The Supreme Court of Connecticut yesterday delivered a ruling on the regulation of debt negotiation services, reinforcing the separation of powers between the judicial and executive branches of government. In its decision, the Court ruled in Commonwealth Servicing Group, LLC v. Department of Banking, affirming that the regulation of debt negotiation by attorneys falls exclusively under the judicial branch, and not under the Department of Banking’s authority.
The background: The case began when the Connecticut Department of Banking issued a cease-and-desist order against Commonwealth Servicing Group, LLC, an affiliate of a law firm, for allegedly violating the state’s debt negotiation statutes. These statutes, require that debt negotiators be licensed by the Department of Banking. The Department accused Commonwealth Servicing of engaging in debt negotiation activities without the required license, despite operating under the supervision of licensed Connecticut attorneys.
- Commonwealth Servicing went to the courts, claiming that the Department of Banking was exceeding its statutory authority. They argued that the judicial branch has exclusive authority over the regulation of attorneys engaged in debt negotiation as part of the practice of law.
- This principle had previously been established in Persels & Associates, where the court ruled that legal debt negotiation services provided by attorneys were shielded from the Department of Banking’s regulatory oversight, as long as they met certain conditions of attorney involvement.
The ruling: The Connecticut Supreme Court upheld the plaintiffs’ position, emphasizing that determining whether an entity is engaged in the practice of law — especially in cases involving debt negotiation — falls within the exclusive purview of the judicial branch. The Court referenced the Persels presumption, which asserts that debt negotiation services provided by attorneys as part of their legal practice are not subject to the Department of Banking’s jurisdiction unless it can be shown that the attorney’s involvement is a mere “front” to evade proper regulation.
- Importantly, the Court ruled that the plaintiffs were not required to exhaust administrative remedies before challenging the Department’s authority in court.
- This decision reinforces the principle that if an agency lacks expertise in a specific legal issue, such as whether an entity is engaged in the practice of law, judicial review can be sought directly without first going through the administrative process.
- This ruling serves as a reminder for law firms and debt negotiation services that operate under attorney supervision: as long as they adhere to the requirements set forth in Persels — such as maintaining attorney oversight and a bona fide attorney-client relationship — they are exempt from the Department of Banking’s licensing requirements.
