When home buyers and sellers sign a HUD-1 settlement statement at the closing of a real estate deal, they sign away their rights to the money they agree to pay in closing fees.
That was the testimony Wednesday of the first defense witness to be called in the real estate services and tax fraud case against Washington State Auditor Troy Kelley.
“There may be services owed [in exchange for the fees],” real estate attorney and expert witness Mark Schedler told the jury. “But it’s not the borrower’s money anymore.”
The defense hopes to convince the jury that this is a crucial flaw in the government’s theory of the case against Kelley -- that he illegally pocketed millions of dollars in closing fees that should have been refunded to homeowners.
During the pre-recession housing bubble, before he was elected state auditor, Kelley ran a company that contracted with title and escrow companies to track reconveyances. A reconveyance is when a deed of trust to a property is returned to the owner after a loan is paid off and the lender clears its interest in the property.
Kelley’s clients in Washington state would typically collect a reconveyance fee of $100 to $150 from homeowners at closing and pass that money along to Kelley’s company, the Post Closing Department.
Prosecutors allege that Kelley was entitled to retain a small tracking fee of $15 to $20 with the remaining funds to be set aside in the event they were needed to pay third-party trustee or county recording fees to process the reconveyance.
Refunds: courtesy or obligation?
If those funds weren’t needed, prosecutors maintain that Kelley’s agreements with his clients—specifically Fidelity National Title and Old Republic Title--obligated him to refund the excess money back to the homeowners.
Kelley and his defense team assert just the opposite -- that all of the fees were earned at the time they were received and there was no obligation to refund, although occasionally the Post Closing Department would issue refunds as a courtesy.
At one point, defense attorney Patty Eakes showed Schedler a copy of a closing statement that listed a reconveyance fee for the Post Closing Department. She asked him who the money would belong to after the settlement statement was signed and the funds transmitted.
“It will be the Post Closing Department’s money when it is paid,” Schedler replied.
Asked if there had been a practice in Washington state of refunding reconveyance fees, Schedler said: “It happens, yes.” But he testified that refunds were paid not as a legal obligation, but as a way to keep escrow company clients happy since the industry relies on referrals and good word-of-mouth. If the client wants a refund, Schelder said, “that’s what you do.”
As Schelder testified and explained the particulars of the escrow industry and the vagaries of reconveyances, Kelley leaned forward on his elbows and often nodded affirmatively.
On cross-examination, Assistant U.S. Attorney Arlen Storm sought to show that regardless of industry practices, Kelley’s clients expected him to issue refunds.
“It’s consistent with that,” Schedler agreed after reviewing the wording of a refund letter the Post Closing Department had issued to a homeowner.
Storm also sought to establish that Kelley was obligated to act in good faith with his clients.
“Troy can’t lie to Fidelity National Title and Old Republic Title?” Storm asked.
“He has no authority to lie to them,” Schedler agreed.
“Or deceive?” Storm continued.
“That’s a lie,” Schedler concurred.
Move for dismissal
Earlier in the day, defense attorney Angelo Calfo provided a made-for-TV courtroom moment for the court watchers in the gallery.
Minutes after the government had rested its case and the jury had left the courtroom, Calfo stood and moved to have the majority of the 16-count indictment dismissed.
It was a moment reminiscent of Calfo’s failed attempt nearly five weeks earlier to get the judge to declare a mistrial immediately after the prosecution finished its opening statements.
As he had before, Calfo accused the prosecution of putting forth shifting theories of the case and failing to prove who Kelley stole the money from -- escrow companies or their customers.
“You have to steal with the intent to deprive the owner of the attributes of ownership,” Calfo told Judge Ronald Leighton. “Where is the government’s proof?”
Calfo also argued the government had failed to prove the false declaration and money laundering charges against Kelley.
“I don’t believe there is sufficient evidence of an intent to conceal,” Calfo said of the money laundering charges.
Judge Leighton was unpersuaded.
“In the main … I am satisfied that there is an abundance of evidence of possession and concealment of stolen property,” Leighton told the attorneys. “And I’m satisfied that there’s an abundance of evidence on the money laundering counts that a rational jury could find on those counts.”
Leighton said the case would go to the jury, but did appear open to Calfo’s argument that the prosecution hadn’t clearly established a victim in the case. He asked Assistant U.S. Attorney Andrew Friedman to reiterate the government’s theory of the case.
Friedman said that Kelley had fraudulently taken the money both from escrow companies and their customers and then later engaged in theft of the funds. “He’s receiving it by fraud, he also steals it as time goes on,” Friedman argued.
However, the prosecution maintains that Kelley can be convicted even without a clear victim. “Any felonious taking will qualify,” Friedman said.
This lawyerly wrangling happened outside the presence of the jury. But it provided a reminder that the instructions the jury gets before it begins to deliberate could be key to the outcome of the trial.
The case is expected to go to the jury next week.
Character witness
Besides being state auditor and a former state legislator, Kelley is a lieutenant colonel and lawyer in the Washington National Guard. As a character witness for Kelley, the defense called Lt. Col. Matthew Cooper, a friend and colleague of Kelley’s from the Guard.
Asked to rate Kelley’s truthfulness and honesty, Cooper said: “I would rate him extremely high, the highest that I’ve worked with.”
Cooper testified that Kelley had been tapped to lead a sensitive personnel investigation and supervised National Guard defense lawyers throughout the western United States.
“He’s held in very high regard,” Cooper testified.
Cooper also described Kelley as a devoted family man who coaches his sons’ sports teams.
During a brief cross-examination, prosecutors established that Cooper didn’t know Kelley prior to 2008 and had no knowledge of Kelley’s past business dealings. Cooper was also asked about meals he had with Kelley that Kelley allegedly deducted as business expenses. Cooper said that he and Kelley met frequently to discuss National Guard issues, but not Kelley’s document tracking business.
