2018 - new.reorg-research.com · For Judgment Pursuant to CPLR Article 78 :: - against - : VERIFIED PETITION: THE NEW YORK STATE DEPARTMENT OF: ORAL ARGUMENT FINANCIAL SERVICES; and

SUPREME COURT OF THE STATE OF NEW YORKCOUNTY OF NEW YORK

-- --- ---- -- --- ----- --- ---- -- --- ---- --x

:

In the Matter of the Application of, :

:

NEW YORK STATE LAND TITLE :

ASSOCIATION, INC.; THE GREAT AMERICAN :

TITLE AGENCY, INC.; and VENTURE TITLE :

AGENCY, INC., :

:

Petitioners, : Index No.

:

For Judgment Pursuant to CPLR Article 78 :

:- against - : VERIFIED PETITION

:

THE NEW YORK STATE DEPARTMENT OF : ORAL ARGUMENTFINANCIAL SERVICES; and MARIA VULLO, in: REQUESTEDher official capacity as Superintendent of the New :

York State Department of Financial Services, :

:

Respondents. :

:-- --- ---- -- --- ----- --- ---- -- --- ---- --x

Petitioners NEW YORK STATE LAND TITLE ASSOCIATION, INC. ("NYSLTA"),

THE GREAT AMERICAN TITLE AGENCY, INC., and VENTURE TITLE AGENCY, INC.,

by their attorneys Gibson, Dunn & Crutcher LLP, as and for their Verified Petition seeking relief

against the Respondents, allege as follows:

FILED: NEW YORK COUNTY CLERK 02/20/2018 10:36 PM INDEX NO. 151562/2018

NYSCEF DOC. NO. 1 RECEIVED NYSCEF: 02/20/2018

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TABLE OF CONTENTS

NATURE OF THE PROCEEDING...............................................................................................~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 1

THE PARTIES................................................................................................................................ 5

JURISDICTION AND VENUE.....................................................................................................~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~7

FACTUAL BACKGROUND.........................................................................................................~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~7

A. The Title Insurance Industry's Key Role in New York State's Economy in Facilitatingand Protecting Residential and Commercial Property Purchases and Mortgages............. 7

B. The Title Insurance Industry Is Governed By A Comprehensive Statutory Scheme...... 10

1. The Statutory Prohibition On Inducements For Title Insurance Business Has Never

Been Interpreted To Bar Ordinary Marketing Expenses.........................................10

2. By Statute, Title Insurance Premium Rates Must Be Approved by DFS Based on a

Statistical Analysis of Actual Past and Prospective Losses and Expenses. ............12

C. DFS Proposes Insurance Regulation 208, Dramatically Limiting Historically Permitted

Business Activities in the Title Insurance Industry......................................................... 13

D. Comments Raise Serious Legal Defects With Proposed Insurance Regulation 208. ..... 14

1. Comments on Section 228.2 (Explaining that Restricting Marketing Expenses and

Political and Charitable Contributions Was Legally Flawed).................................14

2. Comments on Section 228.3 (Effectively Imposing Industry-Wide Five-Percent

Reduction in Premium Rates)..................................................................................16

3. Comments on Section 228.5(a) (Capping Fees For"Ancillary"

Services).............17

4. Comments on Section 228.5(d) (Restricting TitleClosers'Closers Sources of Revenue)..18

E. DFS Enacts Final Insurance Regulation 208 Without Making Any Significant Changes

to Address the Legal Deficiencies Raised by the Public Comments. ............................. 19

F. Petitioners Submit a FOIL Request Seeking Additional Public Comments, But DFS

Refuses to Timely Produce the Documents. ................................................................... 21

G. Petitioners and State Legislators Urge DFS to Reconsider Legally Flawed Elements of

Regulation 208 and Stay Implementation, But it Fails to Do So.................................... 22

LEGAL STANDARD...................................................................................................................~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~26

ARGUMENT................................................................................................................................~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~26

A. Insurance Regulation 208's Restrictions On Ordinary, Non-Quid Pro Quo Business

Marketing Practices (Sections 228.2(a) & (b)) Are Inconsistent With The GoverningStatute And Are A Sweeping Reversal Of Agency Precedent........................................ 27

1. Section 228.2's prohibition of ordinary, non-quid pro quo business marketingpractices is inconsistent with Insurance Law § 6409(d)..........................................27

2. DFS's new interpretation of Insurance Law § 6409(d) is an arbitrary and

capricious reversal of longstanding agency precedent............................................32

B. The Five Percent Reduction In Premium Rates (Section 228.3) Is Impermissibly

Retroactive, Inconsistent with the Governing Statute, and Arbitrary and Capricious.... 35

.1



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(continued)

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1. The five percent reduction in premium rates violatesPetitioners'

Due Process

rights because it penalizes Petitioners for conduct they had no fair notice would

later be prohibited....................................................................................................35

2. Section 228.3 is inconsistent with the governing statute because it sets rates that

are not based on a statistical analysis of actual past expenses. ...............................38

3. Section 228.3 is arbitrary and capricious because it imposes a severe penalty on the

title insurance industry without sufficient justification...........................................39

C. The Restrictions on Political Contributions, Charitable Donations, And Advertising(Section 228.2(c)) Are Impermissibly Vague and Violate The First Amendment. ........ 42

1. Section 228.2(c)'s restrictions on political contributions, charitable donations, and

advertising are unconstitutionally vague.................................................................42

2. Section 228.2(c)'s restrictions on political contributions, charitable donations, and

advertising violatePetitioners'Petitioners First Amendment Rights. ......................................44

D. The Prohibitions On Pick-Up Fees For In-House Closers In Sales Transaction, And For

All Closers In Refinancing Transactions (Section 228.5(d)) Are Arbitrary and

Capricious Because They Will Have Severe Unintended Consequences....................... 47

E. The Price Caps For Ancillary Services (Section 228.5(a)) Are Arbitrary And Capricious

Because They Are Unreasonable and Lack Factual Justification. .................................. 50

F. Insurance Regulation 208 Should Be Invalidated in Its Entirety.................................... 53

1. Insurance Regulation 208 Amounts To Improper Legislative Policymaking And Is

Beyond DFS's Rulemaking Authority....................................................................53

2. Insurance Regulation 208 is Procedurally Invalid Under the State Administrative

Procedure Act..........................................................................................................56

G. Insurance Regulation 208 Will Cause Irreparable Harm. ............................................... 59

CAUSES OF ACTION.................................................................................................................~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 62

FIRST CAUSE OF ACTION: SECTION 228.2 IS INCONSISTENT WITH THE

GOVERNING STATUTE, AND INVALID.................................................................................................................................... 62

SECOND CAUSE OF ACTION: SECTION 228.2 IS AN ARBITRARY ANDCAPRICIOUS REVERSAL OF AGENCY PRECEDENT........................................... 63

THIRD CAUSE OF ACTION: SECTION 228.3 VIOLATES PETITIONERS' DUE

PROCESS RIGHTS (LACK OF FAIR NOTICE)......................................................... 64

FOURTH CAUSE OF ACTION: SECTION 228.3 IS INCONSISTENT WITH THE

GOVERNING STATUTE, AND INVALID .................................................................. 64

FIFTH CAUSE OF ACTION: SECTION 228.3 IS ARBITRARY, CAPRICIOUS, ANDINVALID ........................................................................................................................ 65

SIXTH CAUSE OF ACTION: SECTION 228.2(C) VIOLATES PETITIONERS' DUE

PROCESS RIGHTS (VOID FOR VAGUENESS)................................................................................................................ 66

..11



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TABLEOFCONTENTS

(continued)

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SEVENTH CAUSE OF ACTION: SECTION 228.3(C) VIOLATES PETITIONERS'FIRST

AMENDMENT RIGHTS................................................................................................D~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 67

EIGHTH CAUSE OF ACTION: SECTION 228.5(D) IS ARBITRARY, CAPRICIOUS,

AND INVALID...............................................................................................................~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 67

NINTH CAUSE OF ACTION: SECTION 228.5(A) IS ARBITRARY, CAPRICIOUS, ANDINVALID ........................................................................................................................ 69

TENTH CAUSE OF ACTION: INSURANCE REGULATION 208 EXCEEDS DFS'S

REGULATORY AUTHORITY......................................................................................~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 69

ELEVENTH CAUSE OF ACTION: INSURANCE REGULATION 208 IS INVALID

UNDER THE STATE ADMINISTRATIVE PROCEDURE ACT................................................................ 70

PRIOR APPLICATION................................................................................................................~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~71

PRAYER FOR RELIEF ............................................................................................................... 71

...111



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NATURE OF THE PROCEEDING

1. Petitioners New York State Land Title Association, The Great American Title

Agency, Inc., and Venture Title Agency, Inc. bring this action to challenge the legality of New

York State Department of Financial Services ("DFS") Insurance Regulation 208, codified at 11

N.Y.C.R.R. 228. Insurance Regulation 208 consists of a sweeping set of restrictions and

requirements imposed on the title insurance industry that make illegal industry marketing

practices permitted by statute and settled DFS precedent, effectively mandate a significant,

industry-wide five percent premium rate reduction as a retroactive penalty for marketing conduct

that DFS now seeks to prohibit for the first time, and significantly reduces entire categories of

fees, prohibiting certain revenue sources and making others unprofitable without justification

or authority. Insurance Regulation 208 simply cannot be squared with the statutory scheme

governing title insurance, due process fair notice and vagueness requirements, economic reality,

longstanding agency policy, the First Amendment, and proper administrative procedure. In fact,

the challenged regulation will wreak havoc on title insurance corporations, title insurance

agents, and title closers across New York State all of which are central to the functioning of

New York's real estate markets and will result in company closures, layoffs, and reduced

services for consumers, hitting small businesses hardest. DFS must be stopped before more

companies are forced to close or lay off employees and consumers are harmed across the state.

The text of Insurance Regulation 208, as codified, is attached as Exhibit 1 to the Affirmation of Mylan L.

Denerstein, dated February 20, 2018 and submitted herewith. All citations herein to "Ex. " are to the exhibitsto the Denerstein Affirmation.

Title insurance agents sell title insurance policies and produce title insurance reports that inform purchasers,lenders, and their representatives as to the marketability and insurability of a particular parcel of real property.

Title insurance corporations sell title insurance policies and produce title insurance reports, and also assume

liability under title insurance policies for the risk of loss from defects in title to real property.

Title closers are either employees of title insurance corporations and agents ("in-house"closers) or independent

1

contractors ("independent"closers) who provide services to parties at the closing of real estate transactions.



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2. This Court should therefore strike down Insurance Regulation 208 because:

Section 228.2 Forbids Marketing Activities Permitted By Statute and Precedent

• Section 228.2 is inconsistent with the plain terms of Insurance Law § 6409(d),

which prohibits only quid pro quo"inducements"

for business, not ordinary

marketing activities, which are critical for the success of the industry.

• Section 228.2 represents an arbitrary reversal of longstanding agency precedent

prohibiting only quid pro quo"inducements"

for business, consistent with

Insurance Law § 6409(d). It will unreasonably impede title insurance

corporations andagents'

ability to survive and compete.

Section 228.3 Imposes A Rate Reduction As A Retroactive Penalty for Previously

Permitted Conduct

• Section 228.3 effectively mandates an industry-wide five-percent reduction in

premium rates based on marketing activities that were not prohibited at the time

they were engaged in-that is, a severe penalty imposed without fair notice that

violates Petitioner's due process rights.5

• Section 228.3 is inconsistent with the statute governing rates because it imposes a

rate reduction that is not based on a statistical analysis of past expenses, or on

projections of future expenses.

• Section 228.3 arbitrarily and capriciously imposes a severe penalty on the title

insurance industry without factual substantiation or justification.

Section 228.2(c) Imposes Unconstitutionally Vague Restrictions on Speech

• Section 228.2(c) imposes unconstitutionally vague restrictions on political and

charitable contributions and advertising activities-in violation of due process

by barring spending that is "lavish orexcessive,"

and not "reasonable andcustomary,"

which are ambiguous standards that are not defined.

• Section 228.2(c) violates the First Amendment by restricting political and

charitable contributions, and "[a]dvertising or marketing in any publication, ormedia,"

without any important government interest justifying the restrictions.

5Specifically, the regulation forces title insurance corporations and agents to choose between accepting the five-

percent premium reduction or certifying, under penalty of criminal sanction, that for the previous six years theyhave not incurred any marketing expenses in certain categories that were not prohibited at the time, or restatingprior filings to remove such expenses.



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Section 228.5(a) Arbitrarily Limits the Amount of Certain Ancillary Fees

Section 228.5(a) arbitrarily limits the amount title insurance corporations and

agents are permitted to charge for certain services, without any economic or other

analysis substantiating the price caps selected. These wide-ranging restrictions on

ancillary fees, imposed in the absence of legislative authorization, also exceed

DFS's regulatory mandate, as noted below.

Section 228.5(d) Irrationally Prohibits Certain Types of Closer Compensation

• Section 228.5(d) irrationally restricts, without a sound factual basis, the

compensation certain title closers are permitted to accept for the important

services they provide to consumers, while permitting other title closers to accept

compensation for performing the same service to consumers. These

comprehensive limitations on closer compensation, imposed without direction

from the legislature, also exceed DFS's regulatory authority, as noted below.

Insurance Regulation 208 is Invalid in its Entirety as an End Run Around the

Legislature and for Failure to Engage in Any Cost-Benefit Analysis

• The regulation constitutes improper regulatory policymaking that usurps the role

of the legislature. Indeed, "many of the actions that DFS now seeks to take in

Regulation 208 are measures which were originally advanced by thedepartment"

in past legislative negotiations, "and which were expressly rejected at the

negotiation table by theSenate,"

as the Chairman of the State Senate Insurance

Committee wrote recently to DFS.6

• DFS failed to adequately analyze the economics costs and impacts of the

regulation, in violation of the State Administrative Procedure Act.

3. Comments sent to DFS during the rulemaking process, including from Petitioners

NYSLTA and The Great American Title Agency, Inc., as well as numerous letters from state

senators and assemblypersons, alerted the agency to these problems and defects, but it

nonetheless chose to plow forward with the regulation. Petitioners submit those materials in

support of this Petition, as well as detailed affidavits-including an affidavit from former New

York State Superintendent of Insurance Gregory Serio-setting out the industry's and DFS's

longstanding interpretation of the governing statute to permit ordinary marketing practices, the

6 Ex. 2 (Letter from Senator James L. Seward to Superintendent Vullo, Dec. 11, 2017) at 2.



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risk."

Report"

improper retroactive nature of the rate reduction, the impossible task of understanding what DFS

may consider "reasonable andcustomary,"

and not"excessive"

or"lavish,"

political

contributions, charitable donations, and advertising expenses, the lack of economic or other

rationale for the restrictions on marketing, ancillary fees, and closer revenue, the harmful effects

of the regulation on the industry and consumers, and the arbitrary and capricious nature of these

regulations.7regulations. The deleterious economic impacts of the regulations-and DFS's failure to provide

"anyanalyses"

or "statistical data that wouldjustify"

the severe restrictions it now imposes by

agency flat-are demonstrated in the accompanying independent expert report of Nam D. Pham,

Ph.D and affidavits of other industryparticipants.8participants.

4. Senator James L. Seward, Chairman of the State Senate Insurance Committee,

wrote to DFS that "[t]he title industry is a very important business in New YorkState"

that

"employ[s] thousands ofpeople,"

and "Regulation 208 will lead to increased costs to consumers,

disruption in the real estate market, and [will] put thousands of small businesses at risk."9 The

impact is already being felt, as demonstrated in the affidavits submitted in support of this

Petition. For example, one affiant stated he has already been "forced to terminate two valuable

employees"because of Insurance Regulation 208."10 And as noted by another affiant, as a result

of Insurance Regulation 208 "many smaller title insurance agents will no longer conduct

refinancing transactions, to the detriment of consumers."11Finally, one affiant noted that he was

7 Affidavits submitted herewith are from the President of Petitioner The Great American Title Agency, Inc.,numerous NYSLTA member-representatives, and Mr. Serio.

8 see Affidavit of Nam D. Pham, Ex. B ("Pham Report") at 16.


10 Affidavit of John J. Hughes, Jr., Feb. 16, 2018, ¶ 10.

11 Affidavit of John Frates, Feb. 15, 2018, ¶¶ 3, 10.



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already aware of small companies that wereclosing.12

Clearly, Insurance Regulation 208 will

continue to have a devastating impact on the title business and its employers and consumers.

5. For all of these reasons, Insurance Regulation 208 represents improper regulatory

overreach and is arbitrary and capricious. It is inconsistent with governing law, longstanding

agency precedent, and the economic realities of the title insurance industry. This Court should

declare Insurance Regulation 208 void and unenforceable in its entirety.

THE PARTIES

6. Petitioner NYSLTA is a registered not-for-profit corporation organized under

federal and state law founded in 1921.13 Its principal place of business is located at 65

Broadway, New York, New York, 10007. NYSLTA consists of 405 member companies serving

all 62 counties throughout the State, and supports the title insurance industry in New York,

advancing the common interests of all those engaged in the business of abstracting, examining,

and insuring titles to property, as well as otherwise facilitating real estate transactions and

interests. NYSLTA members include, among others, title insurance agents, title insurance

corporations, and title closers. NYSLTA provides accredited professional education and

promotes the business and general welfare of its members, real estate professionals, homeowners

and all who use and benefit from the services of the land title profession. In connection with

NYSLTA's purpose of advancing the general welfare of the title insurance industry, it brings this

special proceeding to protect the interests of its members that will be severely harmed by

Insurance Regulation 208.

12 Affidavit of John Martinico, Feb. 16, 2018, ¶ 3.

13 26 U.S.C. § 501(c)(6); see New York State Department of State, Division of Corporations Entity Information,https://www.dos.ny.gov/corps/bus_entity_search.html.



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"Superintendent"

Purpose"

7. Petitioner The Great American Title Agency, Inc. is a licensed title insurance

agent located in White Plains, New York. The Great American Title Agency, Inc. was founded

in 2013, and employs 14 people in New York.

