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Persels & Associates, LLC v. Banking Commissioner

Supreme Court of Connecticut

September 15, 2015


Argued April 23, 2015

As Corrected November 16, 2015.

Page 593

Appeal from a declaratory ruling of the defendant interpreting the statutory exemption for Connecticut attorneys engaged in debt negotiation from certain regulatory requirements set forth in General Statutes § 36a-671 et seq., and holding that the exemption was inapplicable to the plaintiff, brought to the Superior Court in the judicial district of New Britain, where the court, Cohn, J., denied the defendant's motion to dismiss; thereafter, the court, Prescott, J., rendered judgment dismissing the appeal, from which the plaintiff appealed.


Pursuant to a provision (§ 36a-671c[1]) of the state debt negotiation statutes, attorneys who provide debt negotiation services generally are not exempted from the licensing and registration requirements of the Banking Commissioner, but those attorneys who are admitted to the practice of law in the state and who engage in or offer debt negotiation services as an ancillary matter to such attorneys' representation of a client are exempt.

The plaintiff, a national consumer advocate law firm based in Maryland, petitioned the defendant Banking Commissioner for a ruling declaring that, pursuant to § 36a-671c(1), a law firm, such as itself, that offers debt negotiation services to its clients using Connecticut attorneys is not required to have a debt negotiation license from the Department of Banking when the services are rendered in connection with the attorneys' representation of clients. The plaintiff uses Connecticut attorneys working in tandem with paraprofessionals to provide legal services in connection with compromises of unsecured debt, defense of creditor lawsuits, protection from creditor harassment and bankruptcy. The attorneys are licensed and regulated by the Judicial Branch and the Statewide Grievance Committee, respectively, and the plaintiff's retainer agreements with its clients provide that it offers debt negotiation services as well as other legal services that clearly constitute the practice of law. The commissioner determined, as a matter of law, that § 36a-671c provided an exemption from licensure only for a natural person who is an attorney admitted to practice in Connecticut and is not retained to perform debt negotiation services as the primary purpose of the representation of a client. The commissioner ruled that the plaintiff did not qualify for such an exemption because it was not a natural person, and it performed debt negotiation services, including communications with clients and creditors, through paraprofessional employees who are not attorneys admitted to practice in Connecticut and who are neither shareholders nor partners of the plaintiff. The commissioner thus concluded that the plaintiff must obtain a license to offer its debt negotiation services to Connecticut consumers and that its provision of those services would be subject to oversight by the department. The plaintiff appealed from the commissioner's decision to the trial court, challenging his interpretation and application of § 36a-671c. The trial court affirmed the commissioner's decision, and the plaintiff appealed, challenging, inter alia, the trial court's conclusion that because debt negotiation does not constitute the practice of law, § 36a-671c does not unconstitutionally delegate to the department the authority to license and regulate the practice of law. Held that the debt negotiation services that the plaintiff provides are inextricably bound together with the practice of law by licensed Connecticut attorneys, the regulation of whom falls under the exclusive authority of the Judicial Branch, and, therefore, in their current form, the debt negotiation statutes offend the separation of powers provision of article second of the state constitution and are unenforceable with respect to Connecticut attorneys engaged in the bona fide practice of law: although the legislature may regulate attorney conduct insofar as it concerns the entrepreneurial or commercial aspects of the profession of law, the regulation of the actual practice of the law remains the sole province of the Judicial Branch, and the services that the plaintiff provides bear all the external indicia of the practice of law; moreover, the commissioner's claim that debt negotiation services cannot constitute the practice of law when such services legally may be provided by nonattorneys was unavailing, because, even if that premise were true, when those services are performed by attorneys within the context of the attorney-client relationship, they constitute the practice of law.

Robert M. Frost, Jr., for the appellant (plaintiff).

Patrick T. Ring, assistant attorney general, with whom were Matthew J. Budzik, assistant attorney general, and, on the brief, George Jepsen, attorney general, for the appellee (defendant).

Rogers, C. J., and Palmer, Zarella, Eveleigh, Espinosa, Robinson and Vertefeuille, Js. VERTEFEUILLE, J. In this opinion the other justices concurred.


Page 594

[318 Conn. 654] VERTEFEUILLE, J.

Connecticut's debt negotiation statutes, General Statutes § § 36a-671 through 36a-671e,[1] authorize the defendant, the Banking Commissioner (commissioner), to license and regulate persons engaged in the debt negotiation business. Attorneys who provide debt negotiation services are not exempted generally from such regulation, except those attorneys " admitted to the practice of law in [Connecticut] who [engage] or [offer] to engage in debt negotiation as an ancillary matter to such [attorneys'] representation of a client . . . ." General Statutes § 36a-671c(1) (attorney exception). The dispositive question presented by this appeal[2] is whether the debt negotiation statutes unduly permit the commissioner to interfere with the Judicial Branch's regulation of the practice of law and, therefore, violate the separation of powers provision contained in article second of the constitution of Connecticut.[3] We conclude that § 36a-671c offends the [318 Conn. 655] state constitution. We therefore reverse the judgment of the trial court, which rejected the plaintiff's constitutional challenge and dismissed its administrative appeal.

The present appeal arises from a petition for a declaratory ruling that the plaintiff, Persels & Associates, LLC, a national consumer advocacy law firm, filed with the commissioner in 2012, seeking a determination that the plaintiff is exempt from the debt negotiation statutes. Before reviewing the procedural history of the case, it will be instructive to consider briefly the relevant statutory scheme, its history, and the mischief to which it is directed.

