United States District Court, Western District of Kentucky, Louisville
MEMORANDUM OPINION AND ORDER
JOHN G. HEYBURN II SENIOR JUDGE, U.S. DISTRICT COURT
Buying real estate can be complicated and costly. There are titles to check, conditions to inspect, and lawyers to hire. In the not-too-distant past, it was even more costly-unscrupulous real estate professionals and lawyers would give and take kickbacks during settlement services and improperly drive up the cost of real estate transactions. Since the 1970s, Congress has entrusted regulatory watchdogs with halting these illegal kickbacks. Today, the Consumer Financial Protection Bureau pursues civil enforcement actions against supposed violators of anti-kickback laws.
The CFPB now believes that a Louisville, Kentucky, law firm, Borders & Borders, PLC, as well as individual members of that firm (collectively, “the Borders”), have violated the relevant laws. The Borders, though, believe that their actions are legal under statutory safe harbor provisions. They have asked this Court to grant judgment on the pleadings, effectively a dismissal of the CFPB’s case with prejudice. The Court believes, however, that the CFPB has pled facts sufficient to both give the Borders fair notice and allow this Court to conclude that the CFPB’s claims are legally plausible. Thus, for the following reasons, the Court will not grant judgment on the pleadings.
In 1974 Congress created the Real Estate Settlement Procedures Act (RESPA) to curb abuses in the real estate settlement process. Kickbacks and unearned fees were driving up the costs of real estate settlements, resulting in unnecessarily high settlement charges. Thus, RESPA and its enabling regulations prohibited the giving and receiving “of any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” 12 U.S.C. § 2607(a). Originally, the Secretary of the Department of Housing and Urban Development enforced RESPA and took action against violators. Upon its relatively recent creation, though, the Consumer Financial Protection Bureau was charged with enforcing violations of “Federal consumer financial law, ” 12 U.S.C. §§ 551(c)(4), 5512(a), and 5564(a), including RESPA violations. 12 U.S.C. § 5481(12)(M), (14). The CFPB’s sights are now set on the Borders.
Borders & Borders, PLC is a small, family-owned law firm focusing on residential real estate closings in Louisville, Kentucky. J. David Borders established the firm in 1971, and his two sons, John, Jr. and Harry Borders, now manage the business. Lenders hire the Borders to prepare real estate conveyance and mortgage documents and conduct closings. The Borders do not represent borrowers. Over the years, the Borders have developed strong relationships with local real estate brokers and agents, mortgage brokers, lenders, and other real estate professionals. Some years ago, the Borders entered into nine joint ventures with some of these real estate professionals (“the Joint Venture Partners”). These joint ventures (“the Title LLCs”) were Kentucky limited liability companies that served as title insurance agents for two title insurance companies. The individual Borders defendants owned 50 percent of each Title LLC and the Joint Venture Partners owned the remainders. From 2006 to 2011,  the Borders referred borrowers to these Title LLCs in connection with real estate closings. When the borrowers purchased title insurance from the Title LLCs, the Title LLCs received 80 percent commission on the insurance premium, and the remaining 20 percent went to the title insurance companies. Then, the Borders and the Joint Venture Partners received profit distributions as returns on ownership interests in the Title LLCs. Aye, there’s the rub.
The CFPB believes that this process is illegal. Specifically, the CFPB alleges that these “profit distributions” were really just kickbacks paid for referrals. Its concerns spring in part from the nature of the Title LLCs-the Borders provided the initial capitalizations for most Title LLCs, and the funding only covered the Title LLCs’ Errors and Omissions insurance. Allegedly, the Joint Venture Partners often did not contribute any initial capitalization funds. Each Title LLC had but one staffer, an independent contractor whom was simultaneously shared by all the Title LLCs and concurrently employed by Borders & Borders. The Borders-or their agents or employees-managed the Title LLCs, and the nine Title LLCs did not have office spaces, email addresses, phone numbers, nor could they function without the Borders. The Title LLCs did not advertise to the public, and all of their business came from the Borders’ referrals. The CFPB doubts that these Title LLCs did any substantive work: It alleges that the Borders, not the Title LLCs, (1) researched and reported the condition of the title; (2) reviewed title reports and decided what conditions and exceptions should be included in a title commitment to issue title insurance; (3) resolved the conditions on the title commitment in order to issue the title insurance; (4) prepared insurance closing letters; (5) prepared title insurance commitments; and (6) conducted closings.