8. Petitioner Venture Title Agency, Inc. is a licensed title insurance agent located in

Patchogue, New York. Venture Title Agency, Inc. was founded in 1986, and employs three

people in New York.14

9. Respondent DFS was created on October 3, 2011 by the Financial Services Law,

which consolidated the Departments of Insurance and Banking into a single state agency for the

purpose of enforcement of the Insurance, Banking, and Financial Services Laws. N.Y. Fin. Serv.

§ 102.

10. Respondent Maria T. Vullo, the Superintendent of DFS (the "Superintendent"), is

the head of DFS, appointed by the governor, by and with the advice and consent of the Senate, to

supervise the business of, and the persons providing, financial products and services, including

any persons subject to the provisions of the insurance law and the banking law. N.Y. Fin. Serv.

§§ 201, 202. She is sued here in her official capacity only.

14 Each of the Petitioners independently has standing to bring this Article 78 proceeding. NYSLTA has standingto bring this proceeding, because, as discussed above, one or more of its members has standing to sue, theinterests advanced in this Petition are germane to NYSLTA's purpose of advancing the common interests of thetitle insurance industry in New York, and the participation of individual members is not required to assert theseclaims attacking the validity of Insurance Regulation 208, or to afford NYSLTA complete relief in the form ofthe invalidation of the challenged regulation. See Aeneas McDonald Police Benev. Ass'n, Inc. v. City ofGeneva, 92 N.Y.2d 326, 331 (1998). The Great American Title Agency, Inc. and Venture Title Agency, Inc.also each has standing to bring this proceeding, as each asserts in this Petition interests that are within the zoneof interests to be protected by Insurance Regulation 208 and the statutes governing DFS-including an interestin ensuring that the rates and fees charged for the products and services provided by the title insurance industryare appropriate, and that its marketing practices comply with the governing statute. See Insurance Regulation208 Section 228.0(f) ("Scope(" and Purpose"); Ins. Law §§ 2303, 6409(d). Moreover, each will be harmed byInsurance Regulation 208, and there is no clear legislative intent negating review. See Axelrod v. Sobol, 78N.Y.2d 112, 115 (1991).



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JURISDICTION AND VENUE

11. This Court has jurisdiction over this proceeding against Respondents pursuant to

CPLR §§ 3001 and 7804(b).

12. Venue is appropriate in the County of New York because the principal office of

DFS is within the Judicial District that includes the County of New York, pursuant to CPLR

§§ 506 and 7804(b).

FACTUALBACKGROUND

A. The Title Insurance Industry's Key Role in New York State's Economy in

Facilitating and Protecting Residential and Commercial Property Purchases and

Mortgages.

13. Title insurance lies "at the heart of [American] real property conveyancing

routines, and it remains important to basic residential as well as complex commercial

transactions."15 "Because of the permanent nature of land and real property, every parcel of land

has a long, and perhaps even unique, history of transactions between persons who at one time

held an interest in it."16 This presents the danger that prior interests in real property "might not

be disclosed to the purchaser in that later transaction and that he or she might unknowingly take

property that is subject to the preexistinginterest."17

Therefore, to "protect against such defects

in real property titles, American abstractors and attorneys well over 100 years ago devised the

original forms of title insurance,"18 which furthers New York's policy of promoting

homeownership and commercial real estate transfers in the State.19

15 D. Barlow Burke, Law of Title Insurance Preface (3d ed. 2018).

16 Id ~1.01.

17 Id.

18 Ig

19Orexample, Governor Andrew Cuomo has stated that his "administration is committed to helping more New

Yorkers realize the American Dream of homeownership." Office of the Governor of New York State,Governor Cuomo Announces $26 Million Available for Affordable Homeownership Statewide, Dec. 8, 2017,



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14. Title insurance professionals serve critical roles in the functioning of New York

State's robust property markets, which are a central feature of New York's economy. Key actors

in the title insurance business include title insurance agents, who sell title insurance policies,

produce title insurance reports that inform purchasers, lenders, and their representatives as to the

marketability and insurability of a particular parcel of real property, and typically work to aid in

clearing any title issues before the closing of a transaction; title insurance corporations, which

protect insureds by assuming liability for the risk of loss from defects in title to real property, in

addition to producing title insurance reports and selling title insurance policies through their

agents; and title closers, who either as employees of title insurance corporations and agents ("in-

house"closers) or as independent contractors

("independent"closers) provide services to parties

at the closing of real estate transactions, including the satisfaction of existing mortgages.

15. Unlike other types of insurance, title insurance is focused on risk avoidance, and

title insurance corporations and agents are paid a one-time premium to provide significant up-

front work in order to fully analyze title and thereby prevent future claims. One of the chief

responsibilities of title insurance corporations and agents is to produce "titlereports"

that inform

real estate purchasers and lenders as to the marketability and insurability of a particular parcel of

real property. In creating these reports, title insurance corporations and agents conduct thorough

research to analyze and evaluate public records to determine the status of title.20title.

16. Once a title report is completed, agents and title insurance corporations

recommend solutions to any title problems or exceptions that may affect the marketability or

available at https://www.governor.ny.gov/news/governor-cuomo-announces-26-million-available-affordable-

homeownership-statewide.

20 See also Hughes Aff. ¶¶ 12-22 (describing the tasks undertaken by title agents in the title insurance process).â€”



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insurability of aproperty.21property.

'This requires a title agent or title insurance corporation to work with

a proposed purchaser's attorney, lender, seller, and/or their representatives in order to resolve

any problems or issues identified by the title report, which can include document deficiencies,

bankruptcy or other court proceedings, adverse possession and encroachment, chain of title

issues, or open liens.

17. If the report production and clearing process results in insurable title, a title

insurance policy is issued at a closing, which insures, for the entire term of ownership, the

purchaser's ability to sell or mortgage the property. Because owners of property are required to

have any open mortgages satisfied at closing, individuals known as "titleclosers"

are often

engaged to attend the closing of the transaction, and subsequently obtain a satisfaction of

mortgage, a service outside of the scope of title insurance premiums that is done in exchange for

a "pick-upfee."

After the closing, the title agent or title insurance corporation must review and

record all documents, pay all outstanding mortgage taxes, real estate taxes, and transfer taxes,

and account for all funds received.

18. Title insurance agents also provide a wide range of services to attorneys

representing sellers, purchasers, or borrowers in real estate transactions that go beyond the

issuance of title insurance policies, such as searching various databases (including bankruptcy,

building department, Office of Foreign Assets Control, and municipal databases, etc.) to

determine the relevant history of the parties to a transaction and the property at issue. These are

known as"ancillary"

services, which services are not included in the cost of the title insurance

premium, and are not necessary to the issuance of a title insurance policy.

21 While the clearance of title issues is not included in the scope of a title insurance premium, and agents and titleinsurance corporations are therefore not formally responsible for doing so, agents nonetheless typically providethis service.



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B. The Title Insurance Industry Is Governed By A Comprehensive Statutory Scheme.

19. In 1984, New York State re-codified an existing comprehensive statutory regime

to ensure that the insurance industry as a whole, including title insurance, was regulated

appropriately. Article 64 of the New York Insurance Law provides, inter alia, for the licensing

requirements of title insurance corporations, see Ins. Law $ 6402, organizational and

management requirements for such corporations, see id.; Ins. Law $ 6403, and minimum

capitalization and reserves that title insurance corporations must hold, see Ins. Law $$ 6402,

6404. In addition, title insurance rates and rate filings are governed by Article 23 of the

Insurance Law, and any rate increase or reduction requires approval of DFS. See Insurance Law

$$ 2303, 2306.

20. Previous changes to this scheme have been made not through sweeping regulatory

changes by DFS beyond the scope of DFS's authority, but by the legislature. Most recently, for

example, the legislature enacted Chapter 57 of the Laws of 2014, which required title insurance

agents to become licensed in New York, and amended provisions of Insurance Law

$ 6409(d) to prohibit title insurance applicants and their representatives from accepting

inducements (in addition to the existing prohibitions against title insurance corporations and

agents providing inducements), and to clarify the penalties for violations of the section.

1. The Statutory Prohibition On Inducements For Title Insurance Business Has

Never Been Interpreted To Bar Ordinary Marketing Expenses.

21. Insurance Law ) 6409(d) prohibits"inducements"

offered by title insurance

corporations and agents in exchange for title insurance business. Specifically, the statute states

that:

No title insurance corporation, title insurance agent, or any other

person acting for or on behalf of the title insurance corporation or

title insurance agent, shall offer or make, directly or indirectly, any

1

rebate of any portion of the fee, premium or charge made, or pay or



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give to any applicant, or to any person, firm, or corporation actingas agent, representative, attorney, or employee of the owner, lessee,

mortgagee or the prospective owner, lessee, or mortgagee of the real

property or any interest therein, either directly or indirectly, any

commission, any part of its fees or charges, or any other

consideration or valuable thing, as an inducement for, or as

compensation for, any title insurance business, nor shall any

applicant, or any person, firm, or corporation acting as agent,

representative, attorney, or employee of the owner, lessee,

mortgagee or of the prospective owner, lessee, or mortgagee of the

real property or anyone having any interest in real property

knowingly receive, directly or indirectly, any such rebate or other

consideration or valuable thing.

Ins. Law § 6409(d) (emphasis added).

22. Insurance Law § 6409(d) has long been interpreted based on its plain meaning to

permit title insurance corporations and agents to provide potential or existing clients, or their

representatives, meals, entertainment, educational events, and other items as part of the

marketing of their businesses and products so long as there was no quid pro quo for engaging the

corporation or agent to provide title insuranceservices.22services.

'Providing these types of typical

marketing activities has been permitted and viewed as no different than other businesses in many

other industries throughout the United States that take clients and potential clients to dinner,

drinks, or even coffee to maintain or build relationships, and not as quid quo pro.

23. Not only does the plain reading of the statute dictate that marketing expenses are

not per se"inducements," DFS itself, and its predecessor, the New York State Department of

Insurance, has since enactment of § 6409(d) agreed with this interpretation in numerous formal

opinions by the DFS Office of General Counsel. These formal opinions have confirmed that

§ 6409(d) permits ordinary marketing and entertainment expenses, so long as there is no quid pro

22See, e.g., Affidavit of Joseph Willen, Feb. 16, 2018, ¶¶ 7-8.

11



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accordingly.

quo arrangement. See, e.g., Ex. 3 (OGC Opinion Nos. 2002-290 (Nov. 13, 2002), 2005-284

(Nov. 10, 2005), and 11-05-04 (May 31, 2011)).

24. Further support for the fact that DFS's current interpretation of the statute is

plainly wrong, is that DFS previously advocated for the legislature to adopt a broader definition

of prohibited activities under Ins. Law § 6409(d) during negotiations over Chapter 57 of the

Laws of 2014 (which, inter alia, required title insurance agents to become licensed in New

York); such measures were "expresslyrejected"

and "omitted in the final legislation."23

2. By Statute, Title Insurance Premium Rates Must Be Approved by DFS Based

on a Statistical Analysis of Actual Past and Prospective Losses and Expenses.

25. By statute, a title insurance "rate serviceorganization"

licensed by DFS submits

proposed title insurance premium rate filings on behalf of its members, and DFS approves rate

filingsaccordingly.24

The rate service organization is required to considerinsurers'

"past and

prospective lossexperience,"

as well as "past and prospectiveexpenses"

incurred by insurers,

Ins. Law § 2304(a), and the "reporting of expenseexperience"

must be done pursuant to

"[s]tatistical plans andrules,"

id. § 2315. The title insurance industry provides data to the rate

service organization pursuant to an annual "datacall,"

detailing, inter alia, loss experience and

expenses incurred. The rate service organization then submits to DFS proposed premium rate

filings based on a statistical analysis of the data it receives. DFS then approves or rejects

premium rate filings based on this submission. Id. §2305(b).252305(b). Premium rates shall not be

23 Affidavit of Gregory V. Serio ¶ 18 & Ex. A (Letter from Senator James L. Seward, Sept. 3, 2014); Ex. 2 (Letterfrom Senator James L. Seward to Superintendent Vullo, Dec. 11, 2017) at 2.

24 Under Article 23 of the Insurance Law, DFS has licensed the Title Insurance Rate Service Association, Inc.

("TIRSA") as its Rate Service Organization and statistical agent, meaning that TIRSA receives, compiles, andsubmits all statistical data regarding premiums, losses, and expenses on behalf of the title insurance industrystatewide that choose to delegate their rate filing obligation to TIRSA pursuant to Insurance Law § 2306.

25Currently, two title insurers in New York have chosen not to delegate their rate filing obligation to TIRSA;these companies independently submit rates to DFS. These companies must comply with the same rate filing

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"inadequate, unfairly discriminatory, destructive of competition or detrimental to the solvency of

insurers."Id. § 2303.

C. DFS Proposes Insurance Regulation 208, Dramatically Limiting HistoricallyPermitted Business Activities in the Title Insurance Industry.

26. On May 1, 2017, DFS announced proposed Insurance Regulation 208, to be

codified at 11 N.Y.C.R.R. 228.26228. The proposed regulations would:

• Prohibit title insurance corporations and title insurance agents from making

ordinary marketing expenditures "regardless of whether provided as a quid pro

quo for specificbusiness."

Proposed 11 N.Y.C.R.R. 228.2 (emphasis added);

• Require title insurance corporations to either submit restated expense schedules

covering the previous six years for the calculation of title insurance premiums to

exclude any now-prohibited expense, "affirm in writing to thesuperintendent"

that no expense schedule submitted in the previous six years contains anyprohibited expenditure, or "file a rate filing with the superintendent . . . which

provides for a uniform five percent reduction in the base rate schedule for each

category ofpolicy."

Proposed 11 N.Y.C.R.R. 228.3(c) (emphasis added);

• On a going-forward basis, require title insurance corporations and agents to

exclude from "expense schedules reporting titleexpenses"

any now-prohibited

expenditure , and "affirm inwriting"

that submitted expense schedules do not

include any such expenditures. Proposed 11 N.Y.C.R.R. 228.3(a)(1);

• Impose maximum prices that title insurance corporations and agents may charge

applicants in connection with a real property closing for services including

Patriot, bankruptcy, or municipal or departmental searches. Proposed 11

N.Y.C.R.R. 228.5(a);

• Prohibit any closer engaged by a title insurance corporation or agent "from

receiving any compensation directly or indirectly for the closing other than the

compensation paid by the title insurance corporation or title insuranceagent,"

including pick-up fees and gratuities. Proposed 11 N.Y.C.R.R. 228.5(d).

obligations as TIRSA; that is, they must file statistical information justifying their proposed rates pursuant toArticle 23 of the Insurance Law. DFS must then approve the proposed rates.

26 Ex. 4 (Proposed Insurance Regulation 208); Ex. 5 (Press Release, Department of Financial Services, GovernorCuomo Announces Action to Protect New Yorkers from Unscrupulous Activities in the Title Insurance Business,

May 1, 2017).

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officials."

27. DFS did not release any data, study, or investigation report to justify these

industry-wide regulations, nor did it explain how such regulations were permissible given the

statutory scheme governing title insurance and not unconstitutional given the restraints on due

process and speech.

D. Comments Raise Serious Legal Defects With Proposed Insurance Regulation 208.

28. Following the proposed rulemaking, DFS received "close to three hundred written

comments"on the proposed regulations, from "title insurance corporations, title insurance agents

and agencies, title insurance closers, attorneys, trade associations, a rate service organization,

and public officials."27 In addition to explaining the legal defects and practical challenges

presented by the proposed Regulation, the comments also explained the severe economic

hardship it would cause for the title insurance industry, particularly small businesses, causing

employers to lay employees off and to close their doors.28

1. Comments on Section 228.2 (Explaining that Restricting MarketingExpenses and Political and Charitable Contributions Was LegallyFlawed).

29. First, many commenters raised concerns that Section 228.2 of the new regulations

unlawfully and improperly expands the scope of Insurance Law § 6409(d) to prohibit marketing

expenses that were previously permitted under the statute, and are commercially necessary. By

prohibiting marketing expenses that do not involve quid pro quo, NYSLTA noted that Section

228.2's interpretation of § 6409(d) "is not only unsupported by prior guidance, but it is

27 Ex. 6 (Department of Financial Services, Assessment of Public Comments on proposed new 11 NYCRR 228(Insurance Regulation 208)).

28 See Ex. 7 (Stewart Title Insurance Company Comments on Proposed Insurance Regulation 208, June 16, 2017)at 1 (stating that the regulations "will damage New York's overall economy and eliminate a number of small

businesses"); Ex. 8 (AmTrust Title Insurance Company Comments on Proposed Insurance Regulation 208, June

19, 2017) at 4 (stating that the regulations "will be harmful to both the consumer and to the solvency of the titleinsurance industry").

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practices."

fundamentallyillogical."29 NYSLTA noted that Section 228.2 "applies a meaning to

'inducements'"under Insurance Law § 6409(d) that "is unworkable and far too

broad,"and

"would inhibit normal marketingpractices."30

30. Similarly, a title insurance corporation stated in its comments that Section 228.2,

by "not only altering, but also expanding upon, the prohibitions contained in [section]6409(d),"

has "abolishe[d] the Department's long-standing interpretation of the term'inducement'

in

6409(d)."31Because companies had been "relying for

years"on DFS's "documented

interpretation of6409(d),"

the company commented that Section 228.2 has "added confusion and

ambiguity which is harmful to theindustry,"

without providing "clear and specificguidance"

as

to "what types of activities it now considers to be prohibitedinducements,"32

First Amendment

concerns that were echoed by multiple other title insurance corporations in their comments.33comments.

31. Likewise, counsel for another title insurance corporation commented that the

expenses prohibited by Section 228.2 were vague and "very much in the eye of thebeholder,"

and emphasized that "the title insurance industry in New York is historicallyrelationship-

driven,"meaning that "[k]eeping in touch with other professionals in or near the real estate

29 Id. at 3; see also Ex. 7 (Stewart Title Insurance Company Comments on Proposed Insurance Regulation 208,June 16, 2017) at 3-4, 6; Ex. 9 (First American Title Insurance Company Comments on Proposed InsuranceRegulation 208, June 19, 2017) at 3-4.

