Barnard v. SunTrust Bank

JAMIE BARNARD and MARK ZURAWEL, Plaintiffs, v. SUNTRUST BANK and APRIL KISSELBURG DAVIS, Defendants.

CIVIL CASE NO. 1:11-cv-000289-MR

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF NORTH CAROLINA ASHEVILLE DIVISION

Signed: September 30, 2013

ORDER

THIS MATTER is before the Court on the Defendants' Motion to Dismiss Plaintiffs' Second Amended Complaint.¹ [Doc. 35].

I. PROCEDURAL BACKGROUND

This civil action was brought originally by 46 purchasers of subdivision lots in a failed real estate development known as the Grey Rock subdivision in Lake Lure, North Carolina ("Grey Rock"). [Amended Complaint, Doc. 19 at ¶1]. These purchasers brought suit assertingviolations of the Interstate Land Sales Act, 15 U.S.C. § 1703(a)(2) ("ILSA"), asserting claims for violations of the North Carolina Deceptive Trade Practices Act, N.C. Gen. Stat. § 75-1.1, et seq. ("Chapter 75"), negligent misrepresentation, and fraud, arising from the Defendants' alleged involvement in a scheme to sell lots in Grey Rock at artificially inflated prices. [Id.].

On January 23, 2012, the Magistrate Judge entered an Order questioning whether all of the Plaintiffs were properly joined in this action pursuant to Rule 20 of the Federal Rules of Civil Procedure and ordering the parties to show cause why the Plaintiffs should not be severed in this case and why the purchasers of each individual lot should not be required to prosecute their cases separately. [Doc. 15]. After receiving the responses of the parties, the Court ordered the severance of all of the Plaintiffs, and directed them to file separate complaints setting forth their individual causes of action. [Doc. 27].

On August 6, 2012, the Plaintiffs Jamie Barnard ("Barnard") and Mark Zurawel ("Zurawel") filed their Amended Complaint in compliance with the Court's Order. [Doc. 85]. Defendant SunTrust Bank ("SunTrust" or "the Bank") now moves to dismiss this action pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. [Doc. 94].

II. STANDARD OF REVIEW

In reviewing a motion to dismiss filed pursuant to Rule 12(b)(6), the Court is guided by the Supreme Court's instructions in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009). As the Fourth Circuit has noted, "those decisions require that complaints in civil actions be alleged with greater specificity than previously was required." Walters v. McMahen, 684 F.3d 435, 439 (4^thCir. 2012).

In order to survive a motion to dismiss pursuant to Rule 12(b)(6), "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570). To be "plausible on its face," a plaintiff must demonstrate more than "a sheer possibility that a defendant has acted unlawfully." Iqbal, 556 U.S. at 678.

In reviewing the complaint, the Court must accept the truthfulness of all factual allegations but is not required to assume the truth of "bare legal conclusions." Aziz v. Alcolac, Inc., 658 F.3d 388, 391 (4^thCir. 2011). "The mere recital of elements of a cause of action, supported only by conclusory statements, is not sufficient to survive a motion made pursuant to Rule 12(b)(6)." Walters, 684 F.3d at 439.

To survive a Rule 12(b)(6) motion, "a complaint must state a 'plausible claim for relief.'" Id. (quoting Iqbal, 556 U.S. at 678). Determining whether a complaint states a plausible claim for relief is "a context-specific task," Francis v. Giacomelli, 588 F.3d 186, 193 (4^thCir. 2009), which requires the Court to assess whether the factual allegations of the complaint are sufficient "to raise a right to relief above the speculative level," Twombly, 550 U.S. at 555. As the Fourth Circuit has recently explained:

To satisfy this standard, a plaintiff need not forecast evidence sufficient to prove the elements of the claim. However, the complaint must allege sufficient facts to establish those elements. Thus, while a plaintiff does not need to demonstrate in a complaint that the right to relief is probable, the complaint must advance the plaintiff's claim across the line from conceivable to plausible.

Walters, 684 F.3d at 439 (citations and internal quotation marks omitted).

III. FACTUAL BACKGROUND

Taking the well-pled factual allegations² of the Amended Complaint as true, the following is a summary of the relevant facts.

Grey Rock was intended to be a luxury real estate development of approximately 900 homesites with multiple amenities, including multiple clubhouses, an equestrian center, and a retail village, and other attractions, such as an HGTV "Dream Home." [Amended Complaint, Doc. 31 at ¶¶3, 4, 71]. The developers of the subdivision were LR Buffalo Creek, LLC ("LR Buffalo Creek") and its parent company, Land Resource, LLC ("Land Resource") (together, the "Developers"). [Id. at ¶1].

