A federal judge sanctioned the Consumer Financial Protection Bureau on Friday by dismissing a massive lawsuit against several payment processors and admonishing the agency for acting "in bad faith."

U.S. District Judge Richard W. Story in Atlanta wrote in a 23-page opinion that the CFPB had failed to provide a knowledgeable witness in depositions in the case. The judge also said the bureau showed a "willful disregard" for, and "an unwillingness to comply" with, the court's instructions.

The case in the U.S. District Court for the Northern District of Georgia was widely seen as an example of overreach by the CFPB, which filed a lawsuit in March 2015 alleging that payment processors "should have known" that debt collectors were trying to illegally collect on debts that consumers did not owe.

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Harsh words
"The CFPB has put up as much opposition as possible at every turn," U.S. District Judge Richard Story wrote in dismissing the bureau's lawsuit against payment processors on the grounds that the CFPB violated discovery rules. S.Gnatiuk

In the end, the judge punished the CFPB not based on the merits of the case but rather for its failure to comply with the rules of discovery, lawyers said.

"The CFPB has put up as much opposition as possible at every turn," Judge Story wrote. "The deposition transcripts show that the CFPB’s approach comes in two forms. The first is to bury the defendants in so much information that it cannot possibly identify, with any reasonable particularity, what supports the CFPB’s claims. The second is to assert privilege objections to questions that the court has repeatedly ordered to be answered. Neither form is proper, and together they demonstrate a willful disregard of the court’s instructions."

Federal rules allow judges discretion to impose a range of sanctions such as striking claims or outright dismissal of a lawsuit if a party fails to comply with discovery orders. The judge did not impose any fines.

The CFPB declined to comment.

The CFPB had sued Frontline Processing Corp., Global Payments, Pathfinder Payment Solutions and Electronic Merchant Systems for allegedly processing payments for debt collectors in Georgia and New York that were considered "phantom debts" and therefore were not owed by consumers.

John Da Grosa Smith, who defended Pathfinder, said he could not recall another case in which the penalty for sanctions in discovery led to an outright dismissal.

"Today the court determined to sanction the CFPB with the most severe discovery sanctions possible by dismissing the case against all parties that were not debt collectors," said Da Grosa Smith, managing principal of the Smith law firm in Atlanta.

Christopher Willis, a partner at Ballard Spahr in Atlanta, agreed that the dismissal was "highly unusual, especially for a case involving the government."

"This illustrates that the bureau is not always successful when it brings claims against parties in consent orders, and that the CFPB has the same obligation to participate in the discovery process as every party does," he said.

Government agencies rarely get so-called rule 37 sanctions, said Gerry Sachs, of counsel at the law firm Paul Hastings. "The CFPB would be up in arms if a defendant showed up and read off a prepared statement for 45 minutes and never answered any questions."

When the lawsuit was filed, CFPB Director Richard Cordray said in a statement that he was "taking action against the many parties that allegedly contributed to this phantom-debt-collection operation."

He continued: "The ringleaders of the scheme, the telemarketing company that broadcast millions of robo-calls, and the companies that processed the payments, should all be held accountable for taking advantage of vulnerable consumers."

In March, a district court judge in North Dakota dismissed a lawsuit against payment processor Intercept Corp. and its two top executives, arguing that the CFPB had failed to present enough facts in the case.

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