Redding v. Mont. First Judicial Dist. Court

• Decision Date: 06 July 2012
• Docket Number: No. OP 11–0558.,OP 11–0558.
• Citation: 281 P.3d 189,365 Mont. 316
• Parties: Billie L. REDDING, Petitioner, v. MONTANA FIRST JUDICIAL DISTRICT COURT, The Honorable Dorothy McCarter, Presiding, Respondent.
• Court: Montana Supreme Court

365 Mont. 316

281 P.3d 189

Billie L. REDDING, Petitioner,

v.MONTANA FIRST JUDICIAL DISTRICT COURT, The Honorable Dorothy McCarter, Presiding, Respondent.

No. OP 11–0558.

Supreme Court of Montana.

Argued April 25, 2012.

Submitted April 26, 2012.

Decided July 5, 2012.

Amended: July 6, 2012.

For Petitioner: Linda M. Deola (argued), Morrison, Motl & Sherwood, PLLP, Helena, MT.

For Respondent: P. Brad Condra (argued), G. Patrick HagEstad (argued), Milodragovich, Dale, Steinbrenner & Nygren, P.C., Missoula, MT.

For Amicus: Jesse Laslovich, Jameson C. Walker, Brett O'Neil, Office of the Commissioner of Securities and Insurance, Helena, MT.

Justice MICHAEL E. WHEAT delivered the Opinion of the Court.

[365 Mont. 318]¶ 1 Petitioner Billie L. Redding (Redding) asks this Court, pursuant to M.R.App. P. 14, to exercise supervisory control over the First Judicial District Court, Lewis and Clark County, and to conclude it was error for the District Court to grant partial summary judgment to Defendants Timothy Janiak; Anderson ZurMuehlen & Co., P.C.; Ray E. Petersen; and Rick Ahmann (collectively “AZ”).

BACKGROUND

¶ 2 For the purposes of this Opinion, the facts are not materially disputed. Redding is a 76 year old widow ¹ with a high school education. Redding worked the majority of her adult life on family ranches. In 2004, Redding sold her ranch for approximately 3.3 million dollars. Seeking to avoid tax liability on the sale, and provide income for life for herself and her son, Redding sought advice from her accountant, Timothy Janiak (Janiak).

¶ 3 Janiak, a Certified Public Accountant (CPA), had been Redding's accountant for approximately 20 years and was a shareholder at the accounting firm Anderson ZurMuehlen & Co. (“Anderson”). Janiak assisted Redding in the sale of her ranch, and Redding sought his advice to invest the proceeds of the sale. To help Redding achieve her financial goals, Janiak steered Redding to a company called Anderson ZurMuehlen Real Estate and Business Brokerage, LLC, d/b/a Acquiron.

¶ 4 Acquiron was a subsidiary of Anderson, formed with Rick Ahmann (Ahmann), a real estate broker. Ray E. Petersen (Petersen), a CPA and former shareholder at Anderson, was Anderson's representative in Acquiron. Acquiron sold Tenants–In–Common investments (TICs) to clients of Anderson. A TIC investment is, generally speaking, a joint investment in real property, in this case commercial property, where each owner owns an undivided share of the property. The TICs involved in Redding's case were initially owned by DBSI Housing, Inc. (DBSI) or one of its hundreds of affiliates.²

¶ 5 DBSI would acquire title to real property then sell the same property in shares to a number of investors. DBSI would then require the new owners to execute several agreements, including a lease agreement with DBSI in which the owners leased the property back to DBSI as “master tenant,” and a TIC agreement with the other owners. The owners also assumed a pro rata share of the debt DBSI incurred in acquiring the real property.

¶ 6 DBSI, as “master tenant,” would then lease the properties to commercial tenants, acting as a property manager for the owners. DBSI would pay the expenses of operating each property. According to the “NNN Plus Lease” summary provided by DBSI to potential investors, Redding and the other owners did not have to invest “the personal time and effort involved in operating the property and in dealing with multiple tenants.” Rather, as DBSI advertized, “the management responsibilities of the TICs will simply consist of dealing with the NNN PLUS Lessee and receiving and depositing a monthly lease payment from the Lessee.”

¶ 7 In return for the owners' investment, DBSI promised a 6%–7% per year rate of return on each owner's investment, with annual increases of approximately 3%. These promised returns were from the lease payments DBSI collected on the properties. DBSI would keep any profits above the promised rate of return to investors.

¶ 8 Ultimately, Redding purchased four DBSI TICs via 1031 exchanges in 2004.³ The 1031 exchanges allowed Redding to avoid tax liability on the sale of her ranch, and, in theory, the newly purchased properties would provide the income she sought. Redding's purchases were brokered by Acquiron. Using the proceeds of the ranch sale and other assets, Redding paid approximately $4. 6 million for the properties, which includes approximately $2.2 million cash and $2.4 million of assumed debt on the properties.

