Kreisers Inc. v. First Dakota Title Ltd.
| Decision Date | 30 July 2014 |
| Docket Number | Nos. 26809,26818.,s. 26809 |
| Citation | 2014 S.D. 56,852 N.W.2d 413 |
| Parties | KREISERS INC.; David H. Larson; David A. Larson, Jr.; Christopher N. Larson; Scott R. Larson; and Philip L. Johnson, Plaintiffs and Appellees, v. FIRST DAKOTA TITLE LIMITED PARTNERSHIP d/b/a First Dakota Title and d/b/a The Title Resource Network, Defendants and Appellants. |
| Court | South Dakota Supreme Court |
OPINION TEXT STARTS HERE
Timothy M. Gebhart, Davenport, Evans, Hurwitz & Smith, LLP, Sioux Falls, South Dakota, for plaintiffs and appellees.
Thomas K. Wilka, Hagen, Wilka & Archer, LLP, Sioux Falls, South Dakota, for defendants and appellants.
[¶ 1.] Kreisers Inc. hired First Dakota Title to assist it with a like-kind property exchange in order to receive tax deferred benefits under 26 U.S.C. § 1031. After a partial failure of that exchange, Kreisers sued First Dakota for negligence and negligent misrepresentation. The circuit court determined that First Dakota was negligent in assisting Kreisers with the exchange. First Dakota appeals. We affirm.
[¶ 2.] Kreisers Inc. is a Subchapter S corporation that distributes and sells medical supplies. Its principal office is located in Sioux Falls, South Dakota. In 2006, Kreisers owned real property (hereinafter “relinquished property”) located on South Minnesota Avenue in Sioux Falls. Kreisers moved its business from the relinquished property in 2001, and placed the property on the market for sale in 2005. Around the time Kreisers placed the relinquished property on the market, it sought to acquire replacement property for warehouse services. Kreisers retained Dan Tunge to market the relinquished property and to assist with locating and acquiring replacement property. Tunge was informed that Kreisers was interested in pursuing a possible like-kind property exchange under 26 U.S.C. § 1031.1
[¶ 3.] In October 2006, Kreisers accepted an offer to sell the relinquished property to Urology Specialists Chartered for $765,000. Philip Johnson, an accountant and the eventual Chief Financial Officer of Kreisers, was already contemplating a like-kind exchange at this time; however, he knew little about § 1031 exchanges. Accordingly, officers from Kreisers met with MSM McGladrey, Inc., an accounting firm that performed regulation accounting and tax services for Kreisers and some of its shareholders. Following the meeting, Jason Zanderson and Tracy Peterson of McGladrey sent Johnson a memo on October 20, 2006, regarding like-kind exchanges of property. The memo discussed a new building to be constructed on replacement property as part of the like-kind exchange.
[¶ 4.] Prior to receiving the offer from Urology Specialists, Tunge had located possible replacement property in the Sioux Falls Industrial Park in the northeast part of Sioux Falls. Kreisers hoped to construct a new warehouse facility on the replacement property. On October 20, 2006, Kreisers entered into a purchase agreement with the Sioux Falls Development Foundation, Inc. to purchase the replacement property for $356,160.
[¶ 5.] Following the agreement to purchase the replacement property, Kreisers began preliminary work on developing plans for the construction of a new warehouse to be built on the replacement property. In March 2007, Kreisers selected Peska Construction as the contractor. A final contract between the parties was executed in May 2007. Peska Construction was informed of the § 1031 exchange and of the requisite time constraints for completing such an exchange.
[¶ 6.] On February 28, 2007, Urology Specialists assigned its purchase agreement with Kreisers to Brenkevco Properties LLC by written agreement. Shortly after the signing of the Brenkevco agreement, Tunge recommended that Johnson contact James Rogers of First Dakota Title regarding the possibility of First Dakota assisting Kreisers with a § 1031 exchange. Rogers, who is an attorney, was the manager of the title department at First Dakota. First Dakota advertised that it could provide § 1031 tax deferred exchange services. It did not advertise any limits on the types of § 1031 services it provided.
