2004) ("party must make a concrete showing that it is in fact likely to suffer financial injury as a result of the challenged action") (emphasis added). The Supreme Court has likewise made clear that there are limits to the competitor standing doctrine. For instance, in Already, LLC v. Nike, Inc., 133 S. Ct. 721 (2013), the Court rejected plaintiff's "boundless theory of standing," remarking, "[t]aken to its logical conclusion, [plaintiff's] theory seems to be that a market participant is injured for Article III purposes whenever a competitor benefits from something allegedly unlawful — whether a trademark, the awarding of a contract, a landlord-tenant arrangement, or so on." Id. at 731.

The Bank relies on just such a "boundless theory." Id. The assumption underlying the Bank's assertion of injury is that the FSOC's designation of GE Capital as a SIFI will confer a competitive advantage on GE and a corresponding disadvantage on the Bank. (See Private Plaintiffs' Opposition to Defendants' Motion to Dismiss [ECF No. 27] ("Pvt. Pl. Opp.") at 36.)^[7] The Bank alleges that GE Capital is its direct competitor in the market to raise capital and in the market to sell consumer loans, and that GE will benefit from a cost-of-capital advantage that "will place SNB at a competitive disadvantage in each" market. (Id. at 37.)

In support of the Bank's allegation that GE is a direct and current competitor in the consumer loan market, Chairman and former President of SNB Jim Purcell asserts in a recent declaration that "approximately 37% of the Bank's outstanding loans are agricultural loans" and "[a]ccording to publicly available information, GE Capital and its subsidiaries offer numerous loans in the agricultural sector, including in markets that are served by the Bank." (Second Declaration of Jim R. Purcell [ECF No. 35-1] ("Second Purcell Decl.") ¶¶ 4, 11.) Purcell indicates that there are two farm equipment dealerships within a 100-mile radius of the Bank that provide financing through GE Capital or its subsidiaries. (See id. ¶ 11.) With respect to the market to raise capital, Purcell indicates that "[t]he Bank competes with a wide variety of bank and non-bank financial institutions for deposits," and offers interest rates ranging from .05% on checking account deposits to .40% on 1-year CDs as of May 31, 2013. (See id. ¶¶ 13, 15.) Based on publicly available data, Purcell represents that GE Capital offers accounts that pay as much as 1.10% as of June 13, 2013. (See id. ¶ 17.) He asserts that "[c]ustomers can apply for these accounts and fund them online through the GE Capital website from anywhere in the United States, including the geographic areas in which the Bank does its business." (Id.)

While these assertions lend some plausibility to the Bank's allegation that GE is a "direct and current" competitor at least in the agricultural loan business, the Bank relies on conjecture to argue that the SIFI designation will benefit GE and harm the Bank.^[8] The Bank speculates that the designation will cause investors to flock to the designees because they will be perceived as safer investments due to the possibility of government backing. (See 6/11/13 Motions Hearing Transcript ("Tr.") at 72-73, 82.) Of course, SIFI designation does not, in fact, mean that the federal government is "backing" the SIFI or that the government will not allow the company to fail. Instead, it means that the SIFI will be subject to more stringent regulation and government oversight. See 12 U.S.C. § 5323(a)(1), (b)(1), 5365(c)(I). But whether SIFI designation will mean anything else is simply unknown at this early stage.

The ambiguous consequences of SIFI designation are underscored by David Price, the very source cited by the Bank:

The precise implications of being designated as a SIFI are not known yet because the new regulatory regime has not yet been defined. . . . On the plus side, SIFI designation may confer benefits on a company by reducing its cost of capital. Creditors may believe that enhanced supervision lowers an institution's credit risk. . . .The extent of this benefit to creditors, if any, is not clear at this point however. . . . So far, institutions appear to believe that they would be worse off as SIFIs. In public comments filed with FSOC and in public statements, large nonbanks and their trade associations have argued that they should not be considered systematically important. . . . The institutions' concerns about the regulatory regime for SIFIs may be heightened by a fear that the as-yet-unwritten rules will turn out to be overly restrictive.

David A. Price, "Sifting for SIFIs," Region Focus, Federal Reserve Bank of Richmond (2011), at www.richmondfed.org/publications/research/region_focus/20110q2/pdf/federal_reserve.pdf (cited in Second Am. ¶ 145).

Indeed, one of the proposed SIFIs, Prudential Financial, is appealing its designation, which indicates that at least one nonbank perceives the designation more as a detriment than a benefit. On the other hand, GE Capital has declined to appeal, because it "is already supervised by the Fed and as a result has strong liquidity and capital." (Third Supplemental Declaration of Gregory Jacob [ECF No. 36-1] ("Third Jacob Decl."), Ex. 1, Daniel Wilson, GE Capital, AIG Accept SIFI Label While Prudential Protests, Law 360, July 2, 2013.) Since the SIFIs themselves are far from unanimous as to the consequences of being designated, it is difficult to prophesize that the designation confers a clear benefit on them, much less a corresponding disadvantage on non-SIFI institutions like SNB. See Already, Inc., 133 S. Ct. at 731. In short, the Bank has not come close to a "concrete showing that it is in fact likely to suffer financial injury as a result of the challenged action." KERM, Inc., 353 F.3d at 60-61 (emphasis in original).

The Bank objects to defendants' suggestion that the burden of being designated a SIFI may outweigh the advantages, arguing that "the Government cites no authority for the novel proposition that the benefits flowing from a statute should be netted against its harms for purposes of determining whether a party has been injured." (Pvt. Pl. Opp. at 38-39.) But standing requires a showing of "certainly impending" injury, Clapper, 133 S. Ct. at 1151, and at this stage, nothing is certainly impending. The Bank's theory of injury "require[s] guesswork as to how independent decisionmakers will exercise their judgment," id. at 1150, and consequently, guesswork as to whether the Bank will suffer an injury-in-fact from the designation of GE Capital or any other alleged competitor. Here the need for such guesswork defeats the Bank's attempt to demonstrate that it faces an "imminent" injury. Lujan, 504 U.S. at 560-61.

2. Causation and Redressability

Furthermore, the Bank has not made an adequate showing with regard to the causation and redressability prongs of the standing requirement. See Lujan, 504 U.S. at 560-61. The Bank's attenuated claim of causation is highlighted by its admission that large financial companies already enjoy a cost-of-capital advantage, even without a formal SIFI designation, because these institutions have been perceived by the public as "too big to fail." (See Second Am. ¶ 146 (Federal Reserve Chairman Bernanke describing benefits that businesses enjoyed of being perceived as "too big to fail" before Dodd-Frank granted designation authority to FSOC).) The Bank asserts that the

formal SIFI designations promulgated by the FSOC will enhance any direct cost-of-capital subsidy previously enjoyed by institutions considered by some in capital markets to enjoy unofficial SIFI status, by removing uncertainty as to the government's views on their SIFI status, and will extend this direct cost-of-capital subsidy to institutions not previously considered by those in capital markets to enjoy unofficial SIFI status.

(See id. ¶ 148.) Indeed, GE Capital already offers interest rates between 2.75 and 22 times greater than those offered by the Bank. (See Second Purcell Decl. ¶¶ 13, 15, 17.) No explanation has been given for the disparity, but given the large gap in what the two institutions already offer, it is hardly reasonable to infer that GE's greater ability to attract deposits is fairly traceable to the SIFI designation proposed only weeks ago or that it is redressable by a court. Whereas the Bank has demonstrated that GE Capital already has a distinct advantage, whether because of "unofficial SIFI status" or merely because it is a larger, more highly capitalized company, it can only speculate that SIFI designation will "enhance" this pre-existing benefit. (Second Am. Compl. ¶ 148.) Because the Bank has failed to establish that GE's SIFI designation is the cause of an injury to the Bank, it has also failed to establish that this Court could redress any such injury by invalidating Title I.

3. Ripeness

For the same reason that the Bank lacks standing, the Bank's claim under Count III is not ripe: the lack of a "certainly impending" injury caused by Title I. See Coal. for Responsible Regulation, Inc. v. EPA, 684 F.3d 102, 130 (D.C. Cir. 2012) ("Ripeness . . . shares the constitutional requirement of standing that an injury in fact be certainly impending.") Therefore, in the absence of a concrete and particular injury, Count III will be dismissed under Fed. R. Civ. P. 12(b)(1).

II. TITLE II: THE ORDERLY LIQUIDATION AUTHORITY ("OLA")

A. The Statutory Provision

Pursuant to the OLA of Title II, the Treasury Secretary may appoint the FDIC as receiver of a failing "financial company."^[9] The purpose of Title II of Dodd-Frank is "to provide the necessary authority to liquidate failing financial companies that pose a significant risk to the financial stability of the United States in a manner that mitigates such risk and minimizes moral hazard." 12 U.S.C. § 5384(a). Title II is viewed as providing "the U.S. government a viable alternative to the undesirable choice it faced during the financial crisis between bankruptcy of a large, complex financial company that would disrupt markets and damage the economy, and bailout of such financial company that would expose taxpayers to losses and undermine market discipline." S. Rep. No. 111-176, at 4. The statute provides that this authority

shall be exercised in the manner that best fulfills such purpose, so that [] creditors and shareholders will bear the losses of the financial company; [] management responsible for the condition of the financial company will not be retained; and [] the [FDIC] and other appropriate agencies will take all steps necessary and appropriate to assure that all parties . . . having responsibility for the condition of the financial company bear losses consistent with their responsibility, including actions for damages, restitution, and recoupment of compensation and other gains not compatible with such responsibility.

12 U.S.C. § 5384(a).

The OLA replaces, in limited instances, the liquidation and reorganization mechanisms of Chapters 7 and 11 of the Bankruptcy Code. (See State Plaintiffs' Opposition to Defendants' Motion to Dismiss [ECF No. 28] ("States' Opp.") at 5.) Traditionally, bankruptcy proceedings begin with the filing of a petition by either the debtor company or the company's creditors in federal bankruptcy court. (See id. (citing 11 U.S.C. §§ 301, 303).) A trustee elected by the creditors' committee and the United States trustee act, under court supervision, to ensure that creditors' rights are protected. (See id. (citing 11 U.S.C. §§ 307, 341, 702, 704, 705, 1102, 1104, 1106, 1129).) Central to this dispute is the principle under bankruptcy law that "similarly situated creditors are entitled to equal treatment [in the form of] the pro rata payment on their claims." (See id. at 6 (citing 11 U.S.C. §§ 726(b), 1123(a)(4)).) The "automatic stay" provided by bankruptcy proceedings "reinforces that right, by preventing individual creditors and other stakeholders from seeking preferential treatment from the company." (See id. (citing 11 U.S.C. § 362).)

"There is a strong presumption that the bankruptcy process will continue to be used to close and unwind failing financial companies, including large, complex ones," as the "orderly liquidation authority could be used if and only if the failure of the financial company would threaten U.S. financial stability." S. Rep. No. 111-176, at 4. "Therefore the threshold for triggering the [O]rderly [L]iquidation [A]uthority is very high." Id. In order to activate the OLA, two-thirds of the Federal Reserve Board and two-thirds of the FDIC Board provide a written recommendation to the Treasury Secretary. See 12 U.S.C. § 5383(a). The recommendation must include an evaluation of eight statutory factors: [1] "whether the financial company is in default or in danger of default"; [2] "the effect that the default . . . would have on financial stability in the United States"; [3] "the effect that the default . . . would have on economic conditions or financial stability for low income, minority, or underserved communities"; [4] "the nature and extent of actions to be taken"; [5] "the likelihood of a private sector alternative to prevent the default"; [6] "why a case under the Bankruptcy Code is not appropriate"; [7] "the effects on creditors, counterparties, and shareholders of the financial company and other market participants"; and [8] "whether the company satisfies the definition of a financial company" under the statute. Id.

Before the Treasury Secretary can authorize use of the OLA, he must make seven findings: [1] that the company is "in default or in danger of default"; [2] that "the failure of the financial company . . . would have serious adverse effects on financial stability in the United States"; [3] that "no viable private sector alternative is available to prevent the default"; [4] that "any effect on the claims or interests of creditors, counterparties, and shareholders of the financial company and other market participants . . . is appropriate"; [5] that "any action taken [under this authority] would avoid or mitigate such adverse effects"; [6] that "a Federal regulatory agency has ordered the financial company to convert all of its convertible debt instruments that are subject to the regulatory order"; and [7] that "the company satisfies the definition of a financial company" under the statute. Id. § 5383(b).

