Compound Prop. Mgmt. v. Build Realty, Inc.
| Decision Date | 21 February 2023 |
| Docket Number | 1:19-cv-133 |
| Parties | COMPOUND PROPERTY MANAGEMENT LLC, on behalf of itself and all others similarly situated, Plaintiffs, v. BUILD REALTY, INC., d/b/a, GREENLEAF FUNDING, et al., Defendants. |
| Court | U.S. District Court — Southern District of Ohio |
Plaintiffs Compound Property Management LLC, Leone1, LLC, R&G Cincy Investments, LLC, Pyramid Investment Group, LLC, and Ratio Models, LLC (collectively “Plaintiffs”) contend that Defendants Build Realty, Inc., Edgar Construction, LLC Cincy Construction, LLC, McGregor Holdings, LLC, Cowtown Holdings, LLC, Build NKY, LLC, Greenleaf Support Services LLC, Build SWO, LLC, Gary Bailey, George Triantafilou, G2 Technologies, LLC, GT Financial, LLC, and First Title Agency Inc. (collectively “Defendants”) violated the 1961 Racketeer Influenced and Corrupt Organizations (“RICO”) Act, along with the Ohio Corrupt Practices Act, trust law, and various equitable doctrines, when they allegedly engaged in a pattern of defrauding investors through the Defendants' propertyflipping business enterprise. Seeking to vindicate their own rights, as well as the rights of all others similarly swindled (or so Plaintiffs claim), Plaintiffs now move the Court to certify this matter as a class action under Federal Rule of Civil Procedure 23. (See Mot. for Class Certification, Doc. 155).
For the reasons explained more fully below, the Court GRANTS IN PART and DENIES IN PART Plaintiffs' Motion to Certify (Doc. 155). Specifically, the Court GRANTS certification for Plaintiffs' civil RICO claim (part of Count I) and breach of fiduciary duties claim (Count II), but DENIES certification for Plaintiffs' Ohio Corrupt Practices Act (part of Count I), civil conspiracy (Count III), and unjust enrichment (Count IV) claims. Finally, the Court finds Plaintiffs lack standing to pursue their declaratory relief claims and so DISMISSES Plaintiffs' Count V, Count VI, and Count VII WITHOUT PREJUDICE.
The Court APPOINTS Plaintiffs Compound Property Management LLC, Leone1, LLC, R&G Cincy Investments, LLC, Pyramid Investment Group, LLC, and Ratio Models, LLC as class representatives for the class, and APPOINTS Plaintiffs Compound Property Management LLC, Leone1, LLC, R&G Cincy Investments, LLC, and Ratio Models, LLC as class representatives for the subclass. The Court APPOINTS the Finney Law Firm, LLC, and Markovits, Stock & DeMarco, LLC as class counsel.
Plaintiffs a collection of small real-estate investor LLCs, allege that Defendants engaged in a complex scheme to defraud them and others like them. (Doc. 155). They contend that Defendants' labyrinthine business model maximized opportunities to generate money for Defendants by violating investor expectations, contractual agreements, and (at least as to some Defendants) fiduciary duties. (See id.). Defendants, meanwhile, argue in their Response that they operated a legitimate enterprise with many satisfied investors and they fully advised investors of the risks and rewards their system offered. (Doc. 183, #7579-88). Because the arrangement's specifics matter, the Court begins there.
Defendants' business model (what Plaintiffs call the “Build Scheme”) is to help investors purchase, rehab, and resell homes (a practice sometimes called “flipping”). Defendants began by identifying and acquiring rights to purchase “properties with rehab potential.”[1] (Id. at #7573). After acquiring a right to purchase a property for a set price, Build Reality prepared an estimate of the improvement costs needed to “flip” it for profit. (Doc. 183-1, #7640-41). Defendants simultaneously solicited investors for these properties through various means, including roadside signs, a website, mailed brochures, seminars, and word-of-mouth. (Reply, Doc. 219, #10344). Signage included the phrases “$10k down, including rehab $$$” and “no credit check!” (Doc. 193-10, #9728; Doc. 185, #8027). Advertisements also trumpeted that “Build purchases properties in bulk from over 20 different sources and then passes the savings on to you.” (Doc. 193-8, #9723). After recruiting investors, Defendants paired each investor to a property (or multiple properties) for that investor to “purchase,” rehab, and resell. (Doc. 183, #7574).
About 200 to 250 investors enrolled. (See Doc. 193-12, #9735-58; Doc. 185, #8031-32; Doc. 193-9, #9726).