[¶ 7.] Sometime in early March 2007, Johnson called Rogers. The conversation was brief, lasting about three to four minutes. Johnson informed Rogers that Kreisers was working with McGladrey on a § 1031 exchange. Rogers testified that he recalled discussing a § 1031 exchange with Johnson, but did not remember the specifics of the conversation. Rogers told Johnson that First Dakota performed § 1031 exchange services. Rogers did not rely on a checklist of information and did not recall asking Johnson many questions. First Dakota had no written protocol or procedures to guide its employees in connection with § 1031 exchanges. There is no evidence that Johnson and Rogers discussed an improvement (or construction) § 1031 exchange. Johnson testified that he told Rogers to call Zanderson of McGladrey. Rogers did not call Zanderson, and Johnson did not instruct Zanderson to call Rogers.
[¶ 8.] A closing date was set for both the replacement property and the relinquished property. To comply with § 1031, closing on the relinquished property occurred first. First Dakota agreed to act as the closing agent and to provide § 1031 exchange services. Rogers was charged with assembling the necessary information for a § 1031 exchange, which included preparing documents that had been created by Attorney Sam Assam, who was retained by First Dakota to draft a series of form documents for § 1031 exchanges. After preparing the documents, Rogers sent them back to Assam for review.
[¶ 9.] Assam's documents were only meant for forward § 1031 exchanges as it was First Dakota's policy to only handle forward or delayed exchanges. In a forward exchange, First Dakota would act as a “qualified intermediary.” It would take an assignment of the purchase agreement from the seller of property and act as a seller for purposes of facilitating a § 1031 exchange. It would then receive the sale proceeds from the purchaser of the relinquished property following closing and agree to hold and use those proceeds to purchase replacement property for the seller at a later closing. First Dakota, as a matter of policy, did not handle construction exchanges, although they did not advertise this restriction.2
[¶ 10.] Rogers did not ask whether Kreisers intended a construction exchange instead of a forward exchange. Although it was normally his practice to contact a client's attorney or accountant to discuss the details of a § 1031 exchange, Assam did not do so in this case. Assam reviewed the documents, but did not discuss with Kreisers or Rogers whether something other than a forward exchange was contemplated.
[¶ 11.] Kreisers closed on the relinquished property at the office of First Dakota on April 16, 2007. The closing was conducted in phases with the buyer and seller meeting separately to execute the necessary documents. David H. Larson, President of Kreisers, and Johnson represented Kreisers at the closing. The closing agent for First Dakota was Sue Reiff. Tunge was also present.
[¶ 12.] At closing, First Dakota provided Kreisers with the closing documents, including the § 1031 documents that had been prepared by Rogers and reviewed by Assam. Reiff briefly summarized each document for Larson and Johnson while Larson signed the documents. Johnson testified that he talked about the warehouse construction project at the closing. Larson did not recall any such conversation. Reiff stated that she had no independent recollection of the closing, but testified that if there was any indication that Kreisers intended a construction exchange, rather than a forward exchange, she would have stopped the closing to obtain additional guidance because of First Dakota's policy of not handling construction exchanges.3 Reiff told Larson and Johnson that she would fill in the property description on the form required to designate the replacement property. Larson signed the blank description form. Reiff later completed the designation of replacement property by describing the replacement property that was to be purchased from the Foundation. Reiff never sent the completed form to Kreisers.
[¶ 13.] Kreisers closed on the replacement property at First Dakota on April 19, 2007. Mary Olson handled the closing for First Dakota on April 19. Once again, First Dakota acted as both the closing agent and the qualified intermediary for the § 1031 exchange; and both the buyer and the seller met separately with First Dakota. Larson and Johnson represented Kreisers at the closing. The closing lasted about five minutes. There was no discussion regarding a construction exchange. There is no evidence that Kreisers read the closing documents or that their attorneys reviewed the documents.
[¶ 14.] The Foundation delivered a warranty deed dated April 20, 2007, to First Dakota conveying title to the replacement property. The deed was recorded by First Dakota on April 25. Kreisers was not provided a copy of the deed at closing. The deed and final owner's policy of title insurance were not mailed to Kreisers until July 1, 2007.
[¶ 15.] Following closing, First Dakota held the excess proceeds of $328,733.87, which represented the difference between the net cash received from the sale of the relinquished property and the amounts paid by Kreisers for closing costs and the purchase of the replacement property. Kreisers had 45 days from the closing of the relinquished property to designate replacement property. First Dakota knew that Kreisers had designated the property from the Foundation as replacement property.
[¶ 16.] On or around June 30, 2007, and after the expiration of the 45 days, Peska submitted to Kreisers its first request for payment for its construction of the warehouse on the replacement property. Johnson instructed First Dakota to pay Peska from the excess proceeds still retained by...
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