Gerald Terry v. SunTrust Banks, Incorporated ( 2012 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 11-1704
GERALD R. TERRY; ANN T. ROBBINS; JANE T. EVANS, on their own
behalf and on behalf of a class of others similarly
situated,
Plaintiffs – Appellants,
v.
SUNTRUST BANKS, INC.,
Defendant – Appellee,
and
THEODORE L. CHANDLER, JR.; CHRISTINE R. VLAHCEVIC; G.
WILLIAM EVANS; RONALD B. RAMOS; DEVON M. JONES; STEPHEN
CONNER,
Defendants.
No. 11-1707
ANGELA M. ARTHUR, as Trustee of the Arthur Declaration of
Trust, dated December 29, 1988, and all similarly situated;
VIVIAN R. HAYS, an individual, and all others similarly
situated; LEAPIN EAGLE LLC, a limited liability company, and
all others similarly situated; DENISE J. WILSON, an
individual, and all others similarly situated,
Plaintiffs – Appellants,
v.
SUNTRUST BANKS, INC., a Georgia corporation,
Defendant – Appellee,
and
G. WILLIAM EVANS, an individual; STEPHEN CONNOR, an
individual,
Defendants.
Appeals from the United States District Court for the District
of South Carolina, at Anderson. Joseph F. Anderson, Jr.,
District Judge. (8:09-cv-00415-JFA; 8:09-cv-01739-JFA)
Argued: May 17, 2012 Decided: July 2, 2012
Before AGEE, DAVIS, and WYNN, Circuit Judges.
Affirmed by unpublished opinion. Judge Davis wrote the opinion,
in which Judge Agee and Judge Wynn joined.
ARGUED: Thomas G. Foley, Jr., FOLEY BEZEK BEHLE & CURTIS, LLP,
Santa Barbara, California, for Appellants. Cory Hohnbaum, KING
& SPALDING, LLP, Charlotte, North Carolina, for Appellees. ON
BRIEF: Cheryl F. Perkins, WHETSTONE MYERS PERKINS & FULDA, LLC,
Columbia, South Carolina, James R. Gilreath, GILREATH LAW FIRM,
Greenville, South Carolina, for Appellants Gerald R. Terry, Ann
T. Robbins, Jane Evans; Robert L. Brace, HOLLISTER AND BRACE,
Santa Barbara, California, for Appellants Angela M. Arthur,
Vivian R. Hays, Leapin Eagle LLC, Denise J. Wilson.
Unpublished opinions are not binding precedent in this circuit.
2
DAVIS, Circuit Judge:
In these diversity actions, consolidated for pre-trial
proceedings in the District of South Carolina by the Judicial
Panel on Multi-District Litigation (“JPML”), the district court
dismissed with prejudice pursuant to Federal Rule of Civil
Procedure 12(b)(6) all claims against Appellee SunTrust Banks,
Inc. (“SunTrust”). 1 The principal question presented is whether
LandAmerica 1031 Exchange Services, Inc. (“LES”), which (before
it filed a petition in bankruptcy) acted as a “qualified
intermediary” (“QI”) in the exchange of investment properties
pursuant to 26 U.S.C. § 1031(a)(1), assumed fiduciary duties
with respect to the proceeds of the sale of the relinquished
properties. Appellants (“the Exchangers”) are the named
representatives of putative classes consisting of approximately
400 members that engaged LES as a QI between February and
1
The Exchangers brought other claims that are not at issue
in this appeal, including claims against several individual
officers and directors of LES and its corporate parent,
LandAmerica Financial Group, Inc. (“LFG”). The individual
defendants, the claims against whom have been and remain stayed,
are Theodore L. Chandler, Jr. (Chairman and Chief Executive
Officer of LFG), Stephen Conner (Senior Vice President of LES
and LFG), G. William Evans (Executive Vice President and Chief
Financial Officer of LFG, director and officer of LES), Ronald
B. Ramos (Vice President and Treasurer of LES and Senior Vice
President and Treasurer of LFG), and Devon M. Jones (Vice
President and Assistant Treasurer of LES and LFG). Among the
claims against the individual defendants are allegations of
fraud, discussed infra at 27-38.
3
November 2008. The district court ruled LES did not assume
fiduciary duties; thus SunTrust -– which had held LES’s general
operating account, sold LES certain securities, and extended LES
a line of credit –- could not be liable for aiding and abetting
the breach of a fiduciary duty by LES. The district court also
dismissed the Exchangers’ claim of civil conspiracy. We affirm.
I.
First, we address the claim of aiding and abetting breach
of fiduciary duties. We review a district court’s dismissal
pursuant to Rule 12(b)(6) de novo. Nemet Chevrolet, Ltd. v.
Consumeraffairs.com, Inc., 591 F.3d 250, 253 (4th Cir. 2009). We
assume all well-pled facts are true, and draw all reasonable
inferences in favor of the plaintiff. Id. The “complaint must
contain sufficient factual matter, accepted as true, to ‘state a
claim to relief that is plausible on its face.’” Ashcroft v.
Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial
plausibility when the plaintiff pleads factual content that
allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” Id.We begin with an explanation of the statutory and
regulatory framework out of which this dispute arose. We then
4
summarize the district court’s rulings. Finally, we explain why
we discern no error by the district court.
A.
Ordinarily, if a person owns real property for business or
investment purposes that has risen in value over time (i.e., has
a low adjusted basis and a high fair market value), the property
owner incurs capital gains taxes upon selling the property. In
some circumstances, however, a property owner may defer the
recognition of capital gains if the property is “held for
productive use in a trade or business or for investment” and if
the owner “exchange[s]” the property (known as “relinquished
property”) for another property “of like kind” (known as
“replacement property”). 26 U.S.C. § 1031(a)(1). The property
owner must identify replacement property “of like kind” within
45 days of the sale of the original property, and must close on
the new property within 180 days of the original sale. Moreover,
the property owner must not actually or constructively receive
the proceeds of the sale of the first property. 26 C.F.R. §
1.1031(k)–1(f)(2). The Internal Revenue Service has defined four
“safe harbors” available to ensure a determination of non-
receipt: a “qualified escrow account,” a “qualified trust,” a
“qualified intermediary,” or certain security or guarantee
arrangements. See id. § 1.1031(k)–1(g).
5
B.