If the financial company "does not acquiesce or consent to the appointment of the [FDIC] as receiver, the Secretary shall petition the United States District Court for the District of Columbia for an order authorizing the Secretary to appoint the [FDIC] as receiver." Id. § 5382(a)(1). The Secretary's petition is filed under seal. See id. The Court "[o]n a strictly confidential basis, and without any prior public disclosure . . . after notice to the covered financial company and a hearing in which the [] company may oppose the petition, shall determine whether the determination of the Secretary that the covered financial company is in default or in danger of default and satisfies the definition of a financial company under section 5381(a)(11) is arbitrary and capricious." Id. § 5382(a)(1)(A)(iii). The Secretary's other findings are not subject to review. See id. Additionally, the Act establishes criminal penalties for any "person who recklessly discloses" the Secretary's determination or petition, or the pendency of court proceedings. See id. § 5382(a)(1)(C).

A court must make a decision within twenty-four hours of receiving the Secretary's petition; if it does not, the government wins by default. See id. §5382(a)(1)(A)(v). The Court of Appeals reviews the district court's determination under the arbitrary and capricious standard. See id. § 5382(a)(2). Once the district court affirms the Secretary's determination, or fails to issue a decision within 24 hours, the Secretary may begin the liquidation by appointing the FDIC as receiver, and the liquidation "shall not be subject to any stay or injunction pending appeal." Id. § 5382(a)(1)(A)(v), (B). This judicial review process does not include creditors. (See States' Opp. at 9-10.)

After the FDIC is appointed as receiver, it "succeed[s] to . . . all rights, titles, powers, and privileges of the covered financial company and its assets, and of any stockholder, member, officer, or director[.]" 12 U.S.C. § 5390(a)(1)(A). Under Title II, the FDIC has a broad range of tools available to it. It may merge the company with another, sell its assets, transfer assets and claims to a "bridge financial company" owned and controlled by the FDIC, and repudiate "burdensome" contracts or leases. See id. §5390(a)(1)(G), (h)(1)(A), (c)(1).

Once appointed as receiver, the FDIC must provide notice to the failing company's creditors. See id. § 5390(a)(2)(B). Those creditors may file claims, which the FDIC as receiver may pay "in its discretion" and "to the extent that funds are available." Id. § 5390(a)(7). The FDIC is required to treat all similarly situated creditors in a similar manner unless it determines that differential treatment is "necessary [] to maximize the value of the assets of the covered financial company; [] to initiate and continue operations essential to the implementation of the receivership of any bridge financial company; [] to maximize the present value return from the sale or other disposition of the assets of the . . . company; or [] to minimize the amount of any loss realized upon the sale or other disposition of the assets of the covered financial company." Id. § 5390(b)(4). "A creditor shall, in no event, receive less than the amount" that it would have received if the FDIC "had not been appointed receiver" and the company instead "had been liquidated under chapter 7 of the Bankruptcy Code." Id. § 5390(a)(7)(B), (d)(2). A creditor may seek judicial review on any disallowed claim in federal district court. See id. § 5390(a)(4). To date, the OLA has not been invoked. (See Def. Mot. at 14 (citing GAO, "Agencies Continue Rulemakings for Clarifying Specific Provisions of Orderly Liquidation Authority," at 2 (July 2012), at http://www.gao.gov/assets/600/592318.pdf).)

B. Counts IV, V, and VI

1. Standing

Plaintiffs challenge Title II on three separate legal grounds. For all three, they assert standing based on the States' status as creditors, in that the States or their pension funds hold investments in institutions that qualify as "financial companies" under Section 210 of the Dodd-Frank Act, which renders those companies potentially subject to Title II's OLA.^[10] As was the case with the Bank's challenge to Title I, the States are not themselves "the object of the government action or inaction [they] challenge[]," and so "standing is not precluded, but it is . . . substantially more difficult to establish." Summers, 555 U.S. at 493.

a. Present Injury

The State Plaintiffs insist that their standing is based on the existence of a present injury caused by "Dodd-Frank's express abrogation of the statutory rights that the State Plaintiffs previously retained under the Bankruptcy Code." (States' Opp. at 14 (citing Second Am. Compl. ¶ 170).) They maintain that "[a]s investors in the unsecured debt of financial companies, the State Plaintiffs were protected by the federal bankruptcy laws' guarantee of equal treatment of similarly situated creditors. By abridging that guarantee, Title II invades the State Plaintiffs' legally protected interests, injuring them and giving them standing to challenge Title II's constitutionality." (Id.)

The States suggest that their "property rights in their investments [are] a bundle of sticks, [and] one of the `sticks' that [they] held before the Dodd-Frank Act was enacted was the statutory right to equal treatment in bankruptcy." (Id. at 19.) They argue that "[w]hen the Act became law . . . that `stick' was removed from the States' bundle," which constitutes an injury because "a rational investor would prefer an investment that includes a guarantee of equal treatment in bankruptcy to an investment that does not include such a guarantee." (Id.) By casting their claim in this manner, the States attempt to escape the obvious conclusion that any future injury is too conjectural and remote. However, the Court is unconvinced that the States have a present injury because the States' underlying premise that they have a "property right" in the configuration of the Bankruptcy Code is flawed. Simply put, the States' holding of certain statutory rights does not amount to an inalienable property right under the Bankruptcy Code.

Nor is the Court persuaded by the States' argument that the loss of a right in the abstract is sufficient to confer standing. The States cite Lujan for the proposition that an "injury" is "an invasion of a legally protected interest[,]" and the injury "may exist solely by virtue of statutes creating legal rights, the invasion of which creates standing." (Id. at 20 (quoting Lujan, 504 U.S. at 560, 578).) But the States misinterpret Lujan. In the passage that the States cite, the Supreme Court clarified its holding in an earlier case by reiterating that the "[statutory] broadening [of] the categories of injury that may be alleged in support of standing is a different matter from abandoning the requirement that the party seeking review must himself have suffered an injury." Lujan, 504 U.S. at 578-79. As to the latter requirement, the Supreme Court affirmed that "the concrete injury requirement must remain" in suits against the government. Id. (emphasis added). There is no real question then that an injury could arise out of the invasion of a statutory right, as long as there is a concrete injury based on that invasion. Nor is there a real debate that an injury can be of a non-financial nature, as in FOIA cases, see, e.g., Public Citizen v. U.S. Dep't of Justice, 491 U.S. 440, 449 (1989), or in cases such as Zivotofsky v. Sec'y of State, 444 F.3d 614, 617-18 (D.C. Cir. 2006). (See States' Opp. at 19-23.) But there must be a concrete, present injury, which the States have not shown here.

The cases cited by the States are not to the contrary. The States rely primarily on Zivotofsky, where the Court of Appeals stated:

Although it is natural to think of an injury in terms of some economic, physical, or psychological damage, a concrete and particular injury for standing purposes can also consist of the violation of an individual right conferred on a person by statute. Such an injury is concrete because it is of a form traditionally capable of judicial resolution, . . . and it is particular because, as the violation of an individual right, it affects the plaintiff in a personal and individual way.

444 F.3d at 619 (citations, brackets, emphasis, and internal quotation marks omitted). Significantly, however, the injury in Zivotofsky was not an abstract, hypothetical loss of a statutory right. Rather, it was the actual, concrete loss of a right granted by statute to have Israel listed as the place of birth on the passport of a child born in Jerusalem. See Foreign Relations Authorization Act, Fiscal Year 2003, Pub. L. No. 107-228, § 214(d), 116 Stat. 1350, 1365-66 (2002). Despite the clear right granted by statute, the U.S. Embassy in Israel denied the request of the child's American parents. Zivotofsky, 444 F.3d at 615-16. The States' claims here are not remotely similar to the concrete loss in Zivotofsky, since in this case no violation of any statutory right has occurred and it may never occur in the future.

The States represent that "the scholarship is virtually unanimous" that "as a rational creditor you are harmed now by having the certainty that you had under the Bankruptcy Code and the knowledge of what would happen in the event of a default taken away" (see Tr. at 92-93), but a review of their citations does not support this assertion. One author, highlighted by the States at the oral argument on this motion (see id. at 93), cautions that there could be adverse impacts for creditors, but concludes that the ultimate effects are far from clear:

One of the challenging aspects of considering the potential impact of Title II on creditors and other stakeholders of nonbank financial companies that are eligible to be a debtor under the Bankruptcy Code is that many provisions of Title II are subject to the enactment of rules and regulations that are necessary for implementing and clarifying its terms. Since most of those regulations have yet to be promulgated, the impact of Title II on creditors and other stakeholders will continue to evolve. It is possible that many regulations may further "harmonize" certain provisions of Title II with the provisions of the Bankruptcy Code. It is also possible that the very significant differences between the provisions of Title II and those of the Bankruptcy Code will cause creditors of nonbank financial companies that face future financial crises to be more amenable to finding private sector alternatives, including restructuring of debt and consent to sales of assets, in order to avoid the uncertainties posed by this new and as yet untested insolvency regime.

Hollace T. Cohen, Orderly Liquidation Authority: A New Insolvency Regime to Address Systemic Risk, 45 U. Rich. L. Rev. 1143, 1153 (2011) (cited in States' Opp. at 5, 7, 12, 18).

While it may be true that the OLA could generate some uncertainty, which could affect the behavior of investors and others, this type of market uncertainty is insufficient to constitute an injury, either present or future, that is fairly traceable to Title II.^[11] In this regard, the D.C. Circuit's reasoning in Committee for Monetary Reform v. Board of Governors of the Federal Reserve System, 766 F.2d 538 (D.C. Cir. 1985), is relevant. In that case, appellants included businesses, associations, and individuals who alleged that they suffered financial damage "as a result of monetary instability and high interest rates." Id. at 542. The Court assumed that the allegations were sufficient to meet the requirements of injury-in-fact, but held that appellants "failed to show that their injuries are fairly traceable to the asserted constitutional violation," because

[i]t is entirely speculative whether the influence of the Reserve Bank members is responsible for the FOMC's alleged pursuit of restrictive or erratic monetary policies. Moreover, in light of the complexity of the modern economy, it is also highly uncertain whether and to what extent such policies were responsible for the adverse economic conditions that allegedly resulted in harm to the appellants. Similarly, the appellants have given no indication as to how they can succeed in establishing that an overly broad delegation of power to the Federal Reserve System has had the consequence of undermining economic certainty and thereby increasing interest rates.

Id.

The injuries asserted here are even more speculative, for the States have not claimed any actual damage resulting from increased economic uncertainty. Moreover, they have not presented evidence that any harm is fairly traceable to the OLA, nor could they since the OLA exists only on paper at this point in time. While it may be true that certain economic actors have already adjusted their behavior in response to Title II, "[t]he fact that some individuals may base decisions on `conjectural or hypothetical' speculation does not give rise to the sort of `concrete' and `actual' injury necessary to establish Article III standing." Already, 133 S. Ct. at 730 (quoting Lujan, 540 U.S. at 560).

b. Future Injury

Nor can the States prevail on an allegation of future injury. There are a series of contingencies that must occur before they would suffer any actual harm. It is true that Dodd-Frank empowers the FDIC to treat creditors' claims somewhat differently than they are treated in traditional bankruptcy proceedings, but no one can know if this will ever happen. Thus, the States do not face a future harm that is "certainly impending." Clapper, 133 S. Ct. at 1151.

The D.C. Circuit's recent decision in Deutsche Bank Nat'l Trust Co. v. FDIC, 717 F.3d 189 (D.C. Cir. 2013), is instructive. There, the Court of Appeals agreed that appellants' economic interest in receivership funds constituted a legally protected interest, but found that they were "not persuasive in showing that their economic interest faces an imminent, threatened invasion — i.e., one that is not conjectural or speculative." Id. at 193. The Court found that

at least two major contingencies must occur before Deutsche Bank's suit could result in economic harm to appellants: (1) the district court must interpret the Agreement to find that FDIC did not transfer the relevant liability to J.P. Morgan; and (2) Deutsche Bank must prevail on the merits against FDIC in its breach-of-contract claims. . . Under such circumstances, where a threshold legal interpretation must come out a specific way before a party's interests are even at risk, it seems unlikely that the prospect of harm is actual or imminent.