30 Ex. 10 (New York State Land Title Association, Inc. Comments on Proposed Insurance Regulation 208, June

19, 2017) at 2-3.

31 Ex. 11 (Fidelity National Title Group Comments on Proposed Insurance Regulation 208, June 16, 2017) at 2-3.

32 Id. at 3-4; see also Ex. 12 (Old Republic National Title Insurance Company Comments on Proposed InsuranceRegulation 208, June 16, 2017) at 2.

33 Ex. 7 (Stewart Title Insurance Company Comments on Proposed Insurance Regulation 208, June 16, 2017) at 7;Ex. 9 (First American Title Insurance Company Comments on Proposed Insurance Regulation 208, June 19,

2017) at 4-6, 7-8; Ex. 12 (Old Republic National Title Insurance Company Comments on Proposed InsuranceRegulation 208, June 16, 2017) at 2 (requesting that Section 228.2 be clarified to include "[r]easonableparameters for charitable or political donations").

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business"is a "more efficient way to get business . . . than direct market

advertising."34

Furthermore, the company noted that despite DFS's references to an"'industry-wide'

investigation,"it was unaware of any investigation beyond a public DFS hearing in December

2013, much less an investigation revealing"'industry-wide' violations"

of section 6409(d).356409(d).

2. Comments on Section 228.3 (Effectively Imposing Industry-Wide

Five-Percent Reduction in Premium Rates).

32. Second, commenters noted that Section 228.3 of the new regulations imposes a

commercially unreasonable retroactive penalty, that compliance with theregulations'

reporting

requirements is practically impossible, and that the five percent reduction in premium rates

contemplated by the regulations is inconsistent with Insurance Law Article 23.

33. One title insurance corporation noted that restating expense reports for the

previous six years is "notpossible,"

because title insurance corporations are "unable to

retroactively create six years of recordkeeping for records [they were] not required to keep."36

Moreover, "even if the detailed information behind the expense data had been collected and

maintained, it is unclear which expenses the Department would identify as'inducements'

under

the [newregulations],"

which would need to be omitted from the new expense reports.37 As

such, companies would not be able to "affirm the compliance of all expenses over the past six

years,"and the company would not be able to affirm as much on behalf of title insurance

34 Ex. 7 (Stewart Title Insurance Company Comments on Proposed Insurance Regulation 208, June 16, 2017) at 2-

3 ; see also Ex. 11 (Fidelity National Title Group Comments on Proposed Insurance Regulation 208, June 16,

2017) at 4; Ex. 8 (AmTrust Title Insurance Company Comments on Proposed Insurance Regulation 208, June

19, 2017) at 3; Ex. 12 (Old Republic National Title Insurance Company Comments on Proposed InsuranceRegulation 208, June 16, 2017) at 2.

35 Ex. 7 (Stewart Title Insurance Company Comments on Proposed Insurance Regulation 208, June 16, 2017) at 2.

36 EX. 12 (Old Republic National Title Insurance Company Comments on Proposed Insurance Regulation 208,June 16, 2017) at 3.

37 Id.

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agents.38 Because it is not possible to restate expense reports over the previous six years, nor to

alternatively affirm that such reports did not include any expenses now prohibited under the new

regulations, the company observed that Section 228.3 effectively "compels a five percent

reduction of the current base rate schedule for each category ofpolicy,"

despite lacking "the

required analysis and determination that the rate reduction will not result in rates that are

'[e]xcessive, inadequate, unfairly discriminatory, destructive of competition or detrimental to the

solvency ofinsurers'

per Insurance Law Section 2303."39 Another company noted that the five

percent rate reduction "plainly violates Article23"

of the Insurance Law, which requires that rate

filings be "based on genuine economic data."40Instead, it commented that Section 228.3, in

effect, "arbitrarily order[s] rate cuts byfiat."41

3. Comments on Section 228.5(a) (Capping Fees For "Ancillary"

Services).

34. Third, commenters emphasized that Section 228.5(a)'s limits on fees for ancillary

services are arbitrary, commercially unreasonable, and do not reflect the actual cost of providing

the underlying services. NYSLTA stated that the "fees presently charged by the majority of title

companies and agents arereasonable,"

and reflect "the time required to review, interpret, and

rectifyissues."42

Moreover, the fees are "disclosed by title companies and subject to review by

38 ;see also Ex. 7 (Stewart Title Insurance Company Comments on Proposed Insurance Regulation 208, June

16, 2017) at 9-10.

39 EX. 12 (Old Republic National Title Insurance Company Comments on Proposed Insurance Regulation 208,June 16, 2017) at 3; see also Ex. 7 (Stewart Title Insurance Company Comments on Proposed InsuranceRegulation 208, June 16, 2017) at 8; Ex. 9 (First American Title Insurance Company Comments on ProposedInsurance Regulation 208, June 19, 2017) at 6-7; Ex. 11 (Fidelity National Title Group Comments on ProposedInsurance Regulation 208, June 16, 2017) at 7.

40 Ex. 7 (Stewart Title Insurance Company Comments on Proposed Insurance Regulation 208, June 16, 2017) at 8.

41 Id.

42 EX. 10 (New York State Land Title Association, Inc. Comments on Proposed Insurance Regulation 208, June

19, 2017) at 3-4; see also Ex. 7 (Stewart Title Insurance Company Comments on Proposed InsuranceRegulation 208, June 16, 2017) at 10.

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consumers and theirattorney,"

and consumers are "free to shop for these services and must

authorize any charges at or prior to closing."43closing."And a title insurance corporation noted that

Section 228.5(a)'s caps on fees for ancillary services "will not even allow title insurer[s] or

agents to cover their out of pocket and staffing expenses to handle these types of transactions."44

4. Comments on Section 228.5(d) (Restricting Title Closers' Sources of

Revenue).

35. Fourth, commenters stressed that proposed Section 228.5(d)'s prohibitions on

pick-up fees and gratuities for all closers were commercially unreasonable and harmful to

consumers. NYSLTA emphasized that titleclosers'

"paying ofsellers'

liens is not [a service]

included in the titlepremium,"

and that the "duty of obtaining the satisfaction of an existing

mortgage"is delegated to title closers in order to save the consumer money.45money. A title insurance

corporation similarly noted that "the presence of a title closer is necessary to the New York title

closing,"and the "practice of using independent closers for real estate settlements is productive,

efficient and keeps overall title insurance rates down."46 The company commented that if, as a

result of the regulations, "the industry is forced to transition entirely to in-house staff to act as

closers, this will again increase labor overhead which will increase filed premium rates."47rates."


19, 2017) at 3.

44 Ex. 11 (Fidelity National Title Group Comments on Proposed Insurance Regulation 208, June 16, 2017) at 8.


19, 2017) at 4.

46 EX. 7 (Stewart Title Insurance Company Comments on Proposed Insurance Regulation 208, June 16, 2017) at11.

47 ;see also Ex. 11 (Fidelity National Title Group Comments on Proposed Insurance Regulation 208, June 16,

2017) at 9.

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E. DFS Enacts Final Insurance Regulation 208 Without Making Any Significant

Changes to Address the Legal Deficiencies Raised by the Public Comments.

36. On October 17, 2017, DFS announced final adoption of Insurance Regulation

208, codified as 11 N.Y.C.R.R. 228.48228. The final regulations were published in the State Register

on October 18,2017.492017.

37. Specifically, as relevant to this Petition, the challenged regulations:

• Prohibit any "title insurancecorporation"

or "title insuranceagent"

from

providing or offering to any "person, firm or corporation acting as an agent,

representative, attorney or employee of the actual or prospective owner, lessee,

mortgagee of the real property or any interest therein any payment, expense,

compensation or benefit associatedwith"

an enumerated list of items, including"[m]eals and

beverages,""entertainment, including tickets to sporting

events."11

N.Y.C.R.R. 228.2(b) (emphasis added);

• Prohibit expenses including "[a]dvertising or marketing in any publication, ormedia,"media, charitable contributions, and political contributions, where such expenses

are "lavish orexcessive,"excessive

"or not "reasonable and

customary."customary 11 N.Y.C.R.R.

228.2(c) (emphasis added);

• Require title insurance corporations to either submit restated expense schedules

covering the previous six years "that exclude the expenditures prohibited by[section

228.2],""affirm in writing to the

superintendent"that no expense

schedule submitted in the previous six years contains any expenditure that is now

prohibited by section 228.2, or "submit a rate filing to the superintendent . . .

which provides for a uniform five percent reduction in the base rate schedule for

each category ofpolicy"

on a going-forward basis. 11 N.Y.C.R.R. 228.3(c)(emphasis added);

• Require title insurance corporations and agents to exclude from future "expense

schedules reporting titleexpenses"

any expenditure prohibited by section 228.2,

and "affirm in writing that [their] expense schedules do not include anyexpenditure that is

prohibited."11 N.Y.C.R.R. 228.3(a);

• Impose maximum prices that title insurance corporations and agents may charge

applicants in connection with a residential real property closing for"ancillary"

48 Ex. 13 (Press Release, Department of Financial Services, DFS Announces Final Regulations to CombatUnscrupulous Practices in the Title Insurance Industry, Oct. 17, 2017).

49 Ex. 14 (Department of State, Division of Administrative Rules, New York State Register October 18, 2017/Vol.

XXXDC Issue 42, Oct. 18, 2017) at 11-12.

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received.

services including Patriot, bankruptcy, or municipal or departmental searches. 11

N.Y.C.R.R. 228.5(a);

• Prohibit title closers from accepting any fees or gratuities from or on behalf of

applicants to whom they provide services; and prohibit title closers from receiving

any fee for remitting a payoff in refinancing transactions (in the case of

independent title closers), or any transaction whatsoever (in the case of title

closers employed by title insurance corporations). 11 N.Y.C.R.R. 228.5(d).

38. Upon announcing the final regulations, DFS issued a press release claiming that

the final regulations "[took] into consideration comments submitted during the comment period

regulations."for the proposed regulations."so DFS also issued an Assessment of Public Comments on

Insurance Regulation 208 that purported to address the comments it hadreceived.51 '

However,

the final regulations did not correct the sections of the regulations challenged here; indeed, in

some cases they created additional legal flaws:

• The final version of Section 228.2 added an enumerated list of traditional

marketing expenses that are prohibited by the section, as well as a list of expenses

that are permissible only if they satisfy certain conditions, including the vague

and ambiguous requirement that such expenses be "reasonable andcustomary"

and not "lavish or excessive";

• The final version of Section 228.5(a) was revised so that its price limits for

ancillary services apply only to residential, not commercial, transactions; and

• The final version of Section 228.5(d) was revised to allow independent closers to

collect pick-up fees in sales transactions, but it retained the proposed regulation's

prohibition on paying in-house closers the same fees for the same work, meaningthat the same services provided by in-house and independent closers are now

treated differently, in violation of Section 228.5(d)(2)'s requirement that "sellers

should be charged the same amounts for the sameservices."

The final version of

Section 228.5(d) retained the prohibition on pick-up fees for any closer in

refinancingtransactions.52transactions.

so see Ex. 13 (Department of Financial Services, DFS Announces Final Regulations to Combat UnscrupulousPractices in the Title Insurance Industry, Oct. 17, 2017).

51 see Ex. 6 (Department of Financial Services, Assessment of Public Comments on proposed new 11 NYCRR 228(Insurance Regulation 208)).

52 The final version of Section 228.3 also noted that companies could in theory "present reasonable data withactuarial support for the calculation of title rates that exclude" prohibited expenditures in ways other than byrestating expense schedules over the previous six years to exclude now-prohibited expenses. However, thisfails to provide a meaningful solution, because companies would in any event be forced to conduct a manual



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39. Insurance Regulation 208 took effect on December 18, 2017. Under Section

228.3(c), title insurance corporations are required to: (i) either affirm within 120 days of the

effective date of the regulations compliance over the previous six years with the newly instituted

expense prohibitions in Section 228.2, (ii) submit within 120 days of the effective date of the

regulations restated expense schedules for the previous six years excluding expenses newly

prohibited under Section 228.2 and submit within 180 days of the effective date of the

regulations a rate filing for the current period excluding expenses now prohibited under Section

228.2 and affirming that no such expenses were included in the filing, or (iii) submit within 180

days of the effective date of the regulations a rate filing providing for a uniform five percent

reduction in the base rate schedule for each category of policy. 11 N.Y.C.R.R. 228.3(c).

F. Petitioners Submit a FOIL Request Seeking Additional Public Comments, But DFS

Refuses to Timely Produce the Documents.

40. In order to further understand what information DFS relied upon in drafting the

final regulations, on November 28, 2017,Petitioners'

counsel submitted a Freedom of

Information Law request to DFS, requesting a copy of all public comments on Insurance

Regulation 208 from May 1, 2015 forward.53

41. On December 1, 2017, DFS sent a letter to counsel acknowledging receipt of the

FOIL request and stating that the request had been "referred to the appropriate DFS unit(s) to

search for the records that are responsive to yourrequest."

The letter stated that the "assigned

unit(s) will contact you within 20 business days to (i) advise whether the unit has any records

review of every expense item over the previous six years in order to provide the required data, which is not

practically feasible. When discussing herein the restatement of expense schedules, we mean to include thistheoretical (but not practically feasible) option of presenting data with actuarial support for the calculation oftitle rates that excludes prohibited expenditures.

53 Ex. 15 (Freedom of Information Law Request to DFS, Nov. 28, 2017).

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that are responsive to your request; (ii) grant or deny your request, if the unit has responsive

records; or (iii) apprise you of the progress of your request, if the search or review of the records

that you requested is still on-going."54

42. On January 2, 2018, DFS sent another letter to counsel stating:

DFS is unable to respond to your FOIL request within the original twenty-

day period specified in my previous correspondence. We are still in the

process of locating and gathering responsive records and will endeavor to

provide you the determination of your FOIL request by April 30, 2018.

However, if DFS is unable to complete its review by that time, you will then

be provided an update on the progress of your FOIL request.55

43. DFS did not explain why it would need until at least April 30, 2018-more than

five months after the initial FOIL request-to produce copies of public comments to Insurance

Regulation 208. Nor is there any conceivable, reasonable basis for this delay, or any

conceivable, reasonable basis to withhold the requested documents.

44. DFS's failure to provide the requested documents in a timely manner is indicative

of the absence of evidence and lack of basis in the record to support the challenged regulations,

and of DFS's awareness of these failings.

G. Petitioners and State Legislators Urge DFS to Reconsider Legally Flawed Elements

of Regulation 208 and Stay Implementation, But it Fails to Do So.

45. On November 29, 2017, representatives of NYSLTA met with officials at DFS to

reiterate their serious concerns with Insurance Regulation 208, and to request clarification and

reconsideration of the regulations by DFS. On December 12, 2017, DFS informed NYSLTA

that it was declining to reconsider the regulations.

54 Ex. 16 (DFS Response to FOIL Request, Dec. 1, 2017).

55 Ex. 17 (DFS Follow-Up Response to FOIL Request, Jan. 2, 2018) (emphasis added).



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businesses.

46. In December 2017, a number of New York state legislators-including the

chairmen of both the Senate and Assembly Insurance Committees-sent letters to

Superintendent Vullo requesting that DFS delay implementation of Insurance Regulation 208 in

light of serious concerns regarding the legal validity of the regulations and the impact that the

regulations would have on consumers and the title insurance industry, particularly small

businesses.56 Senator James L. Seward, Chairman of the State Senate Insurance Committee,

noted that the "title insurance industry is a very important business in New YorkState,"

which

"employ[s] thousands ofpeople,"

and "produces a very importantproduct"

that "allows people

to purchase homes with the repose of securetitle"

and "allows for complex commercial real

estate transactions that advance economic development, industry, and employment throughout

the state."57 Senator Seward noted concerns "that these regulations overreach [DFS's] statutory

authority"and "will have a myriad of significant, unintended consequences."58consequences."

Senator Seward

raised his concern "that Regulation 208 will lead to increased costs to consumers, disruption in

the real estate market, and [will] put thousands of small businesses at risk."59MOreOVer, he

noted that he has "seen no actuarial justification for the serious overreach that is contained within

Regulation208,"

and that "many of the actions that DFS now seeks to take in Regulation 208 are

measures which were originally advanced by thedepartment"

in past legislative negotiations,

56 see Ex. 18 (Letter from Assemblyman Edward C. Braunstein to Superintendent Vullo, Dec. 14, 2017); Ex. 19(Letter from Assemblyman Kevin A. Cahill to Superintendent Vullo, Dec. 11, 2017); Ex. 20 (Letter fromSenator Martin J. Golden to Superintendent Vullo, Dec. 13, 2017); Ex. 21 (Letter from Senator Todd Kaminskyto Superintendent Vullo, Dec. 13, 2017); Ex. 22 (Letter from Assemblyman Dan Quart to Superintendent Vullo,Dec. 12, 2017); Ex. 2 (Letter from Senator James L. Seward to Superintendent Vullo, Dec. 11, 2017).


58 Id.

59 Id. ;see also Ex. 20 (Letter from Senator.Senator Martin J. Golden to Superintendent Vullo, Dec. 13, 2017) at 1-2

(expressing concerns "that Regulation 208 will have a series of unintended consequences resulting in higher

costs for consumers, while creating havoc in the real estate market").



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promulgated."

"and which were expressly rejected at the negotiation table by theSenate"

and "omitted in the

finallegislation,"

raising "serious questions over the legal standing and authority upon which

Regulation 208 was promulgated."60Further, Senator Seward stated that "few, if

any"of the

public comments on Insurance Regulation 208 "were everaddressed"

in the final regulations, a

concern also raised by Senator Martin J. Golden, a member of the State Senate's Insurance

Committee.61Committee. Therefore, Senator Seward asked for a six month delay in implementation of

Insurance Regulation 208, and asked that prior to implementation, "the Department conduct an

actuarial study and provide a public report, demonstrating the need for theregulation,"

so that

the regulations "may preserve this important industry while providing the necessary consumer

protection as intended by thestatute."62

These concerns were echoed in letters from

Assemblyman Kevin A. Cahill, Chair of the State Assembly's Insurance Committee, and

Assemblyman Edward C. Braunstein.63Braunstein.

