Greenleaf Arms Realty Trust I, LLC v. New Boston Fund, Inc.

• Decision Date: 16 February 2012
• Docket Number: No. 10–P–2192.,10–P–2192.
• Citation: 81 Mass.App.Ct. 282,962 N.E.2d 221
• Parties: GREENLEAF ARMS REALTY TRUST I, LLC, & others 1 v. NEW BOSTON FUND, INC., & others.2
• Court: Appeals Court of Massachusetts

81 Mass.App.Ct. 282

962 N.E.2d 221

GREENLEAF ARMS REALTY TRUST I, LLC, & others 1

v.NEW BOSTON FUND, INC., & others.2

No. 10–P–2192.

Appeals Court of Massachusetts, Suffolk.

Argued Sept. 9, 2011.Decided Feb. 16, 2012.

Michael C. McLaughlin, Boston, for the plaintiffs.

Mark A. Berthiaume, Boston, for the defendants.

Present: BERRY, MEADE, & MILKEY, JJ.

BERRY, J.

In 2003, Joseph and Faye Baglione (husband and wife) entrusted $1.3 million—proceeds derived from a sale of income property—with New Boston Fund, Inc. (New Boston Fund), a locally-based investment management firm. New Boston Fund had promised them an investment vehicle to shelter the monies from gains taxes, as permitted by § 1031 of the Internal Revenue Code. 26 U.S.C. § 1031. That plan went awry, and the Bagliones incurred tax liabilities and fees in excess of $300,000. Litigation ensued (first lawsuit). After some months of negotiation, the Bagliones and all named defendants in the first lawsuit, including New Boston Fund, reached a settlement agreement in May, 2007, in which the parties agreed to establish two tenant-in-common structured investments (TIC agreements) in two commercial properties, one of which was in Westborough.³

Allegedly, when the parties entered into the settlement agreement, the Westborough property was already (or perilously close to being) in default on its mortgage loan. Its sole tenant later declined to renew its lease and the property further declined sharply in value. The Bagliones, who had been kept in the dark as to these material events, lost their entire principal investment in the Westborough property. It is further alleged that, at the time of the settlement, New Boston Fund had led the Bagliones to reasonably believe the Westborough property was a suitable replacement for investment in order to achieve a successful tax deferred § 1031 “like-kind” exchange, an essential component to the deal that was reached by the parties.

Accordingly, in 2009, the Bagliones commenced this action against New Boston Fund, its principals, and certain affiliated entities (collectively, New Boston),⁴ alleging that they had been the victims of a fraudulent scheme carried out by New Boston, which induced them to enter into the settlement agreement and related TIC agreements. Their complaint alleged that New Boston had not only misrepresented facts bearing on the settlement agreement and the TIC agreements, but had also breached fiduciary duties owed to them, as limited partners, by failing to make a full and honest disclosure of the facts surrounding the proposed § 1031 like-kind exchange transaction.

In lieu of a responsive pleading, New Boston filed a motion to dismiss the complaint, pursuant to Mass.R.Civ.P. 12(b)(6), 365 Mass. 754 (1974). A judge allowed the rule 12 motion, ruling the complaint failed to allege such facts plausibly suggesting an entitlement to relief. In essence, the judge concluded that the Bagliones' claims were barred by the exculpatory, disclaimer, and merger provisions of the settlement agreement. On appeal, the Bagliones claim that the allowance of the rule 12 motion was error as matter of law. We agree.

The judge, on the other hand, denied summarily New Boston's motion seeking sanctions against the Bagliones' trial counsel, pursuant to Mass.R.Civ.P. 11(a), as amended, 456 Mass. 1401 (2010). New Boston cross appeals from the denial. We affirm.

Background. We summarize the factual allegations of the Bagliones' 2009 complaint,⁵ reserving some detail for our discussion of the legal contentions advanced by the parties in the cross appeals.

a. Facts. As of 2002 and for some years prior, the Bagliones were the sole beneficiaries of a nominee realty trust that held title to an apartment building in Quincy (Quincy property).⁶ The trust was Joseph's sole source of income, and the Bagliones believed that they would maintain ownership of the Quincy property in this form for tax and estate planning purposes. The Bagliones had not listed the Quincy property for sale. Sometime in 2002, a New Boston Fund representative solicited the Bagliones and proposed that they sell the Quincy property and invest the sale proceeds in real estate funds that New Boston Fund privately managed for its individual and institutional investors. New Boston Fund unequivocally represented that, by doing so, the Bagliones could enjoy both the benefits of a “tax-free exchange investment” permitted by § 1031, and “extraordinary rates of return” on their investment due to New Boston Fund's expertise. The Bagliones took such action.

