Homes Dev. Corp. v. Edmund & Wheeler, Inc.
| Decision Date | 29 September 2022 |
| Docket Number | 21-cv-0633-SM |
| Court | U.S. District Court — District of New Hampshire |
| Parties | Homes Development Corp., and 1031 Realty Trust, LLC, Plaintiffs v. Edmund & Wheeler, Inc., Edmund & Wheeler Exchange Services, LLC, O'Toole Enterprises, LLC, John D. Hamrick, Mary O'Toole, Timothy Burger, and Chris Brown, Defendants |
Plaintiffs Homes Development Corp. (“HDC” and 1031 Realty Trust, LLC, filed this action asserting multiple state law claims that arise from two transactions facilitated by defendant Edmund & Wheeler, Inc. in 2016 and 2018. Defendants have moved to dismiss all claims against them. Defendants' motion is granted in part, and denied in part.
When ruling on a motion to dismiss under Fed.R.Civ.P. 12(b)(6) the court must “accept as true all well-pleaded facts set out in the complaint and indulge all reasonable inferences in favor of the pleader.” SEC v Tambone, 597 F.3d 436, 441 (1st Cir. 2010). Although the complaint need only contain “a short and plain statement of the claim showing that the pleader is entitled to relief,” Fed.R.Civ.P. 8(a)(2), it must allege each of the essential elements of a viable cause of action and “contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face,” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation and internal punctuation omitted). In other words, “a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). Instead, the facts alleged in the complaint must, if credited as true, be sufficient to “nudge[ ] [plaintiff's] claims across the line from conceivable to plausible.” Id. at 570.
Generally a court must decide a motion to dismiss exclusively upon the allegations set forth in the complaint and the documents specifically attached or convert the motion into one for summary judgment. See Fed.R.Civ.P. 12(2). There is, however, an exception to that general rule, as “[a] district court may also consider ‘documents incorporated by reference in [the complaint], matters of public record, and other matters susceptible to judicial notice.'” Giragosian v. Ryan, 547 F.3d 59, 65 (1st Cir. 2008) (quoting In re Colonial Mortgage Bankers Corp., 324 F.3d 12, 20 (1st Cir. 2003)) (alterations in original).
Accepting the allegations in plaintiffs' complaint as true, as the court must at this juncture, the relevant facts are as follows.
This case arises from two transactions between the parties known as Section 1031 exchanges. “Section 1031 exchanges take their name from a provision of the federal tax code, 26 U.S.C. § 1031, which allows an owner of investment property to defer paying capital gains taxes upon the sale of the property if the property is ‘exchanged' for property ‘of like kind.'” U.S. v Carpenter, 736 F.3d 619, 622 (1st Cir. 2013). “[F]unds from the initial sale may be held temporarily in cash form with no tax penalty as long as they are used to purchase new property within 180 days and as long as the investor designates the replacement property within 45 days.” Id. (citing 26 U.S.C. § 1031(a)(3)). Federal regulations require that “the exchangor may not take possession of the funds before purchasing the new property.” Id. (citing 26 C.F.R. § 1.1031(k)-1(a)). Accordingly, “exchangors typically rely on ‘qualified intermediaries' to hold and invest the funds until the exchange is completed.” Id.
Plaintiffs broadly allege that defendants, while acting as plaintiffs' qualified intermediary (“QI”) during the Section 1031 exchange process, conspired with Utah companies Rockwell Debt Free Properties, Inc., Rockwell Birmingham LLC, and Rockwell TIC, Inc. (collectively “Rockwell”), and now-defunct event venue operator Noah Corporation, Noah Operations Hoover, LA, LLC, and Noah Operations Overland Park, KS, LLC, (collectively “Noah”) to sell plaintiffs' real estate interests, while Rockwell and Noah were using the funds generated from those real estate transactions to operate an illegitimate Ponzi scheme. Plaintiffs believed that defendants were acting independently as their QI, but say defendants were actually acting as “finders and feeders” for Noah and Rockwell, working on Rockwell's behalf to locate potential investors and convince them to invest in the properties, in return for Rockwell's payment of commissions and fees. Compl. ¶ 19.
