Manhattan Supreme Court and the Thurgood Marshall U.S. Courthouse Manhattan Supreme Court and the Thurgood Marshall U.S. Courthouse at Foley Square. Photo by Rick Kopstein/ALM

A Manhattan Supreme Court justice on Thursday struck down a state regulation that barred title insurers from passing along marketing and client-relations expenses to customers.

Justice Eileen Rakower issued a decision reversing the rule announced by the state Department of Financial Services in October 2017. The state plans to appeal the decision, DFS Superintendent Maria Vullo said.

Rakower said in her decision that parts of the agency’s regulation were “irrational” and could instead be addressed by the legislature rather than a state agency.

The regulation was created to prevent title insurance companies from charging consumers for marketing expenses through premiums at closing. An investigation by the agency in 2015 found title insurance companies and agents spend millions each year marketing to attorneys and real estate agents.

Those expenses, which could include meals, entertainment and other fees, were in turn billed to consumers in premiums as marketing costs. The DFS said in October that the practice violated a part of the state’s insurance law that prohibits the exchange of a rebate, fee, or any “other consideration or valuable thing” as an inducement for business. The DFS argued marketing and entertainment expenses fall under the latter category.

Rakower disagreed in Thursday’s decision, saying that any “other consideration or valuable thing” is akin to a rebate or fee, not a marketing expense.

“Indeed, ‘rebate,’ ‘fee,’ ‘premium,’ ‘charge’ and ‘commission,’ when construed together, indicated that the Legislature sought to remedy the mischief of kickbacks, not marketing expenses,” Rakower wrote.

Rakower also pointed to the title of that section of law, which only lists commissions and rebates as prohibited, not marketing expenses. The legislature did not write the law to restrict the marketing practices of title insurance companies, she wrote.

“To construe [the law] in this manner is to hold the Legislature intended to prohibit title insurance corporations from marketing themselves for business—and absurd proposition,” Rakower wrote.

The title insurance companies are represented by Gibson, Dunn & Crutcher partner Mylan Denerstein, who previously served as Gov. Andrew Cuomo’s chief counsel, as well as associates Akiva Shapiro and David Coon.

“The court’s thorough decision was very clear: these sweeping regulations exceeded the scope of DFS’s statutory authority and should never have been adopted,” Denerstein said. “As Judge Rakower explained, the regulations are internally ‘irreconcilable and irrational,’ and the notion that the legislature intended to ban the industry’s ordinary marketing activities is an ‘absurd proposition.’”

Rakower also annulled part of the regulation that prohibited in-house title insurance closers from accepting a gratuity or charging a pick-up fee during closing. But the regulation allowed independent title insurers to accept or impose those costs, a carve-out in the regulation based on public comments. Rakower called that exception “internally inconsistent.”

The DFS saw the changes as a way to protect consumers. The regulation was intended to save buyers money during closing, according to the agency. Vullo said in a press release announcing the regulation in October that because of the rule consumers “will know exactly what they are paying for during the closing process and that they will pay only their fair closing costs.”

Vullo maintained that position in a statement Friday.

“DFS remains steadfast in our belief that Regulation 208 is a necessary supervisory tool to ensure appropriate market conduct and to protect New York consumers,” Vullo said. “We remain certain of our legal opinion and are confident we will prevail on appeal.”

The legal action began when several title insurance companies filed an Article 78 petition with the Manhattan Supreme Court in February after the new regulation took effect. The New York State Land Title Association Inc., which represents the industry, along with the Great American Title Agency Inc. and Venture Title Agency, filed the petition.

At the time, those companies said the new regulations from the DFS would “wreak havoc on title insurance corporations, title insurance agents, and title closers across the state of New York.”

The petition followed opposition to the regulation by members of the state legislature in December and January. A few days before the regulation was scheduled to begin in December, three lawmakers asked the DFS to delay implementation until May. Assemblyman Kevin Cahill, a Democrat from the Hudson Valley who chairs the chamber’s insurance committee, wrote in a letter to the agency that the changes “will significantly destabilize an industry that has stability, reliability, and predictability at its very core.”

The DFS announced a few days later that the provision dealing with marketing expenses would take effect in February rather than December.

Members of the State Senate then passed a bill in January to roll back the regulation before it could take effect. The bill, sponsored by Sen. James Seward, a Republican from the Cooperstown area who chairs the insurance committee, passed unanimously in the Senate. It has yet to move in the Assembly, where Cahill is the sponsor.

As state regulators finalized the rule last year, title insurance companies spent $658,000 lobbying members of the legislature, the governor, and the DFS itself, according to filings with the Joint Commission on Public Ethics.