47. Assemblyman Dan Quart, chair of the state assembly's Regulations Review

Committee, noted that parts of Insurance Regulation 208 "are poorly conceived and require

further review beforeimplementation,"

and therefore requested a six month stay in the effective

date of theregulations.64regulations. Assemblyman Quart noted that "[a] number of

concerns"with the

regulations "have been raised by several legislative colleagues from bothhouses"

of the state

legislature, including questions of "how insurers and agents will be able to marketthemselves"

under the regulations, "whether insurers, agents and title closers will be able to cover their costs


61Id.; Ex. 20 (Letter from Senator Martin J. Golden to Superintendent Vullo, Dec. 13, 2017) at 1.


63 see Ex. 19 (Letter from Assemblyman Kevin A. Cahill to Superintendent Vullo, Dec. 11, 2017) at 1 ; Ex. 18(Letter from Assemblyman Edward C. Braunstein to Superintendent Vullo, Dec. 14, 2017) at 1.

64 Ex. 22 (Letter from Assemblyman Dan Quart to Superintendent Vullo, Dec. 12, 2017) at 1.



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due to the caps placed on certain categories of ancillary and discretionaryfees,"

and concerns

with "the requirement for insurers to restate six years of prior expenses and certify their

compliance with the new regulations or agree to implement a five percent rate reduction for all

categories of title insurance policies with no expiration date."65, 66

48. In response to thelegislators'

letters, DFS announced on December 19, 2017 that

it would not begin enforcing Section 228.2 until February 1, 2018. The remaining provisions of

Insurance Regulation 208, however, went into effect on December 18, 2017.

49. On January 12, 2018, the New York State Assembly Standing Committee on

Insurance held a public hearing on Insurance Regulation 208, to "evaluate whether the new title

insurance regulations are successfully lowering consumer costs while also ensuring that the title

insurance market remains healthy and competitive in New York State."67 At this public hearing,

members of the NYSLTA leadership, among others, provided critical testimony regarding the

serious concerns with Insurance Regulation 208 that had been raised previously on numerous

occasions by members of the industry and the legislature. DFS representatives were present at

the hearing, and testified as well.68well. '

50. On January 17, 2018,Petitioners'Petitioners counsel submitted a letter to DFS, detailing its

concerns with provisions of Insurance Regulation 208-including the deficiencies alleged

herein-and requesting that within 30 days, DFS expand the stay of implementation to cover the

65 Id.

66 The concerns and requests outlined above were echoed in a letter from Senator Todd Kaminsky. See Ex. 21(Letter from Senator Todd Kaminsky to Superintendent Vullo, Dec. 13, 2017) at 1.

67 Ex. 23 (Assembly Standing Committee on Insurance, Notice of Public Hearing, Dec. 21, 2017).

68 see Ex. 24 (Statement of Maria T. Vullo, Superintendent New York State Department of Financial ServicesPrepared for Delivery at Public Hearing: An Examination of Recent Title Insurance Regulation in New York

State, Albany, New York, January 12, 2018).



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,N ,Inc .N.Y.2.d

regulations in their entirety and to extend until June 30, 2018, or, in the alternative, that within

30 days DFS correct the deficiencies in the regulations identified in the letter.69letter.

51. DFS has not made any further changes to Insurance Regulation 208, and it has

allowed the prior voluntary cessation of Section 228.2 to lapse. As such, all provisions of

Insurance Regulation 208 are now in effect.

LEGAL STANDARD

52. Article 78 of the New York Civil Practice Law and Rules authorizes Petitioners to

bring this special proceeding to annul those portions of Insurance Regulation 208 that are

"arbitrary andcapricious,"

"made in violation of lawfulprocedure,"

or "affected by an error of

law,"or that constitute "an abuse of

discretion." CPLR 7803(1), (3). An Article 78 proceeding

is "the proper vehicle to determine whether a statute, ordinance, or regulation has been applied in

an unconstitutionalmanner."

Kovarsky v. Hous. & Dev. Admin. of N.Y., 31 N.Y.2d 184, 191

(1972). Courts will also consider facial constitutional challenges as part of an Article 78 action.

See, e.g., Wood v. Irving, 85 N.Y.2d 238 (1995).70

ARGUMENT

53. Many of the operative provisions of Insurance Regulation 208 are invalid. These

include:

• Section 228.2: The regulation's restrictions on ordinary, non-quid pro quo business

marketing expenses are inconsistent with Insurance Law § 6409(d) and are an

arbitrary and capricious reversal of agency precedent.

69 Ex. 25 (Letter from NYSLTA to DFS, Jan. 17, 2018).

70 To the extent the Court determines that any of Petitioners' claims are properly decided in a declaratoryjudgment action, it should "convert th[at] portion of the proceeding into a declaratory judgment action andproceed to the merits," without the need for the filing of a separate complaint. Choe v. Axelrod, 141 AD.2d

235, 238-39 (3d Dep't 1988); see also, e.g., N.Y. Pub. Interest Research Grp., Inc. v. Steingµt, 40 N.Y.2d 250,254 n.1 (1976) ("[W]e(" convert this case to an action for a declaratory judgment pursuant to CPLR 103 (subd

[c]) and proceed to a consideration of the merits."); Kovarsky, 31 N.Y.2d at 192 (finding error in lower court'sfailure to convert facial constitutional challenge to statute into declaratory judgment action).



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-Quo

-Ave.

• Section 228.3: The five percent reduction in premium rates improperly penalizes

Petitioners for conduct they had no fair notice would later be prohibited, is

inconsistent with the governing statute, and has no reasonable factual basis.

• Section 228.2(c): The regulation's restrictions on political contributions, charitable

donations, and advertising are unconstitutionally vague and violate the First

Amendment.

• Section 228.5(d): The prohibitions on pick-up fees for in-house closers in sales

transactions, and for all closers in refinancing transactions, are arbitrary and

capricious because they will have severe unintended consequences, and exceed DFS's

regulatory authority.

• Section 228.5(a): The price caps for ancillary services are arbitrary and capricious

because they are unreasonable and lack factual justification, and exceed DFS's

regulatory authority.

54. In addition, Insurance Regulation 208 is invalid in its entirety both because it is

improper regulatory policymaking that usurps the role of the legislature, and because DFS failed

to analyze the economic costs and impacts of the regulation, in violation of the State

Administrative Procedure Act.

55. For the reasons explained below, Insurance Regulation 208 must be annulled.

A. Insurance Regulation 208's Restrictions On Ordinary, Non-Quid Pro Quo Business

Marketing Practices (Sections 228.2(a) 4 (b)) Are Inconsistent With The GoverningStatute And Are A Sweeping Reversal Of Agency Precedent.

1. Section 228.2's prohibition of ordinary, non-quid pro quo business

marketing practices is inconsistent with Insurance Law § 6409(d).

56. "It is well established that in exercising its rule-making authority an

administrative agency cannot extend the meaning of the statutory language to apply to situations

not intended to be embraced within thestatute."

Trump-Equitable Fifth Ave. Co. v. Gliedman,

57 N.Y.2d 588, 595 (1982). "Nor may an agency promulgate a rule out of harmony with or

inconsistent with the plain meaning of the statutorylanguage."

Id.



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right"

57. The plain meaning of Insurance Law § 6409(d), which the new restrictions on

marketing expenses in Section 228.2 purport to interpret-but in fact apply to "situations not

intended to be embraced by thestatute,"

Trump-Equitable Fifth Ave., 57 N.Y.2d at 595-is that

it prohibits only quid pro quo"inducement[s]"

given in exchange for "title insurancebusiness."

Specifically, the statute states that "[n]o title insurance corporation, title insurance agent, or any

other person acting for or on behalf of the title insurance corporation or title insuranceagent"

may offer or give a title insurance applicant or anyone with an interest in real property, "directly

or indirectly, any rebate . . . , or pay or . . . commission, [or] any part of its fees or charges, or

any other consideration or valuable thing, as an inducement for, or as compensation for, any

title insurancebusiness,"

nor may any applicant or anyone with an interest in real property

"knowingly receive, directly or indirectly, any such rebate or other consideration or valuable

thing."Ins. Law § 6409(d) (emphasis added).

58. Courts interpreting similarly worded anti-inducement statutes have read them to

require a quid pro quo exchange. For example, the U.S. Supreme Court has interpreted the anti-

extortion provisions of the Hobbs Act, 18 U.S.C. § 1951-under which"extortion"

is defined as

"the obtaining of property from another, with his consent, induced by wrongful use of actual or

threatened force, violence, or fear, or under color of official to incorporate a "quid pro

quo requirement forconviction."

Evans v. United States, 504 U.S. 255, 268 (1992). As Justice

Kennedy's concurrence explained: "Something beyond the mere acceptance of property from

another is required, . . . or else the word'induced'

would be superfluous. That something, I

submit, is the quid proquo."

Id. at 273 (Kennedy, J., concurring in part and concurring in the

judgment). Thus, the statutory requirement that there be an"induce[ment]"

generates a

"requirement of a quid proquo."

Id. at 274. New York courts have interpreted anti-inducement



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("

statutes in the same manner. See, e.g., In re Shay, 133 A.D. 547, 551-52 (1st Dep't 1909)

(construing anti-inducement statute applicable to attorneys), aff'd, 196 N.Y. 530 (1909).

59. This interpretation accords with the plain meaning of the word"inducement,"

defined as "a pledge or promise that causes an individual to enter into a particularagreement,"

Gale Encyclopedia of American Law, 3d ed. (2010)-here, an exchange of something of value

for a promise to use a particular title insurance corporation or agent for a specific transaction.71

Thus, as § 6409(d) itself makes clear, without the thing of value being exchanged "for [] title

insurancebusiness,"

there is no impermissible inducement or compensation. This is the

definition of a quid pro quo. See Black's Law Dictionary, 6th ed. (1990) quid proquo"

is the

"[g]iving of one valuable thing for another").

60. Numerous formal opinions by the DFS Office of General Counsel have confirmed

that, by the plain terms of the statute, Section 6409(d) permits ordinary marketing and

entertainment expenses, so long as there is no quid pro quo arrangement. See, e.g., OGC

Opinion Nos. 2002-290 (Nov. 13, 2002), 2005-284 (Nov. 10, 2005), and 11-05-04 (May 31,

2011). For example, in the May 31, 2011 opinion, the DFS Office of General Counsel concluded

that the proposed referral relationship would be unlawful under Section 6409(d) based on a "quid

pro quo, whereby attorneys that do not make the referral quota are removed from thelist"

of

"pre-approved"or

"recommended"attorneys. OGC Opinion No. 11-05-04 (May 31, 2011).

Similarly, in OGC Opinion No. 2002-290 (Nov. 13, 2002), DFS explained that a proposed

practice under analogous N.Y. Ins. Law §§ 2324 & 4224 barring inducements was permissible

because it "does not, as a practical matter, function as an inducement to purchase or retain

71 The only difference between giving an "inducement" for title insurance business and "compensation" for that

business, both barred by Section 6409(d), is that an "inducement" is a transfer by a title insurance corporation oragent of something of value in exchange for an agreement to use that company, while "compensation" ispayment after-the-fact for that business.



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insurance thereis no quid proquo"

(emphasis added). Indeed, the former Superintendent of

Insurance for the State of New York, Gregory V. Serio, has attested that "[s]ince the enactment

of Insurance Law ( 6409(d) in 1984, that statute has been correctly applied by DFS as

specifically prohibiting the exchange of value in return for the purchase of a policy as an illegal

quid pro quo.

61. The title insurance industry has reasonably relied on this interpretation for years.

In fact, DFS previously advocated for the legislature to adopt a broader definition of prohibited

activities under Insurance Law $ 6409(d) during negotiations over Chapter 57 of the Laws of

2014, which shows that DFS itself well understood that the statute as currently drafted did not

cover those broader set of marketing activities; such measures were "expressly rejected at the

negotiation table by the Senate, and... omitted in the finallegislation."

62. Against this backdrop, DFS improperly uses Section 228.2 to rewrite the statute

by prohibiting any consideration or valuable thing... as an inducement for any title insurance

business... regardless of whether provided as a quid pro quo for specificbusiness."

Section

228.2(a) (emphasis added). The regulations then set out a detailed list of prohibited marketing

activities all traditional, ordinary marketing practices that do not involve any quid pro quo and

that have long been permitted in this industry. These include providing"entertainment"

to a

potential client, such as "tickets to sporting events";"outings,"

such as "golf, ski, fishing, and

other sport outings";"parties,"

including "cocktail parties and holiday parties [and] open

houses"; and most "[m]eals andbeverages."

Section 228.2(b)." These new restrictions are all

Serio Aff. $ 13.

Hughes Aff. tttt 25-26; Willen Aff. tt 8; Frates Aff. tt 5.

Ex. 2 (Letter from Senator James L. Seward to Superintendent Vullo, Dec. 11, 2017) at 2.

Section 228.2 also bars "advertising or marketing in any publication, or media," "charitable contributions,"

"political contributions," and various other marketing activities that are not in DFS's view "reasonable and



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entirely inconsistent with Section 6409(d)'s requirement that marketing activities are only

impermissible if they are a quid pro quo"inducement"

for title insurance business.76

63. In its purported Assessment of Public Comments on Insurance Regulation 208,

DFS is transparent about the fact that Section 228.2 expands Section 6409(d) to circumstances in

which there is no "explicit quid pro quo for a particular piece of business."77 DFS casts the

regulation as merely"clarify[ing]"

the statute's reach, id., but Section 228.2 in fact stretches the

statute far beyond its plain meaning by prohibiting all manner of ordinary marketing practices (as

well as"excessive"

media advertising and charitable and political contributions) in the absence

of a quid pro quo inducement. As former Superintendent Serio has attested, the regulation thus

"throws out the plain meaning of Section6409(d),"

and represents an improper "attempt to

assume regulatory authority that goes beyond any statutorymandate."" This "exercise[e of] its

rule-making authority . . . [to] extend the meaning of the statutory language to apply to situations

not intended to be embraced within thestatute,"

via a rule that is "inconsistent with the plain

meaning of the statutorylanguage,"

is arbitrary and capricious. Trump-Equitable Fifth Ave. Co.,

57 N.Y.2d at 595. Section 228.2 is therefore invalid.

customary" or are "lavish or excessive." Section 228.2(c). These restrictions are inconsistent with § 6409(d) in

imposing no quid pro quo requirement. In addition, as explained below, Section 228.2(c)'s limitations are

unconstitutionally vague and violate Petitioners'Petitioners First Amendment Rights. See infra Pt. C.2.

76 Section 228.2 also prohibits title insurance corporations and agents from incurring other ordinary, non-quid proquo expenses, including "[a]dvertising or marketing in any publication, or media," charitable contributions, andpolitical contributions, where such expenses are, in DFS's view, "lavish or excessive," or not "reasonable andcustomary." These restrictions are entirely inconsistent with Section 6409(d) for the same reason.

77 Ex. 6 (Department of Financial Services, Assessment of Public Comments on proposed new 11 NYCRR 228(Insurance Regulation 208), Oct. 20, 2017) at 3-4.

78 Serio Aff. ¶¶ 17-18.

1



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2. DFS's new interpretation of Insurance Law § 6409(d) is an arbitraryand capricious reversal of longstanding agency precedent.

64. Section 228.2 prohibits traditional marketing expenditures, such as meals and

entertainment, which are crucial to title insurance corporations andagents'agents ability to compete,

survive and grow, without regard for whether such expenditures amount to quid pro quo-that is,

whether the expenditures were made in exchange for title insurance business. It thus expands the

scope of § 6409(d) to situations that the DFS Office of General Counsel itself has repeatedly

found to be valid under the plain meaning of the statute.79

65. Agency action is arbitrary and capricious when it "fails to conform to prior

administrativeprecedent,"

unless the deviation is adequately explained. Engel v. Sobel, 161

A.D.2d 873, 874 (3d Dep't 1990); see also Matter of Hilton Hotels Corp. v. Comm'r of Fin. of

the City of N.Y., 219 A.D.2d 470, 477-78 (1st Dep't 1995) (annulling determination where

agency applied a new interpretation of a statute retroactively); Matter of Menachem Realty, Inc.

v. Srinivasan, 60 A.D.3d 854, 856 (2d Dep't 2009) (annulling determination where agency

"failed to adhere to its ownprecedent"

or adequately explain its decision not to do so). An

action by an administrative agency is also arbitrary and capricious "when it is taken without

sound basis in reason or regard to thefacts."

Ward v. City of Long Beach, 20 N.Y.3d 1042, 1043

(2013) (quoting Peckham v. Calogero, 12 N.Y.3d 424, 431 (2009)); see also, e.g., Jewish Mem'l

Hosp. v. Whalen, 47 N.Y.2d 331, 343 (1979).

66. The DFS Office of General Counsel has made clear in numerous formal opinions

and other writings over a period of many years that the language of Insurance Law § 6409(d)

forbidding title insurance corporations and agents from providing consideration "as an

79 See infra n. 80.



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inducement for, or as compensation for, any title insurancebusiness,"

permits ordinary

marketing and entertainment expenses so long as there is no quid pro quo arrangement.80arrangement. The

industry has reasonably relied upon this understanding over many years. In promulgating

Insurance Regulation 208, DFS has "fail[ed] to conform to prior administrativeprecedent,"

without adequate explanation for its shift. Engel, 161 A.D.2d at 874; see also Menachem Realty,

Inc., 60 A.D.3d at 856.

67. DFS's assertion in announcing the final regulations that Section 228.2 was

intended only to"[c]larify"

that "the New York anti-inducement statute is not limited to

situations in which there is a direct quid pro quo forbusiness"

cannot withstandscrutiny.81scrutiny.

'This

supposed clarification of the meaning and scope of the statute is directly contrary not only to the

plain meaning of the statute, but to DFS's own precedent as expressed in prior OGC opinions.

