Mathews v. Cassidy Turley Md., Inc.

Decision Date26 November 2013
Docket NumberNo. 51,Sept. Term, 2012.,51
Citation435 Md. 584,80 A.3d 269
PartiesWilliam H. MATHEWS v. CASSIDY TURLEY MARYLAND, INC. et al.
CourtMaryland Court of Appeals

OPINION TEXT STARTS HERE

Thomas C. Costello (Costello Law Group, Towson, MD), on brief, for appellant/cross-appellee.

Matthew S. Sturtz (Jeffrey P. Reilly of Miles & Stockbridge P.C., Towson, MD), on brief, for appellee/cross-appellants.

Douglas F. Gansler, Esq., Atty. Gen. of Maryland, T. Webster Brenner, Esq., Katharine M. Weiskittel, Esq., Asst. Attys. Gen., Baltimore, MD, Joseph J. Opron, III, Esq., North American Securities Administrators Association, Inc., Washington, DC, for amici curiae brief of Maryland Securities Commissioner and North American Securities Administrators Association, Inc. in support of appellant/cross-appellee.

Argued before: BARBERA, C.J., HARRELL, BATTAGLIA, GREENE, ADKINS, McDONALD, BELL *, JJ.

McDONALD, J.

It is sometimes the case that an individual bent on avoiding taxes exchanges the certainty of the tax liability for a risky, and perhaps fraudulent, investment that proves more costly in the long run. The instant litigation arises out of such a situation. We are asked to decide the nature of the investment—was it a “security” for purposes of application of the Maryland Securities Act?—and whether the long run was too long—are the claims barred by limitations? We also consider the potential use at trial of a bankruptcy examiner's report concerning the promoter of the investment scheme.

We hold that an investment that combined a tenant-in-common interest in commercial real estate with a mandatory management contract with the affiliate of the seller and only a limited ability for the buyers to effect a change of management of the property is an “investment contract” and therefore a security for purposes of the Maryland Securities Act. We affirm the Circuit Court's determination that the buyer's claims under the Securities Act are barred by limitations insofar as they relate to registration under the Act. We reverse the court's determination that the buyer's claims under the Act that relate to alleged fraud and misrepresentation by the defendants are barred by limitations and remand for further consideration whether the limitations period as to those claims was tolled by affirmative fraudulent conduct of the defendants. For a similar reason, we also reverse and remand for reconsideration the Circuit Court's judgment that the buyer's common law tort claims are time-barred as a matter of law. We decline to affirm the award of summary judgment on an alternative ground that the Circuit Court did not adopt. Finally, we affirm the Circuit Court's decision to reserve judgment on the admissibility and use of a bankruptcy examiner's report until it had additional information concerning the proposed use of the report in the context of the trial.

Background
Factual Background

Except as otherwise indicated below, the following facts are undisputed in the record of this case, although the parties have some differences as to immaterial details and as to the inferences that may be drawn from these facts.

Mr. Mathews Seeks an Investment

In 2003, Petitioner William H. Mathews, a retired school teacher and librarian, had owned and managed his rental properties for more than 40 years. At that time, he owned eleven rental properties near the campus of Towson University; he rented those properties primarily to students and faculty at the university. In response to anticipated deleterious changes in local zoning laws, Mr. Mathews decided to sell the properties. Ultimately, he was referred to Stephen Weiss, a real estate professional. Mr. Weiss was then employed by W.C. Pinkard & Co., the predecessor in interest to Respondent Cassidy Turley Maryland, Inc. (Cassidy Turley).1 Mr. Mathews retained Cassidy Turley to market the properties, and in August 2004 the properties were sold to Bob Ward Companies for approximately $4 million. Mr. Mathews paid approximately $176,000 to Cassidy Turley as a commission.

In order to receive more favorable tax treatment of the proceeds of the sale, Mr. Mathews sought to re-invest the proceeds in other real estate shortly after the sale. With Mr. Weiss' advice, Mr. Mathews ultimately used much of the proceeds to purchase five fractional interests in various commercial office buildings located throughout the United States.2 THESE FRACTIONAL Interests were called “tenants in common Interests” (“TICs”). Mr. Weiss provided Mr. Mathews with binders containing various documents that described the particular TICs under consideration.

