Carter v. Welles-Bowen Realty, Inc.
| Decision Date | 27 November 2013 |
| Docket Number | No. 10–3922.,10–3922. |
| Parties | Erick C. CARTER; Whitney A. Hayes–Carter; Joshua J. Grzecki, Plaintiffs–Appellants, United States of America, Intervenor, v. WELLES–BOWEN REALTY, INC.; Welles Bowen Title Agency, LLC; Welles Bowen Investors, LLC; Welles Bowen Mortgage, Inc.; The Danberry Co.; Integrity Title Agency of Ohio & Michigan, Ltd ; Chicago Title Insurance Company; Danberry Title, LLC, Defendants–Appellees. |
| Court | U.S. Court of Appeals — Sixth Circuit |
ARGUED: John T. Murray, Murray & Murray Co., L.P.A., Sandusky, Ohio, for Appellants. Christine N. Kohl, United States Department of Justice, Washington, D.C., for Intervenor. Derek E. Diaz, Hahn Loeser & Parks LLP, Cleveland, Ohio, for Appellees. ON BRIEF: John T. Murray, Murray & Murray CO., L.P.A., Sandusky, Ohio, for Appellants. Christine N. Kohl, Michael Jay Singer, United States Department of Justice, Washington, D.C., for Intervenor. Richard H. Carr, Maumee, Ohio, for Welles–Bowen Appellees. Derek E. Diaz, Robert J. Fogarty, Steven A. Goldfarb, Justin M. Croniser, Hahn Loeser & Parks LLP, Cleveland, Ohio, for Chicago Title Appellee. Jay N. Varon, Jennifer Keas, Foley & Lardner LLP, Washington, D.C., Michael D. Leffel, Foley & Lardner LLP, Madison, Wisconsin, Gregory W. Happ, Medina, Ohio, Robert A. Franco, Mansfield, Ohio, Tara Twomey, National Consumer Law Center, Boston, Massachusetts, for Amici Curiae.
Before: BATCHELDER, Chief Judge; SUTTON, Circuit Judge; BARZILAY, Judge.*
SUTTON, J. (pp. 729–36), also delivered a separate concurring opinion.
OPINION
Under the Real Estate Settlement Procedures Act, a title services company may not pay a real estate agent a fee in exchange for a referral. 12 U.S.C. § 2607(a). Exempted from this prohibition are "affiliated business arrangements." Id. § 2607(c)(4). The statute establishes three prerequisites for this safe harbor, and everyone agrees that the defendants in this case (several realty companies and title companies) satisfied them. The plaintiffs (three home buyers) claim that the defendants nevertheless fall outside the safe harbor's coverage because they failed to satisfy a fourth condition announced by the Department of Housing and Urban Development through a policy statement. As that policy statement is not binding on the Department or anyone else and as it is not otherwise entitled to deference, it does not supplement the Act's existing safe-harbor conditions. We affirm.
Welles–Bowen is a real estate agency. It helps people buy homes. WB Title and Chicago Title are title services companies. They help people confirm the true ownership of a house before they buy it.
Welles–Bowen, WB and Chicago are related to one another along two dimensions—their ownership and their business. As for ownership: The people who own Welles–Bowen also own a holding company that in turn owns about half of WB. Chicago owns the other half of WB. As for business: Welles–Bowen often refers prospective buyers to WB for title services. WB in turn contracts some of the referred work out to Chicago. In the main Chicago gathers evidence relating to the title, and WB evaluates this evidence to determine the title's validity.
When Erick and Whitney Carter bought a home in 2005, they used Welles–Bowen as their real estate agent. Like other Welles–Bowen clients, they received a referral to WB. And like other WB customers, they saw much of their title work contracted out to Chicago. The Carters did not like this arrangement. To their way of thinking, WB was a shell corporation that funneled referral fees between Chicago and Welles–Bowen. They sued all of the companies under the Real Estate Settlement Procedures Act. Joining the Carters in the lawsuit was Joshua Grzecki, a buyer who raised similar claims against a similar set of companies. The companies responded that they satisfied the Act's safe-harbor requirements and that a policy statement issued by the Department of Housing and Urban Development could not impose a new requirement on them.
The district court sided with the companies, holding the policy statement invalid. After the buyers appealed, the United States intervened to defend the validity of the policy statement.
Buying a home involves more than looking at the house, negotiating a price and signing the contract. Before closing the deal, a prudent buyer asks a title agency to check the title for its validity, a pest control company to check the house for termites, an attorney to check the contract for legal errors, and so forth. All of these tasks go by the name of "settlement services." 12 U.S.C. § 2602(3).