68. Section 228.2 is also arbitrary and capricious because it will unreasonably hamper

the ability of title insurance corporations and agents to compete, survive and grow, without

justification. Title insurance corporations and agents must regularly solicit new business

relationships and maintain their existing client relationships to survive andgrow.82 Trust in

agents'agents ability, knowledge, and experience can only be achieved by agents meeting and spending

80 See, e.g., Ex. 3 (OGC Opinion Nos. 11-05-04 (May 31, 2011) (finding that proposed referral relationship wouldbe unlawful under Section 6409(d) because there is a "quid pro quo, whereby attorneys that do not make thereferral quota are removed from the list" of "pre-approved" or "recommended"

attorneys) (emphasis added);2005-284 (Nov. 10, 2005) (stating that Section 6409(d) prohibits title insurance corporations from giving "anyrebate, consideration or other valuable thing, directly or indirectly"

only "if such remuneration constitutes,

among other things, an inducement for, or compensation for, any title insurance business," such as where themembers of a real estate board are given "consideration or valuable thing, or . . . preferential treatment, for

using [a particular] title agency to obtain title insurance"); and 2002-290 (Nov. 13, 2002) (finding proposedpractice permissible under analogous N.Y. Ins. Law §§ 2324 & 4224 barring inducements because it "does not,as a practical matter, function as an inducement to purchase or retain insurance-there is no quid pro quo"

(emphasis added)).

81 See Ex. 13 (Department of Financial Services, DFS Announces Final Regulations to Combat UnscrupulousPractices in the Title Insurance Industry, Oct. 17, 2017).

82 Hughes Aff. ¶ 28-29.



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("â€”

time with clients and prospective clients.83clients. Eliminating title insurance corporations andagents'

ability to discuss real estate topics over breakfast, lunch, dinner, or a quick cup of coffee

eliminates the most important marketing tool they have-personal interaction with clients and

prospectiveclients.84clients. By disallowing routine and reasonable marketing and entertainment

practices, Section 228.2 undercuts title insurance corporations andagents'agents ability to grow their

businesses and compete.

69. Section 228.2's marketing restrictions will have a particularly negative effect on

small title insurance corporations and agents by preventing such businesses from effectively

marketing their skills and expertise in the small group or individual settings that are crucial to

building relationships and attracting new clients.85Indeed, as explained in the expert report of

Dr. Nam D. Pham, "New York State title insurance agents do not spend excessively on

marketing,"as "the typical title insurance agency in New York spends between 2% and 5% of

gross revenue on marketing expenses, and many spend less than 2%."86They are therefore lower

than guidelines from the U.S. Small Business Administration suggesting that small businesses

with revenue less than $5 million, which represents the majority of title insurance agents, should

allocate between 7% and 8% of their revenue to marketing.

70. DFS has presented no data or other evidence justifying broad restrictions on

ordinary marketing expenses. As discussed in the Pham Report, the marketing restrictions have

no statistical or economic rationale, and "DFS has failed to provide statistical data that would

83 Willen Aff. ¶ 6-7 ("There is no quid pro quo or inducement involved in such marketing events; rather, suchevents provide an opportunity for title insurance companies to develop relationships with potential clients.").

84 see Hughes Aff. ¶ 27, 29.

85 see Hughes Aff ¶ 31.

86 Pham Report at 8.



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justify the regulations."87 Nor does it make any sense from a public policy perspective for DFS

to ban outright a broad set ordinary marketing practices that have long been permitted in this and

many other industries, including providing "tickets to sporting events";"outings,"

such as "golf,

ski, fishing, and other sport outings";"parties,"

including "cocktail parties and holiday parties

[and] open houses"; and most "[m]eals andbeverages."

Section 228.2(b). For all of these

reasons, the marketing restrictions imposed by Section 228.2 are arbitrary and capricious.

B. The Five Percent Reduction In Premium Rates (Section 228.3) Is Impermissibly

Retroactive, Inconsistent with the Governing Statute, and Arbitrary and

Capricious.

1. The five percent reduction in premium rates violates Petitioners' Due

Process rights because it penalizes Petitioners for conduct they had no

fair notice would later be prohibited.

71. Under the Constitutions of the State of New York (Art. I, § 6) and the United

States of America (Amend. XIV), Petitioners are entitled to due process of law before they are

deprived by a governmental entity of life, liberty, or property. The Due Process Clause "protects

the interests in fair notice and repose that may be compromised by retroactivelegislation."

Landgraf v. USI Film Prods., 511 U.S. 244, 266-67 (1994). As such, Due Process is denied

where, as here, the agency's "policy in place at the time . . . gave nonotice"

that the regulated

party could later be penalized for the conduct at issue. Fox Television Stations, 567 U.S. at 254;

accord Bartko v. SEC, 845 F.3d 1217, 1222-23 (D.C. Cir. 2017) (invalidating "impermissibly

retroactivepenalty"

premised on conduct permitted at the time); cf People v. Bright, 71 N.Y.2d

376, 379 (1988) (statute violated due process where it "fail[ed] to give fair notice to the ordinary

citizen that the prohibited conduct is illegal").illegal"

87 Id. ag 16.



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("

("â€”

72. Section 228.3 (11 N.Y.C.R.R. 228.3) effectively mandates that title insurance

corporations and agents accept an across-the-board five percent reduction in premium rates based

on conduct-marketing activities over the past six years-that were permitted under the statute

and agency policy at the time they were conducted. Only through Insurance Regulation 208 has

the agency reversed its interpretation of Section 6409(d), without fair notice, to penalize the

entire industry for those previously permitted activities. This is clearly an impermissible,

retroactive penalty.

73. Specifically, Section 228.3 requires title insurance corporations to either: (a)

"affirm in writing to thesuperintendent"

that no expense schedule submitted in the previous six

years contains "anyexpenditure"

that is not "in accordancewith"

Section 228.2's new

restrictions on marketing expenses; (b) submit re-stated expense schedules covering the previous

six years "that exclude the expenditures prohibited by [section 228.2]"; or (c) or "submit a rate

filing . . . which provides for a uniform five percent reduction in the base rate schedule for each

category ofpolicy"

on a going-forward basis.

74. As DFS well knows, options (a) and (b) are a practical impossibility.88impossibility. Title

insurance corporations did not collect, and do not maintain, records concerning expenses that

would practically enable them to restate the previous six years of expense schedules to omit any

now-prohibited marketingexpenditureS.89 Companies collected data, and maintained their

records, in accordance with the categories of permitted expenditures at the time; they had no way

88 Martinico Aff. ¶ 4 ("Section 228.3 does not actually provide a choice; instead, it effectively mandates a fivepercent reduction in premium rates.").

89 See, e.g., Affidavit of Erik Deppe, Feb. 16, 2018, ¶¶ 5-9; Frates Aff. ¶¶ 4-6 ("Stewart Title does not maintainrecords that would allow them to either restate past expense schedules or affirm that no now-prohibitedexpenses were made without conducting a manual review of every expense item over the previous six years,which is not practically feasible. This is because our data collection practices were not designed to separate outexpenses that were previously permissible but are now prohibited by Section 228.2.").



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("

customary'

of knowing Department would later reverse its policy with respect to these expenditures,

requiring them to maintain their records differently.90differently. Removing past expenses that are now

impermissible under Section 228.2 would therefore "require a manual review of every expense

item over the previous sixyears,"

which is not practically feasible-certainly not "within 120

days"of the regulation's effective date, as required under Section 228.3(c)(1)(ii).91 Nor can

companies certify that no now-prohibited expenditures were included in past filings because they

certainly were included; title insurance corporations and agents appropriately engaged in the

ordinary marketing and advertising practices that are now prohibited.

75. Companies will thus have no choice but to accept the five percent reduction in

premium rates as a direct result of recordkeeping practices and marketing activities over the past

six years that were permitted at the time, but are now prohibited under DFS's novel

interpretation of Section 6409(d). Once rates have been reduced, that five percent rate reduction

will be rolled over indefinitely into future years, causing continuing harm to title insurance

corporations and agents for the foreseeable future.92 The entire industry will be punished

indefinitely based on conduct that it did not have fair notice at the time would later be penalized.

This is a violation of due process. See Fox Television Stations, 567 U.S. at 254-57 (lack of due

90 Deppe Aff. ¶ 6; Hughes Aff. ¶ 40 ; see also Ex. 26 (excerpt of Data Call input spreadsheet including broadexpense categories such as "Advertising" and "Marketing and Promotional Expenses").Expenses"

91 FrateS Aff. ¶ 5 ; see also Deppe Aff. ¶¶ 6-8 ("We have determined that a manual review of six years' worth ofexpenses would require several years of work."). Moreover, even if title insurance corporations could feasiblyreview their expense data for the previous six years in the time allotted, they "ha[ve] no way of knowing what isprohibited under Section 228.2's requirement that 'advertising or marketing in any publication, or media,'

'charitable contributions,' and 'political contributions' be 'reasonable and customary' and not "lavish orexcessive." It is simply not possible for companies to "know with any degree of certainty whether DFS willconsider a given advertising or marketing expense, political contribution, or charitable contribution 'reasonableand and therefore 'permissible' under Section 228.2-or unreasonable, not customary,

'lavish' or'excessive,' and therefore 'prohibited.'" Frates Aff. ¶ 7 ; see also infra Pt. C.1 (discussing Section 228.2(c)'sunconstitutional vagueness).

92 While DFS could in theory permit periodic rate increases, it has instead approved "cut[s] [in] the rates for titleinsurance twice over the last dozen years-in 2006 and 2017." Martinico Aff. ¶ 8.



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process where agency's "interpretation hadchanged"

without "affirmativenotice,"

and company

was penalized for prior conduct under new standard). Section 228.3 is therefore "impermissibly

retroactive,"invalid, and unenforceable. Koch v. SEC, 793 F.3d 147, 158 (D.C. Cir. 2015).93

2. Section 228.3 is inconsistent with the governing statute because it sets

rates that are not based on a statistical analysis of actual past

expenses.

76. Under Article 23 of the Insurance Law, DFS has licensed the Title Insurance Rate

Service Association, Inc. ("TIRSA") as a rate service organization. TIRSA also functions as the

statistical agent for DFS. As the statistical agent for DFS, TIRSA receives, compiles, and

submits all statistical data regarding revenue, losses, and expenses on behalf of the title insurance

industry in the state of New York. The title insurance industry provides data to TIRSA pursuant

to an annual "datacall"

approved by DFS, detailing, inter alia, loss experience and expenses

incurred. As a rate service organization, TIRSA submits rate filings on behalf of its members

that have chosen to delegate their rate filing obligation to TIRSA pursuant to Insurance Law

§ 2306.

77. A rate service organization is required to considerinsurers'

"past and prospective

lossexperience,"

as well as "past and prospectiveexpenses"

incurred by insurers, Ins. Law

§ 2304(a), and the "reporting of expenseexperience"

must be done pursuant to "[s]tatistical

plans andrules,"

id. § 2315. After conducting a rate review, and when supported by statistical

data that it has received, TIRSA submits proposed rate filings to DFS on behalf of its members.

DFS reviews this submission and approves or rejects rate filingsaccordingly.94accordingly. Id. § 2305(b).

93 Nor does any statute authorize DFS to promulgate such a retroactive regulation. See Bowen v. GeorgetownUniv. Hosp., 488,488 U.S. 204, 208 (1988).(1988) ("[A] statutory grant of legislative rulemaking authority will not, as ageneral matter, be understood to encompass the power to promulgate retroactive rules unless that power isconveyed by Congress in express terms.").

94currently, two title insurers in New York have chosen not to delegate their rate filing obligation to TIRSA;these companies independently submit rates to DFS.



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By statute, premium rates shall not be "inadequate, unfairly discriminatory, destructive of

competition or detrimental to the solvency ofinsurers."

Id. § 2303.

78. As NYSLTA's independent economics expert has explained, the five percent rate

reduction chosen by DFS is not backed by any statistical analysis, and is not based on title

companies'actual past and prospective expenses.95expenses. ' The five-percent reduction will also render

the premium rates"inadequate"

relative to the industry's actual expenses, and fails to account for

the impact of reduced premium rates on the solvency of insurers, in contravention of the

statutory mandate to DFS. Ins. Law. § 2303.

79. By failing to incorporate the industry's actual expenses and any statistical

analysis, the five percent rate reduction is "out of harmony with [and] inconsistent with the plain

meaningof"of the statute governing rate determinations. Trump-Equitable Fifth Ave. Co., 57

N.Y.2d at 595. This will be true not only in the initial year after the reduction takes effect, but

also with respect to premium rates in all future years that incorporate the initial five percent rate

reduction-that is, indefinitely. Section 228.3 is thus arbitrary, capricious, and unenforceable.

3. Section 228.3 is arbitrary and capricious because it imposes a severe

penalty on the title insurance industry without sufficient justification.

80. An action by an administrative agency is arbitrary and capricious, and shall be

invalidated, "when it is taken without sound basis in reason or regard to thefacts."

Ward, 20

N.Y.3d at 1043. The five percent figure selected by DFS is untethered to any analysis of

industry expenses or other data, and because DFS "has failed to provide statistical analysis

justifying the five percentreduction,"

the five percent reduction "likely differs markedly from

95 Pham Report at 16; see also Martinico Aff. ¶ 6 ("DFS has effectively imposed a five percent reduction inpremium rates on the assumption that this figure accurately approximates the amount of now-prohibitedexpenses incorporated into past rate filings, without provided any statistical analysis, evidence, or data

supporting that figure").



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expenses."title

companies'actual past and prospective expenses."96

Instead, DFS has asserted in a

conclusory manner that it approximates the percentage of title company revenue spent on now-

prohibited marketing activities under Section 228.2.97 But the available data suggests otherwise:

Dr. Pham has determined that "the typical title insurance agency in New York spends between

2% and 5% of gross revenue on marketing expenses, and many spend less than 2%."98 And that

is the total amount spent on marketing expenses; the amount spent only on now-prohibited

expenses is a fraction of that. There is also "no basis for DFS to imply that one dollar of

marketing expenses translates directly dollar-for-dollar with premium rates for consumers, and

therefore a 5% reduction in premiums cannot be justified by an unsupported assertion that 5% of

past marketing expenses were improper."99

81. DFS's conclusory assertion that the rate reduction is necessary to counter

inappropriately high marketing expenditures is also without factual basis. Indeed, Dr. Pham has

found that the marketing expenses of the typical title insurance agency in New York State is

"substantially lower than the 7%-8% guidelines suggested by the U.S. Small Business

Administration (SBA) for small businesses."100Moreover, "[b]y banning certain marketing

expenses that DFS now views as improper, the regulations ensure that subsequent rate filings by

title insurance companies, from which premium rates are calculated, will not include such

96 SeriO Aff. ¶ 26.

97 see Ex. 24 (Statement of Maria T. Vullo, Superintendent New York State Department of Financial ServicesPrepared for Delivery at Public Hearing: An Examination of Recent Title Insurance Regulation in New York

State, Albany, New York, January 12, 2018).


99 Id. at _16-17.

Id.



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("

expenses. Therefore, additionally imposing a 5% premium reduction will arbitrarily reduce

premium rates that will not incorporate any improper expenses."101

82. The five percent reduction in premium rates will, moreover, have significant

adverse consequences. There can be no doubt that it will drive small companies out of business,

force companies to lay off employees, and result in wage reductions and cutbacks in benefits for

workers.102 For some industry participants, the five percent reduction in rates will prevent them

from providing certain services to consumers whatsoever, such as title insurance for refinancing

transactions, harming consumers who will have no choice but to rely on national or international

providers that lack expertise in the New York market.103 ' As a result of the five percent reduction

in title insurance corporations andagents'

premium revenue, combined with the effects of the

other provisions of Insurance Regulation 208, the net income of title insurance corporations and

agents will be reduced by over 40 percent.104 This significant decline in net income will force

smaller title insurance corporations and agents, who face more severe negative impacts than

larger companies due to economies of scale, to go out of business.¹°5 Section 228.3 will cause

these severe harms without any factual justification for this significant penalty, or for the five-

percent figure chosen by DFS. The rate reduction is accordingly"unsupported,"

"without

101 Id. at 16.

102 Willen Aff. ¶ 21 ("The further five percent reduction effectively mandated by Section 228.3 will simply be toomuch to bear for many companies. The significant reduction in premium rates will lead to job losses and paycuts at title insurance agencies.").

103 Frates Aff. ¶ 11 (noting that if New York companies are forced to close, "consumers will suffer from a lack oflocal expertise, as more business will go to out of state companies that provide title insurance servicesremotely,"

reducing "the ease and efficiency with which consumers are able to complete real estatetransactions").

lo4 Pham Report at 2-3.

105 Iy

1



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rational basis and whollyarbitrary,"

and must be set aside. Jewish Mem'l Hosp., 47 N.Y.2d at

343.

C. The Restrictions on Political Contributions, Charitable Donations, And Advertising(Section 228.2(c)) Are Impermissibly Vague and Violate The First Amendment.

1. Section 228.2(c)'s restrictions on political contributions, charitable

donations, and advertising are unconstitutionally vague.

83. Section 228.2(c) (11 N.Y.C.R.R. 228.2(c)) requires that title insurance

corporations'and

agents'"[a]dvertising or marketing in any publication, or

media,"their

charitable contributions, and their political contributions be "reasonable andcustomary"

and not

"lavish or excessive."106 These requirements are extraordinarily vague and ambiguous, and fail

to provide individuals in the industry with reasonable notice of what is prohibited, as individuals

subject to the regulation have no way of knowing what DFS will consider to be "reasonable and

customary"and not "lavish or

excessive" expenses.107 '


States of America (Amend. XIV), Petitioners are entitled to due process of law before they are

deprived by a governmental entity of life, liberty, or property. "[T]he constitutional requisite

that a statute be informative on its face to assure that citizens can conform their conduct to the

dictates of thelaw"

is "the first essential of due process oflaw."

People v. N.Y. Trap Rock

Corp., 57 N.Y.2d 371, 378 (1982) (citations and quotation marks omitted). Due process is thus

violated where a law is "so vague that it fails to give ordinary people fair notice of the conduct it

punishes, or so standardless that it invites arbitraryenforcement."

