If the political career of state Auditor Troy Kelley ultimately unravels with convictions for tax evasion and lying under oath, it will be homeowners like Paige Perisich who pulled the first string.
She and several others acted as plaintiffs in the lawsuits that were unsuccessful but uncovered what federal prosecutors now allege was theft of a tiny portion of real-estate closing costs. Prosecutors now say Kelley stole millions of dollars and hid it from tax collectors. He maintains his innocence and faces a January trial.
The lawsuits came more than four years before voters elected Kelley as watchdog over state finances in 2012. At first, they didn’t target Kelley or even recognize his existence. In fact, some of the transactions they challenged had no connection to him.
That includes the sale of Perisich’s Renton condominium. It was Jan. 31, 2006, near the peak of the overheated housing market, when she signed closing paperwork at the Kent office of the Talon Group.
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A form headlined “U.S. Department of Housing and Urban Development Settlement Statement” explained the charges by escrow company Talon: $516.80 for “Settlement or closing fee.” $521.15 for “Title insurance.” $45 for “Wire/Express.” $230 for “Reconveyance Fee.”
That last one caught the seller’s eye. The eyes of most homeowners might have glazed over by that point, but Perisich was a former mortgage loan officer. She had worked for the bank that had loaned her the money for the condo. She knew what a reconveyance was: the paperwork necessary to record that an old loan has been paid off.
“‘I said, ‘No, my bank already charged me that,’” Perisich said. Recalling it nearly a decade later, she says: “A normal person doesn’t know this. They go, ‘Oh, OK.’”
Perisich paid the fee under protest, but later would be contacted by Seattle-based law firm Hagens Berman with an offer to pursue Talon Group’s parent company, First American Title Insurance.
The firm was recruiting plaintiffs in what it hoped would become class-action lawsuits on behalf of similarly situated homeowners against escrow companies First American, Chicago Title Company, Old Republic Title and Fidelity National Title of Washington.
The Hagens Berman lawyers didn’t get what they were after, but the net they cast eventually ensnared Kelley, who made a living tracking reconveyances for Old Republic and Fidelity from 2003 to 2008.
Tens of thousands of Washington residents who sold or refinanced a home during last decade’s housing boom paid reconveyance fees at closing, often for between $100 and $150.
Federal prosecutors say Kelley told the companies he would keep flat fees of $15 or $20 per home, pay any fees to the trustees responsible for doing the reconveyance and the government offices where they were recorded, and refund the rest to homeowners.
Prosecutors say he kept more than $2.9 million in unused fees that should have been refunded to borrowers.
Kelley says his business practices were “squarely in line with standard industry practices.” In defending himself from a different lawsuit, he retained a former regulator as an expert on the title industry to declare that it was rare for companies to give refunds.
The lawsuits by homeowners seem to bear that out to some degree. The fees that borrowers complained were unnecessary or too high were paid both in transactions that Kelley worked on and in those he never touched, like Perisich’s sale.
That fact won’t necessarily help Kelley if the practice is deemed illegal.
The story of the Hagens Berman lawsuits doesn’t start with Kelley. It doesn’t even start with reconveyance fees.
The firm started looking into closing fees after another lawyer, Tim Warzecha, tipped them off to a different questionable practice. A banker friend had told Warzecha over breakfast about how money from a real-estate transaction earned the equivalent of interest while sitting in a bank account. The issue was who should keep that money.
Poring over the “settlement statements” that itemized fees to escrow companies, the lawyers discovered another practice: the reconveyance fees that became the crux of their lawsuits.
“They were falsely representing to people that these were necessary fees and if they proved unnecessary they’d get refunded,” said Tom Loeser, a partner at Hagens Berman.
Escrow companies that charged them say the fees covered the costs of checking official records to make sure the paperwork had been completed to clear property title on the old loan. If not, they would prod the former lender to take care of it.
One executive said his subsidiary of First American “sends letters, e-mails, faxes and often calls the lender to follow up until the reconveyance is actually recorded in the appropriate public records.”
The executive, Robert Dailey, explained the work in a 2009 court filing as First American defended itself against the claims of Perisich and other homeowners. “The process of reconveyance tracking continues after the transaction at issue has closed, sometimes up to 90 to 120 days following closing,” Dailey wrote.
If calling and cajoling didn’t work, a company might have to take the paperwork into its own hands, which would require paying processing costs.
But homeowners alleged those kinds of costs were needed only in a minority of cases, and companies routinely kept the full fees regardless of whether they used the money.
In many cases the lenders were already doing the work with no need for the escrow companies to get involved, lawyers argued. A simple check by the escrow company to make sure a property title has been made clear shouldn’t require a separate fee, Loeser said, since that’s part of the company’s job.
