United States District Court, D. Vermont
C. MINOT DOLE, Plaintiff,
WILLIAM ADAMS, Defendant.
DECISION AND ORDER ON THE MERITS OF PLAINTIFF’S COMPLAINT (DOC. 2)
J. Garvan Murtha United States District Judge
Plaintiff C. Minot Dole commenced this diversity action in February 2012. He alleges Defendant William Adams committed fraud causing Plaintiff losses exceeding $4, 000, 000. See generally Doc. 2 (Am. Compl., hereinafter, “Compl.”). The Court held a three-day bench trial from September 22 through 24, 2015. See Docs. 110-12 (Trial Trs.). The parties presented testimony and introduced exhibits. Both parties filed post-trial memoranda. (Docs. 113, 117, 118.) The Court has carefully considered the trial testimony and arguments, evidence presented, and the parties’ post-hearing submissions, and, for the reasons stated below, determines Plaintiff has failed to sustain his burden of proof to show that William Adams committed fraud.
On September 22 through 24, the Court held a bench trial on Dole’s remaining common-law fraud claim. Plaintiff’s case consisted of the testimony of six witnesses, including, inter alia, himself and Defendant Adams and two experts, and exhibits entered into evidence. (Doc. 109.) Defendant orally moved for judgment on partial findings under Federal Rule of Civil Procedure 52(c) and later filed a written motion. See Dkt. Entry No. 106; Doc. 104. The Court took Adams’ motion under advisement and it remains pending. (Doc. 104.) Defendant’s case consisted of his own testimony and exhibits entered into evidence. Based on the trial testimony and evidence presented, the Court finds the following facts.
C. Minot Dole is a resident of Shelburne, Vermont. He retired in 1995 after approximately forty years as owner and CEO of Dole Associates, a product design and development company. Dole sought a “like-kind exchange” for an office building in New York state he had owned since 1979 as sole member of 23 Parkway, LLC. He testified the income from the building was his sole retirement income, he did not want to manage it himself, and he wished to avoid paying capital gains tax on the sale. Trial Tr. vol. 2 (Doc. 111) 8:12-12:5 (Sept. 23, 2015). In 2008-2009, Dole’s broker, Larry Miller, sent him many options for investments that would qualify for a like-kind exchange, including one provided by DIS Partners. Id. 16:22-17:8. Miller informed him that DIS Partners, LLC specialized in the acquisition, sale, and management of Texas residential rental properties, and sent him a copy of DIS Partners’ Confidential Private Placement Memorandum, known as PPM-II. Pl.’s Ex. 302. DIS Partners offered the opportunity to invest under PPM-II--exclusively through licensed broker dealers--beginning in May 2008. Id.
The PPM-II investment offered fee simple ownership in Texas single-family and multi-unit residential properties, coupled with a lease-back agreement, called a Master Lease Agreement (“MLA”). Pl.’s Ex. 302 at 4-6. The investment was likely eligible for a like-kind exchange, id. at Ex. C, allowing investors to defer paying federal income tax on the sale of business property. PPM-II outlined a 7% rent paid on a monthly basis, beginning sixty days after the first full month of operations, supported by a letter of credit from a bank equal to one year’s rent. Pl.’s Ex. 302 at 20. In January 2009, DIS Partners issued a Second Supplement to PPM-II that revised the proposed MLA to offer a second investment option. The option required investors to purchase properties with a 50% loan-to-value ratio, and required DIS Partners to pay 10% rent for the first five years, with the entire first year’s rent due at closing. Pl.’s Ex. 317. It also eliminated the letter of credit. Id.
Miller gave Adams, a Managing Partner and Executive Vice President of Marketing and Product Development of DIS Partners, permission to speak directly with Dole. Adams sent Dole a letter by email on August 29, 2008, answering a list of questions. Pl.’s Ex. 3. Adams also sent Dole an email on September 2, describing DIS Partners’ investment plan as “brilliant” and urging Dole to travel to Texas to view properties as soon as possible. Pl.’s Ex. 5. Dole requested a meeting in person with Adams but delayed a trip to Texas until he had a buyer for his New York property.
On March 19-20, 2009, Dole traveled to Houston, Texas to view current DIS Partners’ properties and to San Diego, California to meet with Adams. They discussed the terms of the PPM-II investment. Dole testified Adams told him a letter of credit and the appreciated value of the properties would protect his investment. Trial Tr. vol. 2, 37:4-12. On March 27, Dole signed a Subscription Agreement listing an investment amount of $1, 000, 000 from the anticipated sale of his New York office building and certifying he had a net worth in excess of $1, 000, 000, had read and understood the PPM risk factors, and was not relying on outside information in making his investment. Def.’s Ex. O. Miller also signed the Agreement certifying his client Dole was an “accredited investor” with a net worth and income sufficient to sustain the risks, including loss of investment and lack of liquidity, and the offering of DIS Partners was a suitable investment for Dole. Id.
