Dole v. Adams et al
Filing
120
DECISION AND ORDER on the Merits of 2 Amended Complaint; denying as moot 104 MOTION for Judgment on Partial Findings, 116 MOTION to Continue Objection to Testimony and Admission of Exhibits Related to Mitigation of Damages. Judgment found in favor of the Defendant as to each of Plaintiff's claims. Signed by District Judge J. Garvan Murtha on 1/29/2016. (esb)
UNITED STATES DISTRICT COURT
FOR THE
DISTRICT OF VERMONT
C. MINOT DOLE,
Plaintiff,
v.
WILLIAM ADAMS,
Defendant.
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Case No. 1:12-cv-00024-jgm
DECISION AND ORDER
ON THE MERITS OF PLAINTIFF’S COMPLAINT
(Doc. 2)
I.
Introduction
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.”).1 The Court held a three-day bench trial from
September 22 through 24, 2015.2 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’ posthearing submissions, and, for the reasons stated below, determines Plaintiff has failed to sustain his
burden of proof to show that William Adams committed fraud.
1
Dole also alleged a claim under the Vermont Consumer Fraud Act, Vt. Stat. Ann. tit. 9,
§§ 2451-2480g, that the Court previously dismissed. See Docs. 79, 90.
2
Also pending before the Court are Adams’ motion for judgment on partial findings, made
orally at trial and filed September 24, 2015 (Doc. 104), and Dole’s motion to continue his objection
to testimony and admission of exhibits related to mitigation of damages filed October 30, 2015
(Doc. 116), also raised orally during trial. Neither party filed written oppositions.
II.
Facts
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.
2
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 PPMII 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
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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 Carroll3--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
3
Carroll is named as a defendant in the complaint but was dismissed from this action
without prejudice on January 9, 2014, at Dole’s request, following Carroll’s filing for bankruptcy.
See Doc. 27; Dkt. Entry No. 36 (Jan. 9, 2014).
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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
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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 September 6, 2011. Pl.’s Ex. 408. The bank foreclosed on the properties on November 1, 2011.
See Trial Tr. vol. 2, 157:6-13; Compl. ¶ 19. At the time of the foreclosure, Dole owned assets over
$4,000,000 and had access to $25,000 in credit. Trial. Tr. vol. 3, 12:21-13:16.
At trial, Dole offered testimony from David Kadleck, CEO of ONEprop, LLC, a Texas real
estate company specializing in the leasing and management of single-family homes, and proffered
him as an expert witness. Kadleck testified DIS Partners contacted ONEprop in June 2010,
regarding 160 vacant properties in Houston and ONEprop agreed to consider taking over
management of the properties. Trial Tr. vol. 3, 46:7-20. Dole contacted Kadleck in May 2011,
regarding his options for his properties. Id. 72:18-24.
6
Dole also offered testimony from Michael Keller, a certified public accountant and partner
at Gallaher, Flynn & Company, and proffered him as an expert witness. Keller testified DIS
Partners had a loss of approximately $1.3 million in 2009, and that it had a negative net equity
position of over $2.2 million in both May and June of 2009. Trial Tr. vol. 1 (Doc. 110) 172:25173:20 (Sept. 22, 2015).
Dole asserts a claim based upon fraud and misrepresentation, Compl. ¶¶ 20-22. He alleges
losses over $4,000,000, id. ¶ 22, and seeks a judgment exceeding $1,000,000 in damages, id. at 12.
Following trial, Dole asserts Adams is liable for the following misrepresentations: (1) stating Dole
would be investing in single-family homes fully renovated to like-new condition; (2) stating Dole’s
property values would increase when valued as rental and the properties had high appreciation
potential; and (3) providing a projection about Dole’s portfolio in July 2009 and stating DIS
Partners’ historic average occupancy and rent increase. (Doc. 117 at 21-24 ¶¶ 1, 3, 6.) Dole also
asserts Adams is liable for fraud for (1) failing to revise or correct his representations about the
properties being “fully rehabbed;” (2) failing to correct his statements regarding occupancy rates of
DIS Partners’ properties when those rates changed; and (3) failing to inform Dole that DIS Partners
was experiencing financial difficulties in 2009. Id. at 22-23 ¶¶ 2, 4, 5.
III.
Discussion
The parties agree the proper standard of proof is clear and convincing evidence. This
standard is a “very demanding” measure of proof:
Although something less than proof beyond a reasonable doubt, it is substantially
more rigorous than the mere preponderance standard usually applied in the civil
context, and is generally said to require proof that the existence of the contested fact
is “highly probable” rather than merely more probable than not.
Woolaver v. Vermont, 833 A.2d 849, 854 (Vt. 2003) (quoting In re N.H., 724 A.2d 467, 469-70
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(Vt. 1998)). A district court’s findings of fact entered after a bench trial are reviewed for clear error.
