In Re § 1031 Exchange Litigation.

• Decision Date: 02 June 2010
• Docket Number: C/A No. 8:09-2054-JFA.
• Citation: 716 F.Supp.2d 415
• Court: U.S. District Court — District of South Carolina
• Parties: In re § 1031 EXCHANGE LITIGATION.

716 F.Supp.2d 415

In re § 1031 EXCHANGE LITIGATION.

C/A No. 8:09-2054-JFA.

United States District Court,

D. South Carolina,

Anderson/Greenwood Division.

June 2, 2010.

COPYRIGHT MATERIAL OMITTED.

Charles W. Whetstone, Jr., Cheryl F. Perkins, Whetstone Myers Perkins and Young, Columbia, SC, James Robinson Gilreath, William Mitchell Hogan, Gilreath Law Firm, Greenville, SC, Michael P. Denver, Robert L. Brace, Hollister and Brace, Robert A. Curtis, Thomas G. Foley, Jr., Foley Bezek Behle and Curtis, Santa Barbara, CA, for Plaintiffs.

Cory Hohnbaum, King and Spalding, Charlotte, NC, Justin C. Jeffries, Michael R. Smith, King and Spalding, Atlanta, GA, Nikole Setzler Mergo, Susan Pedrick McWilliams, Nexsen Pruet Jacobs and Pollard, John J. Pringle, Jr., Page McAulay Kalish, Ellis Lawhorne and Sims, Columbia, SC, David A. Hickerson, Scott L. Fredericksen, Foley and Lardner, William A. Burck, Weil Gotshal and Manges, Washington, DC, Henry L. Parr, Jr., Meliah Bowers Jefferson, Wyche Burgess Freeman and Parham, Greenville, SC, Gabrielle Theresa Kelly, John J. Eklund, Calfee Halter and Griswold, Cleveland, OH, Steven Alan Reiss, Weil Gotshal and Manges, New York, NY, for Defendants.

ORDER

JOSEPH F. ANDERSON, JR., District Judge.

This case concerns an intermediary's use of funds originally on deposit at a bank and the circumstances surrounding its alleged inability to return such funds due to its investment in the now frozen auction-rate securities market. The matter is currently before the court on the motion of defendant SunTrust Banks, Inc. (“SunTrust”) to dismiss the claims of Gerald Terry, Ann Robbins, Jane T. Evans, Angela M. Arthur, Vivian Hayes, Leapin Eagle LLC, and Denise Wilson (collectively, the “Customers”). (Dkt. No. 64.) The motion has been fully briefed and the court heard oral argument at a February 17, 2010 hearing, where the court took the motion under advisement. This order serves to announce the ruling of the court.

I. BackgroundA. Factual History

LandAmerica 1031 Exchange Services, Inc. (“LES”) offered its services as a qualified intermediary to individuals seeking to effect a tax deferred like-kind exchange under § 1031 of the Internal Revenue Code. 26 U.S.C. § 1031 (2006). For a flat fee of between $600 and $1,000, and a $250 closing fee, LES would hold the proceeds (the “Exchange Funds”) of a real estate sale until such time as the customer identified and sought to close on a target property. At closing, LES would transfer the Exchange Funds to the seller of the target property. ¹ Through using LES as a qualified intermediary, a customer could avoid realizing a taxable gain on the sale of his property, as the customer avoids possession of the initial sale proceeds. When a § 1031 exchange is carried out correctly, any taxable gain is deferred until the target property is sold. A contract (the “Exchange Agreement”) set forth the relationship and obligations between the parties.

The Customers allege that LES placed their Exchange Funds in LES's general operating account at a SunTrust bank located in Richmond, Virginia known as the 3318 Account. The Customers further allege that LES used Exchange Funds from the 3318 Account to purchase auction-rate securities (“ARS”) through a SunTrust subsidiary. When the ARS market froze in February 2008, the Customers allege that LES held more than $200 million in ARS and that LES suffered substantial losses stemming from the illiquidity of its ARS holdings. Due to the illiquidity of the ARS after February 2008, the Customers allege that LES began to use Exchange Funds from new customers, such as the Customers, to complete exchanges for existing customers-effecting a Ponzi scheme.

On November 26, 2008, LES filed for bankruptcy, which had the effect of freezing all Exchange Funds and preventing the Customers and other § 1031 exchange participants from completing their transactions or from accessing their funds. The Customers' theory of the case posits that LES should have ceased operations and distributed the remaining proceeds when the ARS market froze in February 2008. The Customers allege by continuing to solicit new clients after February 2008, including the Customers, and using their Exchange funds to complete exchanges for those customers whose money was tied up in illiquid ARS, LES breached its fiduciary duty to the Customers and converted their Exchange Funds.

