Federaal Hof leest tussen de regels door om ongebruikelijke RESPA Sectie 8-claim door te laten gaan

In Kallai v. Jatola Homes, a recent decision under Section 8 of the Real Estate Settlement Services Procedure Act (RESPA), a federal district court judge in Ohio ruled that class plaintiffs’ RESPA allegations were sufficient to proceed past the pleadings stage. In so ruling, the court discussed Section 8 basics and reached some surprising conclusions under the lens of a liberal pleading standard.

Section 8 of RESPA prohibits any person from giving or accepting a “thing of value” pursuant to an agreement or understanding that settlement service business shall be referred in a transaction involving a federally related mortgage loan. From the outset, the Kallai case is unusual because the plaintiffs were real estate buyers and their RESPA theory did not include any allegations that their own buyer’s agent was involved in the claimed kickback agreement. Nor did the plaintiffs allege that the promised kickback was actually delivered by the party allegedly receiving the referral. We examine below how the court read the complaint between the lines to allow the case to survive despite reasonable challenges by the defense for failure to state a claim.

The Kallais’ claim was that the selling builder, with the direction and approval of its affiliated title company, promised to give real estate agents with a certain brokerage firm a monetary bonus at a later time for successful referrals of buyers or sellers to the title affiliate. The seller’s listing agent was associated with that brokerage firm; the Kallais’ buyer’s agent was not. Both parties used the title affiliate at the closing of the Kallais’ purchase. By all indications, the promised bonus had not actually been paid at the time the case was filed. The Kallais claimed that they paid more for their title services than they would have if it were not for the alleged RESPA violation. 

Under this fact pattern, the following RESPA issues were raised: 

• Is a mere promise to pay a bonus for a successful referral a “thing of value” under RESPA, even if said bonus was never paid? The Kallai court found that it is.
  
  
• Does a buyer state a RESPA claim when the listing broker, not the buyers’ broker, is claimed to be involved in the kickback arrangement? The court found that it does.
  
  
• Did the plaintiffs have constitutional and prudential standing to bring the RESPA claim? The Kallai court found that they did.
  
  
• Was there a basis to keep the individual owners of the brokerage firm and the title company in the case? The court found that there was not.
  
  
• What did the title company allegedly do to violate Section 8 of RESPA? The court did not consider this question.

The “thing of value” issue

The court analyzed this issue closely. It noted that while the RESPA statute defines a “thing of value” as “any payment, advance, funds, loan, service, or other consideration,” RESPA’s implementing regulation fleshes out this element, defining it as a non-exclusive laundry list of valuable items including, among other things, “credits representing monies that may be paid at a future date” and “the opportunity to participate in a money-making program.” The court further noted that under RESPA’s regulation, “the term ‛payment’ is synonymous with the giving or receiving any ‛thing of value’ and does not require transfer of money.” The authors, mindful of this regulatory framework, regard the concept as so encompassing that we have often remarked that unless the “thing” at issue is refused or thrown away, it will likely count.

In Kallai, the court concluded that the claimed promise to pay bonuses to real estate agents for successful referrals itself was “consideration” that was given to the agents. Perhaps the offer was viewed as a chance to participate in a money making opportunity. The court may have been influenced by the fact that there were allegations that similar bonuses were paid to other agents in the year before. But if that had not been alleged, is an unenforceable promise really a thing of value? It is a close call, legally speaking, but if the agent were found to have relied on the promise and made the referral, it is likely to qualify.

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

The plaintiffs’ allegations on this point were hazy. Although they apparently made a conclusory allegation that they were referred to the title affiliate by the seller’s agent, that allegation was bereft of any factual content other than that the Kallais’ agent was an independent agent not associated with the same brokerage as the listing agent and the parties each used the same title company. The defense argued that the required “referral” element was lacking, pointing out that it was entirely possible that the buyers’ agent just happened to select that title company for the buyers. The court was not persuaded.

Under RESPA, a “referral” is defined as any oral or written action directed to a person where the action has the effect of “affirmatively influencing” the selection of a settlement services provider or requiring the use of such a provider. The court found that the complaint allowed for a reasonable inference that the sellers’ agent persuaded, suggested, or even perhaps required the use of the builder’s title affiliate. 

While this analysis would be understandable if the referring agent represented the referred consumer, it seems to be based on little more than speculation in this setting. It is not clear what, if anything, the seller’s agent did to persuade or require the buyers to use the title company. A referral requires some affirmative influence; a passive consumer, who does not care who closes the transaction and just agrees to use whomever the seller has selected, would not appear to have been so predisposed. Similarly, some consumers may have their own reasons to use the same title company as their seller, apart from any influence of the seller: perhaps they were a repeat customer, saw an appealing advertisement, or talked to someone else about the provider. Another court may well have viewed this issue differently.

Whether the plaintiffs had constitutional and prudential standing

The court easily, and appropriately, concluded that the plaintiffs’ allegations conferred standing. The defense failed to draw support from a RESPA decision from the Fourth Circuit Court of Appeals, Baehr, in which the court affirmed dismissal of a RESPA case for lack of Article III standing (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 plaintiffs failed to allege a concrete and particularized injury where their sole claimed harm was a deprivation of fair and impartial competition between settlement service providers. Unlike Baehr, where the plaintiffs conceded that the prices charged by the underlying title company were fair and competitive, and that the title company provided good service quality, the Kallais alleged that the builder’s title affiliate overcharged them. The court found this was enough on a motion to dismiss to allege a concrete injury. 

Likewise, prudential standing was clearly established on the basis that the plaintiffs — persons whom the court believed were allegedly referred to the title company in exchange for a thing of value — were within the zone of interests that RESPA is intended to protect. 

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

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

Basis of the alleged liability of the title company is unclear

The issue of what the title company did to violate Section 8 of RESPA was not raised by the parties, but it could have been. The defense and the court appear to have operated under the premise that because the complaint alleged that the builder entered into the kickback agreement with the “direction, approval and support” of the title company, that both the builder and title company violated the statute.

However, Section 8 of RESPA only applies to persons who “give” or “accept” a thing of value pursuant to the agreement or understanding that business will be referred. Here, as alleged, the builder gave the thing of value (i.e., a promise to pay bonuses at a future date) and the real estate agents received it. Missing, however, was any indication that the title company played a part except for the alleged direction, approval, and support. The court assumed the plaintiffs’ allegations were sufficient, perhaps thinking that this element is akin to some sort of “conspiracy to violate RESPA” or another form of secondary liability. Whether RESPA reaches such a theory, however, is dubious at best and has been rejected by at least one federal court.    

Parting thoughts about how this case was brought in the first place

We are often asked whether regulators are vigorously enforcing RESPA and whether there are private actions challenging various courses of conduct that could present RESPA Section 8 risk. As the Kallai case illustrates, whether the government presently has RESPA on the front burner or not, both the government and the plaintiffs’ class action bar will allege RESPA actions in situations that present some ambiguity. Moreover, the potential exposure involved in a RESPA class action — three times the value of the settlement service involved in the violation, plus attorney’s fees to a prevailing plaintiff — can be formidable.

We do not know how the Kallai case arose. It is possible that the builder’s conduct had generated attention over time; the complaint includes an allegation that the year before the claimed promise to pay bonuses, the builder in fact had paid referral bonuses to agents at a “Team Christmas Party.” Perhaps a competitor got wind of this and complained. 

In the end, it does not matter. The reality is that compliance with Section 8 of RESPA is possible with sophisticated outside counsel, and the risks for failing to comply (or even arguably failing to comply) are serious.