Section 36a-671(a)(1) defines debt negotiation as " for or with the expectation of a fee, commission or other valuable consideration, assisting a debtor in negotiating or attempting to negotiate on behalf of a debtor the terms of a debtor's obligations with one or more mortgagees or creditors of the debtor, including the negotiation of short sales of residential property or foreclosure rescue services . . . ." In his declaratory

Page 595

ruling on the plaintiff's petition, the commissioner described the origins of Connecticut's debt negotiation statutes: " Since the economic downturn in 2007, the [Department of Banking (department)] has seen a rising number of complaints against debt negotiation firms. . . . Connecticut residents and consumers struggling financially are turning to debt negotiators as an alternative to bankruptcy and as a potential solution to their increasing consumer debt levels. . . . [M]any debt negotiators mislead debtors, collecting thousands of dollars in [up-front] fees without performing any debt negotiation work and often making a debtor's circumstances worse. . . . [T]he most common business model in the industry . . . requires consumers to stop paying their debts, during which time the debtor falls [further] behind in his or her bills, the debt itself [318 Conn. 656] increases through interest and collection fees, lawsuits may be brought against the debtor, and the debtor's already weak credit rating will be damaged even further. . . . Unfortunately, enrolling in a debt negotiation program worsens the family's financial situation in the overwhelming majority of cases . . . . [C]ompanies like [the plaintiff] . . . lure in new customers, take hard-working consumers' limited funds, and ultimately provide little or no value for that money. . . .

" Because of these serious problems, [the commissioner] sought statutory authority to regulate the debt negotiation industry in 2009. . . . [Number 9-208, § § 29 through 32, of the 2009 Public Acts, which was codified as § 36a-671 et seq., was intended to] update and increase the power of the [c]ommissioner to try to protect people who find themselves in difficult times and dealing with these kinds of organizations." (Citations omitted; internal quotation marks omitted.)

There are four principal components to the regulatory scheme that the legislature enacted in 2009 to address these concerns. First, any person wanting to offer or provide debt negotiation services in Connecticut must first obtain a license from the department. See General Statutes § 36a-671(b). Before issuing such a license, the commissioner must approve the " financial responsibility, character, reputation, integrity and general fitness" of the applicant; General Statutes § 36a-671(d)(1); and the applicant must pay a fee of $1600; General Statutes § 36a-671 (e); and obtain a surety bond. General Statutes § 36a-671d. Second, General Statutes § 36a-671a(b) authorizes the commissioner to conduct an investigation into any debt negotiation transaction, and to discipline anyone he finds to have violated the debt negotiation laws, committed fraud, misappropriated funds, or failed to perform any debt negotiation agreement with a debtor. Specifically, the commissioner may suspend, revoke, or refuse to renew a debt [318 Conn. 657] negotiation license; General Statutes § 36a-671a(a); order financial restitution and disgorgement of fees; General Statutes § 36a-50(c); and assess a civil penalty of up to $100,000 per violation. General Statutes § 36a-50(b). Third, the debt negotiation statutes prohibit the charging of up-front fees for such services, and authorize the commissioner to establish a schedule of maximum fees.[4] General Statutes § 36a-671b(b).

Page 596

The commissioner also may review the fees charged by a person offering debt negotiation services and order the reduction of excessive fees. General Statutes § 36a-671a(c). Fourth, the statutes establish various contractual protections that must be afforded to a debt negotiation consumer; General Statutes § 36a-671b(a); and provide that any contract that fails to provide such protections is voidable by the consumer. See General Statutes § 36a-671b(c). For example, each debt negotiation customer must be provided a contract that contains: " (1) a statement certifying that the person offering debt negotiation services has reviewed the consumer's debt . . . (2) an individualized evaluation of the likelihood that the proposed debt negotiation services would reduce the consumer's debt or debt service or, if appropriate, prevent the consumer's residential home from being foreclosed [and (3) a prominent notice that] the consumer [may] cancel or rescind such contract within three business days after the date on which the consumer signed the contract." General Statutes § 36a-671b(a).

[318 Conn. 658] Other states enacted similar protections in the wake of the residential mortgage crisis of the last decade,[5] and the Federal Trade Commission passed amendments to its Telemarketing Sales Rule to curb deceptive and abusive debt negotiation practices. Among other things, the new Federal Trade Commission regulations " set forth disclosure requirements for the industry, prohibited certain misrepresentations in the telemarketing of debt relief services, and banned debt relief service companies . . . from charging fees to consumers in advance of renegotiating, settling or reducing unsecured debt balances. 16 C.F.R. [§ 310.1 et seq.], 75 Fed.Reg. [48458] 48460 ([August] 10, 2010) . . . ." (Citation omitted.)

Connecticut's debt negotiation statutes contain a provision that exempts certain persons from the scope of these regulations and licensing requirements. See General Statutes § 36a-671c. As initially enacted, § 36a-671c provided in relevant part: " 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, when engaged in such practice . . . ." Public Acts 2009, No. 09-208, § 31; see General Statutes (Rev. to 2011) § 36a-671c. This attorney exception presumably reflected the legislature's recognition that, under article second of the state constitution, the Judicial Branch has the exclusive authority to license and regulate the practice of law in this state. See Lublin v. Brown, 168 Conn. 212, 228, 362 A.2d 769 (1975).

In 2011, however, the legislature amended § 36a-671c so that the attorney exemption now extends only to an " attorney admitted to the practice of law in this state [318 Conn. 659] who engages or offers to engage in debt negotiation as an ancillary matter to such attorney's representation of a client. . . ." (Emphasis added.) Public Acts 2011, No. 11-216, ยง 43. The legislative history is silent as to the rationale for this amendment. The commissioner, however, indicates that the department itself lobbied the legislature for the amendment, with the ...

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