The Exchangers chose the qualified intermediary option, and
engaged LES as a QI between February and November 2008. As IRS
regulations require, LES’s role was to “acquire[] the
relinquished property from the taxpayer, transfer[] the
relinquished property, acquire[] the replacement property, and
transfer[] the replacement property to the taxpayer.” Id. §
1.1031(k)–1(g)(4)(iii)(B). The Exchangers all executed the same
Exchange Agreement, which, among other things, enumerated the
parties’ rights with respect to the “Exchange Funds” -- the
proceeds LES would receive upon selling the relinquished
property, decreased by remaining debts on the property, real
estate commissions, closing costs, and other expenses. 2
As for the Exchange Funds, LES agreed in § 2(a) of the
Agreement to “hold” them and “apply” them toward the purchase of
replacement properties. LES also agreed in § 3(a) to “deposit”
the funds in an account at SunTrust and to “unconditionally
guarantee the return and availability of the Exchange Funds” as
well as certain rates of “guaranteed interest.” The Exchangers,
for their part, agreed in § 2(c) that LES would have “sole and
exclusive possession, dominion, control and use of all Exchange
2
A sample Exchange Agreement is at J.A. 822-32. All
citations to sections of the agreement are to that sample
agreement.
6
Funds” during the course of the exchange, and that the
Exchangers would have “no right, title, or interest in or to the
Exchange Funds or any earnings thereon,” as well as “no right,
power, or option to demand, call for, receive, pledge, borrow or
otherwise obtain the benefits of any of [the] Exchange Funds,”
other than the right to receive any remaining balance of the
Exchange Funds after LES purchased replacement property. The
Exchangers also acknowledged that LES would “invest[]” the
Exchange Funds, and that “the amount of the Exchange Funds may
be in excess of the maximum amount of deposit insurance carried
by [SunTrust].” As compensation for LES’s services, the
Exchangers agreed to pay fees of approximately $750 to $1,000
per exchange.
The Agreement also provided the following:
• Section 6(b) recites that LES was “entering into this
Exchange Agreement solely for the purpose of facilitating
taxpayers’ exchange” (emphasis and capitalization omitted);
• Section 6(c) limits LES’s duties to those “expressly set
forth herein,” and provides that “no additional duties or
obligations shall be implied hereunder or by operation of
law or otherwise”;
• Section 11, an integration clause, provides: “This Exchange
Agreement contains the entire understanding between and
among the parties hereto.”
7
LES abided by its contractual obligation to sell the Exchangers’
relinquished property, and received the net proceeds. LES
deposited the Exchange Funds in its general operating account, a
money market account at a SunTrust bank in Virginia (the “3318
account”). LES failed, however, to complete the exchanges.
Prior to agreeing to serve as the Exchangers’ QI, LES had
used other property owners’ exchange funds in part to buy
hundreds of millions of dollars of auction rate securities
(“ARS”). ARS are long-term variable-rate debt securities with
interest rates or dividends that are reset at frequent
intervals. Most of the ARS held by LES had been sold to LES by
SunTrust Robinson Humphrey, Inc. (“STRH”), a SunTrust-related
entity. In February 2008, the auctions through which ARS
interest rates were set began to fail, and the ARS market froze.
LES held ARS with a par value of $290.5 million, but the frozen
market left those securities with a liquidation value of only a
small percentage of par. With those assets frozen, LES’s liquid
assets were insufficient to acquire replacement properties for
the property owners under existing exchange agreements. While
LES eventually declared bankruptcy, it did not do so
immediately. Rather, apparently hoping the ARS market would
normalize, LES continued to enter into new exchange agreements,
including those with the Exchangers, allegedly using new
8
exchange funds to cover old exchanges as they came due -- an
arrangement the Exchangers call a Ponzi scheme.
C.
LES filed for Chapter 11 bankruptcy on November 26, 2008.
One of the issues before the bankruptcy court was whether the
Exchange Funds (a) became the property of LES when they were
received in the SunTrust account, in which case the Exchangers
would be limited to a pro rata share of the assets in LES’s
bankruptcy estate, or (b) remained the property of the
Exchangers, in which case the Exchangers would be entitled to
preferential recovery of those funds. As explained in detail
below, the Bankruptcy Court concluded the Exchange Funds became
LES’s property, and therefore were subject to pro rata
distribution in bankruptcy. Frontier Pepper’s Ferry, LLC v.
LandAmerica 1031 Exch. Serv. (In re LandAmerica Fin. Group
Inc.), No. 08-35994, 2009 WL 1269578 (Bankr. E.D. Va. May 7,
2009); see also Millard Refrigerated Servs., Inc. v. Landamerica
1031 Exhange Servs. (In re LandAmerica Financial Group, Inc.),
412 B.R. 800, 815 (Bankr. E.D. Va. 2009) (reaching the same
conclusion with respect to a minority of the property owners
whose funds were held in segregated rather than commingled
accounts at SunTrust).
After that issue was resolved in favor of LES’s trustee,
the trustee ratably distributed LES’s remaining assets among
9
LES’s creditors, including the Exchangers. The Exchangers
recovered only a portion of the Exchange Funds from LES in that
process. They then turned their attention to SunTrust (among
others, see supra n.1), for the role it allegedly played in the
loss of the Exchange Funds.
The Arthur plaintiffs filed suit in the Southern District
of California and the Terry plaintiffs filed suit in South
Carolina state court. The Terry action was removed to federal
court and the JPML consolidated the cases in the District of
South Carolina for pretrial proceedings and discovery. After the
district court dismissed certain claims against SunTrust in a
consolidated amended complaint, for failure to plausibly allege
that SunTrust knew about “LES’s [a]ctivities,” In re § 1031
Exchange Litigation, 716 F. Supp. 2d 415, 428 (D.S.C. 2010)
(“Terry I”), the plaintiffs filed a second amended complaint
(“SAC”) on October 6, 2010.
In the SAC, the Exchangers asserted three claims against
SunTrust, two of which are at issue on appeal: aiding and
abetting LES’s breach of fiduciary duty, and civil conspiracy. 3
In their aiding-and-abetting claim against SunTrust, the
Exchangers allege that LES owed fiduciary duties to the
3
We address the conspiracy claim infra at 27-38. The SAC
also alleged conversion and aiding and abetting conversion; the
Exchangers have not appealed the dismissal of those claims.