To effectuate this arrangement, whenever a Joint Venture Partner made an initial referral of closing or settlement services to the Borders involving a federally related mortgage loan, the Borders would arrange for the title insurance on the underlying transaction to be processed by the particular Title LLC co-owned by the Joint Venture Partner who referred the business to the Borders. The profits that the Title LLC supposedly generated were then split amongst the Borders and the Joint Venture Partners. According to the CFPB, this system assured that the referring Joint Venture Partner was compensated for the initial referral. The Borders received substantial payments from the Title LLCs, purportedly from ownership interests, on top of significant fees for closing services.
Meanwhile, the Borders-without necessarily disputing these factual assertions-say that their conduct falls within a statutory safe harbor. RESPA does in fact contain a statutory safe harbor that protects “affiliated business arrangements, ” or “ABAs.” 12 U.S.C. § 2607(c)(4). The safe harbor authorizes certain referrals to providers of settlement services, so long as the referral is made to an ABA which comports with three statutory elements. Those three elements are: (1) a disclosure of the nature of the ABA at the time of the referral, which conforms to certain procedural requirements; (2) the referred customer may not be required to accept the referral to proceed; and (3) the only thing of value received from the ABA must be a return on ownership interest or franchise relationship. See Id. The Borders believe their enterprise falls within this safe harbor. And so, they argue that the pleadings require judgment in their favor.
The CFPB disagrees. Indeed, it disputes-explicitly and implicitly-each of the statutory requirements. First, it doubts that ABA disclosures were consistently made. Even when there were disclosures, the CFPB is convinced that the disclosures did not substantially comply with regulatory requirements. Second, the CFPB frets that the disclosures were not timely-that they were made at closing and not at the time of referral. This is problematic: Not only does the statute dictate disclosures at the time of referral, making the disclosures at closing could also negate the second factor. After all, if disclosures are made only at closing, customers might practically be required to accept the referral. Most importantly, though, the CFPB disputes the safe harbor was met because of alleged sham returns on ownership interest. While the Borders maintain that any money derived from the Title LLCs is a return on ownership, the CFPB argues that the system is nothing more than an elaborate gimmick to provide cover for illegal kickbacks exchanged for referrals. In sum, the CFPB maintains that judgment is inappropriate at this time and that discovery should proceed.
“After the pleadings are closed-but early enough not to delay trial-a party may move for judgment on the pleadings.” Fed.R.Civ.P. 12(c). A motion for judgment on the pleadings is weighed under the same standard as a motion to dismiss for failure to state a claim under Rule 12(b)(6). Wee Care Child Ctr., Inc. v. Lumpkin, 680 F.3d 841, 846 (6th Cir. 2012). Thus, courts faced with a Rule 12(c) motion must accept the plaintiff’s well-pled allegations as true, “and the motion may be granted only if the moving party is nevertheless clearly entitled to judgment.” JPMorgan Chase Bank, N.A. v. Winget, 510 F.3d 577, 582 (6th Cir. 2007) (citation omitted). To avoid judgment on the pleadings, “a complaint must contain direct or inferential allegations respecting all the material elements under some viable legal theory.” Commercial Money Ctr., Inc. v. Illinois Union Ins. Co., 508 F.3d 327, 336 (6th Cir. 2007). The complaint “must contain sufficient factual matter to ‘state a claim that is plausible on its face.’” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). And facial plausibility exists “when the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 663 (2009) (citing Twombly, 550 U.S. at 556)). That is, the plaintiff “must plead ‘sufficient factual matter’ to render the legal claim . . . more than merely possible.” Fritz v. Charter Twp. of Comstock, 592 F.3d 718, 722 (6th Cir. 2010) (internal citation omitted). Courts will review the facts in the light most favorable to the non-moving party. See Columbia Natural Res., Inc. v. Tatum, 58 F.3d 1101, 1109 (6th Cir. 1995) (citation omitted). And, finally, courts may consider the complaint, the answer, and any written instrument attached as exhibits when deciding motions for judgment on the pleadings. Fed. Rs. Civ. P. 12(c), 7(a).
The parties vigorously dispute the effect of a recent Sixth Circuit case, Carter v. Welles-Bowles Realty, Inc., 736 F.3d 722 (6th Cir. 2013). In that case, home buyers sued Welles-Bowen, a real estate agency, and two title service companies, WB Title and Chicago Title. Id. at 724. Welles-Bowles and Chicago Title co-owned WB Title. Referrals were made and profits were distributed according to supposed ownership interests. Like this case, the home buyers believed that the Welles-Bowles scheme was impermissible under RESPA. Id. Unlike this case, all parties in Carter agreed that the statutory safe harbor elements had been met. Id. The sticking point was whether a HUD policy statement, which essentially added a fourth element regarding the bona fides of an ABA, was valid. Id. The district court sided with the companies, holding that any safe harbor requirement added on top of the three ...