¶ 9 DBSI's scheme collapsed and it stopped making payments to investors in 2008, and filed for bankruptcy. In response to petitions from the states of Idaho and Montana, the bankruptcy court appointed an examiner to investigate the finances of DBSI and its various affiliates. The examiner found that DBSI was running a Ponzi scheme.⁴

¶ 10 In a related complaint brought by the bankruptcy trustee against DBSI's Idaho attorneys, the trustee alleged that, “[i]n November 2008 ... [t]ens of thousands of [DBSI] investors learned that they had lost everything. The docket of the Bankruptcy Court is crowded with letters from individual investors telling of lost savings accumulated in some cases through the efforts of generations.”

¶ 11 After the colossal collapse of DBSI, Redding sued AZ in 2009 ⁵ alleging: (1) unlawful sale of securities; (2) negligence; (3) negligent misrepresentation; (4) breach of fiduciary duty; (5) breach of contract; and (6) tortious breach of the covenant of good faith and fair dealing. Redding sought damages in the amount of $4,635,485.51, plus additional amounts for punitive damages, emotional distress, loss of established course of life, and consequential damages.

¶ 12 Redding moved for summary judgment on several issues, however the only issue relevant here is “[w]hether or not the DBSI TICs sold to [Redding] are securities under the Securities Act of Montana[.]” AZ also moved for summary judgment on the same issue. After briefing, the District Court found the DBSI TICs were not securities under Montana law. In an August 9, 2011, order, the District Court found that “Redding did not engage in a common enterprise,” an essential element of an investment contract (i.e. a security), because she “did not share the risks of the investment with other investors because she agreed upon a contractually set return on her investment.” The District Court stated the “keystone” of a common enterprise is “risk and fluctuation with the return on the investment.” Because Redding “wanted ‘zero risk[,]’ ” the District Court found the TICs were not securities under Montana law.

¶ 13 On September 23, 2011, Redding filed her Petition for Writ of Supervisory Control (“Petition”). AZ moved to stay the proceedings in District Court, pending the outcome of Redding's Petition. The District Court granted AZ's motion over Redding's objection. Redding's Petition presents one issue, we restate as follows:

¶ 14 Did the District Court err in holding that the TICs at issue are not securities under the Securities Act of Montana?

DISCUSSION

¶ 15 Before reaching the merits of Redding's Petition, we must determine whether the exercise of supervisory control is appropriate.

A. Is Supervisory Control Appropriate?

¶ 16 By virtue of Article VII, Section 2(2) of the Montana Constitution, this Court has “general supervisory control over all other courts.” Stokes v. Montana Thirteenth Judicial District Court, 2011 MT 182, ¶ 5, 361 Mont. 279, 259 P.3d 754. Supervisory control is an extraordinary remedy, reserved for extraordinary circumstances. Stokes, ¶ 5. We consider the propriety of supervisory control on a case-by-case basis. Stokes, ¶ 5.

¶ 17 Rule 14(3) of the Montana Rules of Appellate Procedure governs petitions for writs of supervisory control:

The supreme court has supervisory control over all other courts and may, on a case-by-case basis, supervise another court by way of a writ of supervisory control. Supervisory control is an extraordinary remedy and is sometimes justified when urgency or emergency factors exist making the normal appeal process inadequate, when the case involves purely legal questions, and when one or more of the following circumstances exist:

(a) The other court is proceeding under a mistake of law and is causing a gross injustice;

(b) Constitutional issues of state-wide importance are involved;

(c) The other court has granted or denied a motion for substitution of a judge in a criminal case.

¶ 18 “This Court will assume supervisory control of a district court to direct the course of litigation where the district court is proceeding based upon a mistake of law, which if uncorrected, would cause significant injustice for which an appeal is an inadequate remedy.” Truman v. Montana Eleventh Judicial District Court, 2003 MT 91, ¶ 13, 315 Mont. 165, 68 P.3d 654. Judicial economy and inevitable procedural entanglements are appropriate reasons to exercise supervisory control where a mistake of law will affect virtually all aspects of the case: the costs, the course of discovery, settlement negotiations, and the trial itself. Truman, ¶ 15;Stokes, ¶ 6. In such cases, any verdict rendered would be “questionable” and would inevitably lead to further costs and litigation. Truman, ¶ 15.

¶ 19 Redding argues that supervisory control is appropriate because the District Court's order is a clear mistake of law, and is in direct conflict with the precedent of the United States Supreme Court and the opinions of the Montana Commissioner of Securities and Insurance, the Securities Exchange Commission (SEC), and the Financial Industry Regulatory Authority (FINRA) (formerly known as National Association of Securities Dealers (NASD)). If allowed to stand, Redding argues the ruling will create an “environment ripe for securities fraud” in Montana, and supervisory control is required to prevent significant injustice to Redding and all citizens of Montana.

¶ 20 AZ appeared for the District Court, and argues that...