10
Exchangers and that SunTrust knowingly “assisted LES in
breaching its fiduciary duties to Exchangers.” (SAC ¶5.) 4 They
allege that SunTrust not only knew that LES’s assets were tied
up in the frozen ARS market, but also that “neither [LES’s
parent] LFG nor LES had a rolling source of liquid assets to
fund exchanges other than the daily influx of new Exchange
Funds.” (SAC ¶12.) SunTrust and LES, they allege, “plan[ned] . .
. to conceal the scheme from new Exchangers” until LES somehow
came up with money to plug the gap in its balance sheet. (SAC
¶18.) The plaintiffs further allege SunTrust aided and abetted
LES’s actions because it had a financial incentive to do so: Not
only did SunTrust hold LES’s operating account; it also had sold
ARS to LES through STRH and had extended LES a $200 million
revolving line of credit. SunTrust, they allege, hoped that by
helping LES operate its alleged Ponzi scheme, LES would be more
likely able to repay a portion of the $100 million outstanding
on the line of credit.
The Exchangers also allege that SunTrust committed common
law civil conspiracy. They allege that certain agents or
representatives of SunTrust, including its Deputy General
4
The SAC and attached exhibits appear at pages 743-1160 in
the Joint Appendix, and at ECF No. 130 on the district court’s
docket. We will refer to the Exchangers’ allegations by the
numbered paragraphs in the SAC where they appear.
11
Counsel and Senior Vice President Brian Edwards, and
representatives Samuel Ballesteros, Kris Anderson, Bill
Mayfield, Linda Burras and Sheridan Reese, “engaged in concerted
action” with the individual defendants (Allen, Ramos, Conner,
Jones and Chandler) “for the united purpose” of (1) breaching
LES’s fiduciary duties to the Exchangers, and (2) “defrauding
the Exchangers out of their Exchange Funds.” (SAC ¶209.)
The district court dismissed the aiding-and-abetting claim
primarily because it concluded LES did not owe the Exchangers a
fiduciary duty. See In re IRS § 1031 Exchange Litigation, MDL
No. 8:09-mn-2054-JFA, 2011 WL 2444805 (D.S.C. June 15, 2011)
(“Terry II”). It also dismissed the conspiracy claim. See Terry
I, 716 F. Supp. 2d at 427-28 (dismissing without prejudice the
conspiracy claim in the first amended complaint); Terry II, 2011
WL 2444805, at *6 (dismissing the conspiracy claim in the second
amended complaint). The Exchangers timely appealed.
D.
The principal question presented in this appeal is the
legal issue of whether LES plausibly owed a fiduciary duty to
the Exchangers. The Exchangers offer three alternative theories
for why the Agreement created a fiduciary relationship between
themselves and LES: (1) the Exchange Funds were held by LES in
trust; (2) LES was the Exchangers’ agent; and/or (3) LES served
as a real estate broker. As evidence of LES’s alleged fiduciary
12
status, they point to language in the Agreement, particularly
LES’s commitment to “hold” the exchange funds and “apply” them
toward the purchase of replacement properties, as well as
evidence of trade usage and extrinsic evidence of the parties’
intent. We are not persuaded by any of those theories that
reversal is warranted.
1.
(a)
The Exchangers first argue LES was a fiduciary because the
Agreement created either an express or resulting trust, with LES
as the trustee. 5 An express trust is created when the parties
“affirmatively manifest an intention that certain property be
held in trust for the benefit of a third party.” In re Dameron,
155 F.3d 718, 722 (4th Cir. 1998). A resulting trust is “an
indirect trust that arises from the parties’ intent or from the
nature of the transaction and does not require an express
declaration of trust.” 1924 Leonard Rd., LLC v. Roekel, 636
S.E.2d 378, 383 (Va. 2006). When a trust has been created, the
beneficiary remains the “equitable owner of the trust property.”
In re Dameron, 155 F.3d at 722 (quoting Broaddus v. Gresham, 26
5
The parties agree that Virginia law governs the question
whether LES was a fiduciary. The district court below considered
whether to certify the question of LES’s fiduciary status to the
Virginia Supreme Court or the California Supreme Court. All
parties opposed certification.
13
S.E.2d 33, 35 (Va. 1943)). 6 The Exchangers argue that under the
Agreement they “reserved an equitable interest in their exchange
proceeds” and limited LES’s role to “hold[ing]” those funds and
applying them toward the purchase of replacement property;
therefore, they argue, LES held the funds in trust. 7 They rely on
three categories of evidence to show that LES held the funds in
trust: (1) the language of the Agreement; (2) custom and usage
in the QI industry; and (3) extrinsic evidence of the parties’
intent.
As for the language of the Agreement, the Exchangers point
to four terms or phrases:
(1) LES’s obligation was to “hold” the funds and “apply”
them toward replacement properties, see § 2(a) (“to
hold and apply the Exchange Funds in accordance with
the terms and conditions of [the] Exchange
Agreement.”); § 2(c) (referring to the funds “held by
LES”).
(2) § 3(a) provides that LES “will deposit the Exchange
Funds” in a SunTrust account, and discloses that “the
amount of the Exchange Funds may be in excess of the
6
Virginia law also recognizes constructive trusts, which
arise “by operation of law, independently of the intention of
the parties,” In re Dameron, 155 F.3d at 722. The Exchangers do
not argue a constructive trust was formed; their argument is
that the parties intended to create a trust.
7
Although the Exchangers do not specify whether they
believe an express or resulting trust was formed, in these
circumstances the question presented is the same regardless:
whether the Agreement and the surrounding circumstances reveal
the parties’ intent that LES would hold the Exchange Funds in
trust for the benefit of the Exchangers.
14
maximum amount of deposit insurance carried by the
depository institution [i.e., SunTrust].”
(3) In § 3(a) LES “unconditionally guarantee[d] the return
and availability of the Exchange Funds.”
(4) § 6(b) limits LES’s role to one “solely for the
purpose of facilitating taxpayers’ exchange.”
These terms are evidence of LES’s trustee status, the Exchangers
argue, because they “direct[] that the Funds be used and
applied” for a specific purpose, Appellant’s Reply Br. at 18,
and belie a conclusion that LES “received full ownership of the
exchange funds with the right to spend the funds however it
chose.” Appellants’ Br. at 41.
The Exchangers also point to industry custom and usage.