TICs

Each of the TICs in question was created by a company called DBSI, Inc., located near Boise, Idaho, or an affiliated company. The structure of the TICs are set forth in various written agreements and other materials. DBSI would purchase real estate, typically an office building, and divide it into TICs that it would then sell to investors. Investors in the TICs were required, as a condition of the purchase, to agree to retain DBSI 3 as property manager,4 in return for which DBSI promised a specified annual rate of return on the investment. DBSI would locate sub-tenants who would occupy the property and pay the rent that produced a revenue stream. Under the property management agreement, replacement of DBSI as property manager required a majority vote of all TIC owners of a given piece of property, as well as indemnification of DBSI against any and all claims, actions, costs, damages, liabilities, deficiencies or expenses relating to the property. In the event that DBSI was terminated as property manager, a unanimous vote by the TIC owners was required to appoint a new manager. Under the terms of a TIC agreement, there was no provision for direct control of the property by the TIC owners.

Mr. Mathews received steady payments with respect to his TICs over the next few years and sold one of them.5 However, in 2008, things changed.

DBSI Bankruptcy; Examiner's Report

In 2008, Mr. Mathews learned that DBSI would be suspending payments for certain of the TICs. Mr. Mathews then contacted Mr. Weiss, who, according to Mr. Mathews, assured him that payments would resume and that he should not worry.6 In November 2008, DBSI filed a voluntary petition for bankruptcy under Chapter 11 of the bankruptcy code.7 All of the properties underlying Mr. Mathews' TICs became the subject of foreclosure proceedings.

The bankruptcy court appointed an attorney from a prominent Washington, D.C., law firm as an examiner to conduct an investigation into DBSI. In re: DBSI, Inc., No. 1:08–bk–12687 (D. Del. filed November 10, 2008). The examiner's report describes a downward spiral fueled by related party transactions, conflicts of interest, growing debt disguised as equity, limited sources of revenue, complex and sloppy accounting, and the misleading of investors. Among other things, the report describes the structure and marketing of the DBSI TICs. The bankruptcy court ultimately made findings similar to those of the examiner in concluding that many of DBSI's transactions were “either constructively or actually fraudulent” and that it would be futile to attempt to unravel many of the related party transactions.

Licensing and Registration Status

At the time Mr. Mathews purchased his TICs, Cassidy Turley was licensed by the Maryland Real Estate Commission as a real estate broker. Neither Mr. Weiss nor Cassidy Turley was licensed under the Maryland Securities Act to act as an investment adviser, investment adviser representative, securities broker-dealer, or agent.

Investigations of DBSI

Following the collapse of DBSI, the Securities Division of the Maryland Attorney General's Office undertook an investigation of the offer and sale of DBSI TICs in Maryland. In April 2009, the Securities Division contacted Mr. Mathews as part of that investigation. No action was ultimately taken by the Securities Division against DBSI or Cassidy Turley, although Cassidy Turley did refund to Mr. Mathews the fees and commissions it was paid in connection with his TIC transactions. Federal authorities were also conducting a parallel investigation.8

Procedural BackgroundComplaint

On March 23, 2010, Mr. Mathews filed a complaint in the Circuit Court for Baltimore County against Mr. Weiss and Cassidy Turley.9 Mr. Mathews' complaint alleged that Cassidy Turley owed Mr. Mathews legal and fiduciary duties to disclose material facts and to act with the care and skill of a “professional financial adviser.” It alleged that Cassidy Turley had misled Mr. Mathews concerning the suitability of the TIC investment for his financial situation, the safety of the investment, and the soundness of DBSI. It also alleged that Cassidy Turley had failed to inform him of other material information, including its lack of research into the investment, its receipt of a commission from the sale of the TICs, and the risks associated with the investment. It alleged that Cassidy Turley actively concealed its alleged wrongdoing from him and lulled him into relying upon it, even after the DBSI bankruptcy, until he was contacted by the Securities Division.

The complaint included common law tort claims for fraud, constructive fraud, negligent misrepresentation, and negligence, as well as a claim for breach of contract. It also included a claim under the Maryland Securities Act, Maryland Code, Corporations & Associations Article, (“CA”) § 11–703.

The parties conducted discovery. After the completion of discovery, they filed cross-motions for summary judgment, as well as motions in limine related to evidence anticipated to be offered at trial.

Rulings on Pretrial Motions

At the pre-trial motions hearing on December 5, 2011, the Circuit Court, among other things, granted a motion in limine that precluded Mr. Mathews from mentioning or introducing into evidence at trial the bankruptcy examiner's report on the basis that it was inadmissible hearsay, although the court held open the possibility that it...

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