New York City can regulate the conduct of attorneys engaged in debt collection, the U.S. Court of Appeals for the Second Circuit has ruled.

In Eric M. Berman, P.C. and Lacy Katzen, LLP v. City of New York, et al., the plaintiffs, two law firms that engaged in debt collection, argued that a New York City law under which an attorney can qualify as a “debt collection agency” was preempted by New York State’s authority to regulate attorneys. As originally enacted, the local law imposed a licensing requirement on a “debt collection agency” and contained an exclusion for “any attorney-at-law collecting a debt as an attorney on behalf of and in the name of a client.”

In 2009, the local law’s definition of a “debt collection agency” was expanded to include “a buyer of delinquent debt who seeks to collect such debt either directly or through the services of another by, including but not limited to, initiating or using legal processes or other means to collect or attempt to collect such debt.” The attorney exclusion was revised to limit it to attorneys and law firms collecting debts “solely through activities that may be performed only by a licensed attorney” and the exclusion was made inapplicable to “any attorney-at-law or law firm or part thereof who regularly engages in activities traditionally performed by debt collectors, including, but not limited to, contacting a debtor through the mail or via telephone with the purpose of collecting a debt or other activities as determined by rule of the commissioner…” In addition, the local law was revised to impose certain requirements and prohibitions on the practices of a “debt collection agency.”

Agreeing with the plaintiffs, the district court concluded that the local law was preempted by the state law that gives authority to the New York courts to regulate the conduct of attorneys, and thus granted summary judgment in plaintiffs’ favor. On appeal, the Second Circuit certified for review by the New York Court of Appeals the question of whether the local law “insofar as it regulates attorney conduct, constitute[s] an unlawful encroachment on the State’s authority to regulate attorneys, and [whether] there [is] a conflict between [the local law] and [state law].” Answering the question in the negative, the New York Court of Appeals issued an opinion (from which two judges dissented) in which it found no unlawful encroachment on state authority or conflict between state law and the local law’s requirement for licensing of attorneys engaged in “debt collection activity” that falls outside the practice of law. Instead, it deemed the two regulatory schemes “complementary to, and compatible with, one another.”

Based on the New York Court of Appeals’ opinion, the Second Circuit concluded that the district court had erred in finding that the local law impermissibly interfered with the state’s authority to regulate attorney conduct and vacated the district court’s judgment. The plaintiffs had also challenged the local law as unconstitutionally vague. Because the district court had not reached that issue due to its preemption finding, the Second Circuit remanded the case to the district court to consider the vagueness challenge. However, the Second Circuit cautioned the district court to “assure itself of Plaintiffs’ standing to assert their facial and as applied challenges, including by exploring how any alleged vagueness relates to Plaintiffs’ conduct.”