They argue that the QI industry “promotes, through marketing
materials and its industry trade group, the recognition that
qualified intermediaries are fiduciaries owing fiduciary duties
to protect and preserve the monies they handle.” Appellant’s Br.
at 52. For example, the Code of Ethics and Conduct of the
Federation of Exchange Accommodators, the national trade group
for qualified intermediaries, provides that exchange
accommodators such as LES “shall have the responsibility to act
as custodian for all exchange funds,” “shall invest exchange
funds in investments which meet the ‘Prudent Investor
Standard,’” shall not “knowingly commingle[]” exchange funds
with operating accounts, and shall not invest exchange funds “in
15
a manner that does not provide sufficient liquidity to meet the
Exchange Accommodator’s contractual obligations to its clients
and does not preserve the principal of the exchange funds.” J.A.
95.
Finally, although they concede that some provisions run
contrary to their interpretation, the Exchangers argue that at
most those provisions render the Agreement ambiguous; given the
ambiguity we may rely on extrinsic evidence, which, they argue,
shows that the parties considered LES a trustee. For example,
LES’s website described Exchange Funds as “Held in Trust,” (SAC
¶161); an “Executive Summary” that LES provided to SunTrust
stated that LES “serves in a fiduciary capacity” for its
customers (SAC ¶6; J.A. 846); LFG’s 10-K referred to Exchange
Funds as “the customer’s funds,” which “are held by us for the
benefit of our customers and are therefore not included as our
assets” (SAC ¶9); minutes of an October 1, 2008, LFG Investment
Funds meeting stated that “the company is acting in a fiduciary
capacity, with the funds ultimately belonging to the retail
client” (SAC ¶139); and an October 6, 2008, letter from LFG to
the Nebraska Department of Insurance, which described LES’s
exchange agreements as “a specialized form of escrow.” (SAC
¶140; J.A. 1137.) In addition, in an October 7, 2008, letter to
SunTrust, LFG’s general counsel stated that LES “holds [Exchange
Funds] in escrow as a fiduciary,” and invests them “on behalf of
16
its customers,” “until the funds (with the related earnings) are
returned to customers to complete the 1031 exchange.” (SAC ¶94;
J.A. 1056.)
The district court rejected these arguments, as had the
bankruptcy court that oversaw the LES bankruptcy, where, as
here, the Exchangers argued that they retained an “equitable
interest in the ownership of the Exchange Funds” and accordingly
LES’s rights to the funds were limited to those of a trustee.
The courts reasoned, to the contrary, that by entering the
Agreement the Exchangers “relinquished any and all interests in
the [Exchange Funds], including the equitable interest that a
beneficiary of a trust would retain in trust property,” an
action that is “inconsistent with the establishment of a trust.”
Frontier Pepper’s Ferry, 2009 WL 1269578, at *9; see also Terry
II, 2011 WL 2444805, at *4 (“[F]or those reasons expressed by
the bankruptcy court in Frontier Pepper’s Ferry, . . . the court
finds that Virginia law would not impose a fiduciary
relationship between LES and the Plaintiffs under the facts of
this case through either an express or resulting trust.”).
(b)
Under Virginia law, a contract “must be construed as a
whole to determine the parties’ intent with respect to specific
provisions.” Westmoreland-LG&E Partners v. Virginia Elec. &
Power Co., 486 S.E.2d 289, 294 (Va. 1997). If a contract is
17
“complete, unambiguous, and unconditional,” evidence of prior or
contemporaneous oral negotiations is “generally inadmissible to
alter, contradict, or explain the terms” of the contract. Id.Whether a contract is ambiguous depends on whether its language
“admits of being understood in more than one way,” id., that is,
whether “its parts can be read together without conflict,”
Doswell Ltd. P’Ship v. Virginia Elec. & Power Co., 468 S.E.2d
84, 88 (Va. 1996). If a contract’s “parts can be read together
without conflict,” a court “must construe the language as
written.” Id.Unlike such parol evidence, “[e]vidence that contract
phrases or terms have acquired, by custom in the locality, or by
usage of the trade, a peculiar meaning not attached to them in
their ordinary use is admissible even though the phrases or
terms themselves are unambiguous.” Doswell, 468 S.E.2d at 90.
Such evidence of “usage of trade” is admissible to “ascertain[]
the meaning of the parties’ agreement,” “give particular meaning
to specific terms of the agreement,” and/or “supplement or
qualify the terms of the agreement,” Va. Code Ann. § 8.1A-
303(d), so long as “the usage in question operated upon the
minds of the parties in using the language which was employed in
the contract.” Westmoreland, 486 S.E.2d at 293.
Thus, the question presented is whether the language of the
Agreement, as “supplement[ed] or qualif[ied]” by relevant
18
evidence of trade usage, Va. Code Ann. § 8.1A-303(d),
unambiguously excludes any interpretation that LES assumed the
fiduciary duties of a trustee. We conclude it does.
First, the bankruptcy court correctly observed, “not only
is there an absence of any language that the parties intended to
create a trust”; the language above “actually evidences an
intent not to do so.” Frontier Pepper’s Ferry, 2009 WL 1269578,
at *9 (emphasis in original). The Exchangers expressly granted
to LES “sole and exclusive possession, dominion, control and use
of all Exchange Funds” during the course of the exchange. They
disclaimed any “right, title, or interest in or to the Exchange
Funds or any earnings thereon.” They also disclaimed any “right,
power, or option to demand, call for, receive, pledge, borrow or
otherwise obtain the benefits of any of [the] Exchange Funds,”
other than the right to receive any remaining balance of the
Exchange Funds after LES purchased replacement property. The
Agreement disclaimed all duties other than those “expressly set
forth herein,” and provided that “no additional duties or
obligations shall be implied hereunder or by operation of law or
otherwise” (§ 6(c)). The Agreement also stated that it
“contain[ed] the entire understanding between and among the
parties hereto” (§ 11). For these reasons, the Agreement
unambiguously did not create a trust.
