The State of Connecticut Department of Banking has issued a very interesting declaratory ruling in the matter of Persels & Associates. I find it interesting because it is yet another example of how attorneys might not have such a “free pass” when it comes to offering debt settlement services all across the country. In this case the Persels & Associates was told that even using in-state attorneys was not sufficient to avoid licensure as a debt relief provider.
On March 21, 2012, Persels & Associates, LLC (“Persels”) filed with the Banking Commissioner a Petition for Declaratory Ruling (“Petition”).
Persels is a Maryland limited liability company that describes itself as a Maryland-based, national consumer advocate law firm. Persels states that it does not advertise in Connecticut and that all of its clients in Connecticut are acquired via third party referrals, primarily through Care One Services, Inc.
(“Care One”). (Care One Services, Inc. is a licensed debt adjuster in Connecticut.)
According to the Petition, Persels’ clients sign a retainer agreement wherein Persels agrees (for a fee) to provide its clients with, among other things, debt negotiation services.
Persels indicates that these “other things” provided to its clients are as follows:
As part of the representation, the finn assigns a Connecticut attorney to consult with each client about their legal options. This includes legal advice on topics such as the applicable statute of limitations, the advantages and disadvantages of bankruptcy, garnishment exemptions, and litigation options and strategies. If litigation develops, the assigned Connecticut attorney assists the client in preparing answers to complaints and arbitration demands, drafts responses to discovery (if applicable), drafts cease and desist letters to creditors, and, when appropriate, helps the client assert claims against creditors who violate the law on collection practices. For an additional fee, the tinn also offers to provide bankruptcy consultations to those clients who cannot settle their debts outside of bankruptcy.
According to the Petition, Connecticut attorneys provide these seryices, including debt negotiation services, in accordance with requirements of an October 20ll settlement agreement between Persels and the Office of the Chief Disciplinary Counsel. That settlement agreement requires that any Connecticut attorney performing debt negotiation services for Persels have an initial consultation with the Comiecticut client and comply with Rule of Professional Conduct 5.3 with respect to supervision of support staff.
The Petition further states that in return for a fee, Care One provides Persels with various administrative services under a written contractf including “preparing client in-take folders and managing client information” using Care One’s proprietary software. The Petition provides that Persels pays Care One the “fair market value” for such services based on a flat fee per client per month.
The Petition requests that I:
- Issue a declaratory ruling stating that, pursuant to Section 36a-67lc of the 2012 Supplement to the General Statutes, a law firm that offers debt negotiation services to a client using Connecticut attorneys is not required to have a debt negotiation license from the Department when the debt negotiation services are delivered in aid of the law firm’s representation of the client, as evidenced by a retainer agreement, the offering of legal advice and the delivery of other services constituting the practice of law; or
- Issue a declaratory ruling clarifying the Commissioner’s interpretation of the attorney exemption provided in Section 36a-67lc of the 2012 Supplement to the General Statutes, with specific guidance as to when a Connecticut attorney or law firm must have a license from the Department to offer legal services inthe field of debt negotiation.
Thirteen comments were timely filed in response to the Notice. One comment submitted on behalf of other law firms offering debt negotiation services can be broadly characterized as supporting the Petition. See Memorandum in Support of Persels & Associates’ Petition for Declaratory Ruling by Proposed Parties Macey Bankruptcy Law, P.C. and Macey, Aleman & Searns, d/b/a The Mortgage Law Group, LLC (collectively “Macey”); and Ruling on Joint Petition by Macey for Party Status in Proceeding for Declaratory Ruling.
One comment submitted by the Deputy Chief Court Administrator for the State of Connecticut Judicial Branch can be broadly characterized as expressing concern that the Department not unduly encroach on the Judicial Branch’s authority to regulate attorney conduct.