Id. Here, too, there are a host of contingencies that must occur before the States could arguably suffer economic harm under Title II, and "because [the statute] at most authorizes — but does not mandate or direct — the [enforcement] that respondents fear, respondents' allegations are necessarily conjectural." Clapper, 133 S. Ct. at 1149 (emphasis in original).^[12]

First, "[a] systematically important financial company in which the States are invested would have to be in default or in danger of default." (Defendants' Reply [ECF No. 30] ("Def. Reply") at 30.) Second, "[t]he Secretary of the Treasury would have to exercise his discretion to seek the appointment of a receiver under Title II's [O]rderly [L]iquidation [A]uthority, and he could do so only if numerous statutory prerequisites were met, including consultation with the President of the United States, and a written recommendation from the Federal Reserve Board and the FDIC, or another agency." (Id.) Third, "the States as creditors would have to suffer a greater loss in a Title II liquidation than they would have in bankruptcy, and this would have to happen despite Title II's requirement that each creditor will receive no less than it would have under a liquidation pursuant to chapter 7 of the Bankruptcy Code." (Id.)^[13]

In some instances, when and if the OLA is ever invoked, a given creditor may find itself worse off than it would have been had the debtor company been subject to a Chapter 11 proceeding. Other creditors may, however, find themselves better off since the very point of the OLA authority is to try to minimize the losses and maximize the value of the assets of the failing financial company. See 12 U.S.C. § 5390(b)(4). It is entirely speculative that the States will be among the creditors that will end up worse off. Furthermore, it is possible that regulations will be enacted that will provide greater certainty, as Cohen suggests, and that the doom the States foresee will never come to pass. In short, the States' theory "stacks speculation upon hypothetical upon speculation, which does not establish an `actual or imminent'" injury. N.Y. Reg'l Interconnect Inc. v. FERC, 634 F.3d 581, 587 (D.C. Cir. 2011) (quoting Lujan, 504 U.S. at 560). Any injury is "hopelessly conjectural," depending upon a chain of potential but far from inevitable developments. Deutsche Bank, 717 F.3d at 193. See also Price, Sifting for SIFIs, at 8 (suggesting that the existence of the OLA could prompt some creditors to "believe that they may. . . get protection unavailable in a normal bankruptcy"). Accordingly, the States lack standing to challenge Title II.

2. Ripeness

The States' claims are also not ripe because they are not "fit for judicial review." See, e.g., Seegars v. Gonzales, 396 F.3d 1248, 1253 (D.C. Cir. 2005) (citations omitted). In such an instance, the issues would be much clearer for judicial review with further factual development, and "denial of immediate review would [not] inflict a hardship on the challenger — typically in the form of its being forced either to expend non-recoverable resources in complying with a potentially invalid regulation or to risk subjection to costly enforcement processes." Id. Even a "pure legal issue," such as a facial challenge, may not be ripe. See, e.g., Nat'l Park Hospitality Ass'n v. Dep't of the Interior, 538 U.S. 803, 812 (2003) (even a "purely legal" "facial challenge" is unripe if "further factual development would significantly advance [the court's] ability to deal with the legal issues presented."). Of particular relevance here, "a claim is not ripe for adjudication if it rests upon contingent future events that may not occur as anticipated, or indeed may not occur at all." CTIA-The Wireless Ass'n v. FCC, 530 F.3d 984, 987 (D.C. Cir. 2008) (quoting Texas v. United States, 523 U.S. 296, 300 (1998)). As the D.C. Circuit has noted, in rejecting a separation-of-powers claim on ripeness grounds:

In the instant case, as in Buckley [v. Valeo, 424 U.S. 1 (1976)], appellant asks this court to pass on the constitutionality of an entire Act of Congress that vests in an entity a host of powers, most of which have not been invoked and many of which may never be invoked in the proceedings concerning appellant. To decide the legitimacy of powers whose exercise is the antithesis of "all but certain" would clearly contravene the principle of constitutional avoidance underlying both this court's and the Supreme Court's decisions in Buckley, the principle that "the quarrel must be with the official and not the statute book." . . . In the course of time we may have a more concrete application of the Act as a whole. Then, and only then, will we be justified in deciding the facial constitutionality of the Act.

Hastings v. Judicial Conference, 770 F.2d 1093, 1101-03 (D.C. Cir. 1985) (citation omitted). Similarly, the States ask the Court to invalidate all of Title II, despite the fact that none of the OLA powers "have [] been invoked and many of which may never be invoked" in matters concerning the States. Id. at 1101. For the Court to do so would be the height of imprudence. Therefore, even if the States could survive a challenge to their standing, which they cannot, their claims are not ripe.

For these reasons, the Court finds that the States lack standing on Counts IV, V, and VI, or in the alternative, that their claims are not ripe, and will accordingly dismiss these counts pursuant to Fed. R. Civ. P. 12(b)(1).

III. TITLE X: CONSUMER FINANCIAL PROTECTION BUREAU

A. The Statutory Provision

Title X established the Consumer Financial Protection Bureau in order to "implement and. . . enforce Federal consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive." 12 U.S.C. § 5511(a). The Bureau is an independent agency within the Federal Reserve System. See id. § 5491(a). The Bureau is headed by a Director appointed by the President, with the advice and consent of the Senate and removable by the President for cause. See 12 U.S.C. § 5491(b), (c). The President appointed Richard Cordray as the Bureau's first Director on January 4, 2012, pursuant to the Recess Appointments Clause, U.S. Const. art. II, § 2, cl.3. The President renominated Cordray to a full term on February 13, 2013. Cordray's recess appointment was due to expire at the end of the Senate's current session or upon the Senate's confirmation of his nomination if earlier, but on July 16, 2013, the Senate confirmed Cordray's appointment.^[14]See Danielle Douglas, Senate confirms Cordray to head consumer agency, WASH. POST, July 17, 2013, at A12.

Title X transferred regulatory authority to the Bureau over consumer financial products and services that had previously been exercised by other federal agencies. See 12 U.S.C. § 5581. This includes regulatory authority under, among others, the Truth in Lending Act ("TILA"), the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act ("RESPA"), and the Electronic Funds Transfer Act ("EFTA"). See id. §§ 5581, 5481(12), (14). The Dodd-Frank Act also amended many existing laws related to consumer financial issues and transferred the authority to implement those amendments to the Bureau. (See Def. Mot. at 7.) Under the Act, the Bureau is also authorized to promulgate any rule that it deems "necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof." 12 U.S.C. § 5512(b)(1). The Bureau has authority to directly enforce these laws, including the power to initiate civil enforcement actions. See 12 U.S.C. § 5564.

1. UDAAP Authority

In addition to granting existing regulatory authority to the Bureau, Title X also authorizes the Bureau to issue new regulations to implement the provisions of Title X, including its prohibition against any "unfair, deceptive, or abusive act or practice" by a "covered person" or "service provider." 12 U.S.C. §§ 5512(b)(1), 5531(a), 5532(a)), 5536(a)(1)(B), 5481(6), (26). Although Title X authorizes the Bureau to issue regulations under this "UDAAP authority," it has yet to do so. (See Def. Mot. at 8.) The Bureau has, however, commenced enforcement actions pursuant to its UDAAP authority, such as filing complaints and securing consent orders against third parties in matters unrelated to this litigation. (See Pvt. Pl. Opp. at 4.)

The Bureau also has the authority to "supervis[e] covered persons for compliance with Federal consumer financial law, and tak[e] appropriate enforcement action to address violations of Federal consumer financial law." 12 U.S.C. § 5511(c)(4). The "prudential regulators" — the Federal Reserve Board, the FDIC, the OCC, the NCUA, and previously, the OTS — remain primarily responsible for examining the compliance of smaller insured depository institutions and credit unions (i.e., those with $10 billion or less in total assets that are not affiliates of large banks and credit unions) with Federal consumer financial law. See id. §§ 1813q, 5481(24), 5581(c)(1)(B), 5516(a). SNB falls under the authority of the OCC. (See Pvt. Pl. Opp. at 4.) The Bureau may require reports from those smaller institutions and may participate in the prudential regulators' examinations of those institutions "on a sampling basis." 12 U.S.C. § 5516(b), (c)).

The Bureau may also recommend to the prudential regulator that it take action when there is reason to believe that one of the smaller institutions has violated Federal consumer financial law. See 12 U.S.C. § 5516(d)(2). The prudential regulator has an obligation to respond in writing to any such recommendation. See id. To date, no reporting requirement has been imposed on SNB, and neither the OCC nor the Bureau has taken any action against SNB.

2. Remittance Rule

Dodd-Frank amended the EFTA to establish greater consumer protections for remittance transfers from consumers in the United States to businesses and individuals abroad. (See Def. Mot. at 7 (citing 15 U.S.C. § 1693o-1).) With the EFTA regulatory authority that it now exercises, the Bureau promulgated the Remittance Rule to implement this statutory amendment. The Remittance Rule establishes disclosure and compliance requirements for institutions that offer international remittance transfers, and it applies to "any person that provides remittance transfers for a consumer in the normal course of its business." Electronic Fund Transfers (Regulation E) ("EFT"), 77 Fed. Reg. 6194, 6205 (Feb. 7, 2012) (to be codified at 12 C.F.R. pt. 1005)). On February 7, 2012, the Bureau published the final rule, and on August 20, 2012, it published an amendment to that rule establishing a safe harbor provision. See EFT, 77 Fed. Reg. 6194 (Feb. 7, 2012) (codified at 12 C.F.R. pt. 1005, subpart B); EFT, 77 Fed. Reg. 50244 (Aug. 20, 2012) (amending 12 C.F.R. pt. 1005). Following several months of additional rulemaking, the Bureau issued a final rule on May 22, 2013, amending several aspects of the rule not relevant here, and establishing that the rule would take effect on October 28, 2013. See EFT, 77 Fed. Reg. 77188 (Dec. 31, 2012); EFT Temporary Delay of Effective Date, 78 Fed. Reg. 6025 (Jan. 29, 2013); EFT 78 Fed. Reg. 30661 (May 22, 2013).

3. Rules Relating to Mortgages

The Bureau has also promulgated two rules regarding mortgages that are relevant to SNB's claim of standing.

a. RESPA Servicing Rule

On February 14, 2013, the Bureau issued a final rule governing mortgage servicing under RESPA, 12 U.S.C. § 2601 et seq. ("RESPA Servicing Rule"). See Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X), 78 Fed. Reg. 10696 (Feb. 14, 2013) (to be codified at 12 C.F.R. § 1024.41(j)). Although multi-faceted, the portion of the rule relevant here will prohibit a servicer from making "the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process unless a borrower's mortgage loan obligation is more than 120 days delinquent." Id. at 10885. This rule will take effect on January 10, 2104. See id. at 10696.

b. ATR-QM Rule

On January 10, 2013, the Bureau issued a final rule implementing Title XIV of the Dodd-Frank Act and amending Regulation Z, which implements the Truth in Lending Act, 15 U.S.C. 1601 et seq. ("ATR-QM Rule"). See Ability-to-Repay and Qualified Mortgage Standards under the Truth in Lending Act (Regulation Z), 78 Fed. Reg. 6408 (Jan. 30, 2013) (to be codified at 12 C.F.R. § 1026.43). This rule requires lenders to determine potential borrowers' ability to repay before extending mortgage credit to them. See 15 U.S.C. § 1639c(1). The failure to conduct this determination leaves lenders subject to liability and a foreclosure defense by borrowers. See id. § 1640(a), (k). Title XIV and the ATR-QM Rule both provide for a safe harbor under which a lender will be deemed to have made the ability-to-repay determination for qualified mortgages, and a rebuttable presumption that a lender has made the ability-to-repay determination for qualified mortgages that are "higher-priced covered transactions."^[15]See id. § 1639c(b); 78 Fed. Reg. at 6585-87. On May 29, 2013, the Bureau expanded the scope of the safe harbor, by

[r]aising the threshold defining which qualified mortgages receive a safe harbor under the ability-to-repay rules for loans that are made by small creditors under the balloon-loan or small creditor portfolio categories of qualified mortgages. Because small creditors often have higher cost of funds, the final rule shifts the threshold separating qualified mortgages that receive a safe harbor from those that receive a rebuttable presumption of compliance with the ability-to-repay rules from 1.5 percentage points above the average prime offer rate (APOR) on first-lien loans to 3.5 percentage points above APOR.

78 Fed. Reg. 35430, 35431 (June 12, 2013).^[16]

B. Counts I and II

In its Opposition, the Bank bases its claim of standing as to Count I on "four here-and-now financial injuries directly caused by the unconstitutional formation and operation of the Bureau." (Pvt. Pl. Opp. at 12.) First, it alleges that it "has incurred and will continue to incur substantial compliance costs to ensure it acts consistently with the Bureau's regulations and interpretations of Federal consumer financial law." (Id.) Second, it alleges that the Bureau's Remittance Rule caused the Bank initially to "cease[] offering profitable remittance transfers" and subsequently to resume offering the transfers on a limited basis. (Id.) Third, it alleges that "the Bureau's new rules governing mortgage foreclosure increase the Bank's costs of doing business with respect to mortgage loans it has already made." (Id.) Fourth, it alleges that as of October 2010, it "discontinued a profitable mortgage practice to avoid prosecution pursuant to the Bureau's UDAAP authority." (Id.) In addition, the Bank asserts that it has standing simply "because it is directly regulated by the Bureau." (Pvt. Pl. Opp. at 30-31.)

