Defense Puts Industry On Trial In Court Case Against Washington State Auditor

Mar 17, 2016

Washington State Auditor Troy Kelley is on trial for pocketing real estate closing fees that prosecutors say should have been refunded to homeowners. But emails introduced into evidence Thursday call into question whether his company was the only real estate services firm that failed to issue consumer refunds during the housing bubble of the 2000s.

“One of the rumors going around is that RSI is not returning funds to customers,” cautioned a 2006 email from a quality assurance manager at Old Republic Title in Washington, referring to a now defunct firm called Reconveyance Services Inc.

Old Republic subsequently stopped doing business with RSI. The owner of RSI, Judy Caton, has previously said that she consistently issued refunds until her business imploded due to embezzlement and she ran out of money.

After Old Republic dropped RSI, the escrow company hired Kelley’s firm, the Post Closing Department, to take on the task of making sure that lenders cleared their interest in a property after a sale or refinance. This is known as a reconveyance.

In the pre-recession frenzy of the housing market, lenders didn't always process reconveyances, and escrow companies got behind in tracking them. This provided a niche for third-party tracking firms like the Post Closing Department.

Escrow companies would collect a $100 to $135 in reconveyance fees from homeowners at closing and then pass that money onto Post Closing.

Prosecutors, and Kelley’s former clients, contend that Post Closing was entitled to keep a flat tracking fee of $15 to $20 per reconveyance. The remaining money, however, was to be set aside in event Post Closing had to pay trustee or county recording fees to get the reconveyance completed. If the money wasn’t needed for that purpose, prosecutors and the escrow companies say Kelley was obligated to refund the fees—minus the small tracking fee—to homeowners after the reconveyance was recorded.

“He told me that all undisbursed trustee fees would be returned to the borrowers,” retired Old Republic executive Carl Lago told the jury.

“Was this a very clear conversation between the two of you?” Assistant U.S. Attorney Arlen Storm asked.

“Absolutely,” Lago said.

Prosecutors allege that Kelley rarely issued refunds and instead pocketed the extra fees. By 2008, bank records show he had amassed more than $3 million in reconveyance fees in three bank accounts—one for each of his primary clients.

In an often aggressive cross-examination, defense attorney Angelo Calfo sought to undermine Lago’s insistence that Kelley was obligated to issue refunds.

Calfo established that an initial draft of their agreement made no mention of refunds. He also got Lago to acknowledge that he couldn’t recall ever having approved a refund letter that would accompany the refund check Kelley sent to homeowners. Calfo also suggested that an Old Republic staff member had conspired in an email to “chisel” Kelley out of his $20 tracking fee in some cases.

In 2011, Kelley settled a lawsuit with Old Republic for more than $1 million stemming from his handling of reconveyance fees. Calfo has pointed out that most of that settlement went to pay Old Republic’s lawyers, not to pay refunds to homeowners.

At one point, Lago was asked to read from a communication he had received from Kelley in 2006 in which Kelley quoted Abe Lincoln as saying, “All we have are our reputations.” As Lago read that sentence out loud to the court, Kelley sat at the defense table nodding affirmatively.

The fourth day of Kelley's trial began with the defense continuing its cross-examination of Julie Yates, a former manager for Fidelity National Title escrow operations, another of Kelley’s clients.

Defense attorney Patty Eakes got Yates to acknowledge that in some cases reconveyances can go unrecorded for as long as a decade and sometimes they never get completed, creating a cloud on title situation.

"It would be a very small percentage," Yates said.

This is an important point for the defense, because Kelley allegedly told federal investigators that even after he shuttered his Washington operations in 2008, he had a 10-year plan to fully wind down the business and close out all the reconveyances he had been tracking.

Yates also testified that during the 2006-2008 timeframe, after she had left Fidelity to work for Chicago Title, upwards of 40 percent of reconveyances required additional work to make sure they were completed.

The defense could try to use this to help bolster a contention Kelley has made: that his staff often had to push lenders to get reconveyances done, and that justified charging fees beyond just the base tracking fee.

On redirect, the prosecution sought to show Kelley’s $15 tracking fee included an obligation to follow up with lenders. “It was part of the services,” Yates said.

The prosecution also played for jurors two voicemail messages Kelley left for Old Republic’s Carl Lago following a June 2008 fire at Stewart Title in Everett.

Kelley had an office at Stewart Title and told Lago in one of the messages that the fire would disrupt his services until he found a new location. But by the time of the fire, prosecutors noted, Kelley had already started shuttering operations in Washington and moving the reconveyance fees he was holding to an out-of-state account.

For the second time since the trial started, former State Auditor Brian Sonntag was in court watching the proceedings.

"I'm just interested still on behalf of the office," said Sonntag who was auditor for 20 years and has previously called on Kelley to resign as state auditor.