Association of Settlement v. Dept. of Bank.

• Decision Date: 24 July 2009
• Docket Number: No. 11 M.D. 2009,11 M.D. 2009
• Citation: 977 A.2d 1257
• Parties: The ASSOCIATION OF SETTLEMENT COMPANIES; Century Negotiations, Inc., Eagle One Debt Solutions, LLC, Petitioners v. DEPARTMENT OF BANKING, Respondent.
• Court: Pennsylvania Commonwealth Court

977 A.2d 1257

The ASSOCIATION OF SETTLEMENT COMPANIES; Century Negotiations, Inc., Eagle One Debt Solutions, LLC, Petitioners v. DEPARTMENT OF BANKING, Respondent.

No. 11 M.D. 2009

Commonwealth Court of Pennsylvania.

Argued June 10, 2009.

Decided July 24, 2009.

Robert B. Hoffman, Harrisburg, for petitioner.

Kenneth L. Joel, Sr. Deputy Attorney General, Harrisburg, for respondent.

BEFORE: LEADBETTER, President Judge, and McGINLEY, Judge, and SMITH-RIBNER, Judge, and PELLEGRINI, Judge, and COHN JUBELIRER, Judge, and LEAVITT, Judge, and BUTLER, Judge.

OPINION BY Judge COHN JUBELIRER.

I. Introduction

In this case we are asked to resolve inter alia, numerous constitutional challenges to the Debt Management Services Act (Act 117).¹ These challenges were brought via a Petition for Review (Petition) filed by two individual debt settlement services providers (DSS Providers), Century Negotiations, Inc. (Century), and Eagle One Debt Solutions, LLC (Eagle One), and a trade group representing a number of DSS Providers, The Association of Settlement Companies (collectively, Challengers). In their Petition, which was filed in this Court's original jurisdiction, Challengers argue that Act 117 is unconstitutional on its face and as applied to DSS Providers. Before this Court are Preliminary Objections in the nature of demurrers filed by the Department of Banking (Department) contending, inter alia, that Act 117 is not constitutionally infirm.

In conducting our review of these Preliminary Objections, there are several principles that we must consider. First, we are mindful of our Pennsylvania Supreme Court's statement as to the limits of our review in evaluating the work of the General Assembly:

At the outset, it is important to make clear that we are neither passing on the wisdom of the substantive provisions of this Act nor on whether [regulation of consumer debt services] in general is in the best interests of the citizens of our Commonwealth. These decisions are for the General Assembly. We are only considering the discrete legal issues that have been raised for our review primarily regarding the constitutionality of this piece of legislation.

Pennsylvanians Against Gambling Expansion (P.A.G.E.) Fund, Inc. v. Commonwealth, 583 Pa. 275, 288, 877 A.2d 383, 390-91 (2005).

Second, we are guided by our standard for resolving constitutional challenges to legislative actions. Our law provides a strong presumption that legislative enactments, as well as the manner in which legislation is enacted, do not violate the Constitution. P.A.G.E., 583 Pa. at 292, 877 A.2d at 393. A party that challenges the constitutionality of a statute bears "a very heavy burden of persuasion" to overcome this presumption. P.A.G.E., 583 Pa. at 292, 877 A.2d at 393. "Accordingly, a statute will not be declared unconstitutional unless it clearly, palpably, and plainly violates the Constitution [and a]ll doubts are to be resolved in favor of finding that the legislative enactment passes constitutional muster." Id.

Third, because we are in the early stages of this proceeding, we are guided by the principles of review for evaluating preliminary objections in the nature of a demurrer. In reviewing preliminary objections in the nature of a demurrer, all material facts averred in the complaint, and all reasonable inferences that can be drawn from them, are admitted as true. Vattimo v. Lower Bucks Hospital, Inc., 502 Pa. 241, 244, 465 A.2d 1231, 1232 (1983); Fletcher v. Pennsylvania Property & Casualty Insurance Guaranty Association, 914 A.2d 477, 479 n. 2 (Pa.Cmwlth 2007). "The question presented by the demurrer is whether, on the facts averred, the law says with certainty that no recovery is possible. Where a doubt exists as to whether a demurrer should be sustained, this doubt should be resolved in favor of overruling it." Vattimo, 502 Pa. at 244, 465 A.2d at 1232-33 (citations omitted).

With this background, we turn to the averments in the Challengers' Petition and the corresponding demurrers raised to these averments by the Department.