Defendant Edmund & Wheeler, Inc. (“EWI”), is a Section 1031 consulting firm “with over 35 years of exchange experience.” Compl. ¶ 3. EWI is a New Hampshire corporation. Defendant Mary O'Toole is the President Operations Manager, and managing broker of EWI. O'Toole is a licensed real estate broker, realtor, and certified buyer representative. Defendant John Hamrick is EWI's Vice President and Director, and a licensed real estate professional. Defendants Timothy Burger and Chris Brown work for EWI as Section 1031 Exchange advisors.
Defendant Edmund & Wheeler Exchange Services (“EWES”), a New Hampshire limited liability company, is located at the same address as EWI. EWES is affiliated with Hamrick and O'Toole: Hamrick serves as EWES's Manager/Member, while O'Toole serves as a Manager. Finally, Hamrick and O'Toole operate O'Toole Enterprises, LLC, a New Hampshire real estate company comprised of real estate agents and brokers. O'Toole serves as O'Toole Enterprises' principal broker, as a member, and as the company's registered agent. Hamrick is a licensed real estate agent with the company, and, prior to January, 2021, he served as O'Toole Enterprises' registered agent.
Plaintiff HDC is a Massachusetts corporation in the business of building homes and residential developments. Plaintiff 1031 Realty, a Massachusetts limited liability company, is a real estate investment company. Plaintiffs share an address; John Esserian serves as HDC's President, and as the sole member of 1031 Realty.
18 Victory Garden 1031 Exchange
In 2014 and 2015 (before the events giving rise to this action), HDC contracted with EWI for the provision of QI services on two separate occasions. As a result, HDC “had come to rely on EWI” and its employees “as professionals with a fiduciary duty to act in [HDC's] best interests.” Compl. ¶ 25.
In March, 2016, HDC again contracted with EWI for assistance with a Section 1031 exchange involving the sale of property located at 18 Victory Garden Way, Lexington, Massachusetts. The parties agreed that EWI would be paid $2,000 in total exchange fees: $1,000 as an initial fee, and $1,000 at the time of closing on the replacement property. Hamrick, Burger, and O'Toole provided HDC with advisory services.
Under the contract between the parties,[1] EWI agreed to serve as QI for the Section 1031 exchange, which meant EWI would “acquire” 18 Victory Garden Way from HDC, “transfer” 18 Victory Garden Way to the purchaser, hold the funds from the sale of 18 Victory Garden Way in escrow, acquire HDC's replacement property, and, finally, transfer the replacement property to HDC. Defs.' Mot. to Dismiss, Exh. 1. The contract plainly discloses that EWI “has established business relationships with several companies that provide Replacement Property options for Exchangors which could result in a referral fee being paid to an affiliate of EWI.” Id. Finally, the contract instructs that HDC should “seek its own legal and accounting advice regarding this transaction,” and that:
Given the Section 1031 exchange rules, HDC had 45-days from the day of the sale of 18 Victory Garden to identify three replacement properties, and 180-days to close on the purchase of a “like-kind” replacement property (a property of the same nature, character, or class). HDC identified several potential local properties, but Hamrick introduced HDC to another potential replacement property: real estate located at 2025 International Park Lane, Birmingham, Alabama (“Noah's Birmingham”). Noah's Birmingham was an event center owned by Rockwell; HDC could purchase an undivided Tenant-in-Common (“TIC”) interest in Noah's Birmingham, bundled with a long-term lease of the property to Noah, which would operate the event center.
Hamrick informed HDC that Noah was “an expert in the field,” with regard to operating event centers, and was “committed to the success of the venture with a lengthy history of stable profitability.” Compl. ¶ 29. Noah operated several similar event centers around the country, Hamrick said, each of which was a financially separate and independent investment, and, importantly, each of those investments “had a solid track record of returns.” Id. “Hamrick promised HDC annual returns beginning at seven percent per annum with a [two percent] annual increase,” Compl. ¶ 29, and provided HDC with a Noah's Birmingham sales package that featured “beautiful photographs” of a completed event center, Compl. ¶ 30, and described the event center as an “attractive 8,000 square foot building [sitting] on a large 5.2-acre parcel of land in the fast-growing community of Birmingham, AL.” Id. Since Noah was already in possession of the property, HDC was promised full rents immediately upon purchase of the TIC...
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