William H. Mathews
Cassidy Turley Maryland, Inc. ET AL.
Barbera, C.J. Harrell Battaglia Greene Adkins McDonald [*] Bell JJ.
It is sometimes the case that an individual bent on avoiding taxes exchanges the certainty of the tax liability for a risky, and perhaps fraudulent, investment that proves more costly in the long run. The instant litigation arises out of such a situation. We are asked to decide the nature of the investment – was it a "security" for purposes of application of the Maryland Securities Act? – and whether the long run was too long – are the claims barred by limitations? We also consider the potential use at trial of a bankruptcy examiner's report concerning the promoter of the investment scheme.
We hold that an investment that combined a tenant-in-common interest in commercial real estate with a mandatory management contract with the affiliate of the seller and only a limited ability for the buyers to effect a change of management of the property is an "investment contract" and therefore a security for purposes of the Maryland Securities Act. We affirm the Circuit Court's determination that the buyer's claims under the Securities Act are barred by limitations insofar as they relate to registration under the Act. We reverse the court's determination that the buyer's claims under the Act that relate to alleged fraud and misrepresentation by the defendants are barred by limitations and remand for further consideration whether the limitations period as to those claims was tolled by affirmative fraudulent conduct of the defendants. For a similar reason, we also reverse and remand for reconsideration the Circuit Court's judgment that the buyer's common law tort claims are time-barred as a matter of law. We decline to affirm the award of summary judgment on an alternative ground that the Circuit Court did not adopt. Finally, we affirm the Circuit Court's decision to reserve judgment on the admissibility and use of a bankruptcy examiner's report until it had additional information concerning the proposed use of the report in the context of the trial.
Except as otherwise indicated below, the following facts are undisputed in the record of this case, although the parties have some differences as to immaterial details and as to the inferences that may be drawn from these facts.
Mr. Mathews Seeks an Investment
In 2003, Petitioner William H. Mathews, a retired school teacher and librarian, had owned and managed his rental properties for more than 40 years. At that time, he owned eleven rental properties near the campus of Towson University; he rented those properties primarily to students and faculty at the university. In response to anticipated deleterious changes in local zoning laws, Mr. Mathews decided to sell the properties. Ultimately, he was referred to Stephen Weiss, a real estate professional. Mr. Weiss was then employed by W. C. Pinkard & Co., the predecessor in interest to Respondent Cassidy Turley Maryland, Inc. ("Cassidy Turley"). Mr. Mathews retained Cassidy Turley to market the properties, and in August 2004 the properties were sold to Bob Ward Companies for approximately $4 million. Mr. Mathews paid approximately $176, 000 to Cassidy Turley as a commission.
In order to receive more favorable tax treatment of the proceeds of the sale, Mr. Mathews sought to re-invest the proceeds in other real estate shortly after the sale. With Mr. Weiss' advice, Mr. Mathews ultimately used much of the proceeds to purchase five fractional interests in various commercial office buildings located throughout the United States. These fractional interests were called "Tenants in Common Interests" ("TICs"). Mr. Weiss provided Mr. Mathews with binders containing various documents that described the particular TICs under consideration.
Each of the TICs in question was created by a company called DBSI, Inc., located near Boise, Idaho, or an affiliated company. The structure of the TICs are set forth in various written agreements and other materials. DBSI would purchase real estate, typically an office building, and divide it into TICs that it would then sell to investors. Investors in the TICs were required, as a condition of the purchase, to agree to retain DBSI as property manager,  in return for which DBSI promised a specified annual rate of return on the investment. DBSI would locate sub-tenants who would occupy the property and pay the rent that produced a revenue stream. Under the property management agreement, replacement of DBSI as property manager required a majority vote of all TIC owners of a given piece of property, as well as indemnification of DBSI against any and all claims, actions, costs, damages, liabilities, deficiencies or expenses relating to the property. In the event that DBSI was terminated as property manager, a unanimous vote by the TIC owners was required to appoint a new manager. Under the terms of a TIC agreement, there was no provision for direct control of the property by the TIC owners.
Mr. Mathews received steady payments with respect to his TICs over the next few years and sold one of them. However, in 2008, things changed.
DBSI Bankruptcy; Examiner's Report
In 2008, Mr. Mathews learned that DBSI would be suspending payments for certain of the TICs. Mr. Mathews then contacted Mr. Weiss, who, according to Mr. Mathews, assured him that payments would resume and that he should not worry. In November 2008, DBSI filed a voluntary petition for bankruptcy under Chapter 11 of the bankruptcy code.All of the properties underlying Mr. Mathews' TICs became the subject of foreclosure proceedings.
The bankruptcy court appointed an attorney from a prominent Washington, D.C., law firm as an examiner to conduct an investigation into DBSI. In re: DBSI, Inc., No. l:08 -bk-12687 (D. Del. filed November 10, 2008). The examiner's report describes a downward spiral fueled by related party transactions, conflicts of interest, growing debt disguised as equity, limited sources of revenue, complex and sloppy accounting, and the misleading of investors. Among other things, the report describes the structure and marketing of the DBSI TICs. The bankruptcy court ultimately made findings similar to those of the examiner in concluding that many of DBSI's transactions were "either constructively or actually fraudulent" and that it would be futile to attempt to unravel many of the related party transactions.
Licensing and Registration Status
At the time Mr. Mathews purchased his TICs, Cassidy Turley was licensed by the Maryland Real Estate Commission as a real estate broker. Neither Mr. Weiss nor Cassidy Turley was licensed under the Maryland Securities Act to act as an investment adviser, investment adviser representative, securities broker-dealer, or agent.
