Oak Hill Mgmt. v. Edmund & Wheeler, Inc.

• Decision Date: 27 August 2021
• Docket Number: 2:20-cv-124
• Court: U.S. District Court — District of Vermont
• Parties: OAK HILL MANAGEMENT, INC., A Vermont Corporation, Plaintiff, v. EDMUND &WHEELER, INC., A New Hampshire Corporation, O'TOOLE ENTERPRISES LLC, A New Hampshire Limited Lability Company, JOHN D. HAMRICK, an individual, And MARY O'TOOLE, an individual, Defendants.

OAK HILL MANAGEMENT, INC., A Vermont Corporation, Plaintiff, v. EDMUND &WHEELER, INC., A New Hampshire Corporation, O'TOOLE ENTERPRISES LLC, A New Hampshire Limited Lability Company, JOHN D. HAMRICK, an individual, And MARY O'TOOLE, an individual, Defendants.

No. 2:20-cv-124

United States District Court, D. Vermont

August 27, 2021

OPINION AND ORDER (ECF NOS. 23, 24)

WILLIAM K. SESSIONS III, U.S. DISTRICT COURT JUDGE

Plaintiff Oak Hill Management, Inc. (“Oak Hill”) has brought suit against Defendants alleging fraud, negligence breach of fiduciary duty, breach of contract, and sale of unregistered securities in connection with Plaintiff's investment in an Ohio property in relation to a Section 1031 exchange. Presently before the Court are two motions to dismiss.

For the reasons set forth below, the motion to dismiss filed by Edmund & Wheeler, Inc. (“E&W”) and John Hamrick (“Hamrick”) is denied (ECF No. 23). The motion to dismiss filed by Mary O'Toole and O'Toole Enterprises, LLC, is granted, and those claims are dismissed without prejudice (ECF No. 24).

I. FACTUAL BACKGROUND^[1]

Plaintiff Oak Hill Management, Inc. (“Oak Hill”) is a Vermont corporation owned and operated by Eugina Cuomo Cote and Marc P. Cote (the “Cotes”). The Cotes created Oak Hill after Mrs. Cote received a property called Whitney Village as an inheritance. In the summer of 2018, the Cotes sold Whitney Village, and an attorney suggested that they complete a Section 1031 exchange to defer the taxable gains on the sale. Put simply, a Section 1031 exchange involves a like-kind acquisition of a replacement property to defer taxable gains on the sale of another property. See 26 U.S.C. § 1031.

To facilitate its exchange, Oak Hill retained an accountant, a lawyer, and Edmund & Wheeler, Inc. (“E&W”).^[2] E&W is a New Hampshire corporation with its principal place of business in Franconia, New Hampshire. John D. Hamrick is E&W's Vice President and Director, and Mary O'Toole is E&W's President and Operations Manager. E&W purports to be a leading Section 1031 consulting firm.

Because § 1031(a)(3) places some restrictions on the sale timeline and proceeds, property owners often use the services of a qualified intermediary to facilitate the exchange. For this purpose, McLane Middleton, a New Hampshire professional profit corporation, referred Oak Hill to Hamrick. On January 24, 2018, E&W and Oak Hill entered into an Exchange Services & Consulting Agreement (the “Consulting Agreement”), ^[3] pursuant to which E&W would act as the qualified intermediary in the 1031 Exchange. Section 2.0 of the Consulting Agreement explains that E&W will provide “exchange consulting” which will include, but not be limited to:

1. Overall strategy & education related to Section 1031 replacement property strategies, including:

a. Whole Ownership of NNN Leased Properties

b. Fractional Ownership of NNN Leased Properties

c. Fractional DSTs and “REIT-like” investment opportunities

d. Oil & Gas (Subsurface Rights)

e. Conversion of Investment Real Estate to Personal Use Real Estate

2. Introductions to various providers of replacement property options for the purposes of education, product availability due diligence, etc. Also, the provision of specific information on properties and sponsors that Edmund & Wheeler has worked with extensively.

3. Risk/Reward analysis on replacement property options based on past experience and industry information.

4. Strategy pertaining to the holding entity(ies) of the replacement properties moving forward.

5. Evaluation of various options from the standpoint of:

a. 1031 applicability and conformance.

b. Cash flow and NOI analysis.

c. Leverage, debt and loan package analysis.

d. Previous experience(s) with providers of such options.

e. Assistance in reviewing offering packages with review level input.

f. Previous experience with certain property types and tenants (i.e. CVS, Walgreens, Fresenius Medical, Noah's Event Centers, Tractor Supply, Advanced Auto Parts, BoJangles)

Please note that Edmund & Wheeler, Inc. does not operate in a “Broker Relationship” of any kind with the Exchangor. Edmund & Wheeler, Inc. can derive referral fees from certain providers of replacement real estate, and will disclose those potential fees. Working with these providers can significantly reduce the consulting charges in this Agreement.