As an initial matter, the Bank errs to the extent that it suggests that it need only show that it is "directly subject to the authority of the agency" without meeting the basic standing requirements of injury-in-fact, causation, and redressability. (Pvt. Pl. Opp. at 30 (quoting Comm. for Monetary Reform, 766 F.2d at 543).)^[17] The Bank claims to be relying on D.C. Circuit precedent for this proposition, but it has misinterpreted that precedent. In Committee for Monetary Reform, the Court held that "litigants have standing to challenge the authority of an agency on separation-of-powers grounds only where they are directly subject to the authority of the agency, whether such authority is regulatory, administrative, or adjudicative in nature." 766 F.2d at 543. Ultimately, the Court found no standing because plaintiffs did not allege that "they are directly subject to the governmental authority they seek to challenge, but merely assert[ed] that they are substantially affected by the exercise of that authority." Id. The Court did not conclude, however, that being subject to the challenged governmental authority was sufficient. Lest there be any doubt, the Court later cited this holding in NRA Political Victory Fund, where it stated, "[b]ecause an enforcement action is the paradigm of `direct governmental authority,' appellants have standing[.]" 6 F.3d at 824. While the parameters of direct governmental authority have yet to be established, no case stands for the proposition that standing can be established merely by being subject to governmental regulatory authority in the absence of any agency action that causes injury.^[18]

The Bank's claim of standing with respect to Count II is based on the same factual allegations as it relies on for Count I.^[19] (See Pvt. Pl. Opp. at 31.) It is settled that the Bank need not show that the results of any agency action would have been different without an unconstitutional appointment. In other words, the Bank need not present "precise proof of what the [Bureau]'s policies might have been in that counterfactual world." Free Enter. Fund v. Public Co. Accounting Oversight Bd., 130 S. Ct. 3138, 3163 n.12 (2010). See also Comm. for Monetary Reform, 766 F.2d at 543 ("a party is not required to show that he has received less favorable treatment than he would have if the agency were lawfully constituted and otherwise authorized to discharge its functions").

Nevertheless, while the Bank does not have to demonstrate that a constitutionally-appointed director would have made different decisions than Cordray has, it must demonstrate that it has been harmed by some decisions made by Cordray or under his direction. Thus, it cannot complain in Count II about the Bank's 2010 exit from the mortgage market, since that predated Cordray's 2012 appointment, see Lujan, 504 U.S. at 560-61, but it can point to the Remittance Rule, the RESPA Servicing Rule, and the ATR-QM Rule that issued during his tenure and the compliance costs incurred after his 2012 appointment.^[20] Nonetheless, as to both Counts I and II, the Bank must satisfy the injury-in-fact prong of standing, for, as the Supreme Court stated long ago:

We have no power per se to review and annul acts of Congress on the ground that they are unconstitutional. That question may be considered only when the justification for some direct injury suffered or threatened, presenting a justiciable issue, is made to rest upon such an act. . . . The party who invokes the [court's jurisdiction] must be able to show, not only that the statute is invalid, but that he has sustained or is immediately in danger of sustaining some direct injury as the result of its enforcement, and not merely that he suffers in some indefinite way in common with people generally.

Massachusetts v. Mellon, 262 U.S. 447, 488 (1923). The Court will turn to the four grounds upon which the Bank relies to satisfy its burden as to standing.

1. Compliance Costs

The Bank argues that it has spent money to keep abreast of developments under the Dodd-Frank Act and that these expenditures are subsumed under the heading of "compliance costs."^[21] In particular, it asserts that it spent over $230,000 in compliance costs in 2012, including "over $2,500 to send a representative to `Compliance School' that offered classes on, among other things, CFPB regulations." (Pvt. Pl. Opp. at 8 (citing Declaration of Jim R. Purcell [ECF No. 27-2] ("First Purcell Decl.") ¶¶ 5, 6) (emphasis added).) The Bank also began subscribing, at a cost of $9,900 annually, to a service called the "`Compliance Alliance' created by the Texas Bankers Association in response to the passage of the Dodd-Frank Act." (Id.) In the Bank's careful phrasing, the "[s]ervice provides notification and counsel regarding new and proposed regulations, interpretations, and enforcement actions that would affect the Bank's business, and was specifically marketed to SNB and other banks as necessary to stay up-to-date with (among other things) the activities of the CFPB." (Id. (emphasis added).) In 2011, prior to Cordray's appointment, the Bank also subscribed to a second compliance service, TriNovus, at a cost of $2,300. (See id.)^[22] In sum, the Bank's "compliance costs" consist of the costs of learning about the Bureau's regulatory and enforcement activities.

In proposing this novel and overly broad interpretation of the term "compliance costs," the Bank would have this Court adopt a theory of standing that goes beyond any decision in this jurisdiction. Certainly, courts in this jurisdiction have found standing based on expenditures that have been categorized as "compliance costs,"^[23] but in each case, those costs were incurred to come into compliance with the law, rather than merely to keep abreast of developments in the law. See, e.g., Duncan, 681 F.3d at 458 (plaintiff schools "harmed because they will face even greater compliance costs" due to new regulation requiring states to institute school authorization process and complaint-review process). As defendants suggest, a compliance cost is typically "the cost a regulated party incurs to satisfy a legal mandate — e.g., money spent to retrofit a factory to bring it into compliance with a new environmental code," not the cost the party incurs to determine whether it needs to satisfy a legal mandate. (Def. Reply at 21.) But the Bank does not claim to have any costs of the former type, only the latter.

A compliance cost has also been interpreted to include the cost of complying with statutory reporting requirements. See, e.g., Cellco P'ship v. FCC, 357 F.3d 88, 100 (D.C. Cir. 2004) (in assessing a challenge to two regulations involving extensive reporting requirements, the Court held that "[a]s an entity continuously burdened by the costs of complying . . . with what it contends are `unnecessary' regulations[,] . . . [plaintiff's] injuries are concrete and actual"); Inv. Co. Instit. v. CFTC, 891 F.Supp.2d 162, 177, 185 (D.D.C. 2012) (in assessing challenge to regulations issued pursuant to Dodd-Frank involving reporting and registration requirements, Court found standing based on "relative increased regulatory burden and . . . associated costs"). But, while the Bureau has the authority to demand the production of reports from covered entities, the Bank has not been required to submit any reports, nor is it clear that it will be required to do so in the future.^[24]

Because the Bank's overly broad conception of "compliance costs" has never been recognized in this jurisdiction, the Bank resorts to reliance on two cases from the Fourth Circuit. In addition to not being binding on this Court, both of the cases cited by the Bank are distinguishable. In Chambers Med. Tech. of S.C. v. Bryant, 52 F.3d 1252 (4th Cir. 1995), the plaintiff challenged a blacklisting provision under South Carolina state law that prohibited an owner or operator of a waste treatment facility within South Carolina from accepting infectious waste generated in a jurisdiction that prohibits the treatment, storage, or disposal of the waste in that jurisdiction. See id. at 1265. The plaintiff was found to have standing because it "would incur costs associated with monitoring the laws of [sixteen] states to ensure that they did not enact . . . legislation" that would automatically trigger the blacklisting provision. Id. Importantly, in Chambers, the costs of monitoring the other states' laws were necessarily incurred in order to avoid violating South Carolina law. By contrast, the expenditures that SNB includes as "compliance costs" are ones that it has voluntarily incurred to keep track of the CFPB's activities, not to actually comply with any regulations.

Similarly, in Pac. Legal Found v. Goyan, 664 F.2d 1221 (4th Cir. 1981), a funding program that the plaintiff was challenging would have expanded public participation in FDA rulemaking proceedings in which the plaintiff frequently participated, necessitating its increased "vigilance and efforts" to maintain its "`institutional presence'" in those proceedings. Id. at 1224. The Fourth Circuit found that the plaintiff had standing based on the "increased time and expense necessary for it to monitor not only proposals by the FDA and comments thereto, but also proposals by applicants for reimbursement under the program here in question." Id. In that case, there was no question that the plaintiff would participate in future FDA proceedings and that its participation would become more expensive under the funding program. Thus, its injury was "certainly impending." Clapper, 133 S. Ct. at 1143. The same is not true here, where the Bank is monitoring CFPB proposals and actions to determine if the Bureau will take any actions that will affect the Bank. In addition, both of these cases predate Clapper, 133 S. Ct. at 1152, wherein the Supreme Court held that "self-inflicted" injuries, which arguably encompass the harms claimed by the plaintiffs in the Fourth Circuit cases, do not give rise to Article III standing.^[25]

Nevertheless, to the extent that the Fourth Circuit cases can be read to justify the Bank's theory of standing and survive Clapper, this Court is unwilling to accept their rationale. The logical extension of the Bank's expansive definition of compliance costs would be that any time a party spends money or uses its resources (including its in-house counsel) to identify its statutory obligations, or indeed to determine if it even has any, it would then have standing to challenge that statute. That cannot be the law. Just as "a plaintiff cannot achieve standing to litigate a substantive issue by bringing suit for the cost of bringing suit," Steel Co., 523 U.S. at 107, a plaintiff should not be able to achieve standing to litigate an injury based on the cost of figuring out whether it has an injury. To accept the Bank's definition of compliance costs would amount to an evisceration of the requirement of injury-in-fact, and would grant standing to a party that is merely a subject of a regulation or statute. (See supra Section III.B.)

But even if these costs could be construed to constitute an injury, it is a self-inflicted injury, neither caused by Title X nor redressable by this Court. As the Supreme Court recently held, plaintiffs "cannot manufacture standing merely by inflicting harm on themselves based on their fears of hypothetical future harm that is not certainly impending." Clapper, 133 S. Ct. at 1151. The Bank's assertion that it was forced to expend these costs rings hollow since it is not clear that Compliance Alliance and TriNovus provide needed information about Bureau regulations that is not readily accessible from the Bureau's own comprehensive and comprehensible website. (See generally http://www.consumerfinance.gov.) Furthermore, the Compliance Alliance is a service of the Texas Bankers Association, a trade association to which the Bank belongs, which further undermines the Bank's claim that these expenses constitute an injury caused by the Bureau. In addition, while the service may have been inspired by Dodd-Frank, as the Bank suggests, it is not focused exclusively on Bureau regulations. Instead, its publications and resources cover a wide range of federal and state regulations, so it is an overstatement to claim that the entire subscription fee is attributable to Title X of Dodd-Frank. (See Pvt. Pl. Opp. at 8; see generally http://www.compliancealliance.com.) Similarly, the "Compliance School" training related to a variety of subjects, including, but certainly not limited to, CFPB regulations. (See Pvt. Pl. Opp. at 8; Tr. at 18.) Thus, if Dodd-Frank had never been passed, the Bank presumably would still have to spend money to learn about its compliance responsibilities under other federal and state regulations; likewise, if the Court were to invalidate Title X, the Bank would continue to spend money to learn about its other compliance responsibilities. As a result, the Bank has not established that these costs were caused by Title X or that they are redressable by a court.

In short, these expenditures are not "a reasonable reaction to a risk of harm," but rather expenditures that the Bank would make in the normal course of business irrespective of Title X, or, to the extent that they are costs unique to Title X, they are an injury that the Bank has inflicted on itself "based on [its] fears of hypothetical future harm that is not certainly impending." Clapper, 133 S. Ct. at 1151.

2. Remittance Rule

The Bank claims that the Bureau's Remittance Rule has constrained its remittance business, thereby causing it Article III injury. Importantly, on the day the Bureau issued the rule, it also issued a notice of proposed rulemaking indicating that the Bureau was considering the establishment of a safe harbor. (See Def. Reply at 8.) Although the safe harbor, as initially contemplated, would have covered only institutions that provided 25 or fewer remittances, the safe harbor that was ultimately adopted in August 2012 protects institutions that provide 100 or fewer remittances. (See 77 Fed. Reg. at 6203; EFT, 77 Fed. Reg. at 50244.)

