First American Residential Group Inc. backed out of a $600,000-a-year marketing agreement with RE/MAX International Inc. after Colorado regulators raised "the potential illegal nature of such agreements," lawyers for First American said in a court filing.
After paying RE/MAX more than $2.4 million over four years to "exclusively market, endorse, support and promote (First American) products and services to RE/MAX franchisees," First American terminated the agreement in April 2007, withholding a final payment of $693,000. RE/MAX filed suit against First American in March, claiming the title insurer was obligated to honor the agreement through July 2008.
RE/MAX’s lawsuit prompted the Colorado Division of Real Estate to subpoena RE/MAX franchisees and staff members as part of an investigation into whether RE/MAX agents were provided incentives to steer consumers into title insurance policies underwritten by First American (see story).
Although First American has not commented publicly on its reasons for terminating the agreement, lawyers for the company now say RE/MAX originally agreed with the decision after Colorado regulators first questioned whether the agreement violated the Real Estate Settlement Procedures Act, or RESPA, in 2006.
"In 2006, First American was contacted by the state of Colorado concerning First American’s agreement with RE/MAX and the potential illegal nature of such agreements," First American attorneys said in a June 16 court filing. "Subsequently, First American had discussions with the state concerning the effect of termination of the agreement on the investigation and potential regulatory sanctions."
According to attorneys for First American, both parties decided "that the best course of action was to terminate the agreement," but that RE/MAX later changed its mind, claiming the agreement "was still in full force and effect, and (demanding) payment from First American."
First American notified RE/MAX of its intent to terminate the agreement In an April 26, 2007, letter which cited a provision allowing either party an out "if any legal or regulatory action alleging a violation of RESPA" were initiated against the companies or their affiliates, RE/MAX attorneys said.
RE/MAX argues that Colorado’s warnings did not constitute a legal or regulatory action under RESPA, which prohibits kickbacks or payments made in exchange for the referral of business.
A $660,000 payment First American made in 2006 "was not tied to any real estate closings or title insurance sales, but rather constituted payment for the marketing rights and services provided by RE/MAX," lawyers for RE/MAX maintain.
Furthermore, RE/MAX argues, "no legal or regulatory action alleging a violation of RESPA has been commenced against RE/MAX or First American or any other affiliated company with respect to the performance of the parties’ obligations under the marketing agreement."
Both sides agree that the agreement had called for First American to sponsor a $60,000 welcome reception for RE/MAX franchisees and sales associates in the summer of 2007, which it did not. RE/MAX is seeking at least $753,000 in compensatory damages, costs and attorneys’ fees.
According to the June 16 proposed scheduling order prepared by attorneys for both parties, RE/MAX and First American have discussed settlement but have yet to come to terms.
The case has been assigned to Magistrate Judge Craig Shaffer of the U.S. District Court for the District of Colorado, who ordered both sides to submit a confidential settlement statement outlining the facts of the case and the possibilities for settlement by June 16. Shaffer has set a scheduling and planning conference for June 23.
First American attorneys say the director of the Colorado Division of Real Estate, Erin Toll, is one of nine witnesses they intend to depose if the case moves forward. The proposed scheduling order calls for the "discovery" portion of the lawsuit to conclude by Dec. 12.
Toll, who as the state’s deputy insurance commissioner investigated kickbacks title insurers paid to win business from real estate agents, was appointed to her current post in August 2006. She recalls meeting with RE/MAX and First American officials after she started her new job to discuss the July 2006 marketing agreement that is the basis of RE/MAX’s lawsuit, and a previous, April 2003 agreement.
"I said they (the agreements) sound very suspect, and I asked RE/MAX to send (written copies) to me," Toll told Inman News. "They never did — nobody even had a (business) card" at the meeting.
Toll said she didn’t pursue the issue at the time, because the Division of Real Estate was focused on implementing a new program created by Colorado lawmakers to regulate mortgage brokers.
Now, Toll said she’s again able to turn her attention to kickbacks that lenders, title insurers and other settlement services providers may be paying real estate brokers to win business. Colorado has subpoenaed a dozen real estate brokerages, she said, and about half appear to have marketing agreements with lenders or settlement services providers that violate RESPA.
She said RE/MAX appears to be making the most extensive use of such agreements of any of the brokerages now under investigation. RE/MAX has previously said the company has marketing agreements with five settlement services providers and a total of 123 companies that want to provide services to more than 4,000 RE/MAX franchisees.
RE/MAX did not immediately respond to a request for comment. A spokeswoman for First American said the company does not comment on pending litigation.
RE/MAX has previously said that its marketing agreements do not violate RESPA, because they simply provide companies that want to do business with RE/MAX franchises with a means to pitch their services — through a mailing list, for example. The parent company does not control or require its franchises to do business with certain companies, RE/MAX has said.
But Toll said the money involved in the agreement between RE/MAX and First American calls into question the claim that RE/MAX only provided marketing services such as advertising.
"If I’d known about the amount of money we were talking about a year and a half ago, I think I would have acted quicker," Toll said. "It’s not piddly. Explain to me how that’s advertising?"
The RESPA out clause written into the marketing agreement between RE/MAX and First American suggests that the companies knew they were walking a fine line, Toll said. "Whoever heard of an evaporating contract, that disintegrates the second a regulator claims it’s illegal?"
Toll said she plans to meet with officials at the U.S. Department of Housing and Urban Development to discuss the way brokerages employ such marketing agreements. Some of the marketing agreements are with settlement services providers such as appraisers and pest control firms that the state doesn’t regulate, she said.
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