The Real Estate Settlement Procedures Act regulates settlement services. Its leading provision prohibits giving or receiving "any fee ... pursuant to any agreement or understanding ... that business incident to ... a real estate settlement service ... shall be referred." Id. § 2607(a). Anyone who violates the provision commits a crime punishable with up to a year in prison. Id. § 2607(d)(1). A violator also faces civil liability through private-enforcement actions as well as through public-enforcement actions. Id. § 2607(d)(2), (4). The Department of Housing and Urban Development once administered the enforcement provisions, but legislation passed after this case began transferred this task to the new Consumer Financial Protection Bureau. Id. § 2617.
As enacted in 1974, the Act produced uncertainty about its application to referrals between affiliated companies. Suppose a real estate agent refers a client to a title company that the agent owns in part. Consistent with the Act, the agent does not receive a separate fee for making the referral. But the referral gives the title company more business, which in turn increases the title company's profits, which in turn increases the dividends paid to the real estate agent. Does this indirect benefit to the agent constitute a prohibited referral fee?
Congress gave one answer to this question in 1983 when it added a safe harbor for "affiliated business arrangements." Id. § 2607(c)(4). The provision covers arrangements in which the person making the referral "has either an affiliate relationship with or a direct or beneficial ownership interest of more than 1 percent in" the settlement-service provider receiving the referral. Id. § 2602(7). An arrangement qualifies for the safe harbor if it meets three conditions: (1) The person making the referral must disclose the arrangement to the client; (2) the client must remain free to reject the referral; and (3) the person making the referral cannot receive any "thing of value from the arrangement" other than "a return on the ownership interest or franchise relationship." Id. § 2607(c)(4). Each of these requirements, but most especially the third, see 24 C.F.R. § 3500.15(b)(3)(iii), restricts the use of sham affiliated business arrangements to circumvent the prohibition on referral fees.
The buyers claim that the profits earned by the owners of Welles–Bowen and WB constitute prohibited referral fees due to their relationship with WB. There is an easy way to look at this claim and a more complicated way to look at it.
The easy way turns on the safe harbor provisions spelled out in § 2607(c)(4). Welles–Bowen's relationship with WB qualifies as an "affiliated business arrangement." The buyers agree that Welles–Bowen had an "affiliate relationship" with WB, that Welles–Bowen made referrals to WB, and that WB in turn provided settlement services. 12 U.S.C. § 2602(7). This relationship also satisfied the three safe-harbor conditions. Welles–Bowen disclosed the arrangement to the buyers, Welles–Bowen allowed them to reject the referrals, and neither Welles–Bowen nor its owners received anything of value from the arrangement apart from a return on their ownership interests. Id. § 2607(c)(4). Welles–Bowen and WB in short did everything the Act asked of them. They thus qualify for the affiliated business arrangement exemption.
The more complicated way of looking at the claim must account for the policy statement issued by the Department of Housing and Urban Development in 1996. See Statement of Policy 1996–2 Regarding Sham Controlled Business Arrangements, 61 Fed.Reg. 29,258 (1996). The statement announced that, despite the three safeguards already contained in § 2607(c)(4), affiliated business arrangements must satisfy a fourth requirement: "[T]he entity receiving the referrals of settlement service business must be a ... bona fide provider of settlement services." Id. at 29,262. In addition, the statement continues, "[t]he Department will consider" a series of factors "and will weigh them in light of the specific facts" when separating bona fide providers from shams. Id. The ten factors include whether the provider has "sufficient initial capital and net worth," whether it has "its own employees," and whether it is "located at the same business address as one of the parent providers." Id. Claiming that the various companies do not satisfy this ten-factor test, the buyers argue that the statutory safe harbor for an affiliated business arrangement does not apply to them.
The short answer to this claim is that a statutory safe harbor is not very safe if a federal agency may add a new requirement to it through a policy statement. The long answer is that the policy statement is not entitled to Chevron deference or Skidmore consideration, and as a result compliance with the three conditions set out in the statute suffices to obtain the exemption.
Deference under Chevron v. Natural Resources Defense Council comes into play only when an agency offers a binding interpretation of a statute that it administers. 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). As the government concedes, the policy statement's ten-factor test is not a binding interpretation of the Act. The...
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...Perez v. United States, 885 F.3d 984, 991 (6th Cir. 2018); Esquivel-Quintana, 810 F.3d at 1027-32; Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722, 731 (6th Cir. 2013) (Sutton, J., concurring). Other scholars have also focused on the relationship between the Chevron framework and the subs......