Johnson v. United States, 135

106 In addition to being unconstitutionally vague, DFS lacks statutory authority to regulate the size of title insurers'

political contributions. See Serio Aff. ¶ 20-21 ("Based on my experience in New York government, it is clearthat the legislature has structured our laws such that political contributions are limited by the election law, notthe insurance law. Consequently, Section 228.2 of the subject regulation is promulgated in excess of the

statutory authority of DFS.").

107 Deppe Aff. ¶ 10.



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("â€”

customary'

S. Ct. 2551, 2556 (2015); Bright, 71 N.Y.2d at 382. New York courts do not hesitate to find

regulations and ordinances unconstitutionally vague where they fail to provide fair notice of the

conduct proscribed or are susceptible to arbitrary enforcement. See, e.g., Bakery Salvage Corp. v

City of Buffalo, 175 A.D.2d 608, 609-10 (4th Dep't 1991).

85. As the Supreme Court has explained, a regulation violates due process where, as

here, individuals "of common intelligence must necessarily guess at its meaning and differ as to

itsapplication."

Keyishian v. Bd. of Regents of Univ. of State of N.Y., 385 U.S. 589, 604

(1967).108 Because title insurance corporations and agents have no way of knowing what DFS

will consider to be "reasonable andcustomary"

and not "lavish orexcessive"

expenses under

Section 228.2-particularly because what may be"lavish"

in the eyes of a title insurance

corporation or agent focusing on small residential transactions is likely far different than for a

corporation or agent focusing on large commercial transactions-the limitations are

unconstitutionally vague and ambiguous. See, e.g., Kolender v. Lawson, 461 U.S. 352, 359-61

(1983) (statute requiring that suspects provide a "'credible andreliable'

identification that carries

a 'reasonableassurance'

of its authenticity, and that provides 'means for later getting in touch

with the person who has identifiedhimself,'"

was "unconstitutionally vague on its face because

it encourages arbitrary enforcement by failing to describe with sufficient particularity what a

suspect must do in order to satisfy thestatute"

(emphasis added)). Indeed, a single, good faith

error in predicting what the State will consider to be a"reasonable"

or"excessive"

expense could

open the door to prosecution.

108 Frates Aff. ¶¶ 7-9 ("It is simply not possible for Stewart Title or others in the industry to know with any degreeof certainty whether DFS will consider a given advertising or marketing expense, political contribution, orcharitable contribution 'reasonable and and therefore 'permissible' under Section 228.2-or

unreasonable, not customary,'lavish,' or 'excessive,' and therefore 'prohibited."').



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86. Moreover, the limitations invite arbitrary enforcement: the State may seek to

impose criminal penalties for what it later determines on a case-by-case, standardless basis are

"excessive"or not

"customary"expenses or certifications, even if the industry engages in a good

faith effort to comply.109 In particular, Section 228.3 prohibits title insurance corporations and

agents from including any "prohibited . . .expenditure"

in its "expense schedules reporting title

expenses,"and requires that each title insurance corporation and agent "affirm in

writing"on an

annual basis that "its expense schedules do not include any expenditure that isprohibited"

by

Insurance Regulation 208. This certification carries with it potential criminal liability as a false

filing to the State. See, e.g., N.Y. Penal Law § 175.30. And it will be impossible for these vague

standards to be applied uniformly across every expense from every title insurance corporation

and agent in the industry. Due process does not permit the State to place an entire industry under

the cloud of criminal suspicion based on vague standards of conduct that are susceptible to such

arbitrary enforcement. See Keyishian, 385 U.S. at 604. Section 228.2 and the related reporting

obligations of Section 228.3 are therefore unconstitutional, invalid, and unenforceable.

2. Section 228.2(c)'s restrictions on political contributions, charitable

donations, and advertising violate Petitioners' First Amendment

Rights.


States of America (Amend. I), Petitioners are entitled to freedom of speech, and no law shall be

passed to abridge that right. Limitations on political"contribution[s]"

are permitted only where

"the Government demonstrates that the limits are closely drawn to match a sufficiently important

interest,"such as preventing

"corruption"or the appearance of corruption. Randall v. Sorrell,

548 U.S. 230, 247, 253 (2006) (plurality op.) (quotation marks omitted) (holding contribution

109See, e.g., N.Y. Insurance Law § 109(a); see also Frates Aff. ¶ 8; Deppe Aff. ¶¶ 10-11.



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â€”

limit violated the First Amendment). Moreover, laws that "sweep[] broadly to curtail the

donativeimpulses"

of potential charitable donors, "and, conversely, to curtail the ability of many

organizations to solicit and receive candidatedonations,"

are "on a collision course with the First

Amendment."Florida Right to Life, Inc. v. Lamar, 273 F.3d 1318, 1325-26 (11th Cir. 2001)

(finding such a restriction on charitable giving facially unconstitutional). Generally, commercial

speech that "is neither misleading nor related to unlawfulactivity"

may be restricted only where

the government asserts "a substantial interest to be achieved by restrictions on commercial

speech,"and the restrictions are "in proportion to that

interest."Cent. Hudson Gas & Elec.

Corp. v. Pub. Serv. Comm'n of New York, 447 U.S. 557, 564 (1980) (finding regulation

restricting certain promotional advertising unconstitutional); accord, e.g., Matter of von Wiegen,

63 N.Y.2d 163, 170-71 (1984) (advertising is a "form of commercial speech subject to First

Amendment protection"; courts must therefore "assess the validity of the regulation [of

advertising] by carefully balancing the First Amendment interest at stake with the public interest

allegedly served by the regulation");regulation"

Matter of Koffler, 51 N.Y.2d 140, 146-47 (1980).

88. Section 228.2(c) limits and chills political contributions, charitable donations, and

communicative advertising and marketing in "any publication, or eachmedia"

bedrock

categories of protected speech-by barring any such expenditures that are not "reasonable and

customary,"or that are "lavish or

excessive"(whatever those terms mean in the context of

advertising, political contributions and charitable donations, which is entirely unclear). The

regulations and related materials make no finding whatsoever that restrictions on political and

charitable contributions and media advertising are necessary to advance a significant government

interest-or any government interest. DFS has provided no basis for singling out the title

insurance industry in order to restrict itsmembers'

First Amendment right to support candidates



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and charities of their choosing (subject to otherwise applicable campaign finance laws), or to

advertise and market their services to potential customers in publications and other media outlets

(subject to otherwise applicable restrictions on deceptive advertising and quid pro quo offers).

Moreover, because these terms are vague and ambiguous, individuals and companies subject to

Section 228.2 will be forced to effectively self-censor to avoid inadvertently violating the

regulation, chilling protected speech. See FCC v. Fox Television Stations, Inc., 567 U.S. 239,

253-4 (2012) ("When("

speech is involved, rigorous adherence to [the non-vagueness]

requirements is necessary to ensure that ambiguity does not chill protected speech.")¹¹0

89. While DFS has made broad assertions about improprieties related to marketing

activities in the title insurance industry based on anecdotal evidence from a very small number of

actors, it has never suggested-let alone pointed to evidence-that title insurance corporations

and agents are misusing political or charitable donations, or advertising in publications and other

public media, for some improper purpose. Without evidence of corruption or some other serious

harm caused by the industry by means of political or charitable donations, or media advertising,

DFS cannot justify the restrictions imposed by Insurance Regulation 208 on these protected

forms of expression. See, e.g., Randall, 548 U.S. at 261 (plurality op.) (holding that restrictions

on contributions were "not narrowlytailored"

where, inter alia, "we have found nowhere in the

record any special justification that mightwarrant"

the contribution limit at issue; the "record

contains no indication that, for example, corruption (or its appearance) in Vermont is

significantly more serious a matter than elsewhere").elsewhere"

These restrictions therefore impermissibly

burdenPetitioners'

First Amendment rights without adequate justification. See Citizens United

110 Frates Aff. ¶ 8.



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v. FEC, 558 U.S. 310, 340 (2010); Florida Right to Life, 273 F.3d at 1325-26; Cent. Hudson Gas

& Elec. Corp., 447 U.S. at 564. Section 228.2(c) is unconstitutional, invalid, and unenforceable.

D. The Prohibitions On Pick-Up Fees For In-House Closers In Sales Transaction, And

For All Closers In Refinancing Transactions (Section 228.5(d)) Are Arbitrary and

Capricious Because They Will Have Severe Unintended Consequences.

90. Section 228.5(d), 11 N.Y.C.R.R. 228.5(d), permits independent title closers to

receive reasonable pick-up fees from consumers for their services while prohibiting in-house

closers from doing so, a distinction that is illogical and inconsistent with the requirement of

Section 228.5(d)(2) itself that "sellers should be charged the same amounts for the same

services,"and that arbitrarily singles out in-house closers and capriciously denies them the

opportunity to receive reasonable compensation for their services. DFS appears to have assumed

incorrectly that pick-up fees are encompassed by title insurance premiums, and that title

insurance corporations and agents should therefore pay in-house closers out of their revenue

from premiums. However, that is simply false. In reality, pick-up fees are compensation for an

ancillary service provided outside the scope of the issuance of a title policy. Indeed, title closers

were not regulated by DFS prior to Insurance Regulation 208, and while legislation governing

closers has been proposed in the past, no such legislation was enacted.

91. Title closers act as facilitators available to all parties in furtherance of the

completion of a transaction, and assist homeowners and attorneys with many tasks requested of

them at the closing. These tasks may include processing documents unrelated to title insurance,

ascertaining the validity of payoff statements, accounting for escrow disbursements of tax and

insurance payments, and determining when a loan is in default and the consequences to the

payoff process. These services are above and beyond the standard responsibilities of title

closers, and closers should be permitted to be remunerated accordingly.



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92. Title closers were not always responsible for satisfying mortgages. In the past,

lenders would hire counsel to appear at a transaction's closing with a satisfaction of mortgage to

exchange for funds sufficient to pay off the outstanding loan. By passing this responsibility on

to title closers, companies were able to complete the process at a significantly reduced expense

for the consumer, and eliminate bank charges for such services. Moreover, by engaging closers,

rather than agents themselves, to undertake such tasks, title companies can process a large

number of pick-ups far more efficiently, saving consumers time and money by ensuring the

prompt payoff of mortgages. It is far more expensive, in the absence of closers, to have the

seller's attorney perform this service, or to have the lender's representative attend the closing.

93. The effects of Section 228.5(d) will be especially hard-felt in the residential

refinance context. Most residential refinance customers are not represented by counsel. As a

result, title insurance corporations and agents must spend considerable time performing curative

work to clean up title issues that arise during refinance transactions. Refinance transactions are

accordingly labor intensive, and because the premiums in these transactions are low due to rate

decreases over the last decade, they already generate only nominal profits. If title insurance

corporations and agents are required to pay significantly more to closers in refinance transactions

to replaceclosers'closers lost compensation from pick-up fees (and gratuities), title agents may no

longer break even on these transactions, and may exit the business. Indeed, one affiant has

"already heard from [its] appointed title agents that many smaller title insurance agents will no

longer conduct refinancing transactions, to the detriment of consumers who wish to refinance

their mortgages, as these transactions will often no longer be profitable and instead will cause

smaller title insurance agents to lose money."t¹t

111 Frates Aff. ¶ 3.



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â€”

94. Finally, treating in-house and independent closers differently will harm the

industry, its employees, and consumers, because title insurance corporations and agents-small

businesses in particular-cannot reasonably bear the additional expense of paying in-house

closers out of pocket to cover the lost pick-upfees.112 In the short term, in-house closers-whose

compensation will also be significantly reduced by the regulation's prohibitions on pick-up fees

for refinance transactions will exit the business because they will not be adequately

compensated in the absence of these fees, potentially causing a shortage of title closers, and

harming consumers by causing delays in the scheduling and length of closings.113 Over the

longer term, companies will need to raise premiums to be compensated for the service provided

and to be able to employ a sufficient number of closers, harming customers who will be forced to

incur a higher cost forbanks'

attorneys to provide satisfactions of mortgages at closings.114

95. The effects of these restrictions on closer fees are already being felt. Title

insurance corporations and agents have already begun to see contracts of sale that require closing

to be handled by in-house closers, a new requirement by sellers apparently intended to avoid

paying pick-up fees, putting companies on an unlevel playingfield.115

However, most agents

and in particular, small,"mom-and-pop"

businesses that have operated for a long time-do not

employ in-house closers, and now find themselves at an unfair competitive disadvantage.¹¹6 Nor

H2 Willen Aff. ¶ 12 (noting that his company "cannot afford to pay closers enough to offset their lost income from

pick-up fees and gratuities"); Hughes Aff. ¶ 51 ("While(" title closers are a practical necessity for title insurance

companies, in the average small residential transaction, which are not highly profitable due to low premiums,there simply isn't enough revenue to be able to afford to increase the amount [we] pay[] closers to fully replacethe compensation that closers will lose as a result of Section 228.5(d).").

H3 Willen Aff.¶ 13; Hughes Aff. ¶ 52 ("I have already heard from closers who have said that they will exit thebusiness because they cannot make ends meet under the new regulations.").

H4 Willen Aff. ¶¶ 14-15.

us Ex. 27 (Testimony of NYSLTA at Jan. 12, 2018 Public Hearing).

116 Ex. 27 (Testimony of NYSLTA at Jan. 12, 2018 Public Hearing).



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can these businesses afford to hire title closers, in light of other provisions of Regulation 208 that

will cause further economic harm to the industry.117

96. For all of these reasons, Section 228.5(d) is arbitrary and capricious.

E. The Price Caps For Ancillary Services (Section 228.5(a)) Are Arbitrary And

Capricious Because They Are Unreasonable and Lack Factual Justification.

97. The limitations imposed by Section 228.5(a), 11 N.Y.C.R.R. 228.5(a), on the fees

title insurance corporations and agents can charge for ancillary services in connection with

"residential real propertyclosing[s]"

are arbitrary-that is, without any economic or other

analysis substantiating the specific caps selected. See Ward, 20 N.Y.3d at 1043. As Dr. Pham

has opined, "[t]hese fee caps are arbitrarily set substantially below the rates that were typically

charged prior to the regulations. For example, the regulation caps the escrow service fee and the

survey inspection service fee at $50 and $75 (in addition to out-of-pocket costs), respectively.

These arbitrary fee caps are up to 50% lower than what title insurance agents charged their

clients prior to the cap and no economic analysis is provided that justifies the caps chosen."118

Similarly, "the fee caps for recording services and municipality/departmental searches are more

than 50% lower than what the majority of title insurance agents charged their clients prior to the

regulation, also without economic justification."tt9 As one affiant has noted, Section 228.5(a)'s228.5(a)'

price limits "do not cover the cost of production and the consultative work that is incident to the

provision of these importantservices,"

and as a result of the regulations "[t]hese services are now

being provided at a loss."120 These price caps are therefore so low that they will likely drive

117 X. 27 (Testimony of NYSLTA at Jan. 12, 2018 Public Hearing).


119 Id

120 Hughes Aff. ¶ 8.



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companies out of business, causing particular harm to the smaller title insurance corporations and

agents who generally handle residential transactions.

98. Title insurance corporations and agents provide a wide range of services to

support the work of attorneys representing sellers, purchasers, or borrowers in real estate

transactions that go beyond the issuance of title insurance policies. These"ancillary"

services

include searching various databases to determine the relevant history of the parties to a

transaction and the property at issue, and personally inspecting the property being insured with

an existing land survey to determine whether any changes to the property have occurred from the

date of the survey (known as a "survey inspection"). Title insurance corporations and agents

also review documents prior to recording so that they are timely processed, accurate, and in

recordable form,"' and hold escrow funds at a closing to pay various existing liens, such as real

estate taxes, estate taxes, franchise taxes, and mechanic s liens, in order to facilitate transaction

closings for consumers (known as "escrow services"). Often holding these escrow funds allows

a consumer additional time to resolve any issues, negotiate with creditors, and gather their

satisfaction documents. It is not unusual for the title insurance provider to conduct multiple

searches subsequent to the initial escrow deposit to determine if the escrow item has been

satisfied.

99. These services require significant work, and the time and resources title insurance

corporations and agents devote to these services go far beyond the out-of-pocket costs

Each of the 62 counties in New York State have differing recording requirements and differing fees, which

agents must be familiar with. Title insurance providers are now required to input document data into countywebsites prior to recording, a function that until recently was handled by county government. After recording,agents return the original documents with proof of recording to the appropriate parties. When dealing withtransactions in New York City; agents are called upon to prepare documents for the Automated City RegisterInformation System, known as ACRIS. For small businesses, this requires at least one full time trained

1

employee.



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("

incurred.122 For example, title searches must be reviewed by a title professional, discussed with

counsel for the purchaser, seller, and lender, and often require curative work by the agent. It is

not unusual for several hours of analysis and research to be conducted to, for example, cure a

municipal violation, or to review bankruptcyfilings.123 As a result, limiting charges for these

services in the manner Section 228.5(a) prevents title insurance corporations and agents from

recouping the real-world costs of the services theyprovide,124 and blocks them from making a

reasonable profit sufficient to cover salaries, rent, and other overhead costs. The fees received

from providing ancillary services are now an important source of revenue for title insurance

corporations and agents, and the limits Section 228.5(a) imposes on these fees will cause severe

harm to many title insurance corporations and agents without adequate justification. Section

228.5(a) is therefore unreasonable, arbitrary, and capricious.

100. The negative impacts of Section 228.5(a) will be felt by consumers as well. Many

of the services agents are now requested to provide were previously conducted by the insured's

attorney, the seller's attorney, or the lender's attorney, at much higher fees.125 Over the years,

122 Hughes Aff. ¶ 43 ("The price limits imposed by Insurance Regulation 208 for ancillary services are

unacceptably low and do not cover the cost of production and consultation involved in providing these services.Under Insurance Regulation 208, the price limits are unacceptably low and do not cover the cost of productionand consultation. Title agents incur labor expenses in conducting these searches that as these searches go wellbeyond the arbitrary limits imposed by Section 228.5(a).").

123 These services are not required for the issuance of a title insurance policy, but are provided at the request of a

party to the transaction or their representative; they provide additional information regarding a property, but inno way affect its insurability. Accordingly, unlike with respect to rates, these services have historically notbeen regulated by DFS, and prices have historically been set by the market, not by DFS. Despite the fact thatthe costs of these services are specifically excluded from coverage in standard owners'

policies, attorneys

representing owners and lenders frequently ask title insurance companies and agents to provide this additional

service. See Willen Aff. ¶ 18.