Harding v. Naseman, 377 F. App’x 48, 49 (2d Cir. 2010) (citation omitted).
Plaintiff must prove each of the five elements of fraud: (1) intentional misrepresentation of
a material fact; (2) known to be false when made; (3) not open to the defrauded party’s knowledge;
(4) the defrauded party acts in reliance on that fact; and (5) harm. Estate of Alden v. Dee, 35 A.3d
950, 960-61 (Vt. 2011). Fraud can be accomplished affirmatively by false statements or by
concealment of facts by one who knows of and has a duty to disclose those facts. Id. at 961;
see also White v. Pepin, 561 A.2d 94, 96 (Vt. 1989) (noting under Vermont law, fraud must “consist
of some affirmative act, or of concealment of facts by one with knowledge and a duty to disclose”).
A misrepresentation may be made with actual knowledge of its falsity or recklessly without actual
knowledge as to its truth, i.e., with reckless indifference. Follo v. Florindo, 970 A.2d 1230, 1241
(Vt. 2009); Bennington Hous. Auth. v. Bush, 933 A.2d 207, 211 (Vt. 2007). Reckless indifference is
shown where a speaker does not have the confidence in the accuracy of his representation that he
states or implies or knows he does not have the basis for his representation that he states or implies.
Follo, 970 A.2d at 1241. A duty to disclose arises from a special relationship of confidence or trust,
such as a fiduciary relationship. Dee, 35 A.3d at 961. A failure to prove any one element prevents
the party from prevailing.
Dole asserts Adams is liable for fraud for misrepresenting DIS Partners’ occupancy rates in
2009 and for providing a false projection about Dole’s portfolio. (Doc. 117 at 23-24 ¶¶ 4, 6.) He
argues the projection “perpetuated [Adams] fraudulent statements” and induced him to make an
additional $100,000 investment in DIS Partners. Id. Adams described the additional investment as
a “sweet deal.” Pl.’s Ex. 85. Generally, statements of opinion are not actionable as fraud. Howard
Opera House Assocs. v. Urban Outfitters, Inc., 166 F. Supp. 2d 917, 926 (D. Vt. 2001) (applying
Vermont law). The Court finds Adams’ statement regarding Note 2 was one of opinion and
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therefore cannot form the basis for a fraud action. Dole asserts Adams is liable for fraud because he
failed to correct his representation that DIS Partners’ occupancy rate was 94% when the rate
dropped at least 7% by June 30, 2009, after Dole purchased the properties and signed the MLAs.
(Doc. 117 at 23 ¶ 4.) In an August 29, 2008 letter to Dole, Adams stated: “Currently our [DIS
Partners] entire portfolio is at 94% occupancy.” Pl.’s Ex. 3. The letter also stated DIS Partners
manages the properties under MLAs as a merged pool “which reduces the impact of vacancies on
any one investor’s pool.” Id. DIS Partners’ June 30, 2009 occupancy rate was 86.97%. Pl.’s Ex.
313. Under the MLA, Dole was to receive a set amount of rent per month regardless of the
occupancy rate of his particular properties, or of DIS Partners’ properties as a whole. To be
material, a representation must “affect the essence of the transaction.” Silva v. Stevens, 589 A.2d
852, 857 (Vt. 1991). Dole has not established by clear and convincing evidence that a drop in DIS
Partners’ occupancy rates to 87% was material because the occupancy rate had no bearing on the
amount of rent he was to receive under the MLA. Accordingly, Dole’s allegation that Adams’ failure
to correct his August 2008 statement prior to the June 2009 closing was fraudulent fails.
Dole asserts Adams is liable for fraud for stating Dole’s property values would increase by
10-15% when valued as rental properties as opposed to owner-occupied single-family homes and the
properties had high appreciation potential. (Doc. 117 at 22-23 ¶ 3; Pl.’s Ex. 46.) The Court finds
the specific projection of future increase in value and statement regarding general appreciation
potential were statements of opinion and expressed judgment as to future value. Such statements
cannot form the basis of a fraud claim. See Howard Opera House, 166 F. Supp. 2d at 926-27 (citing
Restatement (Second) of Torts § 538A (1977)) (expression of judgment as to quality, value,
authenticity, or other matters of judgment is representation of opinion). Accordingly, this allegation
of fraud fails.
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Dole asserts Adams is liable for fraud by stating Dole would be investing in single-family
homes fully renovated to like-new condition and not correcting the representation when he knew in
June 2009 that Dole’s portfolio would include multi-unit properties. (Doc. 117 at 21-22 ¶ 1.)