19
The aspects of the Agreement the Exchangers focus on do not
render the Agreement ambiguous. LES’s obligation to “hold” and
“apply” the funds toward replacement properties is equally
susceptible to interpretations that LES was or was not a
fiduciary; the unavoidable impact of the provisions quoted
above, however, is that the parties did not intend to create a
trust. Moreover, although § 2(c) does not specifically disclaim
fiduciary duties, that absence is far from dispositive, because
it is the meaning of the Agreement as a whole, not § 2 in
particular, that controls whether LES was a trustee. Finally, we
recognize that LES’s assumption of “purely contractual” duties,
Appellee’s Br. at 25, does not necessarily mean that LES was not
a trustee; it is the nature of the duties LES assumed in the
Agreement that determines whether LES was a fiduciary. See Frank
H. Easterbrook & Daniel R. Fischel, Contract and Fiduciary Duty,
36 J.L. & Econ. 425, 446 (1993) (“Contract and fiduciary duty
lie on a continuum best understood as using a single, although
singularly complex, algorithm.”); see also Victor Brudney,
Contract and Fiduciary Duty in Corporate Law, 38 B.C. L. Rev.
595 (1997) (discussing the overlap between contractual duties
and fiduciary duties). Nonetheless, our reading of the Agreement
is the same as that of the bankruptcy and district courts. The
Agreement unambiguously precludes a finding that LES held the
Exchange Funds in trust.
20
The evidence of trade usage proffered by the Exchangers
also does not alter this conclusion. According to the
Exchangers, they may not have been required to grant LES “sole
and exclusive possession, dominion, control and use of all
Exchange Funds.” Other exchange accommodators apparently do not
require that exchangers grant QIs such a replete bundle of
rights to the proceeds of the sale of relinquished property. Cf.
In re Exchanged Titles, 159 B.R. 303, 305 (Bankr. C.D. Cal.
1993) (finding that a different exchange agreement by a
different accommodator was “ambiguous” as to “whether the
parties intended to transfer both legal and equitable rights” to
the relinquished property or rather legal title only). But it is
LES’s Exchange Agreement, not that of other QIs, that we must
consider, and that Agreement unambiguously did not render LES a
trustee.
Finally, we note that the Exchangers, in electing to rely
on a safe harbor under § 1031, were not required to use a
qualified intermediary. As mentioned above, the Treasury
regulations allow exchangers to use, among other things, a
“qualified escrow” or a “qualified trust.” As the bankruptcy
judge explained in one of the related adversary proceedings:
Instead of using either of these available options,
the parties chose the “qualified intermediary” safe
harbor. . . . The parties did not in addition
separately satisfy the terms and conditions of the
Treasury Regulations for the creation of either a
21
qualified escrow or a qualified trust. . . . [T]he
parties’ decision to eschew the escrow and trust
provisions of the tax code in favor of a different
safe harbor evidences that there was no intention to
create a trust relationship.
Millard Refrigerated Servs., 412 B.R. at 815. This reasoning is
sound.
In sum, we hold that the parties’ Exchange Agreement
unambiguously did not render LES a trustee with respect to the
Exchange Funds. Accordingly, and because the Agreement is
“complete” and “unconditional,” Virginia law precludes our
consideration of extrinsic evidence of the parties’ intent.
2.
The Exchangers next argue that LES was “acting as an agent
on behalf of the Property Owners to consummate these exchange
transactions.” Appellant’s Br. at 35. An agency relationship
arises under Virginia law when one person manifests consent to
another “that the other shall act on his behalf and subject to
his control.” Murphy v. Holiday Inns, Inc., 219 S.E.2d 874, 876
(Va. 1975) (quoting Restatement (Second) of Agency § 1 (1958)).
When a principal-agent relationship exists, the agent is
obligated “to interpret the principal’s statement of authority,
as well as any interim instructions received from the principal,
in a reasonable manner to further purposes of the principal that
the agent knows or should know, in light of facts that the agent
knows or should know at the time of acting.” Restatement (Third)
22
of Agency § 1.01 cmt. e. Virginia characterizes such duties as
those of a fiduciary. See Banks v. Mario Indus., 650 S.E.2d 687,
695 (Va. 2007) (“[O]nce an agency relationship was established,
[the agents] necessarily owed a fiduciary duty to [the
principal].”). “It is open to question,” however, “whether an
agent’s unconflicted exercise of discretion as to how to best
carry out the agent’s undertaking implicates fiduciary
doctrines.” Restatement (Third) of Agency § 1.01 cmt. e.
As evidence that LES was the Exchangers’ agent, the
Exchangers argue LES “was subject to [their] direction” in
various ways, such as identifying the replacement property and
the buyer of the relinquished property, as well as setting the
purchase price. Appellant’s Br. at 60-61. Moreover, the Treasury
Regulation governing QIs characterizes a QI as acquiring and
transferring relinquished properties “either on its own behalf
or as the agent” of a party to the transaction, 26 C.F.R. §
1.1031(k)-1(g)(4)(iv)(B); because LES “explicitly did not
contract on its own behalf,” the Exchangers argue, it must have
been their “agent.” Appellant’s Reply Br. at 16. Finally, they
argue, the safe-harbor regulation states that for purposes of
determining whether a taxpayer received property (and thereby
whether the taxpayer is eligible for § 1031 treatment), the QI
is treated “as if [it] is not the agent of the taxpayer.” 26
C.F.R. § 1.1031(k)-1(g)(4) (emphasis added). This language, the
23
Exchangers argue, implies that LES was their agent “for all
other purposes.” Appellant’s Br. at 62. Finally, they argue,
under Virginia law “an agency relationship is not one that can
be disclaimed.” Appellant’s Reply Br. at 19 (citing Murphy, 219
S.E.2d at 875).
In response, SunTrust argues that although “LES was
contractually obligated to facilitate Appellants’ purchase of
replacement property,” the nature and extent of that obligation
did not render LES the Exchangers’ agent. Appellee’s Br. at 42.
We agree. In a wide variety of contexts, parties execute
contracts, like the Agreement here, that allow one party to
direct another to perform certain actions. Such obligations do
not automatically create fiduciary relationships. Only those
where the agent assents to act “on the principal’s behalf and
subject to the principal’s control” does a fiduciary
relationship arise. Cf. Restatement (Third) of Agency § 1.01. As
explained above, the Exchangers granted LES “sole and exclusive”
possession and use of the Exchange Funds, and disclaimed any
“right, title, or interest in or to the Exchange Funds.” In
light of these provisions, LES cannot be said to have been
acting on the Exchangers’ behalf and subject to their control.