124 Hughes Aff. ¶ 42-43; see also Ex. 7 (Stewart Title Insurance Company Comments on Proposed InsuranceRegulation 208, June 16, 2017) at 10 (stating that the price limits imposed by Section 228.5(a) are "tooburdensome economically," and "not rationally related to the actual degree of legwork and investment involvedin providing the services").

125 In certain counties in northern and western New York (known as "Zone 1"), attorneys still provide theseservices.



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more and more ancillary service requests have been thrust upon agents because it was

determined that having agents perform these services is the most cost-effective way to obtain this

information and facilitate transactions. If, as a result of Section 228.5(a), title insurance

corporations and agents can no longer afford to provide these services, consumers will be forced

to obtain these services from other parties, such as attorneys, who may charge a higher-and

unregulated-rate. Moreover, because the fee limits do not adequately account for the time and

labor that is required to provide these services, companies will no longer be able to perform these

services in a timely and high-qualitymanner.126 DFS appears not to have considered any of these

consequences to consumers, rendering Section 228(a) unreasonable for that independent reason.

F. Insurance Regulation 208 Should Be Invalidated in Its Entirety.

1. Insurance Regulation 208 Amounts To Improper Legislative

Policymaking And Is Beyond DFS's Rulemaking Authority.

101. In promulgating Insurance Regulation 208, DFS usurped the role of the legislature

by engaging in improper policymaking that exceeds its regulatory authority.

102. In determining whether an agency has overstepped its rulemaking authority and

engaged in improper legislative policymaking, New York courts look to whether four

"coalescingcircumstances"

are present. N.Y. Statewide Coal. of Hispanic Chambers of

Commerce v. N.Y.C. Dep't of Health & Mental Hygiene, 23 N.Y.3d 681, 696 (2014).

103. First, courts will look to whether an agency has "constructed a regulatory scheme

laden with exceptions based solely upon economic and socialconcerns,"

which demonstrate the

agency's effort to engage in legislative policymaking by weighing the benefits of government

action "against its social cost and to reach a suitablecompromise."

Boreali v. Axelrod, 71

126 Pham Report at 16-17.â€”



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â€”

â€”

N.Y.2d 1, 11-12 (1987). Second, courts examine whether the agency "did not merely fill in the

details of broad legislation describing the over-all policies to beimplemented,"

but instead

"wrote on a clean slate, creating its own comprehensive set of rules without benefit of legislative

guidance."Id. at 13. Third, courts ask whether "the agency acted in an area in which the

Legislature had repeatedly tried-and failed-to reach agreement in the face of substantial

public debate and vigorous lobbying by a variety of interestedfactions."

Id. Fourth, and finally,

courts will examine whether the agency drafted regulations without the aid of "special expertise

or technicalcompetence"

in the regulated field, and instead simply imposed"simple"

prohibitions with "exceptions for various special interestgroups."

Seeid. at 13-14.

104. Under the fourBoreali factors, Insurance Regulation 208 is plainly an exercise in

improper legislative policymaking by DFS. As to the first factor, exceptions DFS has included

in the regulations based on economic concerns demonstrate DFS's effort-procedurally

insufficient as it was (seeinfra Pt. F.2)-to weigh the consumer welfare benefits of the

regulations against their social costs. For example, in response to public comments on the

proposed regulations that the price limits for ancillary services "may be inappropriate where

there is a particularly complicated commercial closing that requires significantly morework,"

DFS modified Section 228.5(a) such that in the final regulations, "the restrictions on ancillary

charges only apply to residential closings."127 Such a "[s]triking [of] the properbalance"

among

competing policy interests "is a uniquely legislative function.". Boreali, 71 N.Y.2d at 12.

105. Insurance Regulation 208 also plainly falls within the secondBoreali factor, as its

provisions-most clearly Section 228.5's limits on ancillary and closer fees-impose

127 see Ex. 6 (Department of Financial Services, Assessment of Public Comments on proposed new 11 NYCRR 228(Insurance Regulation 208)) at 7.



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comprehensive restrictions on title insurance corporations and agents without legislative

guidance. Prior to Insurance Regulation 208, the statutory and regulatory scheme governing title

closers and fees for ancillary services was a "cleanslate,"

and in the absence of legislative

guidance as to the "policies to beimplemented,"

DFS improperly took it upon itself to develop a

"comprehensive set ofrules"

governing these subjects. Id. at 13.

106. Regarding the thirdBoreali factor, as Senator Seward wrote to DFS, "many of the

actions that DFS now seeks to take in Regulation 208 are measures which were originally

advanced by thedepartment"

in past legislative negotiations, "and which were expressly rejected

at the negotiation table by the Senate."128Moreover, the State Senate has twice passed a bill to

amend Section 6409(b)-in June 2017 and again in January 2018-but that bill has not advanced

in the Assembly.129 This legislative inaction is "evidence that the Legislature has so far been

unable to reach agreement on the goals and methods that shouldgovern"

further regulation of the

title insurance industry. Boreali, 71 N.Y.2d at 12. DFS's attempt to do so through Insurance

Regulation 208 is invalid.

107. Finally, the commercially unreasonable and irrational nature of Insurance

Regulation 208, combined with DFS's utter failure to justify the regulations with robust

evidence, makes clear that the fourthBoreali prong applies as well, in that DFS improperly

drafted the regulations without the aid of "special expertise or technicalcompetence"

in the

regulated field, instead imposed"simple"

prohibitions with "exceptions for various special

interestgroups."

This is shown clearly, for example, by Section 228.5(a), which simply declares

maximum fees for certain services without any technical evidence that the limits are reasonable,


129 see http://assembly.state.ny.us/leg/?default_fld=&bn=S06704&term=2017&Summary=Y&Actions=Y&Text=Y

&Committee%26nbspVotes=Y&Floor%26nbspVotes=Y#S06704.



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â€”

while carving out, as discussed above, exceptions for certain groups-namely, companies

providing title insurance services in large commercial transactions.

108. Each of the Boreali factors is not a "discrete, necessarycondition[]"

for

demonstrating "improper policy-making by anagency;"

accordingly, "respondents may not

counterpetitioners'

argument merely by showing that one Boreali factor does notobtain."

N.Y.

Statewide Coal. of Hispanic Chambers of Commerce, 23 N.Y.3d at 696-97. In any case, each

factor demonstrates that DFS overstepped its regulatory authority in imposing Insurance

Regulation 208. See id. at 691. As a result, Insurance Regulation 208 is, in its entirety, invalid

and unenforceable. See Boreali, 71 N.Y.2d at 14 (holding that it would be "pragmatically

impossible, as well as jurisprudentially unsound, for [the court] to attempt to identify and excise

particular provisions while leaving the remainder of the [challenged regulations] intact, since the

product of such an effort would be a regulatory scheme that neither the Legislature nor the

[agency] intended").

2. Insurance Regulation 208 is Procedurally Invalid Under the State

Administrative Procedure Act.

109. DFS has not conducted an adequate analysis of the economic costs and benefits of

Insurance Regulation 208-despite the fact that it represents sweeping regulatory policymaking

and will have severe consequences for the industry.¹³o As explained below, DFS has thus failed

to comply with the requirements of the State Administrative Procedure Act ("SAPA") governing

administrative rulemaking."[R]espondents'

failure to substantially comply with [SAPA's] clear

mandates"renders the regulation as a whole "invalid, null and void and, as a matter of law . . .

arbitrary, capricious, and an abuse ofdiscretion."

Med. Soc'y of State of N.Y., Inc. v. Levin, 185

130 Pham Report at 16-17.â€”



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,Inc

Misc. 2d 536, 548 (Sup. Ct. N.Y. Cnty. 2000), aff'd sub nom. Med. Soc'y of State of N.Y., Inc. v.

Levin, 280 A.D.2d 309 (1st Dep't 2001).131

110. SAPA requires that in "developing a rule, an agency shall, to the extent consistent

with the objectives of applicable statutes, consider utilizing approaches which are designed to

avoid undue deleterious economic effects or overly burdensome impacts of the rule upon persons

. . . directly or indirectly affected by it or upon theeconomy." SAPA § 202-a(1); Med. Soc'y of

State of N.Y., Inc., 185 Misc. 2d at 546 (annulling insurance regulations in light Insurance

Department's failure to address or provide "bestestimate"

of regulation's projected costs when

promulgating rule). To that end, agencies shall "issue a regulatory impactstatement"

("RIS") for

a "rule proposed foradoption,"

which shall contain, inter alia, a "statement setting forth the

purpose of, necessity for, and benefits derived from therule,"

and a summary of "each scientific

or statistical study, report or analysis that served as the basis for the rule, [and] an explanation of

how it was used to determine the necessity for and benefits derived from therule."

Id. §202-

a(2)-(3). Agencies undertaking rulemaking must also submit a Regulatory Flexibility Analysis

(RFA), which provides an assessment of the rule's anticipated effects on small businesses.

SAPA § 102-a.

111. The DFS materials prepared during the rulemaking process fail to include any

data-driven analysis of the costs and benefits of these sweeping new regulations, let alone a

rigorous economic analysis justifying the regulations in a manner consistent with SAPA. Indeed,

DFS's Regulatory Impact Statement summarized the basis for Insurance Regulation 208 in a

single sentence-claiming that "[t]he Department's investigation revealed industry-wide

131Accord, e.g., Schwartfigure v. Hartnett, 83 N.Y.2d 296, 301-02 (1994) (declaring invalid State Department ofLabor rule for lack of compliance with SAPA's rulemaking requirements); 10 Apartment Assocs., Inc. v. N.Y.State Div. of Hous. & Cmty. Renewal, 240 A.D.2d 585,.585, 586 (2d Dep't 1997) (declaring invalid Division of

Housing and Community Renewal rule because it was promulgated in violation of SAPA).



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â€”

practices that violate Insurance Law section 6409(d), contribute to excessive rates, and constitute

untrustworthiness and deceptive acts andpractices,"

without providing any economic study

whatsoever.132 DFS's Regulatory Flexibility Analysis is also plainly defective. In its Regulatory

Flexibility Analysis, DFS states in a conclusory manner that the new reporting requirements

"should not impose a significantburden,"

with no explanation for how it arrived at this

speculative conclusion-much less one grounded in any sort of meaningful empirical, scientific,

or statistical analysis-and no analysis of the impacts of the restrictions on marketing, on

ancillary fees, and on title closers.133

112. In sum, as Dr. Pham concluded, "DFS has failed to provide any analyses showing

that it properly considered the economic effects and burden of Insurance Regulation 208 on title

insurance companies and the New York economy."134 DFS's failure to do so (in the RIS, RFA,

or otherwise)-despite the sweeping changes wrought to the industry-renders Insurance

Regulation 208 invalid in its entirety under SAPA. See Jewish Mem'l Hosp. v. Whalen, 391

N.E.2d 1296, 1301 (1979) (invalidating regulation in part on the grounds that the agency had

failed to conduct a study of costs to justify its conclusion as to the proper figure to exclude from

reimbursement); Health Ins. Ass'n of Am. v. Corcoran, 531 N.Y.S.2d 456, 462-63 (Sup. Ct.

Albany Cty. 1988), aff'd as modified, 154 A.D.2d 61 (3d Dep't 1990), aff'd, 76 N.Y.2d 995

(1990) (nullifying Department of Insurance regulation in part due to agency's failure to proffer

data in support of its conclusions about the regulation's fiscal implications).

132 See Ex. 28 (Department of State, Division of Administrative Rules, New York State Register May 3, 2017/Vol.XXXIX Issue 18) at 14.

133 See Ex. 28 (Department of State, Division of Administrative Rules, New York State Register May 3, 2017/Vol.XXXIX Issue 18) at 14-15.




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,306 .A.D.2d

G. Insurance Regulation 208 Will Cause Irreparable Harm.

113. Last, Insurance Regulation 208 will cause irreparable harm to NYSLTA and its

members, including Petitioners The Great American Title Agency, Inc. and Venture Title

Agency, Inc.; Petitioners therefore reserve the right to seek to enjoin the regulation during the

pendency of this action. Otherwise, they will be irreparably harmed. An emergency injunction

is warranted where, as here, the moving party can demonstrate "a likelihood of ultimate success

on the merits, irreparable harm absent the granting of the preliminary injunction and a balancing

of the equities in itsfavor."

Four Times Square Assocs. v. Cigna Invs., Inc., 306 A.D.2d 4, 5 (1st

Dep't 2003).

114. Petitioners are likely to succeed on the merits of this action. To establish

likelihood of success in order to obtain preliminary injunctive relief, Petitioners need only make

a "prima facieshowing,"

not a "certainty ofsuccess."

Parkmed Co. v. Pro-Life Counselling, Inc.,

91 A.D.2d 551, 553 (1st Dep't 1982). Indeed, a "governmental entity's serious substantive and

procedural violations of applicable laws are in and of themselves sufficient to establish a

likelihood of success on themerits."

Lee v. N.Y.C. Dep't of Hous. Pres. & Dev., 162 Misc. 2d

901, 909 (Sup. Ct. N.Y. Cnty. 1994). For the reasons set out above, Petitioners easily meet this

threshold.

115. In addition, where the requested "injunctive relief can be tailored to preserve the

status quo with little prejudice to either side, the degree of proof required as to the elements,

other than irreparable injury and the balancing of equities, for a preliminary injunction may be

accordinglyreduced."

O'Henry's Film Works, Inc. v. Bureau of Ferry & Gen. Aviation

Operations, 111 Misc. 2d 464, 469 (Sup. Ct. N.Y. Cnty. 1981). Here, Petitioners challenge

Insurance Regulation 208 through an Article 78 special proceeding that is by its nature

expedited. Respondents can point to no prejudice from an injunction of limited scope and



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duration. Moreover, initial submissions relating to the five-percent rate reduction requirement

are not due for months, and the rate reduction will not become effective until June 16, 2018.

Thus, injunctive relief will in significant part preserve the status quo, rather than disrupting it.

116. Petitioners will also suffer irreparable harm absent injunctive relief. First,

"[w]hen an alleged deprivation of a constitutional right is involved, . . . no further showing of

irreparable injury isnecessary."

Mitchell v. Cuomo, 748 F.2d 804, 806 (2d Cir. 1984) (citations

and internal quotation marks omitted); see also, e.g., Time Square Books, Inc. v. City of

Rochester, 223 A.D.2d 270, 278 (4th Dep't 1996) ("Infringement("

of the constitutionally

guaranteed right of free expression, 'for even minimal periods of time, unquestionably

constitutes irreparable injury.'") (quoting Elrod v. Burns, 427 U.S. 347, 373 (1976)). Because

Petitioners have established a probable violation of their Due Process and First Amendment

rights, they have established irreparable harm.

117. In addition, if a preliminary injunction does not issue, Petitioners will suffer

irreparable harm because Petitioners and NYSLTA's members-particularly small businesses

will, as a result of the crushing impact of the challenged regulations, be forced to lay off

employees, and may even go out of business, and will lose significant amounts of revenue that

will be difficult to quantify after the fact. Reuschenberg v. Town of Huntington, 16 A.D.3d 568,

570 (2d Dep't 2005) (irreparable harm where challenged conduct "threatens to destroy an

ongoing business concern"); Willis of N.Y., Inc. v. DeFelice, 299.299 A.D.2d 240, 242 (1st Dep't

2002) (irreparable damage shown where, "in the absence of a restraint[,] plaintiffs would likely

sustain a loss of business impossible, or very difficult, to quantify") (internal citation omitted).¹³5

135 Martinico Aff. ¶ 10 ("I have already received notice from four title insurance agents that have been forced toclose their doors as a result of the financial harm caused by Insurance Regulation 208. I expect that additionaltitle insurance agencies will go out of business as a result of the regulations as well.") ; Frates Aff. ¶ 11 ("The("

five percent reduction in premium rates will likely force some smaller, local title insurance agencies to close.");



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successful"

In addition, the restrictions on marketing will make it difficult for Petitioners and NYSLTA's

members to attract and retain customers, and the inability to offer a full range of services

because they are no longer profitable (for example,"ancillary"

services)-will harm customer

goodwill.136 Such irreparable economic harms are appropriate basis for injunctive relief. See

JRT Inc. v. STG Props., LLC, No. 1898-04, 798 N.Y.S.2d 345, at *4 (Sup. Ct. N.Y. Cnty. 2004)

(irreparable harm in light of difficulties attracting new customers or retaining . . . existing

customers"in the absence of injunctive relief); Second on Second Café, Inc. v. Hing Sing

Trading, Inc., 66 A.D.3d 255, 272-73 (1st Dep't 2009) (finding irreparable injury where

company's inability to operate harmed customer goodwill and revenue). Moreover, Petitioners

and NYSLTA's members will never be able to recover the revenue they lose during the

pendency of this action-even if it was quantifiable-because there is no vehicle for them to

recover money damages from Respondents (a State agency and its Superintendent) for the

economic impact of the challenged regulations. Cf People v. N.Y. Carbonic Acid Gas Co., 128

A.D. 42, 43 (3d Dep't 1908) (vacating preliminary injunction granted to the State because it was

a "hardship to enjoin the greater part ofdefendants'

business with no indemnity in case they are

finally successful").

118. Finally, the equities favor a preliminary injunction. Respondents cannot

conceivably assert prejudice from a preliminary injunction that stays the imposition of a recently

implemented regulation, including a retroactive penalty that has not yet gone into effect. See Sau

Hughes Aff. ¶ 10 ("As(" a result of these arbitrary and ill-conceived regulations, I was forced to terminate twovaluable employees, who provided good service to our customers. I am now contemplating additional proposedpersonnel reductions and salary and benefit reductions. Moreover, some excellent independent title closers thatour agency used have left the industry.").

136 Frates Aff. ¶ 3 ("I have already heard from Stewart Title's appointed title agents that many smaller titleinsurance agents will no longer conduct refinancing transactions, to the detriment of consumers who wish torefinance their mortgages, as these transactions will often no longer be profitable and instead will cause smaller

title insurance agents to lose money.").