The Bank stopped offering remittances when the initial rule was promulgated — despite the fact that the rule had not come into effect and there was a notice of proposed rulemaking — and it began offering remittances again after the safe harbor provision was adopted. (See First Purcell Decl. ¶¶ 15, 18, 20.) The Bank now argues that its "inability to cost-effectively comply with the Rule has caused it to adopt a policy pursuant to which it has limited its business opportunities by mandating that it will never perform more than 99 covered transfers in any given year." (Pvt. Pl. Opp. at 17 n.8.) However, the Bank has never come close to 100 remittances, as it "regularly offered more than 25 transfers a year," but it has never offered more than 70 transfers in a year. (See First Purcell Decl. ¶ 11.) Thus, it falls comfortably within the safe harbor that was ultimately adopted, and its assertion that it would issue more than 100 remittances annually in the future were it not subject to the regulation lacks plausibility. See Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). For, as the Supreme Court has held, "`some day' intentions — without any description of concrete plans, or indeed even any specification of when the some day will be — do not support a finding of the `actual or imminent' injury that" is required. Lujan, 504 U.S. at 564.

The Bank also argues that even if the Court does not accept its proposition that the rule as currently configured causes it injury, it has standing because when it filed suit, the final Remittance Rule had been issued but the final rule regarding the safe harbor had not yet been formally promulgated. Of course, "standing is assessed at the time of filing." Wheaton Coll. v. Sebelius, 703 F.3d 551, 552 (D.C. Cir. 2012). Nonetheless, the Court disagrees with the Bank's premise. At the time that the suit was filed, the Remittance Rule had not taken effect, and the Bureau had made it clear that it was still in the midst of drafting a rule to provide for a safe harbor. Furthermore, as defendants have noted, further amendment was not only contemplated at the time the rule was issued, it was all but inevitable. (See Tr. at 64.) The statute and the rule specified that the rule would apply only to entities that provide remittance transfers "in the normal course of business," but that phrase was left undefined. (Id.) Ultimately, the safe harbor amendment defined "in the normal course of business" as the issuance of 100 or more remittances annually, thereby limiting the application of the Remittance Rule to institutions that have a far more active remittance business than the Bank. While a plaintiff need not necessarily wait until the effective date of a regulation to challenge it, see Pierce v. Soc'y of the Sisters, 268 U.S. 510, 529, 536 (1925), where it is clear that the administrative process is ongoing to the extent that the regulation's application to the plaintiff is unclear, there is no "certainly impending" injury. Clapper, 133 S. Ct. at 1143.

In addition, considerations of prudential ripeness will sometimes lead courts to refrain from interfering with an agency's ongoing decision-making process. See Reno v. Catholic Soc. Servs., 509 U.S. 43, 58 n.18 (1993) ("Even when a ripeness question in a particular case is prudential, we may raise it on our own motion, and cannot be bound by the wishes of the parties.") (internal quotation marks and citation omitted). As the Court of Appeals recently noted, "[i]n the context of agency decision making, letting the administrative process run its course before binding parties to a judicial decision prevents courts from `entangling themselves in abstract disagreements over administrative policies, and . . . protect[s] the agencies from judicial interference' in an ongoing decision-making process." Am. Petroleum Inst., 683 F.3d at 386. Of course, the Bank is not challenging a specific agency decision, but rather the existence of the agency itself. Nonetheless, in the context of this Court's attempts to assess its jurisdiction over the Bank's claims, similar reasoning applies, for the Bank's claims remain abstract until there is some regulation that actually causes harm or will plausibly harm in the near future.

Furthermore, the Bank's claim is not ripe because the Bank has no imminent injury based on the Remittance Rule as presently promulgated. The Bank alleges that the Bureau could alter the rule at any time to make it applicable to the Bank, "[g]iven the CFPB's constantly changing positions on remittances."^[26] But the promulgation of a handful of amendments to clarify and refine the rule hardly qualifies as taking "constantly changing positions." Furthermore, while anything is possible, that does not render it plausible, much less "certainly impending." Clapper, 133 S. Ct. at 1143. See also Coal. for Responsible Regulation, 684 F.3d at 130 ("Ripeness . . . shares the constitutional requirement of standing that an injury in fact be certainly impending." (internal quotation marks and citation omitted)).

3. Mortgage Foreclosure Rules

The Bank also relies on the RESPA Servicing Rule and the ATR-QM Rule, both issued by the CFPB under Cordray's direction, as evidence of injury. As a threshold matter, it is significant that neither rule had been issued at the time of the filing of the suit. As defendants point out, although the Second Amended Complaint was filed subsequent to the rules' promulgation, the Bank added no allegations about the rules, mentioning them for the first time in its Opposition to defendants' Motion to Dismiss. (See Def. Reply at 13, 15, 16 (citing Arbitraje Casa de Cambio, S.A. de C.V. v. U.S. Postal Serv., 297 F. Supp. 2d 165, 170 (D.D.C. 2003) ("It is axiomatic that a complaint may not be amended by the briefs in opposition to a motion to dismiss.")).) Moreover, "federal jurisdiction depends on the facts as they exist when the complaint is filed." Commercial Union Ins. Co. v. United States, 999 F.2d 581, 585 (D.C. Cir. 1993) (citing Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826, 830 (1989)). Otherwise stated, "[t]o satisfy Article III, an injury in fact must be both `concrete and particularized' and `actual or imminent' at the time the plaintiff files suit." Equal Rights Ctr. v. Post Props., Inc., 633 F.3d 1136, 1141 (D.C. Cir. 2011) (quoting Lujan, 504 U.S. at 560 and citing Worth v. Jackson, 451 F.3d 854, 860 (D.C. Cir. 2006)) (emphasis added). See also Lujan, 504 U.S. at 571 n.5 ("standing is to be determined as of the commencement of suit"). Because these two rules did not exist at the time the suit was filed, they cannot form the basis of the Bank's standing. But even if they could, the Bank's alleged injuries based on the two rules are far too speculative.

a. RESPA Servicing Rule

The RESPA Servicing Rule has numerous requirements, most of which exempt SNB as a small servicer. (See Tr. at 59.) The Bank is not exempt, however, from § 1024.41(j), which prohibits small servicers from making "the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process unless a borrower's mortgage loan obligation is more than 120 days delinquent." 12 U.S.C. § 1024.41(j). The Bank claims that this provision is causing it present injury because it "increases the Bank's cost of doing business" with regard to the outstanding mortgages it holds. (Pvt. Pl. Opp. at 14-15.) Under Texas law, the Bank was able to initiate foreclosure proceedings 20 days after issuing a letter notifying the borrower that he was in default, and a foreclosure sale could be held as soon as 21 days thereafter. (See First Purcell Decl. ¶ 36 (citing Tex. Prop. Code. Ann. § 51.002(a), (b), (d)).) SNB Chairman Purcell asserts that "[e]ven if the Bank did not intend to actually foreclose on a defaulted borrower, posting a foreclosure notice at the courthouse soon after a default can be a useful tool to induce such a borrower to get current on their payments — but the Bank is now prohibited by the Bureau's new rule from doing so for 120 days." (Id.) Therefore, according to Purcell, the new rule "will increase the Bank's costs by drawing out the process by which the Bank may seek to recover on a defaulted loan." (Id.)

There is substantial doubt, however, whether the Bank would ever run afoul of this rule. Defendants have cited to public records showing that the Bank has not initiated a single foreclosure from the beginning of 2008 through the end of 2012 — a time during which foreclosures were rampant nationwide — and indeed, that no mortgage has gone into default from the beginning of 2007 through the end of 2012. (See Def. Reply at 17-18; id., Exs. 3, 4.)^[27] Because the Bank chose to exit the mortgage lending business in 2010, it holds a dwindling number of mortgages, which will total only $577,000 when this rule takes effect in January 2014. (See Def. Reply at 17.)^[28] Furthermore, loans secured by property of 25 acres or more are exempt from RESPA's requirements (see id. at 18 (citing 12 C.F.R. § 1024.5(b)(1))), and § 1024.41(j) only comes into effect if the loans are secured by a borrowers' principal residence. (See id.) The Bank, however, has failed to disclose whether any of its existing mortgages are actually subject to this rule. Moreover, following the oral argument on this motion, the Bank asked for and was given an opportunity to adduce additional facts to support its arguments. Although it did file supplementary declarations, it noted only that "[t]he Bank has previously used the foreclosure-notice-posting process provided for in Tex. Prop. Code. Ann. § 51.002(a), (b), (d)." (Second Purcell Decl. ¶ 12.) Since it is unknown when or how often this occurred, Purcell's declaration does little to sustain the Bank's burden as to standing, and it provides no basis upon which to predict that the Bank will be injured in the future with respect to the dwindling number of residential mortgages that it will hold when the rule becomes effective in 2014.

In sum, given the scant record before the Court, it is simply too speculative to suggest that the Bank would ever wish to issue a notice in less than 120 days; that it would be prevented from doing so by § 1024.5(j); and that it would incur costs as a result.^[29] And, even if the Bank were to re-enter the mortgage market at some point in the future, as it claims it wants to do, the record does not support the Bank's claim that the rule would impose additional costs.

b. ATR-QM Rule

The Bank also alleges injury based on the ATR-QM Rule, which implements the Truth in Lending Act, as well as provisions of Title XIV of the Dodd-Frank Act. (See Pvt. Pl. Opp. at 14, 23; Def. Reply at 12.) But the Bank cannot base Article III standing on the rule nor does the rule satisfy the prudential ripeness standard. First, as noted above, the rule did not exist at the time the suit was filed, but rather was promulgated seven months later on January 10, 2013. Thus, to the extent that standing is based on injury "at the time the plaintiff files suit," Equal Rights Center, 633 F.3d at 1141, the rule cannot give rise to standing.

Furthermore, since its initial promulgation on January 10, 2013, the rule has included several provisions that significantly limit the scope of its application. The rule has always provided that a qualified mortgage that is not "higher-priced" falls within a safe harbor, meaning that the lender is conclusively presumed to have complied with the rule's requirements. See 78 Fed. Reg. at 6408. The Bank has not stated whether it holds any mortgages that fall into this category, or if it would hold any if it chose to re-enter the consumer mortgage market. The rule has also always included a rebuttable presumption for "higher-priced" mortgage loans that do not qualify for the safe harbor. Id. at 6510. When the rule was first issued in January 2013, "higher-priced" mortgages were defined as "having an APR that exceeds APOR by 1.5 percentage points for first liens[.]"^[30]Id. Accordingly, on February 12, 2013, SNB Chairman Jim Purcell stated that "[b]efore leaving the market, the Bank offered several loans at interest rates that were at least 1.5% higher than the Average Prime Offer Rate. . . . Had it continued to offer consumer mortgage loans, it would have expected many of them to be of this character." (First Purcell Decl. ¶ 25 (emphasis added).)

Importantly, however, on the same day the rule was issued, the agency proposed raising the safe harbor ceiling for small creditors from 1.5% to 3.5% APR over APOR, see 78 Fed. Reg. 6621, 6624 (to be codified at 12 CFR 1026) (Jan. 30, 2013), and after notice and comment, the agency issued such a rule on May 29, 2013. See 78 Fed. Reg. 35429, 35431 (June 12, 2013). As noted in the rulemaking,

[b]ecause small creditors often have higher cost of funds, the final rule shifts the threshold separating qualified mortgages that receive a safe harbor from those that receive a rebuttable presumption of compliance with the ability-to-repay rules from 1.5 percentage points above the average prime offer rate (APOR) on first-lien loans to 3.5 percentage points above APOR.

Id. In response, on June 13, 2013, SNB Chairman Purcell submitted a supplemental declaration indicating that the Bank currently holds only three loans that exceed the prime rate by 3.5% (see Second Purcell Decl. ¶ 10), and thus, these loans, if they still exist when the rule becomes effective on January 10, 2014, will be entitled to the rebuttable presumption, not the safe harbor, in the event that a mortgagee sues or raises a defense based on the rule. See 78 Fed. Reg. at 35429.

