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When executives of Old Republic Title Co. asked the San Francisco district attorney to investigate their chief financial officer for embezzlement, little did they know the probe would eventually lead to their door and cost them millions of dollars. Although CFO Donald Barr would plead guilty to tax fraud charges, he was able to trim his prison sentence to 16 months by laying out for prosecutors Old Republic’s alleged scheme for keeping the interest from escrow accounts deposited with banks that should have gone to homeowners. On Monday, after a two-week trial, San Francisco Superior Court Judge Stuart Pollak found Barr’s road map convincing and ruled that secret interest accrued from the escrow accounts belongs to consumers and not the title company. “The retention of these amounts therefore was unlawful within the meaning of Business and Professions Code Section 17200,” Pollak ruled in State of California v. Old Republic Title Co., 993507. Pollak’s decision means that Old Republic — which has a national division in Minneapolis and a western division in San Francisco — owes refunds of $30 million plus interest to 400,000 customers who entrusted their escrow accounts to it. “From the beginning, we have contended that when Old Republic deposited consumers’ funds into the banks, the interest that was obtained of these accounts belonged to consumers,” said Assistant District Attorney June Cravett of the consumer fraud unit. “Old Republic has used various different methods of trying to make it appear as though that money was not in fact interest. The judge said it was.” Cravett said a second phase of the case opens Wednesday, when city attorneys seek civil penalties against the company. Each violation could cost Old Republic $2,500, Cravett said. In the unusual prosecution of the case, the DA’s office was joined by the city attorney’s office in pursuing restitution from Old Republic. Also, plaintiffs’ attorneys from Burlingame, Calif.’s Cotchett, Pitre & Simon filed a class action seeking to recover the interest money. The cases were consolidated by Pollak. Deputy City Attorney Matthew Davis, who did most of the heavy lifting in presenting the case to the court, said that Pollak also found that Old Republic’s illegal practice extends beyond the title and escrow industries. And, he said, other trust companies may also be illegally pocketing interest money. Davis said that San Francisco District Attorney Terence Hallinan and City Attorney Louise Renne calculate that each of the 400,000 homeowners may have refunds of $75 due them. Those who qualify would have to have opened an escrow account between July 24, 1994, and Feb. 7, 2001, the class period. “The judge has ruled that all the practices where Old Republic has received payment from the banks were, in effect, interest payments that were owed to consumers,” he said. Cotchett partner Niall McCarthy, who worked with both the DA’s and city attorney’s offices, said his firm would probably handle the mechanism for finding the homeowners due a refund and paying it to them. Pollak will also determine the firm’s fees. Jon Tigar, a partner in Keker & Van Nest, said his client asked him to withhold comment on the ruling at this time. Pollak’s decision turned on California Insurance Code Section 12413.5, which states that “any interest on funds deposited in connection with any escrow … shall be paid over by the escrow to the depositing party … and shall not be transferred over to the account of title insurance company.” In his court papers, Tigar argued that the arrangements the title company had with banks did not constitute interest as it is generally defined. “Even if the benefits received by Old Republic are deemed to constitute interest, plaintiffs’ damages must be limited to the portion of those benefits earned prior to the close of escrow — at best only 28 percent” of the title company’s bank arrangements, Tigar said. Pollak disagreed, saying, “Viewing the matter prospectively, the court cannot escape the conclusion that Section 12413.5, as it now reads, does not permit escrow companies to retain the net interest on instruments required to be purchased with the proceeds of below-market rate loans extended in exchange for depositing escrow funds in demand accounts at the bank making the loan.”

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