Sarah Poriss (Thomas B. Scheffey)
After the 2008 economic crash, business boomed for companies that promised consumers help in addressing credit card debt. But it turns out some debt negotiation firms were much better at collecting fees than solving debtors’ problems. In response, the Connecticut Legislature in 2009 approved stronger Banking Department regulations to prevent predatory practices.
Debt-reduction companies were limited to a $50 initial fee, couldn’t take more than 10 percent of the debt actually reduced, and needed to have a license costing $800 a year. But there was a lawyer exemption from those rules. And so some debt settlement companies took on the shape of law firms.
One prominent example is Maryland-based Persels & Associates, which works for national debt settlement company CareOne, and boasts independent contractor lawyers in all 50 states. In March 2012, Persels asked for a ruling on its eligibility for the attorney exception to the debt negotiation rules.
State Banking Commissioner Howard Pitkin Jr., after soliciting comments, decided the Persels law firm business model didn’t qualify for the Connecticut attorney exemption.
Persels appealed to New Britain Superior Court Judge Eliot Prescott, who recently ruled against Persels, turning aside arguments 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, but Prescott held that the constitutional separation of powers doctrine did not prevent overlapping supervision by the judicial and executive branches.
Pitkin called Prescott’s decision “a victory for consumers, and it puts purported law firms on notice that they cannot circumvent the consumer protection laws relating to debt negotiation.”
Persels lawyer Robert Frost Jr., of New Haven’s Frost & Bussert, said his client will appeal.
“I think reasonable minds might well disagree as to the conclusions reached in the decision,” said Frost, “some of which have far-reaching implications for lawyers, law firms, and the ability of the executive branch to regulate activities commonly understood to be the practice of law when performed by lawyers on behalf of a client.”
Neil Ruther, the Towson, Md., lawyer who owns 99 percent of Persels, sometimes describes his Internet-powered “virtual law firm” in visionary terms. He told the Law Tribune in a 2012 interview that Persels and CareOne serve all-but-forgotten clients who can’t afford traditional lawyers.
Persels markets itself as a national consumer advocate law firm that offers compromises of unsecured debt, defense of creditor collection suits, protection from creditor harassment and bankruptcy. It has no partners or associates in Connecticut, although a Connecticut-licensed lawyer, Heidi Saas, works in Maryland and supervises the Connecticut contract attorneys.
Persels argued that it is unreasonable to require a law firm to be licensed as a debt negotiator.
Its case hinged on the interpretation of a 2011 amendment approved by the General Assembly, which states that only Connecticut lawyers who perform debt negotiation work as an “ancillary” part of their practice are exempt from the Banking Department regulations and licensing requirement.
Prescott, who last month was nominated to the Connecticut Appellate Court, wrote a clear 37-page analysis. He noted that no one is challenging the Judicial Branch’s authority to regulate attorneys engaged in the practice of law, or the banking commissioner’s authority to regulate debt negotiation services.
He also said the 2011 exemption was clearly worded, in that it applied only to “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 attorney’s representation of a client.”
The bottom line, he said, was that Persels & Associates isn’t an attorney admitted to practice law in Connecticut. It’s a law firm. Prescott found extensive support in case law and ethics rules for the premise that only natural persons—human beings—can practice law.
“Only individuals may be admitted to the bar, register with the statewide grievance committee, or be disbarred or presented before the Superior Court.” The term “attorney” as used in the 2011 law, Prescott held, “unambiguously refers to a natural person and not a law firm.”
Prescott also took into account the debt industry abuses that prompted the Legislature to narrow the attorney loophole.
When it follows the “attorney model,” a debt relief company contracts with local attorneys who purport to perform “legal services” for clients, the judge explained. In fact, the lawyer’s role is minimal, he said, with the most common result being that a consumer pays hefty fees in exchange for minimal debt negotiation services.
In the record of Persels v. Banking Department, regulators cited the 2009 case of Dawn Colonni, of Mystic. She complained to banking and bar grievance officials that she paid Persels a total of $2,105, of which all but $124 went to legal fees by the time she stopped paying. She was told by paralegals that attempts to negotiate her credit card debt were unsuccessful.
In holding that the constitutional separation of powers doctrine does not apply here, Prescott addressed the comments submitted to the banking department by Patrick Carroll, now Connecticut’s chief court administrator. Carroll had argued that debt negotiation was a legal practice under the exclusive jurisdiction of the Judicial Branch.
In a footnote, Prescott wrote: “That opinion is not binding on this court because it constitutes a legal opinion. A legal opinion is incompetent evidence except on foreign law.”
Carroll could not be reached for comment. The Judicial Branch seldom comments on pending matters.
Prescott agreed that the Judicial Branch has inherent power to regulate lawyers, but found the 2011 consumer protection amendments did not create a separation of powers conflict: “Merely because one is an attorney, however, does not make him or her immune from all state agency regulation.”
When the Banking Department initially solicited comments, Raphael Podolsky, a lobbyist for Connecticut legal aid interests, was among those who responded. In an interview, he noted the federal Fair Debt Collection Practices Act is another “clear example” of lawyers’ practices being regulated by other governmental branches.
Sarah Poriss, a Hartford consumer lawyer, also applauded Prescott’s decision. In a 2012 letter to the Banking Department, Poriss said: “The largest number of complaints I have received are from consumers who had entered into contracts with CareOne Credit and were supposedly represented by an attorney hired by Persels & Associates.” The clients came to her, said Poriss, still in need of actual legal assistance.
Another debt settlement firm, based in New York, “offered me payment to use my name on their letterhead as their Connecticut attorney,” Poriss said. She declined.
Mark Dubois was Connecticut’s chief disciplinary counsel during the Great Recession boom in debt negotiation work.
Following Prescott’s decision, Dubois said: “In my letter to the Banking commissioner, I said that if a lawyer was a mortgage broker, he’d need a mortgage broker’s license. If he was a real estate agent, he’d need a real estate license. In this debt negotiation field, where there has been a history of abuse, the Banking commissioner has his concerns, and the Judicial Branch has its concerns, and they’re not mutually exclusive.”•
Thomas B. Scheffey is a former senior writer for the Connecticut Law Tribune. He is now a member of the newspaper’s Editorial Board.