Federal Court reads between the lines to allow the prosecution of an unusual claim under section 8 of the EEAA – Real Estate and Construction

In Kallai Houses c. Jatola, a recent decision under Section 8 of the Real Estate Settlement Services Procedure Act (RESPA), a judge in an Ohio Federal District court ruled that the class plaintiffs’ RESPA claims were sufficient to exceed the pleadings stage. In that decision, the court discussed the basic principles of section 8 and came to surprising conclusions from the perspective of a liberal pleading standard.

Section 8 of RESPA prohibits any person from giving or accepting a “thing of value” under an agreement or arrangement that a settlement services firm is to be referred in a transaction involving a mortgage loan linked to the federal government. From the outset, the Kallai The case is unusual because the plaintiffs were buyers of real estate and their RESPA theory did not include any claim that their own buyer’s agent was involved in the claimed bribe deal. Nor have the complainants allege that the promised bribe was actually paid by the party that allegedly received the referral. We take a look below at how the court read the complaint between the lines to allow the case to survive despite reasonable challenges from the failure to report defense.

The Kallais’ claim was that the selling builder, with direction and approval from its affiliate title company, had promised to give realtors at a certain brokerage firm a monetary bonus at a later date for successful referrals from the company. ‘buyers or sellers at the title affiliate. The seller’s listing agent was associated with this brokerage firm; the agent for the Kallais’ buyer was not. Both parties used the affiliate title to close the purchase of the Kallais. Obviously, the promised bonus had not actually been paid when the case was filed. The Kallais claimed they paid more for their title services than they would have if it had not been for the alleged violation of RESPA.

As part of this fact model, the following RESPA issues were raised:

  • Is a simple promise to pay a bonus for a successful referral a “thing of value” under RESPA, even if the bonus has never been paid? the Kallai the court concluded that this was the case.
  • Does a buyer declare a RESPA claim when the listing broker, not the buyers broker, is believed to be involved in the bribe deal? The court concluded that it was.
  • Did the plaintiffs have the constitutional and prudential capacity to bring the RESPA claim? the Kallai the court concluded that they had done so.
  • Was there a basis for keeping the individual owners of the brokerage firm and the title firm in the business? The court concluded that there was none.
  • What would the title company have done to violate section 8 of RESPA? The court did not consider this issue.

The question of the “thing of value”

The court analyzed this issue closely. He noted that although the RESPA law defines a “thing of value” as “any payment, advance, fund, loan, service or other consideration”, the RESPA implementing regulations flesh out this element, defining it as a white list. non-exclusive of valuables, including, but not limited to, “credits representing sums which can be paid at a future date” and “the opportunity to participate in a lucrative program”. The court further noted that under the RESPA rules, “the term ‘payment’ is synonymous with giving or receiving a ‘thing of value’ and does not require a transfer of money.” The authors, aware of this regulatory framework, see the concept to be so all-encompassing that we have often noticed that unless the “thing” in question is refused or thrown away, it is likely to count.

In Kallai, the court found that the claimed promise to pay bonuses to realtors for successful referrals was itself a “consideration” that had been given to agents. Perhaps the offer was seen as a chance to participate in an opportunity to make money. The court may have been swayed by the fact that there had been allegations that similar bonuses had been paid to other officers in the previous year. But if it hadn’t been claimed, does an unfulfillable promise really have any value? It’s a tight call, legally speaking, but if it turns out that the agent relied on the promise and made the referral, he’s likely to qualify.

Were the Kallais “referred” within the meaning of RESPA?

The complainants’ allegations on this point were unclear. Although they apparently made a conclusive claim that they were referred to the title affiliate by the seller’s agent, this claim was devoid of any factual content other than that Kallais’ agent was an agent. independent not associated with the same brokerage as the listing agent and the parties each used the same corporate title. The defense argued that the required element of “recommendation” was lacking, pointing out that it was entirely possible that the buyers agent had simply chosen this title company for the buyers. The court was not convinced.