The remainder of the comments received can be broadly characterized as opposing the Petition because Persels misinterpreted the attorney exemption provided in Section 36a-671c and omitted material facts about Persels’ business operations. All of the comments, except for those submitted by debt negotiation firms, noted numerous reports and consumer complaints that unscrupulous entities holding themselves out as debt negotiation firms frequently take advantage of consumers by charging large, upfront fees while providing little or no relief to desperate consumers.
Having reviewed the Petition, the legislative history of Sections 36a-671 through 36a-67ld,4 and all the comments filed in response to the Notice, I conclude that the issues presented by the Petition are legal questions that can be answered without further fact-finding procedures. Accordingly, I will not hold an administrative hearing, and herein issue this declaratory ruling in accordance with Section 4-176 of the Connecticut General Statutes and Section 36a-1-87 of the Regulations of Connecticut State Agencies.
The questions posed by the Petition can be read as essentially asking what the scope ofthe attorney exemption contained in Section 36a-671c is, and whether Persels qualifies for that exemption.
For the reasons set forth below, I rule as follows:
Section 36a-671c(1) of the 2012 Supplement to the General Statutes provides an exemption from Sections 36a-671 to 36a-67ld, inclusive, only for a natural person who: (a) is an attorney admitted to the practice of law in Connecticut; and (b) is not retained to perform, and does not perform, debt negotiation services, as defined in Section 36a-671 of the 2012 Supplement to the General Statutes, as the primary purpose of the representation, which shall be determined on a case-by-case basis in light of all of the facts and circumstances.
In addition, this Department will take a no-action position for a law firm that is a partnership, limited liability company or professional corporation engaging or offering to engage in debt negotiation services, as defined in Section 36a-671 of the 2012 Supplement to the General Statutes, to be performed and performed exclusively by an attorney admitted to the practice of law in Connecticut who is: (a) a partner or shareholder of the law firm, as the case may be; and (b) the only contact with the debtor and the debtor’s mortgagee(s) or creditor(s), as the case may be; and provided that the firm is not retained to perform, and does not perform, debt negotiation services as the primary purpose of the representation, which shall be determined on a case-by-case basis in light of all of the facts and circumstances.
Based on the information provided in its Petition, Persels would require licensure because it does not qualify for the attorney exemption or the law firm no-action position under the standards set forth in this ruling.
Application to Persels
A straightforward application of the general rule of law articulated above to the facts proffered by Persels in its Petition produces the following result:
(a) is a limited liability company;
AND (b) engages in debt negotiation;
AND (c) has a place of business outside Connecticut, but provides services to Comiecticut residents.
The attorney exemption from licensure set forth in Section 36a-67lc(1) of the 2012 Supplement to the General Statutes requires four things: (1) status as an attorney; (2) admission to the Cormecticut bar;
(3) representation of a client; and (4) debt negotiation services provided “ancillary” to such representation.
Because Persels is not a natural person, Persels cannot be an attorney admitted to the practice law in Connecticut and, therefore, the attorney exception set forth in Section 36a-67lc(1) of the 2012 Supplement to the General Statutes cannot apply to it.
The Petition raises the issue of whether the individual attomey exemption extends to the legal entities that individual attorneys might operate under when providing debt negotiation services. Corporations or other legal entities do not practice law.
Nevertheless, Comiecticut law recognizes that attorneys may form legal entities when representing clients, even though the professional obligations of an attomey belong to the individual attorney, not the legal entity.
The practice of law is open only to individuals proved to the satisfaction of the court to possess sufficient general knowledge and adequate special qualifications as to learning in the law and to be of good moral character. A dual trust is imposed on attorneys at law. They must act with fidelity both to the courts and to their clients. They are bound by canons of ethics which are enforced by the courts. The relation of an attorney to his client is pre-eminently confidential. It demands on the part of the attorney undivided allegiance, a conspicuous degree of faithfulness and disinterestedness, absolute integrity and utter renunciation of every personal advantage conflicting in any way directly or indirectly with the interests of his client.