Regarding the representation Dole would be investing in single-family homes fully renovated to likenew condition, Dole concedes “Adams may have believed this to be the case when he made the
representation[] to Dole in 2008.” Id. Accordingly, because Dole has not demonstrated by clear
and convincing evidence it was known to be false when made, this representation cannot be the
basis of fraud. The remainder of this fraud allegation fails because he has not demonstrated it was
not open to Dole’s knowledge that the portfolio of properties DIS Partners was offering included
multi-unit properties. The Lockwood and Lavender properties had sale prices of $430,000 and
$225,000, respectively. The next highest purchase price was $118,000. The purchase prices alone
were sufficient to put Dole on notice those properties were different than the others. When asked
directly by his counsel at trial whether he understood he was getting any multi-unit properties, Dole
stated: “That’s a hard question to answer. I’m sure that I read it, but what was in my mind was the
single-family houses that I was looking at, and I honestly didn’t spend much time thinking about
multi-family houses.” Trial Tr. vol. 2, 47:22-48:2. Dole had the property addresses of the
Lockwood and Lavender multi-unit properties at least as early as May 18, 2009, Pl.’s Ex. 35, and,
while DIS Partners had not yet provided appraisals, Dole could have made inquiries of public
records regarding the properties. The Court finds Dole has failed to carry his burden to
demonstrate by clear and convincing evidence Adams’ failure to tell Dole in June 2009 his portfolio
of properties would include multi-unit properties was fraud.
Dole asserts Adams is liable for fraud because he failed to inform Dole that DIS Partners
was experiencing financial difficulties in 2009 and would be using Dole’s investment to offset pastdue property tax payments on other properties. (Doc. 117 at 23 ¶ 5.) Accordingly, the Court must
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find Adams had knowledge and a duty to disclose these allegedly material facts. Dole was
corresponding with Adams because Dole’s broker, arguably a fiduciary, who received a commission
of approximately $100,000 from Dole, abdicated the position between Dole--his investor--and DIS
Partners--the company offering the investment the broker presented to Dole. Dole has not
demonstrated Adams was acting as a fiduciary. Assuming Adams had the knowledge, Dole has
failed to demonstrate by clear and convincing evidence he had a duty to disclose to Dole
information regarding DIS Partners’ finances in 2009. See Dee, 35 A.3d at 961. Accordingly, this
allegation of fraud fails.
Dole asserts Adams is liable for fraud because he failed to revise or correct his
representations about the properties being “fully rehabbed.” (Doc. 117 at 22 ¶ 2.) Dole concedes
Adams may have believed his representations that Dole would purchase properties “renovated to ‘as
new’ condition” to be true when he stated it in August 2008, see Pl.’s Ex. 3, but asserts many of the
properties he purchased were not renovated and, though Adams had access to information to
determine whether or not the properties DIS sold to Dole were renovated, Adams never revised or
corrected his representations about the properties being “fully rehabbed.” (Doc. 117 at 22 ¶ 2.)
Dole has not demonstrated by clear and convincing evidence Adams had knowledge and a duty to
disclose this allegedly material fact. As noted above, Adams was not a fiduciary. Even if Adams did
have a duty to investigate and disclose this fact, Dole has not demonstrated by clear and convincing
evidence Adams intended to mislead or defraud Dole. See White v. Pepin, 561 A.2d 94, 96
(Vt. 1989) (“Where [a] duty [to disclose] is present, the failure to disclose a material fact, coupled
with an intention to mislead or defraud rises to the level of material misrepresentation.”). Further,
Dole cannot show the information was not open to his knowledge or that he justifiably relied on
Adams’ August 2008 general statement regarding DIS Partners offering renovated properties once
he was informed in May 2009 of specific properties he would purchase, see Pl.’s Ex. 35. Indeed,
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Dole wrote to Adams that he was concerned about a few of the houses chosen for his portfolio
because he did not think they were representative of what he had been shown when he visited in
March. Pl.’s Ex. 45. At that point, the truth or falsity of the representation was within Dole’s reach:
before making a million dollar investment, Dole could have traveled to Texas again to view the
particular properties he would be purchasing or asked his broker to investigate. Accordingly, this
allegation of fraud fails.
Given the totality of the evidence presented at trial, Dole has failed to carry his burden of
proving by clear and convincing evidence Adams committed fraud under Vermont law.
IV.
Conclusion
Having found the facts described in this opinion, and given the conclusions of law that
followed, see Fed. R. Civ. P. 52(a)(1), this Court determines Plaintiff has failed to sustain his very
demanding burden of proof to show that William Adams committed fraud. Accordingly, the Court
finds in favor of the Defendant as to each of Plaintiff’s claims. The Clerk shall enter judgment on
behalf of the Defendant consistent with the Court’s findings of fact and conclusions of law.
Additionally, Dole’s motion to continue his objection to testimony and admission of exhibits
related to mitigation of damages (Doc. 116), and Adams’ motion for judgment on partial findings
(Doc. 104) are denied as moot.
SO ORDERED.
Dated at Brattleboro, in the District of Vermont, this 29th day of January, 2016.
/s/ J. Garvan Murtha
Honorable J. Garvan Murtha
United States District Judge
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