Federal Court Finds Massachusetts AG's COVID-19 Debt Collection Regulation Unconstitutional

U.S. District Court Judge Richard Stearns issued an order on May 6, 2020, finding that the two primary features of the Massachusetts Attorney General's COVID-19 debt collection regulation — a ban on debt collector initiated telephone communications with debtors and a ban on creditor and debt collector initiated debt collection lawsuits in state and federal courts — are unconstitutional. Judge Stearns' order grants ACA International's (ACA) motion for a temporary restraining order temporarily enjoining Attorney General Maura Healey from enforcing the bans on debt collector calls and creditor and debt collector debt collection lawsuits. (See Holland & Knight's previous alert, "Massachusetts Attorney General's COVID-19 Debt Collection Regulation Faces Legal Challenge," April 28, 2020.) Creditors and debt collectors should fully understand Judge Stearns' ruling and its implications for debt collection activity in Massachusetts and other jurisdictions currently enforcing or contemplating similar regulations.

The Court's Analysis

The U.S. District Court for the District of Massachusetts began with the standard for issuing a temporary restraining order, which is the same as for issuing a preliminary injunction. In order for the court to grant the temporary restraining order, ACA had to show 1) that it was likely to succeed on the merits, 2) that it was likely to suffer irreparable harm in the absence of preliminary relief, 3) that the balance of equities tipped in its favor, and 4) that an injunction was in the public interest. In the First Amendment context, however, the likelihood of plaintiff's success on the merits is the linchpin of the preliminary injunction analysis; where plaintiffs are determined likely to succeed on the merits of their First Amendment claims, irreparable injury is presumed.

The Speech Restriction

In assessing ACA's likelihood of success on the merits of its challenge to the Massachusetts Attorney General's ban on debt collector initiated telephone communications with debtors, the court began by determining the appropriate level of scrutiny to apply to the speech restriction. Under the First Amendment, the court determined, restrictions on speech solely related to the economic interests of ACA and the consumers with whom it interacts are subject only to intermediate scrutiny; restrictions on protected "commercial speech"¹ need only 1) serve a substantial government interest; 2) directly and materially advance that substantial government interest; and 3) be narrowly tailored to that substantial government interest.

Although the Attorney General advanced three government interests as potential justifications for the speech restriction, the court spent little time in rejecting two of the three,² engaging in a full analysis of but one of the proffered interests. The Attorney General argued that restriction on debt collector communications served the government interest of "protecting residential tranquility while citizens have largely had to remain at home during the coronavirus pandemic." Assuming that the interest in protecting residential tranquility was a sufficiently substantial government interest to satisfy the first step in the protected commercial speech analysis, the court moved to the second step of determining whether the speech restriction directly and materially advanced the substantial government interest. The court concluding that it did not observing that "[t]he best that can be said for the Regulation is that it decreases incrementally the number of times that a phone might ring in a debtor's home with a wanted or unwanted call from one species of debt collector." The court noted that the previous Massachusetts regulation already limited the number of debt collection calls to two per consumer per week and that the challenged regulation did not in any way curtail debt collection communications by mortgagors, landlords, nonprofit entities or the federal government.

While the speech restriction, which "incrementally" rather than materially advanced the proffered state interest, failed to withstand the second step of intermediate scrutiny under the First Amendment, the court still proceeded to the final step of the protected commercial speech analysis: determining whether the speech restriction is narrowly tailored to a substantial government interest. The court began by reviewing all the state and federal regulations already applicable to debt collection communications in Massachusetts. Between M.G.L. Ch. 93 § 49, 940 CMR 7.00, the Fair Debt Collections Practices Act (FDCPA), the Telephone Consumer Protection Act (TCPA) and the Federal Trade Commission Act (FTCA), the court noted, Massachusetts residents are already protected from unfair and deceptive debt collection practices. In the court's opinion, the newly adopted speech restriction did not offer any protections that the existing comprehensive scheme of laws and regulations did not already afford to debtors, "other than an unconstitutional ban on one form of communication." As such, the court held that the speech restriction was not narrowly tailored to the Massachusetts Attorney General's asserted interest in preserving domestic tranquility.

The Debt Collection Lawsuit Restriction

In assessing ACA's likelihood of success on the merits of its challenge to the Massachusetts Attorney General's ban on creditor and debt collector initiated debt collection lawsuits, the court's analysis, again, focused squarely on the First Amendment. Under the First Amendment, "Congress shall make no law . . . abridging . . . the right of the people . . . to petition the Government for a redress of grievances." Citing the U.S. Supreme Court's 2011 decision in Borough of Duryea, Pa. v. Guarnieri, the court recognized that "the Petition Clause protects the right of individuals to appeal to courts and other forums established by the government for resolution of legal disputes." Although the Massachusetts Attorney General attempted to provide examples of permissible restrictions on the right to petition, the court found that the proffered examples were not analogous to this case in which citizens are divested of otherwise available legal remedies.