But whether this rule will be invoked by a litigant is sheer conjecture since the Bank has had no mortgages in default, nor has it initiated any foreclosures or become involved in litigation over foreclosures since 2008. (See Def. Reply, Ex. 4.) Furthermore, there is a three-year statute of limitations for affirmative cases brought under the rule; after three years, the rule can be invoked only as a defense to foreclosure. (See 78 Fed. Reg. 6416.) For these same reasons, the Bank's claim that it is being prevented from re-entering the mortgage market because the rule "would impose an additional risk factor that would affect the costs and structure of the loan if the Bank were to offer it" lacks plausibility. (First Purcell Decl. ¶ 32. See also Pvt. Pl. Opp. at 23; Tr. at 25-26.)^[31]

As noted above, the Supreme Court is reluctant to find standing based on theories that "require guesswork as to how independent decisionmakers will exercise their judgment," Clapper, 133 S. Ct. at 1150, and it is "the burden of the plaintiff to adduce facts showing that . . . choices [of the independent actors] have been or will be made in such a manner as to produce causation and redressibility of injury." Lujan, 504 U.S. at 562. See also Nat'l Wrestling Coaches Ass'n, 366 F.3d at 940. The Bank has failed to carry this burden here. For even if the Bank were to offer mortgages that exceed the prime rate by 3.5%, its past record indicates that this would be a small number of mortgages; the rate of defaults would be low even among this class of borrowers; and no one can know if any of the defaulting borrowers would choose to raise the ATR-QM Rule as a defense to foreclosure.

It should also be noted that the Bank's claim of injury based on the ATR-QM Rule faces a redressability problem, insofar as the Bank has not challenged Title XIV, nor asked that the rule be set aside under the Administrative Procedure Act, 5 U.S.C. § 706. (See Def. Reply at 14.) Even if the Court were to invalidate Title X with the effect of nullifying the Bureau, it is arguable that rulemaking authority for TILA, which the ATR-QM Rule implements, could revert to the Federal Reserve Board, which held that authority prior to Dodd-Frank. See 76 Fed. Reg. 27389.^[32]

Moreover, it is obvious that the rule is still a work in progress. The agency is clearly taking seriously public comments that it has received, as it has already made adjustments to the rule based on concern that "small creditors operating in rural and underserved areas may reduce the number of mortgage loans they make or stop making mortgage loans altogether, limiting the availability of nonconforming mortgage credit and of mortgage credit in rural and underserved areas." 78 Fed. Reg. at 35478. So again, considerations of prudential ripeness strongly counsel against the Court's intervention. See Devia, 492 F.3d at 424 (the purpose of ripeness "`is to prevent the courts, through avoidance of premature adjudication, from entangling themselves in abstract disagreements over administrative policies, and also to protect the agencies from judicial interference until an administrative decision has been formalized and its effects felt in a concrete way by the challenging parties'" (quoting Abbott Labs., 387 U.S. at 148-49)).

4. UDAAP Authority

Finally, the Bank contends that it has standing to attack Title X based on the Bureau's UDAAP authority. Its challenge rests on a two-prong attack. First, the Bank claims that in October 2010, several months after the passage of the Dodd-Frank Act, it decided to exit the consumer mortgage business "to avoid the likelihood of a Bureau-driven prosecution, and to avoid the certainty that it would have been required to alter its mortgage lending practices had it stayed in the market." (Pvt. Pl. Opp. at 20 (emphasis in original); see also First Purcell Decl. ¶ 30 ("The Bank did so due to fear that those loans would be subject to enforcement action under the Dodd-Frank Act because they might be deemed to violate the prohibition against unfair, deceptive and abusive practices.").) Second, the Bank claims that "[b]ut for the Bureau, its rules, and its enforcement authority, the Bank would reenter the consumer mortgage and remittance markets without limitation." (First Purcell Decl. ¶ 38.) Neither of these claims can withstand scrutiny as a matter of law or fact.

As an initial matter, one must place the Bank's claims in context in order to understand whether either its decision to get out of the mortgage business or its decision to stay out of that business constitutes a concrete injury-in-fact caused by Title X of the Dodd-Frank Act and redressable by this Court. At the time the Bank ceased offering new mortgages in October 2010, the Bureau was barely in operation; it had not used its UDAAP authority to regulate mortgages or any other consumer products; it had not enacted any regulations; and it had not undertaken any enforcement actions.^[33] In fact, the only event from that time period that plaintiffs point to in support of their claim about the "overwhelming uncertainty inherent in Title X" (Second Am. Compl. ¶ 88) is a September 17, 2010 statement by President Obama in which he asserted that the CFPB would "crack down on the abusive practice of unscrupulous mortgage lenders."^[34] (Id. ¶ 89.)

Thereafter, the Bank filed suit on June 21, 2012, complaining about the lack of certainty as to "whether the CFPB will investigate or litigate against them, deeming [the Bank's mortgage lending] practices to be `unfair,' `deceptive' or `abusive' pursuant to an ex post facto CFPB interpretation of the law" (Original Complaint [ECF No. 1] ("Compl.") ¶ 43), and adding allegations in 2013 when it amended the complaint about "[t]he resulting chilling effect . . . [that] forces lenders such as the Bank to either risk federal prosecution or curtail their own services and products." (Second Am. Compl. ¶ 83.) Yet, even at the time that suit was filed — two years after the enactment of Dodd-Frank — the Bureau still had not enacted any rule that impacted the Bank's mortgage lending practices. In fact, the only mortgage rules that the Bank complains about — the ATR-QM Rule and the RESPA Servicing Rule — were promulgated on January 10, 2013 and February 14, 2013, respectively, and neither was even mentioned in the Second Amended Complaint, which was filed on February 19, 2013.^[35] Moreover, neither rule was promulgated under the Bureau's dreaded UDAPP authority, but rather under preexisting laws for which the regulatory authority had been transferred to the Bureau.^[36]

Nonetheless, in opposing the motion to dismiss, the Bank raised the two mortgage rules for the first time and argued that "but for the Bureau, its rules, and its enforcement authority, the Bank would reenter the consumer mortgage and remittance markets without limitation." (First Purcell Decl. ¶ 38.) Of course, as of the filing of this lawsuit, neither the mortgage rules nor the Remittance Rule had become effective, and they still have not become effective. Furthermore, each rule has been amended multiple times with the addition of significant safe harbors, which further blunt any possible future impact on either the Bank's present mortgage holdings or its future holdings should it chose to reenter the market.^[37] For instance, at the time that Purcell executed his first declaration on February 12, 2013, he pointed to the ATR-QM Rule as a contributing factor to the Bank's unwillingness to reenter the mortgage market, but at that time, the rule's safe harbor was limited to mortgages with a rate less than 1.5% above APOR on first-lien loans. (First Purcell Decl. ¶¶ 25, 32.) Then, on May 29, 2013, the Bureau amended the rule to raise the threshold so that at present, the safe harbor includes all mortgages up to 3.5% above APOR. Thus, much of the reason for the Bank's distress has been alleviated given the expanded scope of the safe harbor, for, as of June 13, 2013, the Bank only had three outstanding mortgage loans that exceeded 3.5% above APOR. (Second Purcell Decl. ¶ 10.) And it still remains unknown whether it would offer similar higher-priced mortgages in the future if it were to reenter the market.

As this chronology demonstrates, the Bank left the mortgage market three months after the law was enacted and long before the adoption of any rule governing residential mortgages so one can only infer that the Bank's generalized fear (or dislike) of the law, and not the mere possibility of increased costs associated with the rules governing mortgages, provides the primary motivation for the Bank to stay out of this business. According to the Bank, its fear arises from the "cloud of regulatory uncertainty" (Compl. ¶ 12), which cannot, by definition satisfy Clapper's requirement of "clearly impending" injury. 133 S. Ct. at 1151.^[38]

In addition, defendants argue persuasively that the Bank's decision to withdraw from the consumer mortgage market as of October 10, 2010, and to remain out of that market, as well as its decision to limit the number of remittance transfers to under 100, constitute "self-inflicted" injuries, in contravention of the Supreme Court's admonition that plaintiffs "cannot manufacture standing merely by inflicting harm on themselves based on their fears of hypothetical future harm that is not certainly impending." Clapper, 153 S. Ct. at 1151. As argued by defendants, the Bureau has not barred the Bank from reentering the consumer mortgage market nor limited the number of remittance transfers it can issue. (See Tr. at 63.) Rather, the Bank has chosen this route because of its fears of a possible hypothetical harm created by the mere existence of the Bureau's looming regulatory and enforcement powers. Standing cannot be based on this type of voluntary act by a plaintiff. See, e.g., Nat'l Family Planning & Reprod. Health Ass'n, Inc. v. Gonzales, 468 F.3d 826, 831 (D.C. Cir. 2006) (association lacked standing because its injury was "self-inflicted" insofar as it "ha[d] within its grasp an easy means for alleviating the alleged uncertainty"); Rodos v. Michaelson, 527 F.2d 582, 584-85 (1st Cir. 1975) (doctors lacked standing to challenge statute restricting abortions after they ceased performing abortions based on purely speculative "fear of prosecution"); Nova Health Sys. v. Gandy, 416 F.3d 1149, 1157 n.8 (10th Cir. 2005) (abortion provider's injury "self-inflicted" where it responded to statute imposing civil liability for abortions performed on minors without "parental consent or knowledge" by requiring all minors to obtain in-person parental consent).

To rebut this argument, the Bank tries to argue, based on several D.C. Circuit cases, that even though the law has yet to be enforced against it, it has standing because "it is `reasonably certain' that the company's `business decisions will be affected' by it." (Pvt. Pl. Opp. at 20-21 (quoting Sabre v. Department of Transportation, 429 F.3d 1113 (D.C. Cir. 2005).) But these cases are factually distinguishable because we are nowhere near the preenforcement point found sufficient in those cases, and to the extent that they hold that standing may be based on "incurring costs in anticipation of non-imminent harm," they cannot survive Clapper, 133 S. Ct. at 1155.

Most notably, the Bank relies on Sabre, 429 F.3d 1113, and Chamber of Commerce v. FEC, 69 F.3d 600 (D.C. Cir. 1995). In Sabre, the Court of Appeals held that the plaintiff had standing "[a]lthough no regulations promulgated by the Department currently constrain [its] business activity and no relevant enforcement actions are pending against any" entity in plaintiff's line of business. 429 F.3d at 1115. However, the Court made clear that its holding was based on a combination of three particular circumstances: "[1] in the Final Rule, the Department claims that it has jurisdiction over independent CRSs under section 411; [2] its statements indicate a very high probability that it will act against a practice that Sabre would otherwise find financially attractive; and [3] it has statutory authority to impose daily civil penalties on Sabre for violation of section 411, which the Department plausibly asserts it may enforce without prior warning by rulemaking or cease-and-desist order." Id.

Comparable circumstances do not exist here. First, it is the OCC, rather than the Bureau, that has jurisdiction to enforce the UDAAP prohibition against the Bank, although the CFPB will undoubtedly wield significant influence over the OCC's interpretation and enforcement of the statute. (See Mot. to Dismiss at 18 (citing 12 U.S.C. § 5516(d)(1), (d)(2)(A), (d)(2)(B)).) More importantly, it cannot be said that there is a "very high probability," or, for that matter, any probability, that the Bureau would use its UDAAP authority to take action against the Bank even with respect to its three higher-priced mortgages or any such mortgages that it might offer in the future. In Sabre, the Department of Transportation issued a Final Rule and made unequivocal statements condemning the business practice in which the plaintiff wished to engage. By contrast, the Bank can only point to general statements by President Obama that the Bureau would "crack down on the abusive practice of unscrupulous mortgage lenders," and by Cordray that the Bureau would "address the origination of mortgages, including loan originator compensation and the origination of high-priced mortgages." (Second Am. Compl. ¶¶ 89, 91 (quoting 9/17/10 Address by President Obama and 3/14/12 Address by Richard Cordray).) Indeed, the Bureau has issued rules pertaining to mortgage practices (though, as noted, none pursuant to its UDAAP authority). However, it has consistently followed a course of creating exceptions for small creditors such as SNB, including the recent amendment to the ATR-QM Rule to expand the safe harbor for small creditors to include mortgages with up to 3.5% APR over APOR. (See 78 Fed. Reg. at 35431.) Thus, far from the unequivocal statements by the Department of Transportation in Sabre, the Bureau's enforcement approach against small creditors like the Bank has been nothing short of a work in progress, and there is no evidence that the Bureau intends to take action against the issuance of higher-priced mortgages in general (as opposed to unscrupulous practices associated with those types of mortgages) of the sort that the Bank has offered or would offer if it were to re-enter the market.^[39]

With respect to the third factor in Sabre (the possibility of enforcement through civil penalties without prior notice), the Bank makes vague allegations about "ex post facto enforcement activities" (Pvt. Pl. Opp. at 9 (citing Second Am. Compl. ¶¶ 16-17, 77, 91)), but the Bureau denies that it has any such power or intent (see Tr. at 66), and the Bank has failed to provide any legal support for its allegations. (See id. at 71.) Thus, unlike Sabre, the Bank cannot claim the Bureau's actions to date give "rise to a significant risk" that plaintiffs' business interests will be injured in the future. Clapper, 133 S. Ct. at 1153-54.