The Plaintiffs purchased Lots 142 and 76, in Phase IB of Grey Rock (the "Barnard and Zurawel Lots") on May 17, 2005, for the purchase price of $134,910 and $89,910, respectively. [Id. at ¶78]. The Plaintiffs financed both of these purchases through loans from SunTrust. [Id. at ¶66].

To promote the development, the Developers hosted extravagant sales events where they flew purchasers to upscale hotels and resorts in North Carolina all-expense paid "get-a-ways," that included expensive activities like golf outings, fly fishing demonstrations, and other activities. [Id. at ¶7]. At these sales events, the Developers' agents created a "cacophony of walkie-talkie communications" claiming that desired lots were being sold quickly and to give the impression that there was great competition to purchase the lots. [Id.]. SunTrust employees appeared and participated in at least some of these events. [Id. at ¶6]. The Developersalso travelled across the country attending real estate conventions in an effort to find buyers who had no knowledge of real estate values in Western North Carolina. [Id. at ¶49]. SunTrust employees also appeared at these events, touting their loan packages to prospective purchasers and repeatedly vouching for the Developer. [Id. at ¶50].

At the same time that the Developers were selling lots by making representations about Grey Rock's numerous amenities and promoting their timetable for building these amenities, SunTrust knew, or should have known, that the promised amenities and infrastructure were not being built and in fact would never be built. [Id. at ¶¶8-14]. For example, SunTrust knew or should have known: that the Developers failed to meet the various timetables for building roads and constructing amenities [Id. at ¶¶10, 13]; that the Developers had failed to pay subcontractors [Id. at ¶12]; that the Developers were unable to provide basic amenities, such as water and electricity to the community [Id.]; that almost all the developments started by Land Resource were either delayed, unfinished, or resulted in poorly finished developments [Id. at ¶19]; and that the Developers were negligently or intentionally permitting or causing the distribution of funds needed to construct the required infrastructure to themselves and to other entities controlled by or related to them, thus rendering the Developersinsolvent and unable to meet their financial obligations. [Id. at ¶43]. SunTrust also knew that the lot values it was financing in Grey Rock were completely dependent upon the promised infrastructure and amenities being built. [Id. at ¶18].

SunTrust also knew, or should have known, that the values placed on the Grey Rock lots were dramatically overstated. [Id. at ¶51]. SunTrust repeatedly funded loans on lots that were repeatedly bought and sold by Ronald Berg's Irrevocable Discretionary Spendthrift Trusts at ever-increasing sales prices. It is alleged that some buyers were required to sign an agreement that made them silent "credit partners" who were then responsible for the payments on the loans under Berg's trust agreements. Berg would then resell the lot to another one of his trusts, where he partnered with another "credit partner" and he would receive 50% of the profit. Berg was in the business of flipping lots and SunTrust provided Berg with the monies needed to fund these transactions at ever increasing prices. [Id. at ¶52]. In all, there were at least 77 transactions involving Ron Berg and his trusts in Grey Rock, 22 of which were funded by SunTrust. Berg bought and sold 23 lots repeatedly. Fourteen of these lots saw increases in value of more than one hundred thousand dollars in a matter of months. [Id. at ¶53]. These inflated one-party transactions affected thevaluations used in all of the other Grey Rock transactions as they established false comparables for all of the other Grey Rock lots. [Id. at ¶56].

The Developers teamed with several lending institutions, including SunTrust, to offer potential purchasers an unusual financing option that essentially required no down payments or periodic payments for two years from borrowers, including these Plaintiffs, so that the Developers could induce borrowers to purchase this raw, undeveloped land at rapidly increasing prices and so that the lending institutions, including SunTrust, could profit from selling loans and their employees could earn fees. [Id. at ¶45]. Specifically, SunTrust and the Developers developed a loan program for Grey Rock whereby lot purchasers received a loan for 90% of the total purchase price of the lot. The additional ten percent of the purchase price was then placed into a "master" account from which interest-only payments were made on the loan for up to twenty four months starting immediately after closing. [Id. at ¶46].

Plaintiff Barnard was referred to Defendant April Kisselburg Davis by a Grey Rock salesperson. When Barnard called Davis she told him that she would email him a personal financial statement to start the loan process and that she would fill out the SunTrust application, which wasemailed to him in New York State...