Finally, although the Treasury Regulations do not prohibit a QI
from being an agent of its customer, and treat a QI “as if” it
were not the Exchangers’ agent, nothing in those regulations
24
requires that result either. The language of the Agreement
controls, and that language is inconsistent with LES having
become a fiduciary under agency law.
3.
The Exchangers’ third argument is that LES was a real
estate broker, and thereby owed them fiduciary duties. Virginia
law defines “real estate broker” as a person or entity “who, for
compensation or valuable consideration,”
(i) sells or offers for sale, buys or offers to buy,
or negotiates the purchase or sale or exchange of real
estate . . . , or
(ii) leases or offers to lease, or rents or offers for
rent, any real estate or the improvements thereon for
others.
Va. Code Ann. § 54.1-2100. The statute expressly excludes from
the definition the following: attorneys acting in the
performance of their duties; trustees, administrators or
executors; auctioneers; property management companies; and
owners or lessors of property acting “in the regular course of
or incident to the management of the property and the investment
therein.” Id. § 54.1-2103. Real estate brokers are subject to
what the Exchangers call “statutory fiduciary duties,”
Appellants’ Br. at 36, namely that they (1) must “[a]ccount in a
timely manner for all money and property received by the
licensee in which the seller has or may have an interest,” Va.
Code Ann. § 54.1-2131(A)(5), (2) must disclose all material
25
facts known to the broker, id. § 54.1-2131(A)(6), and (3) must
not “divert or misuse any funds held in escrow or otherwise held
by him for another,” id. § 54.1-2108.
The Exchangers argue LES was a real estate broker because
LES received compensation for its role as an exchange
accommodator, which involved selling relinquished properties and
buying replacement properties, and QIs are not expressly exempt
from the statutory definition of real estate brokers. We
disagree. Simply put, we believe the Virginia legislature would
not have intended QIs like LES to be considered real estate
brokers. QIs exist as a mechanism for qualifying taxpayers to
defer the recognition of gains on investment properties. They
serve a different, more specialized function than do real estate
brokers as the term is commonly understood. Moreover, and
importantly, the Exchangers agreed to limit LES’s duties to
those “expressly set forth” in the Agreement, and LES is more
analogous to the entities listed among the exceptions than to
real estate brokers. For these reasons, we hold as a matter of
law that LES was not, and may not be treated as, a real estate
broker under Virginia law. 8
8
SunTrust argues in the alternative that, even if the
Agreement rendered LES a real estate broker under Virginia law,
LES disclaimed any corresponding duties imposed by virtue of
that status. The Exchangers argue to the extent there was such a
disclaimer, it should be “void as a matter of public policy.”
(Continued)
26
For the foregoing reasons, read as a whole, the Agreements
did not impose fiduciary duties on LES, and therefore the
district court properly dismissed the claim seeking to hold
SunTrust liable for aiding and abetting LES’s alleged breach of
fiduciary duty. 9
II.
We now turn to the Exchangers’ claim alleging common law
civil conspiracy, judging the sufficiency of the SAC by the same
standard. See supra at 4. Under Virginia common law, “[a] civil
conspiracy is [1] a combination of two or more persons, [2] by
some concerted action, [3] to accomplish some criminal or
unlawful purpose, or to accomplish some purpose, not in itself
criminal or unlawful, by criminal or unlawful means.” Hechler
Chevrolet, Inc. v. Gen. Motors Corp., 337 S.E.2d 744, 748 (Va.
Appellants’ Reply Br. at 22-23 (citing Fairfax Gas & Supply Co.
v. Hadary, 151 F.2d 939, 940 (4th Cir. 1945); All Bus.
Solutions, Inc. v. NationsLine, Inc., 629 F. Supp. 2d 553, 560
(W.D. Va. 2009)). Because we conclude LES was not a real estate
broker under Virginia law, we need not resolve this issue.
9
Because we conclude LES was not a fiduciary under Virginia
law, we need not resolve SunTrust’s alternative argument that
Virginia does not recognize a cause of action of aiding and
abetting a tort.
27
1985). 10 The “unlawful act” element requires that a member of the
alleged conspiracy have “committed” an “underlying tort,” Almy
v. Grisham, 639 S.E.2d 182, 188 (Va. 2007), such as inducing a
breach of contract, Catercorp, Inc. v. Catering Concepts, Inc.,
431 S.E.2d 277, 281 (Va. 1993). Further, a claim for civil
conspiracy requires that the alleged conspirators’ unlawful act
have caused damages; a plaintiff may not recover for “the mere
combination of two or more persons to accomplish an unlawful
purpose or use unlawful means.” Id. at 282.
California law, which the district court concluded applies
to the Arthur plaintiffs’ conspiracy claim, see Terry I, 2011 WL
2444805, at *3, treats allegations of civil conspiracy in much
the same way as does Virginia law, although it considers
conspiracy to be “not a cause of action, but a legal doctrine
that imposes liability on persons who, although not actually
committing a tort themselves, share with the immediate
tortfeasors a common plan or design in its perpetration.”
Applied Equip. Corp. v. Litton Saudi Arabia Ltd., 869 P.2d 454,
10
Virginia also has statutory tort of “Combination[] to
injure others in their reputation, trade, business or
profession,” Va. Code Ann. § 18.2-499, which principally
prohibits two or more persons from combining to “willfully and
maliciously injur[e] another in his reputation, trade, business
or profession.” Id. That statute is not at issue, because the
Exchangers allege only a conspiracy under Virginia common law,
not a violation of § 18.2-499.
28
457 (Cal. 1994). “By participation in a civil conspiracy, a
coconspirator effectively adopts as his or her own the torts of
other coconspirators within the ambit of the conspiracy.” Id.
“In this way, a coconspirator incurs tort liability co-equal
with the immediate tortfeasors.” Id. Like Virginia law,
California law requires that “a conspiracy . . . be activated by
the commission of an actual tort,” and that the “civil wrong”
have “result[ed] in damage.” Id. A plaintiff alleging conspiracy
“must show that each member of the conspiracy acted in concert
and came to a mutual understanding to accomplish a common and
unlawful plan, and that one or more of them committed an overt
act to further it.” Choate v. County of Orange, 103 Cal. Rptr.
2d 339, 353 (Cal. Ct. App. 2000).
