Judicial Review of Agency Authority When Regulating Attorney-Supervised Debt Negotiation

Introduction

Commonwealth Servicing Group, LLC and Commonwealth Law Group, a national consumer-advocate law firm with Connecticut‐licensed attorneys, challenged the Connecticut Department of Banking’s attempt to enforce the state’s debt negotiation statutes against them. In response to a two‐year investigation and a “cease and desist” order alleging that Commonwealth Servicing provided unlicensed debt negotiation services, the law firm and its support entity sought declaratory and injunctive relief. They argued that, under Persels & Associates, LLC v. Banking Commissioner (318 Conn. 652, 2015), there is a rebuttable presumption that attorneys who negotiate debts in the course of representing clients are engaged in the practice of law and thus fall exclusively under Judicial Branch regulation. The key procedural issue was whether they had to exhaust administrative remedies before asking the Superior Court to determine whether the Department of Banking had statutory authority to bring its enforcement action.

Summary of the Judgment

On appeal, the Supreme Court of Connecticut affirmed the Superior Court’s denial of the Department of Banking’s motion to dismiss for lack of subject-matter jurisdiction. It held that:

Although administrative remedies generally must be exhausted before judicial review, an exception applies when an agency lacks expertise to decide whether it has acted beyond its statutory authority.
The Commissioner of Banking is expert in regulating debt-negotiation practices but has no expertise in determining who is “engaged in the practice of law” under Persels.
Because the applicability (and possible rebuttal) of the Persels presumption turns on whether attorneys actually practice law in negotiating debts, that threshold question implicates Judicial Branch authority and separation-of-powers concerns, and need not await a contested administrative proceeding.
Accordingly, Commonwealth Servicing and Commonwealth Law were not required to exhaust administrative remedies before seeking declaratory and injunctive relief on the question of statutory authority.

Analysis

1. Precedents Cited

Persels & Associates, LLC v. Banking Commissioner (318 Conn. 652, 2015): Held that attorneys offering debt negotiation as part of a bona fide attorney‐client relationship are presumptively engaged in the practice of law and cannot be regulated by the Banking Commissioner under §§ 36a-671 to 36a-671f without infringing the Judicial Branch’s exclusive licensing power. The presumption may be rebutted only if the attorney uses the title or license as a façade, fails to supervise staff meaningfully, offers no genuine legal advice, or lacks an actual attorney‐client relationship.

Cannata v. Department of Environmental Protection (215 Conn. 616, 1990): Reaffirmed that parties ordinarily must exhaust administrative remedies when an agency possesses the technical expertise to decide its own jurisdiction or statutory authority.

Greater Bridgeport Transit District v. Local Union 1336 (211 Conn. 436, 1989): Confirmed that where an agency has discretion or expertise (e.g., in labor or environmental regulation), its determinations on threshold questions must be made in the first instance through the administrative process and later appealed under § 4-183.

2. Legal Reasoning

The Court applied the doctrine of administrative exhaustion with its narrow exception: “If an agency has no expertise in resolving the issue of whether it has acted in excess of its statutory authority, a party need not exhaust its administrative remedies before seeking judicial relief.”

• The debt negotiation statutes (§ 36a-671 to 36a-671f) delegate to the Banking Commissioner the power to license and enforce against unlicensed negotiators. But by statute (§ 36a-671c), attorneys negotiating debts as ancillary to client representation are exempt from that licensing scheme.

• Persels presumes that any law firm offering debt negotiation under lawyer supervision is practicing law and thus beyond the Commissioner's reach. Rebuttal of that presumption depends on assessing attorney supervision, provision of legal advice, and bona fide attorney-client relationships—areas squarely within the Judicial Branch’s domain and outside the Commissioner's expertise.

• Because resolution of the Persels presumption raises separation-of-powers issues and requires evaluating legal practice rather than business conduct, the Superior Court properly entertained declaratory and injunctive relief before any administrative determination.

3. Impact on Future Cases

Clarifies that agencies may not force parties to endure protracted administrative proceedings on threshold issues outside the agency’s expertise—especially those implicating separation of powers.
Reinforces judicial primacy in regulating the practice of law and safeguards attorneys’ constitutional protections from administrative overreach.
Guides administrative agencies to frame initial enforcement actions with factual detail sufficient to overcome the Persels presumption—or risk premature court intervention.
Instructs practitioners that they may preemptively seek injunctions or declaratory judgments when an agency oversteps its statutory bounds in areas not within its technical authority.

Complex Concepts Simplified

Administrative Exhaustion Doctrine: A principle requiring parties to pursue all available administrative remedies before going to court—designed to let agencies apply their expertise and to narrowly focus judicial review.
Exception for Lack of Expertise: When an agency lacks the specialized knowledge to decide whether it has overstepped its legal power—such as defining who practices law—parties need not remain in the administrative system and may go straight to court.
Persels Presumption: A rebuttable legal assumption that any attorney-led debt negotiation service is the practice of law and falls exclusively under judicial regulation. It can only be overturned by clear evidence that the attorney’s role is a sham.
Separation of Powers: A constitutional doctrine that assigns the licensing and regulation of lawyers to the Judicial Branch, preventing legislative or executive agencies from intruding into core judicial functions.

Conclusion

The Supreme Court’s decision in Commonwealth Servicing Group, LLC v. Department of Banking reinforces two fundamental principles: first, that courts will step in to adjudicate an agency’s authority whenever threshold questions lie outside the agency’s expertise; and second, that the Judicial Branch retains exclusive control over the practice of law, including attorney-supervised debt negotiation. By affirming the right to immediate declaratory and injunctive relief, the Court has drawn clear lines against administrative overreach and protected the separation of powers that underpins Connecticut’s constitutional structure.