1



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defendants"

Thi Ma v. Xuan T. Lien, 198 A.D.2d 186, 186-87 (1st Dep't 1993) (granting preliminary

injunction where court could "perceive no great harm to defendants").

CAUSES OF ACTION

FIRST CAUSE OF ACTION:

SECTION 228.2 IS INCONSISTENT WITH THEGOVERNING STATUTE, AND INVALID

119. Petitioners repeat and reallege the allegations of the preceding paragraphs.

120. Because DFS's new, restrictive interpretation of Insurance Law § 6409(d) in

Section 228.2, 11 N.Y.C.R.R. 228.2, to prohibit ordinary business marketing practices is

inconsistent with the governing statute, and effectively rewrites the statute through regulation. It

is therefore outside of DFS's authority, in violation of lawful procedure, affected by errors of

law, arbitrary, capricious, an abuse of discretion, and invalid.

121. The plain terms of Insurance Law § 6409(d) forbid marketing and entertainment

expenses only if they are part of a quid pro quo arrangement for title insurance business. The

DFS Office of General Counsel has made clear in numerous formal opinions and other writings

over a period of many years that the language of Insurance Law § 6409(d) permits ordinary

marketing and entertainment expenses so long as there is no quid pro quo arrangement. The

industry has reasonably relied upon this understanding over many years.

122. Nonetheless, DFS attempts to prohibit through Section 228.2 conduct that the

legislature has not, by expanding the scope of the Insurance Law § 6409(d) to apply to situations

that the DFS Office of General Counsel itself has repeatedly found to be valid under the plain

meaning of the statute.

123. Section 228.2 is therefore outside the scope of DFS's authority and invalid, and

the Court should so declare and order.



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SECOND CAUSE OF ACTION:

SECTION 228.2 IS AN ARBITRARY AND CAPRICIOUS REVERSAL

OFAGENCYPRECEDENT


125. DFS's new, restrictive interpretation of Insurance Law § 6409(d) in Section

228.2, 11 N.Y.C.R.R. 228.2, to prohibit ordinary business marketing practices is unreasonable,

arbitrary and capricious, and invalid, including because it representing an unexplained reversal of

longstanding agency policy and precedent.

126. The DFS Office of General Counsel has made clear in numerous formal opinions

and other writings over a period of many years that the language of Insurance Law § 6409(d)

permits ordinary marketing and entertainment expenses so long as there is no quid pro quo

arrangement. The industry has reasonably relied upon this understanding over many years. In

promulgating Insurance Regulation 208, DFS has failed to conform to prior administrative

precedent, without adequate explanation for its shift.

127. DFS has never in the past brought enforcement actions for the non-quid pro quo,

ordinary marketing activities that it now claims are violations of Insurance Law § 6409(d).

128. By disallowing routine and reasonable marketing and entertainment practices,

Section 228.2 will impede title insurance corporations andagents'agents ability to compete, survive

and grow. The harm caused by Section 228.2's marketing restrictions will be acutely felt by

small title insurance corporations and agents, who rely on small group and individual settings to

market their skills and expertise, build relationships, and attract new clients.

129. Section 228.2 is therefore arbitrary, capricious, and unenforceable, and the Court

should so declare and order.



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THIRD CAUSE OF ACTION:

SECTION 228.3 VIOLATES PETITIONERS' DUE PROCESS RIGHTS

(LACK OF FAIR NOTICE)


131. The five percent reduction in premium rates that is effectively required under

Section 228.3, 11 N.Y.C.R.R. 228.3, clearly violatesPetitioners'Petitioners due process rights.

132. Under Section 228.3, title insurance corporations may only avoid a five percent

reduction in premium rates if, on or before April 17, 2018, they either (1) restate expense

schedules for the past six years to omit now-prohibited expenses, or (2) affirm that no now-

prohibited expenses were made during the past six years. Both options are a practical

impossibility for title insurance corporations, and the regulation therefore effectively imposes a

significant retroactive penalty for conduct that was not prohibited at the time companies engaged

in it. This is a clear violation of due process. Insurance Law § 6409(d) provides DFS with no

authority to promulgate such a regulation retroactively.

133. DFS failed to provide individuals of ordinary intelligence fair notice of what it

now considers prohibited conduct. DFS's interpretation of § 6409(d) has changed, but it is

subjecting companies to a five percent premium rate penalty based on their engagement in

marketing practices that at the time DFS and the industry understood to be lawful.

134. Section 228.3 is therefore unconstitutional, invalid, and unenforceable, and the

Court should so declare and order.

FOURTH CAUSE OF ACTION:

SECTION 228.3 IS INCONSISTENT WITH THEGOVERNING STATUTE, AND INVALID


136. The five percent reduction in premium rates that is effectively required under

Section 228.3, 11 N.Y.C.R.R. 228.3, is not based on actual industry expenses or experience, and



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is not backed by any statistical analysis. By failing to incorporate such data, the five percent

figure chosen by DFS is inconsistent with existing provisions of the Insurance Law, including

those provisions that require premiums to be based, pursuant to statistical methods, on actual

experience, and to account for the impact of premium rates on the solvency of insurers. See Ins.

Law §§ 2303, 2304(a), 2315.

137. This will be true with respect to premium rates in all future years that incorporate

the initial five percent rate reduction.

138. Section 228.3 is therefore outside the scope of DFS's authority, in violation of

lawful procedure, affected by errors of law, arbitrary, capricious, an abuse of discretion, and

invalid, and the Court should so declare and order.

FIFTH CAUSE OF ACTION:

SECTION 228.3 IS ARBITRARY, CAPRICIOUS, AND INVALID


140. Section 228.3, 11 N.Y.C.R.R. 228.3, unreasonably imposes a severe penalty on

the title insurance industry without sufficient justification for that penalty, and is therefore

arbitrary and capricious, and invalid.

141. Section 228.3 forces companies to choose between restating past expense filings

or making a retrospective affirmation based on six years of data they do not have ready access to,

or suffering a significant penalty. It is unreasonable, arbitrary, and capricious, to put companies

to the choice between restating expense schedules to exclude expenses that were proper when

made (or making a retrospective affirmation) based on data they did not collect or maintain-and

had no way of knowing they would be expected to collect or maintain-or suffering a significant

financial penalty in the form of an across-the-board 5% reduction in premium rates.



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142. Section 228.3 is therefore arbitrary, capricious, outside the scope of DFS's

authority, and unenforceable, and the Court should so declare and order.

SIXTH CAUSE OF ACTION:

SECTION 228.2(C) VIOLATES PETITIONERS' DUE PROCESS RIGHTS

(VOID FOR VAGUENESS)

143. Petitioners repeat and reallege the allegations of the preceding paragraphs

144. The restrictions on political and charitable contributions and marketing expenses

in Section 228.2(c), 11 N.Y.C.R.R. 228.2(c), violatePetitioners'Petitioners Due Process rights.

145. The requirement of Section 228.2(c) that marketing expenses, political

contributions, and charitable donations by title insurance corporations and agents be "reasonable

andcustomary"

and not "lavish orexcessive,"

is impermissibly vague and ambiguous, as

individuals subject to the regulation have no way of knowing what DFS will consider to be

"reasonable andcustomary"

and not "lavish orexcessive"

expenses, making it impossible for

them to structure their conduct to comply with the restrictions. Because the limitations are vague

and ambiguous, it is entirely possible that the State will seek to impose criminal penalties for

what it later determines are expenses or certifications that do not comply with the regulation,

even if the industry does its very best to comply.

146. Due process does not permit the State to place an entire industry under the cloud

of criminal suspicion based on vague standards of conduct, or to put it to the impossible choice

between risking criminal sanction for violating ambiguous regulations or accepting a significant

monetary penalty.

147. Section 228.2(c) is therefore unconstitutional, invalid, and unenforceable, and the




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SEVENTH CAUSE OF ACTION:

SECTION 228.3(C) VIOLATES PETITIONERS' FIRST AMENDMENT RIGHTS


149. The restrictions in Section 228.2(c), 11 N.Y.C.R.R. 228.2(c), on marketing

expenses, political contributions, and charitable donations violatePetitioners'Petitioners First Amendment

Rights.

150. Section 228.2(c) limits and chills political contributions, charitable donations, and

certain marketing activities by barring any such expenditures that are not "reasonable and

customary,"or that are "lavish or whatever

excessive"those terms mean in the context of

political contributions and charitable donations, which is entirely unclear-without any findings

or basis for concluding that such restrictions are necessary to advance a significant government

interest. Moreover, Section 228.2(b) prohibits outright certain marketing expenses, again

without any findings or basis for concluding that such restrictions are necessary to advance a

substantial government interest. These restrictions therefore impermissibly burdenPetitioners'

First Amendment rights without adequate justification.

151. Section 228.2(c) is therefore unconstitutional, invalid, and unenforceable, and the


EIGHTH CAUSE OF ACTION:

SECTION 228.5(D) IS ARBITRARY, CAPRICIOUS, AND INVALID


153. The prohibitions in Section 228.5(d), 11 N.Y.C.R.R. 228.5(d), on pick-up fees for

in-house closers in sales transactions, and for all closers in refinancing transactions, are

unreasonable, and arbitrary and capricious.

154. Section 228.5(d) permits independent title closers to receive reasonable pick-up

fees from consumers for their services while prohibiting in-house closers from doing so, a



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distinction that is illogical and inconsistent with the requirement of Section 228.5(d)(2) itself that

"sellers should be charged the same amounts for the sameservices."

Moreover, Section 228.5(d)

will harm the title insurance industry, its employees, and consumers, because title insurance

corporations and agents-small businesses in particular-cannot reasonably bear the additional

expense of paying in-house closers out of pocket to cover the lost pick-up fees. In the short term,

Section 228.5(d) will force in-house closers to exit the industry because they will not be

adequately compensated in the absence of these fees, potentially causing a shortage of title

closers, and harming consumers by causing delays in the scheduling and length of closings.

Over the longer term, title insurance corporations and agents will be forced to seek increases in

premiums, harming customers.

155. Additionally, prohibiting closers from accepting pick-up fees in refinance

transactions will likewise have significant adverse consequences, as consumers may no longer be

able to close refinance transactions promptly. If title insurance corporations and agents are

required to pay significantly more to closers in refinance transactions to replaceclosers'

lost

compensation from pick-up fees and gratuities, title insurance corporations and agents may no

longer break even on these transactions, and may exit the business, causing harm to consumers

by reducing the number of people in a position to complete these transactions.

156. DFS has wrongly assumed that pick-up fees are encompassed by title insurance

premiums, and that title insurance corporations and agents should therefore pay in-house closers

out of their revenue from premiums. In reality, pick-up fees are compensation for an ancillary

service provided outside the scope of the issuance of a title policy.

157. Section 228.5(d) is therefore arbitrary, capricious, and unenforceable, and the




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NINTH CAUSE OF ACTION:

SECTION 228.5(A) IS ARBITRARY, CAPRICIOUS, AND INVALID


159. The price limits for ancillary services imposed by Section 228.5(a), 11

N.Y.C.R.R. 228.5(a), are unreasonable and lack factual justification, and are therefore arbitrary,

capricious, and invalid.

160. Title insurance corporations and agents devote significant time and resources to

providing ancillary services covered by Section 228.5(a), and thus incur costs far beyond the out-

of-pocket costs incurred. Section 228.5(a)'s limits on charges for these services will not permit

many title insurance corporations and agents to recoup the real-world costs of the services they

provide, and certainly will not permit them to make a reasonable profit sufficient to cover

salaries, rent, and other overhead costs, causing financial strain for many title insurance

corporations and agents. If, as a result of Section 228.5(a), title insurance corporations and

agents can no longer afford to provide these services, consumers will be forced to obtain these

services from other parties, such as attorneys, who may charge a higher-and unregulated-rate.

161. The price limits imposed by Section 228.5(a) are arbitrary-that is, without any

economic or other analysis substantiating the specific caps selected. They are also so low that

they will likely drive small companies out of business, a serious concern given that these limits

will primarily apply to residential transactions involving smaller title insurance corporations and

agents, thereby causing particular harm to small businesses and consumers.

162. Section 228.5(a) is therefore unreasonable, arbitrary, capricious, and

unenforceable, and the Court should so declare and order.

TENTH CAUSE OF ACTION:

INSURANCE REGULATION 208 EXCEEDS DFS'S REGULATORY AUTHORITY




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164. In promulgating Insurance Regulation 208, DFS usurped the role of the legislature

by engaging in invalid policymaking that exceeds its regulatory authority.

165. Exceptions DFS has included in Insurance Regulation 208 based on economic

concerns demonstrate DFS's effort to weigh the consumer welfare benefits of the regulations

against their social costs, an attempt to balance competing policy interests that is the exclusive

function of the legislature.

166. Insurance Regulation 208 also improperly imposes comprehensive restrictions on

title insurance corporations and agents without legislative guidance.

167. Furthermore, DFS has attempted through Insurance Regulation 208 to take it upon

itself, in the absence of legislative agreement, to determine the goals and methods that should

govern regulation of the title insurance industry, and thus improperly encroached on the

legislature's duty to make choices among competing policy objectives.

168. Finally, DFS improperly drafted the commercially unreasonable and irrational

provisions of Insurance Regulation 208 without the aid of special expertise or technical

competence in the regulated field, and instead imposed simple prohibitions with exceptions for

various special interest groups.

169. The above factors demonstrate that DFS overstepped its regulatory authority in

imposing Insurance Regulation 208, both as a whole and with respect to each of the provisions

challenged herein.

170. Insurance Regulation 208 is therefore outside the scope of DFS's regulatory

authority, invalid, and unenforceable, and the Court should so declare and order.

ELEVENTH CAUSE OF ACTION:

INSURANCE REGULATION 208 IS INVALID UNDER THE STATE

ADMINISTRATIVE PROCEDURE ACT




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172. DFS has failed to substantially comply with the procedural requirements of the

State Administrative Procedure Act ("SAPA") in promulgating Insurance Regulation 208, and

the regulation is therefore invalid and unenforceable.

173. DFS's failure to release any details of the findings of its investigation into the title

insurance industry, in addition to the failure of the Regulatory Impact Statement issued with

proposed Insurance Regulation 208 to even attempt to summarize the analyses that served as the

basis for theregulations'regulations sweeping changes, clearly indicates that DFS failed to consider

utilizing approaches which are designed to avoid undue deleterious economic effects or overly

burdensome impacts of the rule upon persons directly or indirectly affected by it or upon the

economy.

174. DFS therefore failed to comply with the procedural rulemaking requirements of

SAPA in promulgating Insurance Regulation 208, and the regulation cannot withstand judicial

scrutiny.

175. Insurance Regulation 208 is therefore invalid, and unenforceable, and the Court

should so declare and order.

PRIOR APPLICATION

176. No prior application for the relief sought herein has been made.

PRAYER FOR RELIEF

WHEREFORE, Petitioners pray for a judgment against Respondents pursuant to CPLR

3001 & 7801-06:

(A) declaring that DFS, in adopting and implementing 11 N.Y.C.R.R. 228.2,

11 N.Y.C.R.R. 228.3, 11 N.Y.C.R.R. 228.5(a), and 11 N.Y.C.R.R. 228.5(d) (Sections 228.2,

228.3, 228.5(a), and 228.5(d) of Insurance Regulation 208), has acted arbitrarily and

capriciously, abused its discretion, violated lawful procedure, and taken actions affected by

1



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errors of law, including by promulgating regulations that are inconsistent with governing

statutes;

(B) declaring that DFS, in adopting and implementing 11 N.Y.C.R.R. 228.3

(Section 228.3 of Insurance Regulation 208), has infringedPetitioners'Petitioners Due Process rights under

the United States and New York State Constitutions, both facially and as applied;

(C) declaring that DFS, in adopting and implementing 11 N.Y.C.R.R. 228.2

(Section 228.2 of Insurance Regulation 208), has infringedPetitioners'Petitioners Due Process rights under

the United States and New York State Constitutions, both facially and as applied;

(D) declaring that DFS, in adopting and implementing 11 N.Y.C.R.R. 228.2

(Section 228.2 of Insurance Regulation 208), has infringedPetitioners'Petitioners First Amendment rights

under the United States and New York State Constitutions, both facially and as applied;

(E) declaring that DFS, in adopting and implementing 11 N.Y.C.R.R. 228, has

overstepped its regulatory authority;

(F) declaring that DFS, in adopting and implementing 11 N.Y.C.R.R. 228, has

failed to comply with the rulemaking requirements of the State Administrative Procedure Act;

(G) issuing an order and judgment vacating and annulling 11 N.Y.C.R.R. 228

in its entirety, or in the alternative vacating and annulling 11 N.Y.C.R.R. 228.2, 11 N.Y.C.R.R.

228.3, 11 N.Y.C.R.R. 228.5(a), and 11 N.Y.C.R.R. 228.5(d); and

(H) granting such other and further relief as to the Court seems just and

proper.



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Dated: New York, New York

February 20, 2018 GIBSON, DUNN 4 CRUTCHER LLP

/s/ Mylan L. Denerstein

By: Mylan L. Denerstein

Akiva Shapiro

David A. Coon

200 Park Avenue, 47th Floor

New York, NY 10166-0193

Telephone: (212) 351-4000

[email protected]

[email protected]

[email protected]

Attorneys for Petitioners New York

State Land Title Association, Inc., The

Great American Title Agency, Inc., and

Venture Title Agency, Inc.



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VERIFICATION

STATE OF NEW YORK )

) ss:

COUNTY OF NEW YORK )

Robert Treuber, being duly sworn, states that he is the Executive Vice President and

Executive Director of the New York State Land Title Association, a Petitioner in this

proceeding; and has read the foregoing Petition and knows the contents thereof; that the same is

true to his own knowledge, except to matters therein that are stated upon information and belief;

and as to those matters, he believes them to be true.

I OBERT TREUBER

Swo to before me this

thy of February, 2018

NOYARY PUBLIC

PAUL V. PRESTIANOTARY PUBLIC-STATE OF NEW YORK

No. 02PR6021410

lyly

Qualified In NewCommission

York CountyExpires 03-15-2019



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