Terry v. SunTrust Banks, Inc.

Summarized by Cullen Drescher Speckhart , Cooley LLP
13 years 8 months ago

Citation:

Terry v. SunTrust Banks Inc., Case No. 11-1704 (4th Cir. July 2, 2012).

Tag(s):

Ruling:

SunTrust, which held the general operating account of LandAmerica 1031 Exchange Services, Inc. ("LES"), sold LES certain securities, and extended LES a line of credit, could not be held liable for aiding and abetting a breach of fiduciary duty by LES to 1031 exchangers because LES itself had not assumed such fiduciary duties. In addition, SunTrust could not be held liable for civil conspiracy in connection with LES activities.

Procedural context:

Diversity actions were consolidated for pre-trial proceedings in the District of South Carolina by the Judicial Panel on Multi-District Litigation. The District Court dismissed with prejudice under FRCP 12(b)(6) all claims against SunTrust brought by named representatives of putuative classes consisting of approximately 400 members that engaged LES to effectuate 1031 exchanges between February and November of 2008 (the "Exchangers"). The Exchangers appealed.

Facts:

The principal question on appeal was whether LES assumed fiduciary duties in serving as a "qualified intermediary" in the exchange of investment properties pursuant to 26 USC section 1031(a)(1) with respect to the proceeds of the sale of relinquished properties. The court first addressed the Exchangers' claim of aiding and abetting breach of fiduciary ditues. The Exchangers offered three alternative theories under which they argued that LES assumed a fiduciary duty to the Exhangers. First, their exchange funds were held by LES in an expres or resulting trust. Second, LES was the Exchangers' agent, and fiduciary duties arose with the principal-agent relationship. Third, LES served as a real estate broker to the Exchangers, and therefore owed statutory fiduciary duties to the Exchangers. As to the first argument, the court found that the Exchangers had "relinquished any an all interests in the [exchange funds], including the equitable interest tha a beneficiary of a trust would retain in trust property" in entering their Exchange Agreements with LES. According to the court, this action was inconsistent with the establishment of a trust, and that Virginia law would not impose a fiduciary relationship between LES and the Exchangers under the facts presented. As to the second argument, the court found that the language of the Exchange Agreement was controlling and was inconsistent with LES having an agency/fiduciary relationship with the Exchangers. In the Exchange Agreement, the Exchangers relinquished all right, title , and interest in the exchange funds; therefore, LES could not be said to have been acting on the Exchanger's behalf or subject to their control, as is required for an agency relationship to arise under Virginia law. As to the Exchanger's third argument (that LES was a real estate broker because LES received compensation for its role as an exchange accomodator), the court interpreted the statutory definition of "real estate broker," and found that the Virginia legislature would not have intended qualified intermediaries like LES to be considered real estate brokers. This is because qualified intermediaries like LES exist as a mechanism by which certain taxpayers may defer recognition of gains on investment properties, and their "more specialized function" render them more analagous to the entities listed among the exceptions to "real estate broker" in the relevant statutute. Finding that LES assumed no fiduciary duties to the Exchangers, the court turned to the Exchanger's claim alleging common law civil conspiracy. On this count, the court concluded that the Exchangers failed to state a claim for conspiracy to commit fraud because they failed to allege that SunTrust engaged in concerted action with the individual defendants with a mutual understanding of a common purpose to defraud, which is required by both Virginia and California law.

Judge(s):

Agee, J; Davis, J; and Wynn, J.

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