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Originally published September 6, 2012 at 9:25 PM | Page modified September 7, 2012 at 12:57 PM

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State Auditor candidate settled misconduct case

The Tacoma lawyer asking voters to make him Washington State Auditor has himself been accused in a federal lawsuit of financial misconduct.

Seattle Times staff reporters

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The Tacoma lawyer asking voters to make him Washington State Auditor, responsible for investigating government waste, fraud and mismanagement, has himself been accused of financial misconduct.

Rep. Troy Kelley, D-University Place, owner of an escrow-services company, was accused by a business customer, Old Republic National Title Co., in a 2010 federal lawsuit of "fraudulently transferring funds, intentional spoliation of evidence, shady business schemes, tax evasion, and hiding from creditors" $3.8 million in newly formed accounts.

Kelley and the title company settled out of court last year, with both sides agreeing to keep terms of the agreement confidential. Kelley called the matter a simple business dispute and said he had done nothing improper.

"We followed standard industry practice," Kelley said. The money he received "was paid for a service, and the service was rendered."

His Republican opponent, business consultant James Watkins, hoping to gain political advantage, Thursday released hundreds of pages of court records about the lawsuit and alerted reporters.

"Based on his documented history, his own sworn testimony, and the abundant evidence of his own actions, I believe state Representative Kelley is fundamentally unfit to serve in ANY position of public trust, much less as Washington's State Auditor," Watkins said in a statement.

Kelley's company, United National, which did business as The Post Closing Department, tracked loan and real-estate documents for large title and escrow companies. For a fee, Kelley's company tracked mortgage deeds to make sure that lenders canceled them after borrowers paid them off.

Banks and title companies typically collected "reconveyance fees" at the time of purchase to make certain this process took place. Kelley's company had a contract with Old Republic to be paid $20 to track the closing documents.

During the decadelong housing boom that ended in the late 2000s, so many loans were being made to buy or refinance property that some escrow firms decided it wasn't worth their time to handle reconveyances and overpayments.

The firms outsourced the work to a new breed of companies, such as the one formed by Kelley, who was legal counsel for a California title company during that state's real-estate boom in the 1990s.

Old Republic, in its lawsuit, claimed that Kelley's company improperly kept about $1.2 million in escrow fees that Old Republic had asked it to sort out with people who were paying off their mortgages.

Old Republic collected from customers about $140 per mortgage for future conveyance and recording fees, according to court records.

Its contract with The Post Closing Department spelled out only one fee for Kelley's company — a $20 "tracking fee per item," which "includes management of funds due trustees & client refunds."

In nearly all cases, according to Old Republic, Kelly's company didn't incur trustee or recording fees and should have returned $120 to the customer, after taking the $20 fee.

In an interview Thursday and in earlier court pleadings, Kelley said his company did more work than the contract specified and was entitled to the money.

Kelley also said he had a verbal agreement with Old Republic executives that allowed him to charge extra fees for doing more work and that in any case the contract didn't require him to refund customers.

He said the industry practice was not to repay customers with partial refunds on reconveyance fees, and he even hired an expert witness to make this case for him in the federal lawsuit.

But owners of other reconveyance business here say they refund customers' fees, minus the small tracking fee, according to Steven Lusa, who used to run Reconveyance Specialists in Bellevue.

Jonelle Wheeler, owner of ACS Northwest in Orting, said she refunds a large portion of the total fees, except in cases in which she, not the bank or escrow company, incurs recorder's office fees and other costs.

Practices vary across the industry, she said. "It would be based on the contract between the escrow company and the reconveyance company," Wheeler said.

In defending himself in the Old Republic lawsuit, Kelley said that emails and computer records showed that he had an agreement with Old Republic to charge additional fees beyond $20 a reconveyance, but that the records, stored in a basement of an Everett office building, were destroyed by a fire.

An Everett Fire Department official said Thursday it found no evidence of arson, but could not otherwise determine what caused the fire.

The lawsuit also revealed that Kelley wrote checks from his business's bank account for personal expenses, such as his son's tuition and housekeeping, according to court records. He said he later reimbursed his company for these expenses.

Belize

This dispute has its origins in 2008, when class-action lawsuits were filed against Old Republic and several other large title companies that used Kelley's services, eventually sweeping him into the litigation. Within a month of the lawsuits being filed, according to court records, Kelley opened up bank accounts in Nevada and elsewhere and moved nearly $3.8 million from one bank to the next.

The money ended up in accounts that would have allowed him to wire the money to a trust set up in Belize, an offshore haven for shielding assets. Kelley acknowledged in a deposition that the move allowed him to defer paying taxes on the income. He said only a small amount of money ended up in Belize.

"There's been no IRS action, civil or criminal," Kelley said Thursday at a news conference. He said he is current on all taxes owed.

After Kelley settled the lawsuit brought by Old Republic, he asked U.S. District Judge James Robart to seal or redact certain records because "these records could be used improperly as part of a negative ad campaign" in his next political race.

The judge decided that: "As to Mr. Kelley's request to seal documents that may subject him to annoyance, embarrassment or harm to his political career, the court finds that these bases do not overcome the strong presumption of public access to the court's files."

Sanjay Bhatt: 206-464-3103 or sbhatt@seattletimes.com

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