In November, 2002, the Bagliones, through their realty trust, sold the Quincy property for $2.7 million.⁷ Some $1.3 million of the sale proceeds were ultimately invested in New Boston Fund's Fund V and Fund VI. By doing so, the Bagliones became limited partners in these funds.

New Boston Fund's promises of a tax-free, like-kind exchange did not come to pass. The Bagliones incurred heavy tax liabilities as a result of New Boston's action in liquidating a particular asset in Fund V's portfolio. This led the Bagliones to commence the first lawsuit in 2006 against certain New Boston Fund entities, seeking damages. The parties and their counsel then engaged in negotiations over a span of several months.

Among other proposals discussed to resolve both the tax liability issues and pending litigation, New Boston Fund offered to invest the Bagliones' Fund VI money in tenant-in-common interests in two buildings: the then tenant-occupied office building located in Westborough, and a similar property in Franklin, Indiana. Both commercial properties were owned by New Boston Fund.

Transactional documents and settlement papers were drawn up by counsel. At all times, New Boston Fund had custody of the monies invested by the Bagliones, as limited partners of New Boston Fund's Fund V and Fund VI. The Bagliones made it known they were acting under a belief that New Boston Fund and its affiliates, as the general partners of Fund V and Fund VI, remained bound to honor fiduciary duties owed to them as limited partners. New Boston Fund did not refute the Bagliones' understanding along this line.

To induce the Bagliones to enter into the settlement agreement and the TIC agreements, New Boston Fund stated, in no uncertain terms, that the value of the Westborough property was $15,353,333. In October, 2008, some seventeen months after the signing of both the settlement agreement and the TIC agreements, New Boston Fund notified the Bagliones that it was suspending quarterly distributions from Fund VI. The reason, New Boston Fund said, was that the Westborough property would soon be empty, its sole tenant having decided not to renew its triple net lease,⁸ which was scheduled to expire in May of 2009. The value of the Westborough property declined precipitously, to the detriment of the Bagliones as tenants in common, and ultimately, the Bagliones lost their entire investment in the Westborough property.

The Bagliones sent a demand letter, see G.L. c. 93A, § 9, to New Boston Fund. Among other assertions, the Bagliones complained of fiduciary wrongdoing by New Boston Fund and demanded that the latter take swift action to make them whole and return them to the status quo ante as they stood before having entered into the settlement agreement. New Boston Fund refused. This lawsuit then followed.

The judge's dismissal order, entered pursuant to rule 12(b)(6), hinged largely on the exculpatory, disclaimer, and merger provisions of the May, 2007, settlement agreement. The pertinent language of those provisions are as follows:

“1.3 ... The Bagliones acknowledge and agree that they will bear all legal, financial and tax costs and risks to them inherent in such distribution transactions and the related Tenant–in–Common Agreement. In addition, the Bagliones acknowledge that, in connection with the foregoing transfer, they have relied on the advice of their own legal and tax experts and not upon any representations made by the New Boston Parties or their agents, representatives or attorneys.

“1.4 The Bagliones acknowledge and agree that the New Boston Parties have made no promises, representations, or guarantees with respect to the performance, value or any matters relative to the Bagliones' ongoing interest in Fund V or the Two Beneficial Interests.”

The settlement agreement contains a mutual release provision, but, for the present case, the release is qualified or otherwise limited by paragraph 3.2, which provides: “Nothing in [the mutual release provision] shall prevent the Parties from asserting or pursuing any claim to enforce the terms of this Agreement.” New Boston does not argue or otherwise suggest that the release forecloses the Bagliones' rights to seek relief from the settlement agreement.

A merger provision is set out in paragraph 5.1 of the settlement agreement. It is boilerplate in form and provides: “This document contains the complete agreement between, and contains all of the promises and undertakings of, the Parties. Any and all prior agreements, representations, negotiations and undertakings between the Parties, oral or written, express or implied, with respect to the subject matter hereof are hereby superseded and merged herein.”

The settlement agreement specifies that it shall be governed by the laws of this Commonwealth.

b. Judge's dismissal order. After having heard the parties on New Boston's motion to dismiss,⁹ the judge ruled that, as matter of law, paragraphs 1.3 and 1.4 of the settlement agreement barred the Bagliones' claims.^10,11 The judge did not analyze the long-settled law in this Commonwealth as to the legal effect of such contractual exculpatory, disclaimer, or merger provisions in the context of adequately pleaded fraud claims raised by an aggrieved party and signatory to the contract. The judge concluded by stating: “[I]n the absence of Massachusetts appellate authority, I decline to extend fiduciary...