Buying certain types of real estate require a thorough review by your attorney, tax and financial advisors. Edmund & Wheeler does not provide legal advice.

Please note that certain replacement options require that the investor be an “accredited” investor, Edmund & Wheeler makes no claim to the Exchangor's suitability for any investment, but will work with Exchangor to determine eligibility.

6. On-Going Section 1031 education to assist in planning for and choosing replacement options, including:

a. Applicable Section 1031 rules & regulations.

b. Specific statutory items related to Section 1031.

c. Identification rules & identification strategy.

d. Section 1031 standard practices and potential areas of risk.

e. Safe Harbor analysis for real estate conversion.

f. Support of tax and legal professionals in the evaluation of potential replacement property options.

g. Communications with providers of replacement property options on Exchangor's behalf.

h. Provide references of past exchangors that have evaluated and purchased similar replacement property options where applicable.

ECF No. 1-1 at 2.

Section 3.0 of the Consulting Agreement explains what E&W would do under the “exchange facilitation”. The facilitation responsibilities include strategy, support, preparation of documents, reviewal of “all deeds, offers, contracts, Purchase & Sale Agreements and other pertinent documents associated with the Exchange for both Relinquished and Replacement Properties”, coordination and communication with the various professionals, safeguarding the escrow funds, assistance with time deadlines, “ensuring all aspects of the Exchange are in strict compliance with federal tax laws as they pertain to IRC Section 1031”, and more. Id. at 3. Page six of the Consulting Agreement contains the following note: “PLEASE NOTE: Edmund & Wheeler, Inc. does not provide legal or tax advice during this transaction. As Exchange Accommodator and Qualified Intermediary, Edmund & Wheeler, Inc. is not responsible for calculating capital gains taxes on a state or federal level. You are urged to seek the services of qualified professionals. We strongly suggest that you understand your capital gains exposure before, during and after the exchange.” Id. at 6. At the bottom of the last page of the Consulting Agreement, a “REFERRAL FEE DISCLOSURE” warning states that “Edmund & Wheeler, Inc. could receive financial consideration for referring clients to real estate brokers or developers offering replacement property options. Edmund & Wheeler, Inc. does not enter in to a Broker relationship with any client. Edmund & Wheeler, Inc. does NOT receive any compensation whatsoever from securities based replacement property options including Delaware Statutory Trusts (DSTs) or subsurface mineral rights.” Id. at 7.

The Complaint alleges that “[o]nce the Consulting Agreement was executed, E&W proposed and/or analyzed several replacement properties for Oak Hill to purchase in exchange for Whitney Village. Mr. Hamrick's analysis included the risks presented by the tenant in the building to be purchased, the need for due diligence into the building owner and tenant, and inspection of the facilities.”

Maine Property

Before selling Whitney Village, the Complaint alleges that Oak Hill bought a replacement property in Maine on May 30, 2018. “Mr. Hamrick identified, vetted, and was actively involved in the consummation of the purchase of the Maine Property.” He was involved in negotiating the terms of the purchase with the seller, he drafted the letter of intent on behalf of Oak Hill, he included a due diligence period as a condition to the purchase and commented on the due diligence materials, he suggested that Oak Hill receive financial statements and a business plan for the tenant, and he then told Oak Hill that the numbers were only as good as the stability of the tenant. Additionally, he advised Oak Hill on the requirements of the Section 1031 process.

Then, “[t]o facilitate the reverse exchange, E&W created a special purpose entity, Oak Hill Management SPE, LLC (“SPE”), to “park” the title to the Maine Property until after the Whitney Village transaction closed. After the Whitney Village transaction closed, the SPE would transfer title to the Maine Property to Oak Hill.” The SPE, which was controlled and operated by Hamrick, purchased the Maine Property for $4, 250, 000 and funded this purchase with a $ 2.9 million mortgage and a $1, 326, 284.50 cash loan payment from Oak Hill. According to the Complaint, Hamrick “repeatedly promised the Cotes that as soon as the Whitney Village sale closed and the sale proceeds from that transaction were transferred to the escrow account, Mr. Hamrick would return to Oak Hill the $1, 326, 284.50 cash payment Oak Hill made to purchase the Maine Property. Oak Hill understood from Mr. Hamrick that its out-of-pocket cash payment was a loan that would be repaid in full within a short amount of time.”

Whitney Village Sale

On June 13, 2018, Oak Hill sold Whitney Village to Quinnipiac University for $7, 828, 639. On July 11, 2018, the SPE 7 received $4, 122, 115.26 from Quinnipiac University (after Oak Hill's mortgage on Whitney Village was paid off).

Identification Period

The Complaint alleges that Hamrick told Oak Hill that the deadline to identify replacement properties was no later than July 14, 2018 (45 days after Oak Hill closed on the Maine...