Only after Hagens Berman sued the four companies in May 2008 did it emerge that some of the fees had been passed to third parties.
While First American and Chicago Title had done the work at least partly in-house, Old Republic and Fidelity had contracted it out.
Lawyers had thought references to “Post Closing Department” on statements of fees referred to a department within an escrow company, but that was the name of Kelley’s company.
Two days after the claims against the escrow companies hit the courts and the headlines, prosecutors say, Kelley mailed $250 to one of the plaintiffs suing Fidelity. It was sent with a letter claiming Kelley had previously mailed the refund check to plaintiff Frank Cornelius before but he had never cashed it.
Prosecutors say that was false and that Kelley was trying to discredit Cornelius and avoid being drawn into his lawsuit. Cornelius declined comment for this story.
In June 2008, according to prosecutors, Kelley started shutting down his business and made a complicated series of transactions with the company’s money, shuffling it through a series of bank accounts. Prosecutors say he was trying to conceal his ill-gotten gains from the courts.
Three months later, on the same day he was served with a subpoena in the lawsuits, he connected the account that now held the money with an account he set up in Belize, although he didn’t move the money overseas.
Kelley’s role complicated the cases, undermining the central claim against two of the companies that they had kept unearned money. Judges rejected some of the borrowers’ claims that Old Republic and Fidelity had a responsibility to make sure the companies they had paid to do reconveyance work were doing it properly.
Judges also rejected key claims in the First American lawsuit, in part because too much time had elapsed. And they declined to allow the case against Chicago Title to become a class action representing all Washington homeowners who paid similar fees, finding practices differed from location to location.
All four of the cases fizzled out, with plaintiffs receiving at most a refund of their original fees. Borrowers who had paid similar fees but weren’t named in the lawsuit received nothing.
After fighting off the lawsuit, Old Republic filed a suit of its own against Kelley.
Questioned under oath by Old Republic attorney Scott Smith, Kelley said he earned a host of fees that differed based on how much work was to be done on a file – not just a $15 or $20 flat fee. He said records that showed each fee had been destroyed in an Everett fire.
The lawsuit ended when Kelley and Old Republic reached a confidential settlement.
But it came into public view in 2012 when Kelley, a Tacoma Democrat, campaigned to become state auditor. His Republican opponent, James Watkins, released a trove of court documents from the Old Republic case and other lawsuits involving Kelley.
Federal authorities subsequently leaned heavily on statements made in the Old Republic lawsuit to press their case against Kelley. They contacted Smith and sought documents from the settlement.
Prosecutors say that settlement shows Kelley, who had claimed on the campaign trail that the lawsuit was without merit, paid Old Republic more than $1 million.
Old Republic refunded hundreds of thousands of dollars of that money to borrowers, said the company’s former attorney, Smith.
Koos and Cindy Jager, two of the plaintiffs in the case against Old Republic, may have been among the Old Republic customers who got their money back. They received a mysterious check after the case was settled, said Tyler Weaver, a partner at Hagens Berman. Contacted by phone, Koos Jager didn’t recall details of the case.
Some other homeowners, including Perisich, would end up receiving money from a subsequent lawsuit against the Talon Group over a number of closing fees. That lawsuit was successful in achieving class-action status where the Hagens Berman lawsuits failed.
Talon agreed in 2013 to pay up to $1.275 million to homeowners charged the fees.
Last August, Perisich said, she received her share of that settlement: A check for $12.
MEASURE OF SATISFACTION
Karen Tavenner, who filed the successful lawsuit against Talon, received $10,000. She had paid $115 for reconveyance while refinancing her North Bend home in 2005 and said the practice seemed to be “running rampant.”
“I think everybody was charging reconveyance fees,” Tavenner said, “... with the assumption they were supposed to refund whatever unused portions, and of course that never happened.”
At least one lawsuit is still going through the courts. Brought in 2012 against Ticor Title of Washington on behalf of a Tacoma homeowner who paid a reconveyance fee in 2008, a judge allowed it to move forward as a class-action case. A trial is scheduled for October.
It’s not clear if any home sales today include fees similar to the ones charged to the homeowners who have sued. An employee of at least one targeted company, First American, said in court that it no longer charges reconveyance fees separate from its regular escrow fees. Loeser said Chicago Title also had changed its policy to reduce fees.
“We look back on these cases and I can say with absolute confidence that we succeeded in our goal of changing a corrupt practice,” Loeser said.
One other effect of their lawsuits provides the lawyers with a measure of satisfaction: the prosecution of Kelley.
“The day he got indicted,” Weaver said, “was a day for celebration.”