SunTrust's involvement allegedly consisted of “substantially assist[ing] LES in converting the [Customers'] Exchange Funds in hopes of being repaid the $100 Million remaining on a $200 Million revolving line of credit SunTrust had originally loaned LES' parent, LandAmerica Financial Group, Inc. (“LFG”), in July of 2006.” (Am. Compl. ¶ 3.) The Customers assert that SunTrust assisted in the “Ponzi scheme” with the aim of keeping LES in business long enough for the ARS market to thaw or for LFG to sell other liquid assets in order to repay funds owed SunTrust. ( Id.) At bottom, the Customers allege that because a SunTrust subsidiary sold LES the ARS, and because LES deposited the Exchange Funds in SunTrust accounts, SunTrust necessarily knew about and participated in the alleged financial shenanigans.

Specifically, the Customers contend that SunTrust knew (1) that LES was a qualified intermediary; (2) qualified intermediaries act as fiduciaries; (3) that LES was to hold Exchange Funds up to 180 days, but no longer; (4) that the identity of LES's customers changed daily; (5) that the Customers' money was deposited at SunTrust to be held by LES as an agent and fiduciary pursuant to the Exchange Agreement; (6) that the terms of the Exchange Agreement included a provision that Exchange Funds were not fully protected by the FDIC; (7) that Exchange Funds were not held in FDIC protected accounts; (8) that LES was affiliated with the Federation of Exchange Accommodators; (9) that LES acknowledged its fiduciary capacity in the transactions; (10) that LES acknowledged it held funds in escrow; (11) that LES acknowledged that the funds were the property of customers; (12) that LES commingled funds in the SunTrust 3318 account; (13) that SunTrust Account 3318 was an operating account; (14) that LES used new funds to complete transactions for existing customers; (15) that LES was not maintaining the availability of Exchange Funds; (16) that LES was operating with a significant Exchange Fund deficit; (17) that LES held $290 million in ARS that could not be used to complete transactions; (18) that LES's liquidity problems threatened its viability; and (19) that LES was operating a Ponzi scheme. (Am. Compl. ¶ 111.)

Based on the forgoing, the Customers assert four claims against SunTrust: (1) aiding and abetting LES's breach of fiduciary duty, (2) conversion, (3) aiding and abetting LES's conversion, and (4) civil conspiracy.

B. Procedural Background

This case is the result of two cases, Terry v. SunTrust Banks, Inc., 8:09-415-JFA, and Arthur v. SunTrust Banks, Inc., 8:09-1739-JFA, being joined together in a single proceeding. Terry was filed in the Court of Common Pleas for Anderson County, South Carolina, on February 3, 2009, and was removed to this court on February 19, 2009, under 28 U.S.C. §§ 1332(d), 1441, 1446, and 1453. Arthur was filed in the United States District Court for the District of Southern California on January 14, 2009. On March 26, 2009, the Terry plaintiffs filed a motion with the Judicial Panel on Multidistrict Litigation to have their action consolidated with related actions and transferred to the District of South Carolina or the District of Nevada. On June 12, 2009, the United States Judicial Panel on Multidistrict Litigation issued an order transferring the Arthur action to the District of South Carolina for coordinated or consolidated pretrial proceedings. SunTrust and the individual defendants thereafter filed a number of motions to dismiss, though the claims against the individual defendants were stayed pursuant to an order of this court dated January 21, 2010 (Dkt. No. 100).

II. DiscussionA. Legal Standard on a Motion to Dismiss

Pursuant to Rule 8(a)(2), a complaint must contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). To survive a motion to dismiss, a complaint must allege “sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, --- U.S. ----, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) ( quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. Recitals of the elements of causes of action bolstered only by conclusory statements are insufficient, a plaintiff cannot rest on a showing of a “sheer possibility that a defendant has acted unlawfully.” Id.

Pursuant to Iqbal and Twombly, this court must undertake a two-prong approach in determining the sufficiency of plaintiff's complaint. First, bearing in mind that a court must accept as true all factual allegations in the complaint, this court must segregate allegations that are factually supported from those which are mere legal conclusions or naked assertions and not entitled to a presumption of truth. Iqbal, 129 S.Ct. at 1950. Second, this court must determine whether the remaining factual allegations in the complaint state a plausible claim for relief, based on “judicial experience and common sense.” Id.

B. Applicable Law

In a diversity action, a federal court must apply the choice of law rules of the state in which it sits. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). Where a transferee court presides over several diversity actions consolidated by the multidistrict litigation panel, the choice of...