Securities Law Blog

In a case closely watched by broker-dealers specializing in 1031 tenant-in-common (“TIC”) offerings, Derek C. Anderson, the managing partner of Michaels, Ward & Rabinovitz, LLP’s Boulder, Colorado office, recently successfully defended a securities broker accused of failing to undertake adequate due diligence. In Branch Avenue Plaza, L.P. v. United Securities Alliance et al, the Claimant alleged that the broker involved failed to conduct adequate due diligence prior to recommending a TIC syndication and sought nearly $4 million in compensatory damages, interest, attorneys fees, and punitive damages. The critical issue in the case was the due diligence undertaken by the Respondents. After hearing testimony and considering the evidence and arguments offered by the parties, the FINRA arbitration panel dismissed the claims alleged by the Claimant with prejudice and ordered that the complaint be expunged from the broker’s securities industry record. The number of 1031 TIC syndications exploded in 2002 after the issuance of IRS Revenue Procedure 2002-22. In Rev. Proc. 2002-22, the IRS explained under what circumstances undivided fractional interests in rental real property would qualify as a like kind exchange under Internal Revenue Code Section 1031. Broker-dealers specializing in 1031 TIC offerings expect the number of cases alleging negligence in the due diligence process of such offerings to increase dramatically in the wake of the current economic crisis and its impact on real estate values and tenants’ ability to meet their rent obligations. The Branch Avenue Plaza case was the first such case to be considered by a FINRA arbitration panel.

DBSI Inc., a privately held real-estate firm, filed for bankruptcy protection in November 2008 calling into question real estate investments in nearly 240 commercial properties valued at $2.4 billion in over 30 states. Plaintiff’s securities and real estate lawyers have been lining up ever since. DBSI was one the leading syndicators of 1031 tenant in common (“TIC”) securities offerings. The number of 1031 TIC syndications exploded in 2002 after the issuance of IRS Revenue Procedure 2002-22. In Rev. Proc. 2002-22, the IRS explained under what circumstances undivided fractional interests in rental real property would qualify as a like kind exchange under Internal Revenue Code Section 1031. Rev. Proc. 2002-22 allowed the deferral of capital gains taxes upon the sale of real estate holdings through investments in rental producing properties such as warehouses, apartment complexes and office buildings. Sales in 1031 TIC offerings grew from $356 million a year in 2002 to $3.7 billion a year in 2006. In the wake of DBSI’s bankruptcy, numerous cases involving investments in properties sponsored by DBSI have been filed. Plaintiff’s lawyers have targeted broker-dealers and their brokers who recommended investments in DBSI’s offerings. The critical issue in these cases will be the due diligence undertaken by the securities firms and their brokers. Broker-dealers specializing in 1031 TIC offerings expect the number of cases alleging negligence in the due diligence process of such offerings to increase dramatically in the wake of the current economic crisis and its impact on real estate values and tenants’ ability to meet their rent obligations. In the only case tried to date involving such due diligence, Branch Avenue Plaza, L.P. v. United Securities Alliance et al, Derek C. Anderson, the managing partner of Michaels, Ward & Rabinovitz, LLP’s Boulder, Colorado office, successfully defended the broker accused of failing to undertake adequate due diligence. The arbitration panel dismissed the claims against the broker and ordered that the claims be expunged from his industry record.