Turning finally to the Massachusetts Attorney General's argument that the emergency created by the COVID-19 pandemic justified the ban on debt collection lawsuits, the court expressed considerable discomfort with the Attorney General's position. The court reminded us all that "the mere fact of an emergency does not increase constitutional power, nor diminish constitutional restrictions." Citing Justice George Sutherland's dissenting opinion in Home Bldg. & Loan Ass'n v. Blaisdell, 290 U.S. 398 (1934) — a Depression-era case in which the U.S. Supreme Court considered whether state-imposed loan forbearance violated the Contracts Clause of the U.S. Constitution — the court stated that "[i]t is not [permissible] for any department of the Government to change a constitution, or declare it changed, simply because it appears ill-adapted to a new state of things." COVID-19 has certainly changed the state of affairs in Massachusetts and around the world, but the court would not countenance such a restriction on Massachusetts' residents' First Amendment rights, COVID-19 notwithstanding.

The Balance of the Equities and The Public Interest

Once the court determined that ACA was likely to succeed on the merits of its challenges to the speech restriction and the debt collection lawsuit restriction and noted that the finding of a First Amendment violation obviated ACA's duty to show irreparable harm, the court turned to the questions of whether the balance of the equities tipped in ACA's favor and whether an injunction was in the public interest. The court answered both questions in the affirmative. "Given the plethora of protection provided to debtors by the laws and regulations" already on the books, the court stated, "the interest a debtor may have in the Regulation may not weigh as heavily as the threat of extinction faced by smaller collection agencies who have been effectively put out of business." And issuing an injunction, according to the court, was in the public interest because "a capitalist society has a vested interest in the efficient functioning of the credit market which depends in no small degree on the ability to collect debts."

The Implications of the Court's Order

The implications of the court's order finding the two primary features of the Massachusetts Attorney General's COVID-19 debt collection regulation unconstitutional are significant and could become even more significant with time. First, the Massachusetts Attorney General can no longer enforce the ban on debt collector initiated telephone communications with debtors or the ban on creditor and debt collector initiated lawsuits. Creditors and debt collectors can, for the time being and as long as Judge Stearns' order is in place, operate as they did before the Massachusetts Attorney General issued the new COVID-19 debt collection regulation. Second, this ruling could persuade other courts considering challenges to similar regulations adopted in other jurisdictions to rule that those regulations are also unconstitutional. Other jurisdictions in which similar regulations have been adopted and are still in effect include the District of Columbia. Third, the ruling could also persuade other jurisdictions currently contemplating adopting similar regulations not to do so because those regulations may very well be ruled constitutional impermissible.

How Holland & Knight Can Help

Holland & Knight will continue to monitor ACA International v. Healey and other litigation concerning the validity of the recently issued COVID-19 debt collection regulations and keep clients abreast of any meaningful developments. If you have questions about the Massachusetts debt collection regulation or the implications of the recent federal court order finding primary aspects of the regulation unconstitutional, Holland & Knight's Consumer Protection Defense and Compliance Team and Financial Services Regulatory Team can provide additional information. The teams are comprised of individuals with extensive experience advising credit and collection professionals and handling debt collection inquiries and investigations initiated by the Federal Trade Commission (FTC), the Consumer Financial Protection Bureau (CFPB) and state attorneys general. Please contact the authors with any questions.

Notes

¹ Certain commercial speech, including commercial communications that are more likely to deceive than to inform and commercial communications related to illegal activity, is not entitled to any protection under the First Amendment. Cent. Hudson Gas & Elec. Corp. v. Pub. Serv. Comm'n of New York, 447 U.S. 557, 563–64 (1980) ("[T]here can be no constitutional objection to the suppression of commercial messages that do not accurately inform the public about lawful activity. The government may ban forms of communication more likely to deceive the public than to inform it or commercial speech related to illegal activity.") (internal citations omitted).

² The court found that with respect to the asserted government interest in "shielding consumers from aggressive debt collection practices that wield undue influence in view of the coronavirus pandemic," the Attorney General "offer[ed] no empirical support for the proposition that consumers are more susceptible to undue influence exerted by debt collectors during a pandemic than would ordinarily be the case." And the court found that with respect to the asserted government interest in "vouchsafing citizens' financial wellbeing during the coronavirus pandemic," "[w]hile the Regulation promises some relief from unwanted telephone calls, it does not [even] pretend to offer any relief from the debt itself or the obligation to repay it in full."

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.