NNN Durham Office Portfolio 1, LLC v. Grubb & Ellis Co.

2016 NCBC 93

NNN DURHAM OFFICE PORTFOLIO 1, LLC; et al., Plaintiffs, v. GRUBB & ELLIS COMPANY; GRUBB & ELLIS REALTY INVESTORS, LLC; GRUBB & ELLIS SECURITIES, INC.; NNN DURHAM OFFICE PORTFOLIO, LLC; and NNN REALTY ADVISORS, INC., Defendants.

NNN DURHAM OFFICE PORTFOLIO 1, LLC; et al., Plaintiffs, v. HIGHWOODS REALTY LIMITED PARTNERSHIP; HIGHWOODS DLF 98/29, LLC; HIGHWOODS DLF, LLC; HIGHWOODS PROPERTIES, INC.; GRUBB & ELLIS|THOMAS LINDERMAN GRAHAM; and THOMAS LINDERMAN GRAHAM INC., Defendants.

Nos. 10 CVS 4392, 12 CVS 3945

Superior Court of North Carolina, Durham

December 5, 2016

Stark Law Group, PLLC, by Thomas H. Stark and Sara Pohlman Stark and Penry Riemann, PLLC, by J. Anthony Penry, for Plaintiffs.

Parker Poe Adams & Bernstein LLP, by Charles E. Raynal IV and Jamie S. Schwedler, for Defendants Grubb & Ellis Company and Grubb & Ellis Securities, Inc.

Harris Sarratt & Hodges, LLP, by John L. Sarratt, for Defendants Grubb & Ellis Realty Investors, LLC, NNN Durham Office Portfolio, LLC, and NNN Realty Advisors, Inc.

Ellis & Winters LLP, by Jonathan D. Sasser, James M. Weiss Jeremy M. Falcone, and Emily Erixson, for Defendants Highwoods Realty Limited Partnership, Highwoods DLF 98/29 LLC, Highwoods DLF, LLC, and Highwoods Properties, Inc.

Manning, Fulton & Skinner, P.A., by Michael T. Medford and J. Whitfield Gibson, for Defendants Thomas Linderman Graham Inc. and Grubb & Ellis|Thomas Linderman G raham.

ORDER & OPINION

JAMES L. GALE, CHIEF BUSINESS COURT JUDGE

1. THESE MATTERS are before the Court on multiple dispositive motions filed in the two above-captioned lawsuits: NNN Durham Office Portfolio 1, LLC v. Grubb & Ellis Co., No. 10 CVS 4392 (the "Grubb & Ellis Lawsuit") and NNN Durham Office Portfolio 1, LLC v. Highwoods Realty Ltd. Partnership, No. 12 CVS 3945 (the "Highwoods Lawsuit").

I. INTRODUCTION

2. This litigation concerns a commercial-real-estate portfolio of five office buildings in Durham, North Carolina (the "Durham Property"). Plaintiffs are a combination of limited-liability companies ("LLCs") and members of those LLCs who utilized a tax-deferred exchange under section 1031 of the Internal Revenue Code to purchase fractional tenant-in-common ("TIC") interests in the Durham Property. Plaintiffs claim that they were induced to purchase interests in the Durham Property by materially false statements or omissions in a private-placement memorandum ("PPM") concerning the probability that the Durham Property's primary credit tenant would renew its leases. The primary credit tenant's leases were critical to the Durham Property's value, as demonstrated when that tenant later terminated its leases and the Property went into foreclosure.

3. In the Grubb & Ellis Lawsuit, Plaintiffs bring claims against the entity that issued the PPM and against other related entities allegedly responsible for the misrepresentations in the PPM. Plaintiffs claim that those Defendants are subject to primary liability under the North Carolina Securities Act ("Securities Act").

4. In the Highwoods Lawsuit, Plaintiffs bring claims against the Durham Property's prior owner and the prior owner's selling agent. Plaintiffs contend that those Defendants had material knowledge that they failed to disclose, which led to the misrepresentations in the PPM and subjects those Defendants to secondary liability under the Securities Act.

5. All parties in the two lawsuits have moved for summary judgment on one or more ground. This Order & Opinion addresses the following motions.

6. The first motion is The Highwoods Defendants' Motion for Partial Summary Judgment that the Transaction at Issue Does Not Constitute a Security Under the North Carolina Securities Act ("Highwoods' Motion for Partial Summary Judgment"). This motion presents the question whether the TIC interests that Plaintiffs purchased in the Durham Property are "securities" within the meaning of the Securities Act. Highwoods' Motion for Partial Summary Judgment is DENIED, and summary judgment is GRANTED for Plaintiffs on this issue.

7. The second and third motions are The Highwoods Defendants' Motion for Judgment on the Pleadings ("Highwoods' 12(c) Motion") and Thomas Linderman Graham, Inc.'s Motion for Judgment on the Pleadings ("TLG's 12(c) Motion") (collectively the "12(c) Motions"). The 12(c) Motions present the issue whether any claims under the Securities Act must be restricted to those Plaintiffs who either received or accepted an offer for the sale of a security in North Carolina. The 12(c) Motions are GRANTED, and any claim under the Securities Act brought by Plaintiffs other than NNN Durham Office Portfolio 13, LLC, Fannie B. Blackwelder, NNN Durham Office Portfolio 32, LLC, Kenneth Deno McLamb, NNN Durham Office Portfolio 33, LLC, and Cynthia McLamb are DISMISSED.