Nor are the facts in Chamber of Commerce v. FEC, 69 F.3d 600, similar to those presented here. There, the Court based its decision in part on its conclusion that although "appellants are not faced with any present danger of an enforcement proceeding . . . [n]othing . . . prevents the Commission from enforcing its rule at any time." 69 F.3d at 603. In the specific context of the plaintiff's First Amendment challenge, the Court treated its cessation of the scrutinized political activity as evidence of the challenged regulation's chilling effect. See id. The question of whether a regulation has a "chilling effect" has little application beyond the First Amendment context. See id. ("A party has standing to challenge, pre-enforcement, even the constitutionality of a statute if First Amendment rights are arguably chilled, so long as there is a credible threat of prosecution." (original emphasis removed, emphasis added)); Nat'l Rifle Ass'n of Am. v. Magaw, 132 F.3d 272, 294 (6th Cir. 1997) ("Except for cases involving core First Amendment rights, the existence of a chilling effect has never been considered a sufficient basis, in and of itself, for prohibiting government action." (internal quotation marks and citation omitted)). Furthermore, the Court also considered that the plaintiff was particularly at risk of facing future litigation challenges to its activity because of an unusual feature of the statute in question that "permits a private party to challenge the FEC's decision not to enforce." Id. In this case, even though the Bank invokes the First Amendment doctrine of "chilling effect" (Second Am. Compl. ¶ 16), it has not substantiated its allegations by putting forward a credible "claim of specific present objective harm." Bigelow v. Virginia, 421 U.S. 809, 816-17 (1975).

The Bank also relies on two D.C. Circuit cases suggesting that an injury can be based on an agency action that causes a plaintiff to be exposed to additional risks, which in turn affect the plaintiff's business decisions. See Rio Grande Pipeline Co. v. FERC, 178 F.3d 533 (D.C. Cir. 1999); Great Lakes Gas Transmission Ltd. P'ship v. FERC, 984 F.2d 426 (D.C. Cir. 1993). Both of these cases are readily distinguishable. In each case, the agency did something that caused the plaintiff injury. In the instant case, by contrast, the Bank exited the mortgage lending business before the Bureau had done anything. Both cases also involved concrete consequences for the plaintiffs' business interests, in contrast to the speculative nature of the Bank's asserted injuries here. In Rio Grande, the Court found that the risk of future litigation had a demonstrated concrete impact on the plaintiff's "present economic behavior — investment plans and creditworthiness — and its future business relationships." 178 F.3d at 540.^[40] Similarly, in Great Lakes Gas, the effect on the plaintiff's "business decisions and competitive posture within the industry" was also concrete and demonstrable. 984 F.2d at 430.^[41] But those cases involved a credible threat of an actual enforcement, whereas here the Bank is worried about the hypothetical possibility of an enforcement action or a threat of litigation by a mortgagee. These possibilities are simply too speculative.^[42]

In sum, the Bank's claim that "[b]ut for the Bureau, its rules, and its enforcement authority, the Bank would reenter the consumer mortgage and remittance markets without limitation" (First Purcell Decl. ¶ 38) does not establish that the Bank has suffered an injury-in-fact caused by the Bureau and Cordray, and redressable by this Court. Therefore, the Bank lacks standing on Counts One and Two.^[43]

CONCLUSION

For the reasons stated above, the Court will grant Defendants' Motion to Dismiss in its entirety. A separate Order accompanies this Memorandum Opinion.

[1] Pursuant to Fed. R. Civ. P. 25(d), if a public officer named as a party to an action in his official capacity ceases to hold office, the Court will automatically substitute that officer's successor. Accordingly, the Court substitutes Secretary Lew for Neil S. Wolin.

[2] The Supreme Court has agreed to hear a similar case involving the recess appointments of three members of the National Labor Relations Board during its next term. See NLRB v. Noel Canning, 705 F.3d 490 (D.C. Cir. 2013), cert. granted, 133 S. Ct. 2861 (June 24, 2013) (No. 12-1281).

[3] In several unrelated cases, plaintiffs have mounted challenges to regulations promulgated pursuant to authority delegated by Dodd-Frank. Judge Howell recently held that a plaintiff lacked standing to challenge a CFTC regulation setting minimum liquidation times for swaps and future contracts, which was promulgated, in part, pursuant to Dodd-Frank's DCO Core Principles. See Bloomberg L.P. v. CFTC, No. 13-523, 2013 WL 2458283, at *26 (D.D.C. June 7, 2013). The D.C. Circuit also affirmed Judge Howell's ruling in yet another suit challenging CFTC rulemaking in the wake of Dodd-Frank. See Inv. Co. Inst. v. CFTC, 12-5413, 2013 WL 3185090, at *1 (D.C. Cir. June 25, 2013). In Am. Petroleum Inst. v. SEC, No. 12-1668, 2013 WL 3307114, at *1 (D.D.C. July 2, 2013), the plaintiff challenged a provision of Dodd-Frank now codified at section 13(q) of the Securities Exchange Act of 1934, 15 U.S.C. § 78m(q), on First Amendment grounds, and regulations promulgated pursuant to the statute under the Administrative Procedure Act, 5 U.S.C. § 706. Judge Bates vacated the challenged rule, while declining to reach the constitutional challenge as premature in view of the fact that the SEC "has yet to interpret section 13(q) in light of its discretionary authority, and the interpretation it adopts could alter the First Amendment analysis." Id. at *15. See also Am. Petroleum Inst. v. SEC, 714 F.3d 1329 (D.C. Cir. 2013) (Court of Appeals dismissing simultaneously filed suit for lack of subject matter jurisdiction and leaving plaintiff to pursue its claims in the district court). And, in Nat'l Ass'n of Mfrs. v. SEC, No. 13-0635, 2013 WL 3803918, at *1, 31 (D.D.C. July 23, 2013), Judge Wilkins held that section 1502 of the Dodd-Frank Act and a rule promulgated under that authority did not violate the First Amendment.

[4] The States have not joined Counts I, II, or III.

[5] Since plaintiffs raise only facial challenges to the constitutionality of various titles of Dodd-Frank, it is agreed that further development of the record through discovery is unlikely to occur. (See 6/11/13 Motions Hearing Transcript ("Tr.") at 12.)

[6] A "nonbank financial company" is defined as a company "predominately engaged in financial activities," other than bank holding companies and certain other entities. 12 U.S.C. § 5311(a)(4). The term "systematically important financial institution" does not actually appear in the Dodd-Frank Act, but because it has come into common parlance (see Def. Mot. at 3 n.2), and the parties have used the term throughout their briefs, the Court will do so as well.

[7] Because no SIFI designations had yet been made when this motion was briefed, the Bank made arguments about "imminent" SIFI designations without identifying any particular competitor that might be designated. (See Pvt. Pl. Opp. at 36-39.) Following the designation of GE Capital while this motion was pending, the Bank has sought to establish that GE Capital is a competitor and that it will gain a competitive advantage from its SIFI designation. (See Second Jacob Decl., Exs. 3, 4, 5; Second Declaration of Jim R. Purcell [ECF No. 35-1] ("Second Purcell Decl.") ¶¶ 13-17; Third Supplemental Declaration of Gregory Jacob [ECF No. 36-1] ("Third Jacob Decl."), Ex. 1.) While it is unclear if the Bank can seek to identify competitors based on facts that did not exist at the time that the suit was filed (see Section III.B.3), these added facts still do not make the Bank's injury sufficiently concrete to confer standing.

[8] Given the significantly higher interest rates offered by GE Capital, it is somewhat difficult to understand why the Bank believes it is a direct and current competitor with GE Capital with respect to the raising of capital.

[9] "Financial company" is defined under Title II as any company that is a bank holding company, a "nonbank financial company supervised by the Board of Governors," a "company predominately engaged in activities that the Board of Governors has determined are financial in nature", or any subsidiary of any of the above, except not insured depository institutions or insurance companies. 12 U.S.C. § 5381(a)(11). Title II also exempts from coverage insured depository institutions, see id. § 5381(a)(8), for which the FDIC already had authority to serve as receiver under the Federal Deposit Insurance Act. See id. § 1821.

[10] The Private Plaintiffs ostensibly join these counts but make no attempt to establish that they have standing in their own right.

[11] As Professor Hal Scott describes,

[B]ecause [the OLA process] appl[ies] only to institutions determined to be systemically important, and appl[ies] to banks only at the holding company level, all other institutions will be subject to the bankruptcy regime where impairment is even more likely . . . . If short-term debt holders do not know whether their issuer will be deemed systemically important, then they will not know which resolution principles will apply to them, compounding uncertainty in the marketplace. Moreover, because the regulators have significant discretion in determining the circumstances that constitute danger of default the OLA adds another layer of uncertainty for creditors of financial companies who could run at an earlier point in time in order to avoid impairment in the OLA receivership.

Hal S. Scott, Interconnectedness and Contagion 216-217 (Nov. 20, 2012) (cited in States' Opp. at 18).

[12] The States also argue that "denying judicial review of the State Plaintiffs' constitutional claims until after a Title II liquidation occurs would in fact prevent them from ever raising those constitutional claims . . . [because] Dodd-Frank expressly prohibits the courts from reaching these constitutional issues after a liquidation occurs." (States' Opp. at 28.) This is incorrect, as there is ample precedent suggesting that statutory limitations on judicial review do not prevent parties from raising constitutional challenges to the statute itself. See, e.g., Gen. Elec. Co. v. EPA, 360 F.3d 188, 193 (D.C. Cir. 2004) (allowing pre-enforcement review of facial constitutional challenge to statute, despite statutory limitations on judicial review of orders and actions taken under the statute); Time Warner v. FCC, 93 F.3d 957, 965, 973 (D.C. Cir. 1996) (same).

[13] Even the States' articulation of the harm they face highlights its highly speculative nature:

On its face, Section 210(b)(4) of the Act abrogates the rights under the U.S. Bankruptcy Code of creditors of institutions that could be liquidated, destroying a valuable property right held by creditors — including the State Plaintiffs — under bankruptcy law, contract law, and other laws, prior to the Dodd-Frank Act. Section 210(b)(4) exposes those creditors to the risk that their credit holdings could be arbitrarily and discriminatorily extinguished in a Title II liquidation, and without notice or input. Title II's destruction of a property right held by each of the State Plaintiffs harms each State, and is itself a significant, judicially cognizable injury that would be remedied by a judicial order declaring Title II unconstitutional.

(Second Am. Compl. ¶ 170 (emphasis added).)

[14] In supplemental pleadings submitted in response to the Court's request (see 7/17/13 Order [ECF No. 37]), the parties appear to agree that the challenge to Cordray's recess appointment in Count II is not moot. (See Private Plaintiffs' Supplemental Brief in Support of the Court's Jurisdiction over Count II [ECF No. 38]; Defendants' Response to Plaintiffs' Supplemental Brief [ECF No. 40].)

[15] A "higher-priced covered transaction" was initially defined as a mortgage with "an annual percentage rate that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by 1.5 or more percentage points for a first-lien covered transaction, or by 3.5 or more percentage points for a subordinate-lien covered transaction." 78 Fed. Reg. at 6584.

[16] A "small creditor" is defined as a creditor with no more than $2 billion in assets, a category that includes SNB. See 78 Fed. Reg. at 35431.

[17] The Bank backtracked somewhat from this bold position during the oral argument, conceding that an injury is necessary for standing and offering the qualification that its direct regulation argument is "the fifth argument for standing that we have in our brief. So we have many alternative arguments." (Tr. at 44.)

[18] For example, if this were the case, any entity that pays taxes could challenge any action of the IRS even if it had not been the object of an IRS ruling or enforcement action.

[19] The Bank asserts standing for Count II based on the fact that as "an FDIC-insured institution [it] is directly subject to Mr. Cordray's authority as an "ex officio Director of the Federal Deposit Insurance Corporation." (Pvt. Pl. Opp. at 31.) The Bank never elaborates on this argument, and appears to have abandoned it in its further briefing. In the absence of any explanation for this claim, the Court need not address it.

[20] As noted below (see infra Section III.B.3), the fact that the RESPA Servicing Rule and the ATR-QM Rule were issued subsequent to the filing of this suit poses a separate problem for the Bank's standing.

[21] At the oral argument, counsel characterized this claim as its strongest pillar for a finding of standing as to Count I. (See Tr. at 4.)

[22] At the oral argument, SNB's counsel made clear that $230,000 represents the "total figure for all [of the Bank's] compliance costs, but then [the Bank] broke out several specific costs that were specific to the CFPB and Title X," which amounted to $12,400 for 2012. (Tr. at 16.)

