Kick in the Nuts for Attorney Model Debt Settlement?

I was remiss in not covering this sooner but at the end of March there was what appears to be an important decision regarding attorney model debt settlement services where attorneys claim they are not regulated by the state and can charge advance fees.

In a decision that the Maryland based debt settlement group, Persels and Associates, says they will appeal, a Superior Court Judge affirmed the penalties levied by the Connecticut of Banking.

The Persels and Associates position was that the Banking Department, an executive branch agency, had no authority to regulate out-of-state law firms. Persels had argued that only the Judicial Branch can regulate attorneys and law firms.

The Court took a look at two important issues.

  1. First, is the attorney exemption applicable only to natural persons, or should it also be construed to include law firms that employ lawyers who engage in debt negotiation?
  2. Second, if the exemption does not include law firms, is the statute unconstitutional as a violation of the separation of powers doctrine?

It seems this case also has some relation to the Morgan Drexen battle with the CFPB where Morgan Drexen and a Connecticut attorney are saying the CFPB is trying to “regulate the practice of law.”

In the Connecticut case the Department of Banking agreed that the individual Connecticut licensed attorneys did not have to get a license but the law firm did.

The law firm said that all of its Connecticut customers were obtained through Care One, a Maryland based licensed debt adjuster in Connecticut.

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The Connecticut Department of Banking stated their position there was only an exemption from licensing for (1) provides an exemption from debt negotiation regulation “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 doesn ot 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 the facts and circumstances.

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The commissioner additionally held that the attorney exemption to the state’s debt negotiation regulations did not apply to the plaintiff, a law firm organized as an LLC, because only natural persons may be an “attorney admitted to the practice of law in this state.

The commissioner further determined that the 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. .. 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 the facts and circumstances.”

The commissioner ruled that the no-action position did not apply to the plaintiff, which used unlicensed paraprofessionals to contact debtors.

In an interesting twist, the Connecticut court said “Similarly, debt negotiation services do not become the practice of law merely because an attorney or law firm provides the service. There is nothing in the record that indicates debt negotiation itself requires the “high degree of legal skill and great capacity for adaptation to difficult and complex situations that characterizes the practice of law.”

Bottom line of the decision, “This court agrees that the Judicial Branch has inherent authority over the admission and regulation of attorneys. Merely because one is an attorney, however, does not make him or her immune from all state agency regulation. The debt negotiation statutes provide distinctly separate remedies, different both in purpose and in form from the scheme of regulation imposed upon attorneys by the Judicial Branch.”

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You can read the full opinion, here.

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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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