8. The next five motions are cross-motions for summary judgment on the issues of primary and secondary liability under the Securities Act in both lawsuits, and on additional claims in the Grubb & Ellis Lawsuit. These motions include (1) Highwoods Defendants' Motion for Summary Judgment ("Highwoods' Motion for Summary Judgment"), (2) TLG's Motion for Summary Judgment, (3) Defendants' Joint Motion for Summary Judgment as to All Claims and All Parties ("Grubb & Ellis Defendants' Motion for Summary Judgment"), (4) Plaintiffs' Motion for Partial Summary Judgment Pursuant to N.C. R. Civ. P. 56 ("Plaintiffs' Motion for Partial Summary Judgment Against Highwoods & TLG"), and (5) Plaintiffs' Motion for Partial Summary Judgment Pursuant to N.C. R. Civ. P. 56 ("Plaintiffs' Motion for Partial Summary Judgment Against the Grubb & Ellis Defendants"). As to these motions:

● Highwoods' Motion for Summary Judgment is GRANTED;

● TLG's Motion for Summary Judgment is GRANTED;

● The Grubb & Ellis Defendants' Motion for Summary Judgment is GRANTED IN PART and DENIED IN PART, and claims against Grubb & Ellis Company ("Grubb & Ellis Co.") and NNN Realty Advisors, Inc. ("NNN Realty Advisors") are DISMISSED;

● Plaintiffs' Motion for Partial Summary Judgment Against Highwoods & TLG is DENIED; and

● Plaintiffs' Motion for Partial Summary Judgment Against the Grubb & Ellis Defendants is DENIED.

9. Finally, the Court addresses Plaintiffs' Motion to Modify the Court's Order with Respect to Their Claims of Punitive Damages Pursuant to N.C. R. Civ. P. 54(b) ("Plaintiffs' 54(b) Motion"), filed in the Highwoods Lawsuit. This motion is DENIED AS MOOT.

10. In summary, the Court determines the following:

● Defendants have not presented adequate evidence for the Court to find that Plaintiffs' TIC interests, clearly marketed as securities, reserved a sufficient degree of control to the investors to disqualify the investment as an investment contract subject to the Securities Act.

● Claims under the Securities Act must be restricted to claims brought by Plaintiffs who received or accepted an offer to sell in North Carolina, and all other Plaintiffs' Securities Act claims must be dismissed.

● All claims against Grubb & Ellis Co. and NNN Realty Advisors should be dismissed. There are material issues of fact as to whether other Defendants in the Grubb & Ellis Lawsuit may be found primarily liable under the Securities Act.

● Even assuming that Plaintiffs can prove that any of the Defendants in the Grubb & Ellis Lawsuit are primarily liable under the Securities Act, Plaintiffs have failed to demonstrate a basis for imposing secondary liability on Defendants in the Highwoods Lawsuit.

● Defendants in the Grubb & Ellis Lawsuit are not liable as a matter of law on Plaintiffs' claims of breach of contract, negligence, negligent misrepresentation, breach of fiduciary duty, constructive fraud, unfair and deceptive trade practices, civil conspiracy, or punitive damages under chapter 1D.

II. THE PARTIES

A. Plaintiffs

11. Plaintiffs in this litigation are thirty LLCs formed under Delaware law, and a combination of thirty-one individuals, trusts, and corporations that are the sole owners of those LLCs.^[1] Both the investment device-tenancy in common-and the holders of TIC interests-tenants in common-are referred to as "TICs" in this Order & Opinion.

12. As a prerequisite to investing in the Durham Property, each TIC owner qualified as an accredited investor by meeting certain income and net-worth requirements. Only three TIC owners-Fannie B. Blackwelder, Kenneth Deno McLamb, and Cynthia McLamb-are North Carolina residents. Those TIC owners and their respective LLCs-NNN Durham Office Portfolio 13, LLC, NNN Durham Office Portfolio 32, LLC, and NNN Durham Office Portfolio 33, LLC-are collectively referred to as the "North Carolina Plaintiffs." The other Plaintiffs (the "Out-of-State Plaintiffs") received and accepted offers to purchase their TIC interests outside of North Carolina.

B. The Highwoods Defendants

13. Defendants in the Highwoods Lawsuit are four entities that comprise a publicly traded real-estate investment trust: (1) Highwoods DLF 98/29, LLC, (2) Highwoods DLF, LLC, (3) Highwoods Properties, Inc., and (4) Highwoods Realty Limited Partnership (collectively "Highwoods"). Highwoods owns, develops, acquires, leases, and manages properties in the Southeast.

14. Highwoods owned the Durham Property from March 15, 1999, to March 8, 2007.

C. Thomas Linderman Graham Inc.

15. Thomas Linderman Graham Inc. ("TLG") is a former North Carolina-based commercial-real-estate company. TLG conducted business under the trade name Grubb & Ellis|Thomas Linderman Graham as a member of a network of independently owned and operated real-estate brokerage businesses that grant permission to use the Grubb & Ellis brand name.

16. TLG was Highwoods' exclusive selling agent for the sale of the Durham Property.

D. The Grubb & Ellis Defendants

17. Defendants in...