[23] The fact that these costs are relatively minor does not matter, for even the "threat of relatively small financial injury [is] sufficient to confer Article III standing." Raytheon Co. v. Ashborn Agencies, Ltd., 372 F.3d 451, 454 (D.C. Cir. 2004) (citing Franchise Tax Bd. of Ca. v. Alcan Aluminum Ltd., 493 U.S. 331, 336 (1990)).

[24] Under Title X, the Bureau is required to use existing reports before demanding the production of an independent report from a covered entity. See 12 U.S.C. § 5516(b)(1).

[25] In their recently filed Notice of Supplemental Authority [ECF No. 42] ("Pl. Supp. Authority"), plaintiffs cite to another Fourth Circuit case, Liberty Univ. v. Lew, No. 10-2347, 2013 WL 3470532 (4th Cir. July 11, 2013). In that case, the court found that Liberty University had standing to challenge the Affordable Care Act on the grounds that "[e]ven if the coverage Liberty currently provides ultimately proves sufficient, it may well incur additional costs because of the administrative burden of assuring compliance with the employer mandate, or due to an increase in the cost of care." Id. at *7. Once again, the Court agrees that Article III standing may be based on this traditional conception of "compliance costs" — i.e., "the burden of assuring compliance" — but the costs claimed by the Bank do not fall into that category. In the same filing, plaintiffs also cite a recent D.C. Circuit case, Ass'n of Am. R.R. v. U.S. Dep't of Transp., No. 12-5204, 2013 WL 3305715 (July 3, 2013), in support of their compliance costs argument. However, plaintiffs mischaracterize the case as holding that compliance costs constitute Article III injury. (See Pl. Supp. Authority at 2-3.) Rather, in dicta in a footnote, the Court refers to "the immediate actions the metrics and standards have forced" the plaintiff to take as evidence of the "considerable hardship" the plaintiff would face if review of its claims were denied under the second prong of Abbott Lab's prudential ripeness test. See Ass'n of Am. R.R., 2013 WL 3305715, at 10 n.6 (citing Abbott Labs., 387 U.S. at 149).

[26] The Bank relies heavily on the voluntary cessation doctrine as articulated most recently in Already LLC v. Nike, Inc., 133 S. Ct. 721, 727 (2013), arguing that the CFPB could change the Remittance Rule again to do away with the safe harbor, because it has amended the rule in the past. (See Pvt. Pl. Opp. at 17 n.8; Tr. at 8-9.) However, the Bank's reliance is misplaced. This doctrine is an exception to mootness, and "if a plaintiff lacks standing at the time the action commences, the fact that the dispute is capable of repetition yet evading review will not entitle the complainant to a federal judicial forum." Friends of the Earth, Inc. v. Laidlaw Envtl. Servs., Inc., 528 U.S. 167, 191 (2000). It is instead standing and ripeness that are at issue here.

[27] The Bank contends that this information is not properly before the Court because, while the plaintiff can supplement the record on a 12(b)(1) motion, the defendant is limited to arguing based on the plaintiff's pleadings. (See Tr. at 13-15 (citing Haase v. Sessions, 835 F.2d 902 (D.C. Cir. 1987)).) While conversion does not apply in the 12(b)(1) context, a court can look beyond the pleadings to satisfy itself that it has standing. Haase, 835 F.2d at 906, 908. Of course, the Court may take judicial notice of public records, and the information regarding SNB's foreclosure history is derived from information provided by the Bank and contained in public records published by federal agencies. See Kaempe v. Myers, 367 F.3d 958, 965 (D.C. Cir. 2004).

[28] As of December 2012, the Bank held $725,000 in outstanding residential mortgage loans; it will hold $577,000 by the time rule takes effect in January 2014; and, assuming it does not re-enter the mortgage business, it will not hold any residential mortgages within five years. (See Def. Reply at 16-17.) The record does not reflect how many individual mortgages make up these figures.

[29] The Bank argues that the public call data reflects only formal foreclosures and does not account for instances in which the Bank has used informal processes to induce its mortgage customers to get current on their payments. (See Tr. at 31-32.) However, the data reflects that there were no defaults from 2007 through 2012, so it is unclear when in the past six years, a period that includes the height of the housing mortgage crisis, the Bank would have had occasion to use even the informal process. (See Def. Reply, Ex. 4.)

[30] The rule also treats "certain balloon-payment mortgages as qualified mortgages if they are originated and held in portfolio by small creditors operating predominantly in rural or underserved areas." 78 Fed. Reg. at 6409. In 2013, Dawson and Howard Counties, where SNB is based, fell into this category. See Final list of rural and underserved counties for use in 2013, http://consumerfinance.gov/blog/final-list-of-rural-and-or-underserved-counties-for-use-in-2013 (announcing list of counties in which small creditors will be eligible for safe harbors under Escrow Requirements under the Truth in Lending Act Rule ("Escrows Rule"); High-Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act Rule ("HOEPA Rule"); and Appraisals for Higher-Priced Mortgage Loans Rule.) However, Howard County, where the Bank states that the majority of its mortgages originated, has been removed from the list for 2014. (See Pl. Supp. Brief at 3 n.3 (citing Final list of rural and underserved counties for use in 2014 (July 2, 2013), http://www.consumerfinance.gov/blog/final-list-of-rural-and-underserved-counties-for-use-in-2014).)

[31] The Bureau noted in its notice of final rulemaking that it investigated the impacts of potential litigation and found that:

even without the benefit of any presumption of compliance, the actual increase in costs from the litigation risk associated with ability-to-pay requirements would be quite modest. This is a function of the relatively small number of potential claims, the relatively small size of those claims, and the relatively low likelihood of claims being filed and successfully prosecuted. The Bureau notes that litigation likely would arise only when a consumer in fact was unable to repay the loan (i.e. was seriously delinquent or had defaulted), and even then only if the consumer elects to assert a claim and is able to secure a lawyer to provide representation; the consumer can prevail only upon proving that the creditor lacked a reasonable and good faith belief in the consumer's ability to repay at consummation or failed to consider the statutory factors in arriving at that belief. The rebuttable presumption of compliance being afforded to qualified mortgages that are higher-priced reduces the litigation risk, and hence the potential transaction costs, still further.

78 Fed. Reg. 6407, 6512 (Jan. 30, 2013).

[32] In fact, "in 2008 the Federal Reserve Board . . . adopted a rule under the Truth in Lending Act which prohibits creditors from making `higher-price mortgage loans' without assessing consumers' ability to repay the loans. Under the Board's rule, a creditor is presumed to have complied with the ability-to-repay requirements if the creditor follows certain specified underwriting practices. This rule has been in effect since October 2009." 78 FR at 6408. The fact that a substantially similar rule was already issued by the agency that previously held regulatory authority for TILA further underscores defendants' argument that the ATR-QM Rule does not constitute an injury redressable by this Court.

[33] Indeed, the first enforcement action that the CFPB brought pursuant to its UDAAP Authority was not filed until May 30, 2013. That action was brought against a "debt-relief" company. (See Pvt. Pl. Opp. at 4; Jacob Second Decl., Exs. 1-2, CFPB v. Am. Debt Settlement Solutions, No. 13-80548 (S.D. Fla. filed May 30, 2013).)

[34] According to plaintiffs, it was not until after Cordray's appointment in January 2012 that he specifically zeroed in on the need to "address the origination of mortgages, including loan originator compensation and the origination of high-priced mortgages" in a speech given on March 14, 2012. (Second Am. Compl. ¶ 91)

[35] The Remittance Rule was first promulgated on February 7, 2012, and was cited in plaintiffs' original complaint (Compl. ¶ 58). However, it is unrelated to mortgage practices and it was enacted pursuant to the EFTA, not the Bureau's UDAPP authority.

[36] The Bureau issued the final ATR-QM Rule to implement Title XIV of the Dodd-Frank Act and Amended Regulation Z, which itself implements TILA, 15 U.S.C. § 1601 et seq. The RESPA Servicing Rule was issued, as its name implies, under RESPA, 12 U.S.C. § 2601 et seq.

[37] The Court has previously discussed each of these rules and why they do not that provide standing and/or are not ripe for judicial review. (See supra Section III.B.2, 3.) In particular, given the record before the Court, one cannot plausibly argue that the rules inflict a current harm on the Bank nor do they plausibly impose an increase on the Bank's business costs if the Bank were to reenter the market. Alternatively, for prudential ripeness reasons, the Court will refrain from interfering in the ongoing administrative process.

[38] It is questionable that Title X is the cause of the Bank's fears, since even without its UDAAP authority, the government has ample authority to regulate mortgages. For instance, the Bank has been governed for decades by the Federal Trade Commission Act prohibition on "unfair" and "deceptive" practices. See 15 U.S.C. § 45. It is therefore difficult to understand how the insertion of the word "abusive" in defining the Bureau's regulatory authority could make any real difference in the types of business practices that will be scrutinized. The Bank is also subject to numerous statutes and rules regulating mortgage markets. See, e.g., RESPA, 12 U.S.C. § 2601 et seq.; the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, 12 U.S.C. § 5101 et seq.; the Interstate Land Sales Full Disclosure Act, 15 U.S.C. § 1701 et seq.

[39] To date, no action has been taken against an entity simply for offering such mortgages (which, as far as the Court can determine, is the only practice about which the Bank is apprehensive). Rather, the only enforcement action the Bureau has taken based, in part, on its UDAAP authority is against a mortgage company accused of illegally giving bonuses to loan officers to reward them for steering consumers toward mortgages with higher interest rates. See CFPB v. Castle & Cooke Mortgage, No. 13-0684 (D. Utah filed July 23, 2013) (alleging violations of the Compensation Rule, 12 C.F.R. § 1026.36(d)(1)(i); the CFPA, 12 U.S.C. §§ 5531(a), 5536(a)(1); and Regulation Z's Record-Retention Requirements, 12 C.F.R. § 1026.25(a)).

[40] The Court's finding was based on a record indicating not only that "the current rate may be rendered ineffective if any party files a protest," but also reflecting the plaintiff's representation that "the orders `have had a profoundly negative effect on the active marketing of [this] project to new potential users,' have made existing and potential investors `extremely skeptical over further investment in the project,' and have `negatively impact[ed] both [Rio Grande's] ability to raise debt capital and its general creditworthiness.'" Rio Grande, 178 F.3d at 540 (quoting Rio Grande's Brief at 19-20).

[41] The Court noted:

Because of the condition [imposed by the agency], Great Lakes has the present burden of trying to lock in future shipping contracts and NEB export licenses so that it will not be placed at risk for millions of dollars in construction costs should its expansion facility be underutilized in 2005. In the likely event that Great Lakes cannot arrange shipping contracts that far in advance, it will have to adjust its finances and investment strategy to prepare for the risk of underutilization. The at-risk condition also injures Great Lakes' competitiveness in the industry. The anticipation of a risk of lower future earnings lowers Great Lakes' creditworthiness, affecting its ability to raise capital by taking on debt.

984 F.2d at 430-31.

[42] In addition to the forecast of regulatory uncertainty and a threat of litigation by mortgagees, the Bank also cites to greater compliance costs in the future as a reason to stay out of the consumer mortgage business. (See Private Plaintiffs' Response to Defendants' Supplemental Brief [ECF NO. 41] at 2.) As discussed above (see supra Section III.B.1), the plaintiffs define these costs as expenditures incurred to monitor the developments in the law, and as already held, they do not provide a basis upon which to find standing.

[43] None of the other plaintiffs has standing on these counts either. CEI and 60 Plus claim, ever so summarily, that they have suffered injury because Title X has "increased the costs, and limited the availability, of financial services on which the Institute and the Association's members depend." (Pvt. Pl. Opp. at 34.) CEI claims injury because it maintains checking accounts with Wells Fargo, "which has recently increased fees on such accounts," while 60 Plus claims similar injuries, and in addition, claim that its members are "disproportionately impacted by the reduced interest rates offered by banks as a result of the increased regulatory burdens imposed by the CFPB." (Id. at 34-35.) In addition to failing to adequately allege that Title X actually caused these alleged injuries, they are the sort that fall squarely within the category of "generalized grievances," as increased checking account fees and reduced interest rates undoubtedly affect the public at large. See Valley Forge Christian Coll. v. Americans United for Separation of Church and State, 454 U.S. 464, 474-75 (1982); Warth, 422 U.S. at 499-500. The States did not join Counts One and Two. See Pvt. Pl. Opp. at 7.