We discern no conflict between Virginia and California law
on the elements of a properly pled civil conspiracy claim as
applied to the facts here, and the parties have not pointed to
one. Thus, we need not resolve this choice-of-law question, and
we proceed to explain why the Exchangers have failed to state a
claim for civil conspiracy under either Virginia or California
law.
29
As noted, the Exchangers’ complaint, fairly read, alleges
two underlying torts: breach of fiduciary duty and fraud. 11 To
the extent the alleged underlying tort was LES’s breach of
fiduciary duty, the district court dismissed the conspiracy
claim upon concluding that LES was not a fiduciary. See Terry
II, 2011 WL 2444805, at *6. We agree that, because LES did not
owe the Exchangers a fiduciary duty, that theory of the
Exchangers’ conspiracy claim did not allege an “unlawful act,”
and thus was properly dismissed.
As to the Exchangers’ conspiracy-to-defraud theory, they
allege that SunTrust engaged in concerted action with LES’s
officers to conceal LES’s imminent collapse from the Exchangers,
with the common purpose of deceiving the Exchangers into
entering Exchange Agreements that they otherwise would not have
entered. The district court concluded that the complaint “does
not contain sufficient factual matter to move the Customers’
conspiracy claim from the conceivable to the plausible.” Terry
I, 716 F. Supp. 2d at 428. 12 That is also the basis on which
11
The conspiracy count also alleges that an object of the
conspiracy was to “operate an unlawful Ponzi scheme.” J.A. 812.
Because the “unlawful act” element requires an allegation of an
underlying tort, we read this as a further allegation of either
a breach of fiduciary duty or fraud.
12
The district court reached that conclusion upon
dismissing the Exchangers’ first amended complaint, before they
filed the second amended complaint. Because upon dismissing the
(Continued)
30
SunTrust argues we should affirm the dismissal of the fraud
component of the Exchangers’ conspiracy claim. See Appellee’s
Br. at 49-50 (arguing the claim was properly dismissed because
the Exchangers “failed to plead anything beyond conclusory
allegations of the existence of the conspiracy” and “failed to
adequately allege the existence of an underlying tort”).
Because this component of the Exchangers’ conspiracy claim
alleges fraud, the Exchangers’ complaint must comply not only
with Rule 12(b)(6) but also with Federal Rule of Civil Procedure
9(b), which requires that plaintiffs alleging fraud plead “with
particularity the circumstances constituting fraud.” Fed. R.
Civ. P. 9(b). The “circumstances” that must be pled with
particularity are “the time, place, and contents of the false
representations, as well as the identity of the person making
the misrepresentation and what he obtained thereby.” Harrison v.
Westinghouse Savannah River Co., 176 F.3d 776, 784 (4th Cir.
1999) (quoting 5 Charles Alan Wright and Arthur R. Miller,
Federal Practice and Procedure: Civil § 1297, at 590 (2d ed.
1990)). The defendant’s “knowledge as to the true facts” and
latter the district court stated that it “maintain[ed] its
previous finding” that the Exchangers had failed to sufficiently
plead a civil conspiracy cause of action, Terry II, 2011 WL
2444805, at *6, we assume the court’s rationale for dismissing
the fraud component of the conspiracy claim was that the factual
allegations were insufficient.
31
“intent to deceive” may be pled “generally,” Fed. R. Civ. P.
9(b), but a complaint must nonetheless “show[],” that the
defendants’ knowledge and/or intent, where relevant, plausibly
entitles the plaintiff to relief. Fed. Rule Civ. P. 8(a)(2);
Iqbal, 556 U.S. at 678, 686-87. Upon reviewing the factual
allegations in the Exchangers’ complaint and the attached
exhibits, we agree that the Exchangers have not shown that their
factual allegations “plausibly give rise to an entitlement to
relief” for conspiracy. Iqbal, 556 U.S. at 679.
The second amended complaint alleges that by mid-2008, LES
and its officers knew LES was insolvent, as nearly all of its
assets were tied up in frozen ARS, leaving just $28 million to
cover pending exchanges of over $290 million, and by early
November 2008, LES and LFG were preparing to declare bankruptcy.
(SAC ¶118.) Throughout this time, the Exchangers allege, the
individual defendants, along with LES, LFG and SunTrust, had
“actual knowledge of material adverse facts that any and all
potential Exchange clients would irrefutably consider material,”
including that LES’s “financial status” was “dire” and “that LES
was operating a Ponzi scheme and applying their Funds to prior
obligations.” (SAC ¶221.)
Despite this knowledge, the Exchangers allege, and “with
intent to deceive so that the Exchange Clients continued to
deposit Funds with LES,” the individual defendants intentionally
32
breached their duty “to disclose to the Exchange Clients all
material facts concerning the Exchange transactions.” (SAC
¶222.) Moreover, as part of the fraudulent scheme, they allege,
two of the individual defendants, Ronald Ramos and Devon Jones,
arranged for LFG to transfer funds from LFG as “lulling
payments.” (SAC ¶145.) These payments, which temporarily allowed
LES to continue meeting some prior exchange obligations, further
served to fraudulently conceal LES’s “insolvency and imminent
failure . . . from prospective Exchange clients whose Funds were
needed to keep LES going in the short term.” (Id.) Thus, the
Exchangers allege, by intentionally failing to disclose to the
Exchangers that, if the ARS market were to remain frozen, LES
would be unable to comply with its obligation to purchase the
Exchangers’ replacement properties, the individual defendants
committed fraud.
Those factual allegations, which must be taken as true at
this stage, satisfy the “unlawful act” element of a conspiracy
claim under Virginia or California law. The Exchangers also
clearly and plausibly allege that they were harmed by the
failure of LES and the individual defendants to disclose the
above facts. The remaining question is whether the Exchangers
have plausibly and non-conclusorily alleged that SunTrust
“combin[ed]” with LES to engage in “concerted action” to commit
that fraud, as required by Virginia law, see Hechler Chevrolet,
33
337 S.E.2d at 748, and “acted in concert and came to a mutual
understanding” with the individual defendants “to accomplish a
common and unlawful plan,” as required by California law, see
Choate, 103 Cal. Rptr. 2d at 353. For the following reasons, we
conclude the Exchangers’ allegations are insufficient.