With property and investor paired, a set of transactions unfolded. Defendants refer to this as “the double closing.” (Doc. 183, #7574). First, Defendant Build Realty closed on the property from the initial seller using short-term funding Defendant GT Financial provided. (Id.). Defendants call this the “Buy Side” of the double closing. (Id.). Soon after, Build Realty sold the property's title to its subsidiary, Defendant Edgar Construction (which Defendants call the “Sell Side”). (Id.).
That latter transaction is key to the dispute here. The Sell Side transaction was not a straightforward sale. Rather, Build transferred legal title in the property to Edgar Construction (“Edgar”) as trustee of a state-law trust.[2] (Id.). The property was the corpus of the trust, Edgar the trustee, and an investor-created LLC (LLCs like Plaintiffs here) the trust's beneficiary. (Id.). In connection with this Sell Side transaction (from Build to Edgar, as trustee), the investor LLCs received and signed settlement disclosures, including notice that Edgar took legal title to the property as trustee. (See Doc. 180-25, #6190). Investors also agreed to “reimburse actual closing costs incurred by Seller [i.e., Build] for the purchase of this property from the owner of record.” (See, e.g., Doc. 192-7, #9387). In other words, the investors agreed to pay Build's Buy Side closing costs. This obligation, however, was subject to a “cap” on the total “closing costs and funding fees associated with this property.”
(Doc. 192, #9327-28; Doc. 192-8, #9407). First Title Agency, Inc., typically conducted both the Buy Side and Sell Side closings. (Doc. 183, #7575).
Also at the Sell Side closing, Edgar (now holding legal title as trustee) executed a mortgage agreement with its parent, Defendant Build Realty. (Doc. 183, #7576; Doc. 180-21, #6157). As part of that same transaction, Edgar executed a note with Build Realty[3] in which it agreed to pay to Build Realty the total of (1) the Sell Side price, plus (2) the amount Build Realty estimated the investor needed to make improvements, plus (3) various costs tacked on by Build Realty, minus (4) the $10,000 payment the investor made. (Doc. 183, #7576). To use an example, imagine Build transferred the property to Edgar Construction on the Sell Side at a stated price of $100,000, and Build estimated the structure required $50,000 in remodeling. Further, ignore briefly the third category-tacked on costs. The note would be in an amount of $100,000 + $50,000 - $10,000 = $140,000. Afterward, Build Realty would assign the note and mortgage to GT Financial to secure GT's interest in the property (recall GT put up the initial purchase funding). (Doc. 186, #8204). Even after assignment, though, the borrower paid Build Realty directly and Build Realty then used that same money to pay GT (until, as described below, GT sold its interest in the note). (Id. at #8217).
Build Realty structured the note as a “Balloon Payment Promissory Note.” (Doc. 180-19). Under the note, the borrower needed to pay monthly installments on the full amount at a 15% interest rate, with a balloon principal payment at the end of the loan term when the investor sold the rehabbed property. (Doc. 180-19, #6143).
As discussed, Build Realty originally executed the loan with Edgar. But at the Sell Side closing, the investor LLC assumed Edgar's obligations under the mortgage agreement and note, making that LLC liable for the loan. (Id.; Doc. 88-1, #871-72). But because it was the LLC, rather than the LLC's individual owner, that assumed the obligations, the individual owner could walk away from the loan and investment at any time. (Doc. 88-1, #871-82). If so, the investor LLC would default and lose the right to sell the property, but the individual owner lost only the money already spent (typically the $10,000 and any interest payments the LLC made) and incurred no further liability. (Id.). In other words, Build did not require individual owners to personally guaranty the loan.
Although the note's total amount included the estimated rehab costs ( that the lender had made those funds available), Build Realty/GT Financial did not immediately fund an escrow account containing that rehab cost amount. Rather, the rehab funding emerged when GT Financial sold its interest in the note to a third-party lender. (Doc. 186, #8198). From the money it received selling the note (presumably the face amount of the note), GT Financial reimbursed itself the amount it had advanced to Build for the original property acquisition (the Buy Side price). (See id. at #8198, 8210). Build, meanwhile, kept for itself the difference between its Buy Side price and its Sell Side price (the markup on the property). And the estimated rehab amounts (which made up the rest of the loan sale proceeds) went into escrow. (See id.). Build Realty served as the loan servicer and held the escrowed rehab funds (once funded) for later disbursement. (Id. at #8210; Doc. 192-1, #9335).
When GT Financial[4] sold its interest in the note to a third-party lender, it did so at a stated interest rate ranging from 8% to 15%, although most often 12.5%. (Doc. 186 #6216-18, 8227). As described above, the investor LLC was paying Build Realty monthly interest payments calculated as 15% of the loan amount. The difference between that 15% rate...
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