Only a human being can conform to these exacting requirements. Artificial creations such as corporations or associations carmot meet these prerequisites and therefore cannot engage in the practice of law.
Application to Persels
Based on the representations made in the Petition, I conclude that Persels does not meet the standards set forth in Section 1I1.D above regarding who is performing the debt negotiation services. As an initial matter, Persels has not identified any of its Connecticut attorneys and has not established that such Connecticut attorneys are partners in this limited liability company.
Even [if] Persels had provided this information, the Petition is clear that Persels uses Connecticut lawyers “in tandem with paraprofessional staff’ to provide debt negotiation services.
Similarly, because Care One “prepares client in-take folders and manages client information” for Persels for a fee, it may be that staff at Care One could be involved in the provision of debt negotiation services, as defined in Section 36a-671 of the 2012 Supplement to the General Statutes, depending on additional facts. See Petition, p. 4. For our purposes here, and according to the Petition, debt negotiation Work at Persels is done, at least in part, by non-attorney paraprofessional staff for Whom the statute provides no licensure exemption.
The Department will take a no-action position with respect to legal entities only Where the only debt negotiation Work done Within the entity complies with the standards set forth in Section Ill.D above.
The Meaning of “As An Ancillary Matter”
Section 36a-67lc(1) of the 2012 Supplement to the General Statutes provides:
The provisions of sections 36a-671 to 36a-671d, inclusive, shall not apply to the following: (1) Any attorney admitted to the practice of law in this state who engages or offers to engage in debt negotiation as an ancillary matter to such attomey’s representation of a client ….
The Petition argues that the reference in Section 36a-671c to an “attomey’s representation of a client” is both general and broad and, therefore it cannot be limited to any particular substantive area of the law. Persels argues the attorney exemption must be read to refer broadly to “any professional engagement by a lawyer whereby the lawyer holds him or hersebf out to the public as a lawyer and agrees to provide legal services to a client.” Petition, p. 10 (emphasis added). I disagree.
The net effect of Persels’ argument is to seek to replace the phrase “as an ancillary matter to such attorney’s representation of a client” with a blanket exemption for attorneys engaged in any form of debt negotiation. I cannot accept this argument because it reads the phrase “ancillary matter to _ _ .” out of the statute.
The Connecticut General Assembly decided that Connecticut attorneys who perform debt negotiation services in a manner that is something more than just “subordinate”, “subsidiary” or “auxiliary” to a representation require licensure by the Department and are subject to regulation by the Department with respect to their debt negotiation activities.
How Firms Will Be Evaluated
In an effort to provide reasonable notice to attomeys regarding the scope of the exemption in Section 36a-671c(l) of the 2012 Supplement to the General Statutes, and in connection with my position on law firms set forth in Section III.D above, I herein enunciate the basic rule that the Department will employ to analyze whether a matter is ancillary to representation.
The Department will employ a “primary purpose” test. It will seek to take enforcement action in those cases for unlicensed debt negotiation activity where retention of an otherwise qualifying attomey or firm was, or could have reasonably been understood by the debtor to be, for debt negotiation services as a primary purpose of the relationship, or where debt negotiation on behalf of the debtor was the primary purpose of the services actually performed.
This will be ascertained on a case-by-case basis through investigation of all of the facts and circumstances. The mere existence of a written retainer agreement purporting to offer only services other than debt negotiation, or purporting to offer other services in addition to debt negotiation, is not in and of itself dispositive, particularly if other facts and information available indicate that the services intended to be performed (or actually performed) were different in substance or degree than those reflected in the retainer agreement.
As for Persels’ arguments that regulation in this arena violates public policy, I find far more compelling the number of comments that describe the abuses of the attorney business model in the debt negotiation industry. In any event, the legislature has made a public policy determination that attorneys should be exempt from licensure only if debt negotiation is ancillary to such attorney’s representation of a client. I cannot alter the decision of the legislature.
You can read the entire document issued by the Banking Commissioner, Howard Pitkin, here.
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