In May 2009, Dole sold his New York property, triggering a forty-five day window to “identify [his] replacement property” for the like-kind exchange. Compl. ¶ 10. On May 18, 2009, Jennifer Brandt, a DIS Partners employee, sent Dole a letter including sales contracts for 15 of 17 units DIS Partners selected to sell to Dole and identifying the remaining two properties. Pl.’s Ex. 35. She enclosed the first few pages of the appraisals of the 15 properties that included photos and appraised values and noted the appraisals were not complete on the other two properties. Id. Dole reviewed the letter and enclosed documents and emailed Adams on May 21 and 22, questioning the inclusion of four “tiny houses” because they “seemed out of line” with the other properties and the homes he inspected in March. Pl.’s Exs. 37-38. Adams replied by email on May 25, explaining the rent-to-value ratio on the homes was higher than other properties. Pl.’s Ex. 39. Dole responded on June 8, asking Adams to “assuage some of the anxiety [he was] feeling.” Pl.’s Ex. 45. The next day, Adams wrote Dole’s anxiety was noted and offered to personally accompany Dole in the fall to view each house and exchange any Dole felt was substandard. Pl.’s Ex. 46.
On June 17, 2009, Dole purchased the replacement property selected for him by DIS Partners consisting of sixteen properties. At the closing, attended by Dole and a DIS Partners employee, Dole signed a promissory note to Texas Capital Bank and two Master Lease Agreements--already signed by DIS Partners’ CEO Jacob Carroll--one in the name of 23 Parkway, LLC and the other as Trustee of the Charles M. Dole Living Trust. Pl.’s Exs. 501-02. The MLA obligated DIS Partners to manage the properties and pay the associated bills, including the mortgages. See id. The first page of the MLA stated DIS Partners, as tenant, “shall pay” Dole, as landlord, 10% interest on his investment, with the first year’s payment due in full at closing, and “there is no letter of credit for this option.” Id. Exhibit A to the MLAs listed the sale price and mortgage amount for each property, including the Lockwood and Lavender properties for which Dole had not received appraisal information. Id. at Ex. A; Trial Tr. vol. 2, 57:11-22. Mr. Miller was paid approximately $100, 000 as commission for his work on the transaction. Trial Tr. vol. 2, 123:4-6; Trial. Tr. vol. 3 (Doc. 112) 13:17-19; 14:14-15 (Sept. 24, 2015).
On July 7, 2009, Dole accepted a promissory note (“Note 1”) from DIS Partners, signed by Jacob Carroll as CEO, loaning DIS Partners $99, 070.78--the first year’s rent that had been due at closing under the MLA--for one year at 12% interest. Pl.’s Ex. 503. The note was paid in full on March 4, 2011. Def.’s Ex. A-20; Trial Tr. vol. 2, 145:15-25. On August 3, Dole accepted a promissory note (“Note 2”) from DIS Partners, signed by Jacob Carroll as CEO, loaning DIS Partners $100, 000 for one year at 12% interest, to be paid in twelve monthly interest payments of $1, 000 and a lump sum repayment of principal in a year. Pl.’s Ex. 504. Note 2 included a representation of DIS Partners’ solvency. Id. at 2. Adams did not discuss DIS Partners’ solvency with Dole. Trial Tr. vol 3, 165:21-23 (Adams testimony); see also Trial Tr. vol. 2, 122:25-123:3 (Dole testimony). DIS Partners made some interest payments on Note 2 but the principal was never repaid. Def.’s Ex. A-20; Trial Tr. vol. 2, 68:23-69:1.
Adams had communicated with Dole on three occasions between the closing and signing of Notes 1 and 2. He explained the Notes and referred to the “12% coupon” as “pretty rich” and stated it was “an awfully sweet deal.” Pl.’s Ex. 85. He sent a recap of the like-kind exchange and projection of the value of the portfolio in five years. Pl.’s Ex. 86. And finally, he emailed on July 31, 2009, sending a quarterly report and inquiring about Dole’s decision regarding Note 2. Pl.’s Ex. 104. He stated: “We have raised all of the capital we need as of last week, and as a result will have to withdraw our offer to you by the 15th of August. See you in the Fall.” Id. Dole emailed Brandt and Adams on October 26, 2009, inquiring about visiting the properties, Pl.’s Ex. 202, but he did not return to Texas thereafter.
At some point in late 2010 or early 2011, DIS Partners began experiencing problems and fell behind on payments to investors and creditors. See Trial Tr. vol. 3, 180:18-181:12. On June 22, 2011, Texas Capital Bank provided Dole notice his loan was in default. Def.’s Ex. B-15. ONEprop, LLC, a property management firm both DIS Partners and Dole contacted, provided a market analysis of Dole’s properties dated July 11, 2011, Pl.’s Ex. 709, and a property report dated July 26, Pl.’s Ex. 707. On July 29, in a letter to Jacob Carroll, Dole gave DIS Partners written notice of default under the MLA and requested DIS Partners cure deficiencies. Pl.’s Ex. 407; Trial Tr. vol. 2, 148:12-152:8. The MLA’s termination provision provided that if, after notice and a thirty-day opportunity to cure, DIS Partners had not cured the breach, Dole could terminate the lease for cause and take over management of the properties. Pl.’s Ex. 502 ¶ 18. He followed up in an August 19 letter, and noted he obtained a postponement of the default date of Texas Capital Bank to ...