Five years after the collapse and bankruptcy of DBSI, Inc., the Maryland Court of Appeals reversed a trial court's dispositive ruling in favor of a realty company that exposed its client to a TIC1 investment. The Plaintiff was a retired school teacher that reinvested $4 million in proceeds from the sale of various rental properties. In doing so, he sought to take advantage of Section 1031 of the Internal Revenue Code regarding “like-kind exchange property.”
Judge McDonald's opening line to his opinion dispels any suspicions that he ruled in favor of the Plaintiff/Cross-Appellant based on sympathy:
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.
2013 WL 6182531 (MD.2013) at 1.
Despite this mild contempt for the transaction at issue, the Court proceeded to evaluate the characteristics of the transaction in determining that it qualified as an investment contract under the Howe test. As such, it qualified as a security under the ambit of the Maryland Securities Act (pp. 5-9).
But it was not all good news for the investor. The Court concluded that the common law statute of limitations did not supersede the limitations provision set forth in the Act. As such, the investor's claims for violations of the Act's unregistered securities and unregistered broker-dealer provisions were time-barred. But all was not lost. The Court concluded that the investor's claim for fraud in the offer or sale of a security was tolled by a fraudulent concealment statute extraneous to the Securities Act. Moreover, it concluded that whether or not there was, in fact, fraudulent concealment sufficient to toll the statute of limitations was dependent upon a “fact-intensive injury” preclusive of summary judgment2.
Finally, the Court concluded that Mr. Mathew's claim for a violation of the Securities Act's unregistered investment adviser provision, as well as his common law tort and contract claims, were also subject to preservation by the fraudulent concealment statute. (CJ Section 5-203). Whether or not these claims were actually preserved (tolled) would be up to a jury.
This case provides an example of why:
- Investors should seek legal counsel as soon as they suspect something is amiss with one of their investments, and
- Where appropriate, the court petition or arbitration statement of claim should include both statutory and common law claims.
1TIC is an acronym for “Tenants in Common Interests.” I previously served as an expert witness in a DBSI TIC suitability arbitration.
2“Whether a plaintiff's failure to discover a cause of action was attributable to fraudulent concealment by the defendant is ordinarily a question of fact to be determined by the jury.” Matthews v. Cassidy Turley Maryland, Inc., 2013 WL 6182531 (MD.2013) at 14.