Challengers' Petition contains the following averments. Act 117 was signed into law on October 9, 2008 and became effective on February 6, 2009. Act 117 provides for the regulation and licensing of DSS Providers and debt management services providers (DMS Providers). Section 2 of Act 117 defines "debt management services" as "[t]he service of receiving funds periodically from a consumer and then distributing those funds to creditors of the consumer in partial or full payment of the consumer's personal debts." 63 P.S. § 2402. Act 117 also defines "debt settlement services" as:

[a]n action or negotiation made on behalf of a consumer with that consumer's creditors for the purpose of the creditor forgiving part or all of the principal of the debt incurred or credit extended to that consumer. The term shall not include any action taken to convince a creditor to waive any fees or charges.

63 P.S. § 2402. According to Challengers' Petition,² DSS Providers:

11. ... are one of several debt reduction options available to persons who have substantial unsecured debt that they are unable to pay off, are in default on, or are having difficulty paying off in a timely/economically feasible way (e.g., unable to pay minimum balances on credit cards). Other options for persons in that situation include working with a debt management company or declaring bankruptcy. Debt settlement is often the only affordable option for a consumer who cannot pay back their debt due to a hardship.

12. Debt settlement companies act on behalf of consumer debtors to help them settle their unsecured debts at a lesser amount than owed to each of their creditors. They do this by directly negotiating with creditors to reduce the amount the creditors will accept as payment in full. Debt settlement companies also help a debtor take constructive action that will facilitate payment of that reduced amount, such as helping the debtor establish a monthly saving program with funds set aside to pay any settlement(s) the debt settlement company achieves.

13. Most debt settlement companies, and all that are members of [the Association of Settlement Companies], do not hold, handle or control their client's funds.

14. Debt settlement companies receive fees for their services, which typically total between 14% and 20% of the debt that is originally committed by the debtor under the debt settlement program agreement.

(Petition ¶¶ 11-14.) Challengers describe DMS Providers as follows:

21. Debt management and debt settlement companies provide distinct services to consumers.

22. Most debt management companies receive significant funding by the creditors to whom consumers owe their debts.

23. Debt management companies do not negotiate with creditors on behalf of consumers to reduce the principal balance of a debt (as debt settlement companies do) but focus on lowering monthly payments and/or securing a reduced annual percentage rate of interest for payment of the full amount owed over a fixed period of time, usually 3-5 years.

24. Debt management companies work only with creditors that have agreed to participate in debt management programs and focus on securing a reduced annual percentage rate of interest on debt.

25. Debt management companies typically establish a repayment plan with all participating creditors and establish an amount the client will pay monthly. The debtor then makes a single monthly payment in that amount to the debt management company, which then disburses the payment to the creditors on a pro rata basis.

(Petition ¶¶ 21-25.)

Challengers allege that Act 117, as originally conceived, was intended to regulate only DMS Providers and that DSS Providers were included at the last minute. (Petition ¶¶ 29-30, 37-38.) Prior to the passage of Act 117, both DSS Providers and DMS Providers³ were permitted to operate within the Commonwealth. (Petition ¶¶ 16-18, 27.) Act 117 now provides, among other things, that DMS and DSS Providers must be licensed in order to provide services in the Commonwealth. Section 3 of Act 117, 63 P.S. § 2403. With regard to DMS Providers, Section 3(a) provides that in order to operate within the Commonwealth a DMS Provider must be "licensed by the [D]epartment under this act." 63 P.S. § 2403(a). With regard to DSS Providers, however, Section 3(b) states that in order to operate in the Commonwealth, a DSS Provider must be "licensed by the [D]epartment under this act and ... operating in accordance with regulations promulgated by the [D]epartment regarding the conduct of debt settlement services." 63 P.S. § 2403(b) (emphasis added). In their Petition, Challengers allege that the Department has stated that it cannot license DSS Providers until it promulgates regulations regarding debt settlement services. Challengers allege that the Department will not have regulations in place covering DSS Providers until months or years after the effective date of Act 117, and that DSS Providers will not, therefore, be able to continue operating in the Commonwealth.

Therefore, the Challengers brought their Petition in this Court's original jurisdiction seeking declaratory and injunctive relief, attorneys' fees, and asking this Court to determine that Act 117 is unconstitutional because it:⁴ (1) violates the Delegation Doctrine found at article II, section 1 of the Pennsylvania Constitution (Petition, Count V); (2) violates the single subject doctrine found at article III, section 3 of the Pennsylvania Constitution (Petition, Count II); (3) violates DSS Providers' rights to equal protection under the United States and Pennsylvania Constitutions (Petition, Count I); (4) violates DSS Providers' rights to due process under the United States and Pennsylvania Constitutions (Petition, Count IV); and (5) violates the Contracts Clauses of the United States and Pennsylvania Constitutions (Petition, Count III). For relief on these claims,...