Under RESPA, a “referral” is defined as any oral or written action directed against a person where the action has the effect of “positively influencing” the selection of a settlement service provider or requiring the use of such a provider. The court found that there was a reasonable inference from the complaint that the sellers’ agent had persuaded, suggested or even possibly demanded the use of the builder’s title affiliate.

While this analysis is understandable if the referring agent represented the referred consumer, it appears to be based on little more than speculation in this context. It is not clear what, if any, the seller’s agent did to persuade or compel buyers to use the property company. A referral requires some positive influence; a passive consumer, who does not care who concludes the transaction and simply agrees to use whatever the seller has chosen, would not seem to have been so predisposed. Likewise, some consumers may have their own reasons for using the same company title as their seller, regardless of any influence from the seller: they may have been a loyal customer, saw an appealing advertisement, or spoke to someone. other of the supplier. Another court may well have considered this question differently.

If the applicants had constitutional and prudential status

The court easily and correctly found that the plaintiffs’ allegations did confer standing. The defense failed to rely on a RESPA decision from the Fourth Circuit Court of Appeal, Baehr, in which the court upheld the dismissal of a RESPA case for lack of standing for Article III (see our previous coverage of that decision here). In Baehr (in the interest of full disclosure, a case defended by the authors of this article), the complainants failed to allege concrete and particular harm where their only alleged harm was a deprivation of fair and impartial competition between service providers. settlement services. contrary to
Baehr, where the plaintiffs conceded that the prices charged by the underlying title company were fair and competitive, and that the title company provided a good standard of service, the Kallais alleged that the manufacturer’s title subsidiary had them overcharged. The court considered that this was sufficient in the context of a motion for dismissal to allege concrete damage.

Likewise, the prudential position was clearly established on the basis that the plaintiffs – people who the court said would have been referred to the title company in exchange for something of value – were in the area of ​​?? interests that RESPA is supposed to protect.

No viable claims against individual owners of the builder and title company

The court correctly dismissed these individual defendants because there was no allegation that any of them did anything to violate RESPA. Owners or shareholders are not automatically liable for the actions of their businesses, unless they are personally involved in the conduct and there are other factors that justify the court piercing the corporate veil.

The basis for the title company’s alleged liability is unclear

The question of what the securities company did to violate Article 8 of RESPA was not raised by the parties, but it could have been. The defense and court appear to have operated on the premise that, because the complaint alleged that the builder entered into the bribe deal with “the direction, approval and support” of the title company , that the builder and the title company both violated the law.

However, Article 8 of RESPA only applies to people who “give” or “accept” something of value in accordance with the agreement or understanding that the company will be referred. Here, as alleged, the constructor gave the value thing (that is to say, promise to pay bonuses at a later date) and the real estate agents received them. However, there was no indication that the title company had played any role except for the alleged direction, endorsement and support. The court assumed that the plaintiffs’ allegations were sufficient, perhaps believing this element to be some sort of “conspiracy to violate RESPA” or some other form of secondary liability. Whether RESPA achieves such a theory, however, is questionable at best and has been rejected by at least a federal court.

Thoughts on how this case came to be in the first place

We are often asked whether regulators vigorously enforce RESPA and whether there are private actions challenging various lines of conduct that could pose a risk to Article 8 of RESPA. As the
Kallai The case illustrates, whether the government currently has RESPA in the spotlight or not, both the government and the class action plaintiffs bar will allege RESPA actions in situations of some ambiguity. Plus, the potential exposure involved in a RESPA class action lawsuit – three times the value of the settlement service involved in the violation, plus legal fees for a main plaintiff – can be formidable.

We don’t know how the Kallai case arose. It is possible that the builder’s conduct has attracted attention over time; the complaint includes an allegation that the year before the claimed promise to pay bonuses, the automaker had in fact paid sponsorship bonuses to agents at a “team-up Christmas party”. Maybe a competitor got wind of it and complained.

In the end, it doesn’t matter. The reality is that RESPA Section 8 compliance is possible with a knowledgeable outside lawyer, and the risks of non-compliance (or even arguably non-compliance) are serious.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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