The Exchangers do plausibly allege that, at least by
October 2008 and probably before, SunTrust representatives,
including Brian Edwards (its Deputy General Counsel and Senior
Vice President), were aware that LES was facing “severe
liquidity problems that threatened its continued viability” and
that LES was using Exchange Funds “to pay prior commitments on
older Exchange Transactions.” (SAC ¶94.) Indeed, LES provided
detailed disclosures directly to SunTrust, in part because LES
was “imploring SunTrust for financial assistance which
necessarily included disclosing to SunTrust all of the financial
constraints both LFG and LES were operating under.” (SAC ¶111.)
For example, LES provided to SunTrust the “Executive Summary”
described above, which disclosed to SunTrust that “the credit
crisis caused a portion ($290.5 [million]) of the underlying,
liquid investments of our exchange customers to become illiquid
at a time when we were holding approximately $700 million of
client funds.” J.A. 847. The document also explained that
“during the height of the credit crisis, outflows exceeded
inflows by nearly $400 million,” and that although LES
34
“expect[s] the balance in the investment portfolio to be under
less pressure,” “it is likely that during the 4th quarter there
will be a timing difference between inflows and outflows,
requiring liquidity on a portion of the $290.5 million in
auction rate securities.” Id. In the words of LES’s general
counsel, Michelle Gluck, LES desired SunTrust to be “involve[d]”
in LES’s “liquidity plan,” and thus sought to keep SunTrust
apprised of its efforts. J.A. 836. Indeed, on October 23, 2008,
Gluck expressed her “appreciate[ion]” that Edwards and Bill
Mayfield, who was also in SunTrust’s general counsel’s office,
were “remaining in the loop.” Id.
The fact that SunTrust allegedly knew all the above
information does not amount to a plausible allegation that it
“conspired with agents and representatives of LES . . . and
engaged in concerted action for the united purpose of . . .
defrauding the Exchangers out of their Exchange Funds,” J.A.
812. To state a claim that SunTrust conspired to commit fraud,
the Exchangers would have to allege that SunTrust not only knew
about what LES was doing and failed to stop it; they would have
to allege that SunTrust took concerted action with agents or
representatives of LES “in furtherance” of a common purpose of
defrauding the Exchangers, with a “mutual understanding” of that
purpose. The allegations do not rise to this level.
35
The principal allegations of SunTrust’s actions are the
following. First, the Exchangers allege that even after SunTrust
learned that LES was facing major liquidity problems, SunTrust
“continue[d] to service the 3318 account and accept deposits
received from unsuspecting Exchangers thereby assisting LES in
processing purchases of replacement property for LES’s prior
exchangers with new exchangers’ money.” (SAC ¶95.) SunTrust was
LES’s bank; the 3318 account was at SunTrust’s Richmond branch.
The fact that SunTrust allowed LES to continue to make deposits
into and withdrawals from the 3318 account is a far cry from the
concerted action necessary to evince a decision to conspire in
the defrauding of the Exchangers.
Second, the Exchangers allege that on November 29, 2007,
SunTrust agreed to amend SunTrust’s Revolving Credit Agreement
to “reduc[e] certain financial covenants which LFG could not
satisfy” so that LES and LFG would not need to disclose its
inability to meet LES’s credit obligations. (SAC ¶104.) The ARS
market did not freeze until April 2008, however -- five months
after the renegotiation of the line of credit. There simply is
no correlation in that regard plausibly supporting concerted
action with an intent to defraud.
Third, the Exchangers allege that SunTrust “assisted LES
between November 21, 2008 and November 25, 2008, on the eve of
bankruptcy cleaning out . . . the 3318 account of all but $1,”
36
processing “seven transfers totaling $46 million to [an account]
at Smith Barney.” (SAC ¶125.) The Exchangers immediately then
concede, however, that the $46 million remained available to
satisfy LES’s creditors, and indeed was the subject of the
dispute in bankruptcy over whether Exchange Funds were or were
not part of LES’s estate. (Id.)
Fourth, the Exchangers allege that in June 2008, in
negotiating an amendment to LFG’s revolving line of credit,
SunTrust, despite knowing that LFG was “financially impaired,”
“avoided declaring LFG in default, which assisted LES to stay in
the business to continue to solicit new Exchange Funds and
perpetuate the known Ponzi scheme.” (SAC ¶107.) As the
Exchangers acknowledge, however, SunTrust had decided to reduce
the amount it would allow LFG to borrow on its existing line of
credit. 13 SunTrust’s decision not to also declare LFG in default
13
This also rendered SunTrust’s role distinguishable from
certain creditors’ alleged role in perpetuating Edward Okun’s
fraudulent scheme involving § 1031 exchange funds. In the
district court the Exchangers argued SunTrust’s role was
analogous to the alleged role of certain defendants in Hunter v.
Citibank, N.A., No. C 09–02079 JW, 2011 WL 7462143 (N.D. Cal.
May 5, 2011), which the court found sufficient to state a claim
of conspiracy to commit fraud and conversion. See id. at *6.
There, however, the creditor defendants decided to lend Okun
“millions of dollars” knowing “that the monies were being used
to perpetuate Okun’s Ponzi scheme” by “enabl[ing] him to
continue [his] misconduct through lulling payments.” Id.; see
also United States v. Okun, 453 F. App’x 364 (4th Cir. 2011)
(affirming 1,200-month sentence for Okun’s fraud). There is no
(Continued)
37
falls short of concerted action with the purpose of defrauding
the Exchangers required under Virginia and California law.
Thus, the Exchangers have not alleged that SunTrust engaged
in concerted action with the individual defendants, with a
mutual understanding of a common purpose to defraud, required by
Virginia and California law. Indeed, the allegations in the
complaint and the hundreds of pages of emails and other
documents attached to the complaint belie concerted action to
defraud. SunTrust repeatedly expressed its concern to LES that,
by using funds in LES’s “safekeeping account” to purchase ARS,
LES “may have violated its fiduciary duty and/or otherwise acted
improperly with respect to these customers.” J.A. 837.
Furthermore, as noted, by June 30, 2008, SunTrust had reduced
its loan commitment to LFG.
For these reasons, we conclude the Exchangers have not
stated a claim for conspiracy to commit fraud, and affirm the
dismissal of the Exchangers’ conspiracy claim.
allegation here that SunTrust lent additional funds to LES once
SunTrust knew of LES’s liquidity problems.
38
III.
For the foregoing reasons, the judgment of the district
court dismissing the Exchangers’ claims against SunTrust is
AFFIRMED.
39