Investigations of DBSI
Following the collapse of DBSI, the Securities Division of the Maryland Attorney General's Office undertook an investigation of the offer and sale of DBSI TICs in Maryland. In April 2009, the Securities Division contacted Mr. Mathews as part of that investigation. No action was ultimately taken by the Securities Division against DBSI or Cassidy Turley, although Cassidy Turley did refund to Mr. Mathews the fees and commissions it was paid in connection with his TIC transactions. Federal authorities were also conducting a parallel investigation.
On March 23, 2010, Mr. Mathews filed a complaint in the Circuit Court for Baltimore County against Mr. Weiss and Cassidy Turley. Mr. Mathews' complaint alleged that Cassidy Turley owed Mr. Mathews legal and fiduciary duties to disclose material facts and to act with the care and skill of a "professional financial adviser." It alleged that Cassidy Turley had misled Mr. Mathews concerning the suitability of the TIC investment for his financial situation, the safety of the investment, and the soundness of DBSI. It also alleged that Cassidy Turley had failed to inform him of other material information, including its lack of research into the investment, its receipt of a commission from the sale of the TICs, and the risks associated with the investment. It alleged that Cassidy Turley actively concealed its alleged wrongdoing from him and lulled him into relying upon it, even after the DBSI bankruptcy, until he was contacted by the Securities Division.
The complaint included common law tort claims for fraud, constructive fraud, negligent misrepresentation, and negligence, as well as a claim for breach of contract. It also included a claim under the Maryland Securities Act, Maryland Code, Corporations & Associations Article, ("CA") §11-703.
The parties conducted discovery. After the completion of discovery, they filed cross-motions for summary judgment, as well as motions in limine related to evidence anticipated to be offered at trial.
Rulings on Pretrial Motions
At the pre-trial motions hearing on December 5, 2011, the Circuit Court, among other things, granted a motion in limine that precluded Mr. Mathews from mentioning or introducing into evidence at trial the bankruptcy examiner's report on the basis that it was inadmissible hearsay, although the court held open the possibility that it would reconsider that ruling at trial. Later in the hearing, the Circuit Court granted summary judgment in favor of Cassidy Turley as to all counts. With respect to the alleged violations of the Maryland Securities Act, the court ruled that the TICs were not securities as defined by the Maryland Securities Act. The court also held that, even if the TICs were securities, Mr. Mathews' claims under the Securities Act were barred by limitations, as were his common law claims. Specifically, the court ruled that Mr. Mathews' Maryland Securities Act claims were time-barred because the limitations period governing those claims could not legally be tolled and that Mr. Mathews' common law fraud claims were time-barred because he should have discovered the injury early enough that tolling would not have been sufficient to bring his filing within the limitations period.
Cassidy Turley had also sought summary judgment on the common law claims on the ground that Mr. Mathews did not plan to present expert opinion testimony on the scope of duty of a real estate broker and that, without such testimony, Mr. Mathews could not prove his common law tort claims as a matter of law. The court declined to grant summary judgment for that reason.
Mr. Mathews filed a timely notice of appeal, and Cassidy Turley filed a cross-appeal. Prior to briefing and argument in the Court of Special Appeals, Mr. Mathews filed a petition for a writ of certiorari, which we granted.
The parties have asked us to resolve five issues, which we describe as follows:
1. Are the DBSI TICs "securities"?
2 . Are Mr. Mathews' claims under the Maryland Securities Act barred by limitations?
3. Are Mr. Mathews' common law tort claims barred by limitations?
4. Should the Circuit Court have also awarded summary judgment in favor of Cassidy Turley because Mr. Mathews did not intend to present expert testimony on the standard of care of a real estate broker?
5. Would the DBSI bankruptcy examiner's report be admissible in evidence at a trial under the hearsay exception for public records and reports? May it be relied upon by securities law experts who may testify at trial?
We address each of these issues in turn after reviewing briefly the relevant standards of appellate review.
Standard of Review
Under the Maryland Rules, a circuit court may grant summary judgment if there is no dispute as to material fact and the moving party is entitled to judgment as a matter of law. Maryland Rule 2-501(f). The court is to consider the record in the light most favorable to the non-moving party and consider any reasonable inferences that may be drawn from the undisputed facts against the moving party. Because the circuit court's decision turns on a question of law, not a dispute of fact, an appellate court is to review whether the circuit court was legally correct in awarding summary judgment without according any special deference to the circuit court's conclusions. Ross v. Housing Authority of Baltimore City, 430 Md. 648, 666-67, 63 A.3d 1 (2013).
If an appellate court comes to a different conclusion on the pertinent question of law and reverses a grant of summary judgment by a trial court, the appellate court will not ordinarily seek to sustain the grant of summary judgment on a different ground. See Geisz v. GBMC, 313 Md. 301, 314 n.5, 545 A.2d 658 (1988). Such action would interfere with the discretion that a trial court normally enjoys to deny, or to defer until trial, consideration of the merits of summary judgment on certain issues. Hensley v. Prince George's County, 305 Md. 320, 333, 503 A.2d 1333 (1986). Of course, that rationale would not pertain if the circuit court would have no discretion as to the particular issue.
With respect to the admissibility of evidence, such as the bankruptcy examiner's report, the standard of appellate review depends on the basis for admission or exclusion of a particular item of evidence. Some matters, such as the weighing of the relevance of proffered evidence as against unfair prejudice or other considerations, are left to the "sound discretion" of the trial court. Hall v. UMMS, 398 Md. 67, 82, 919 A.2d 1177 (2007). Such decisions will be reversed only for abuse of discretion. Other evidentiary rulings are based on a "pure legal question." Id. In those circumstances, an appellate court considers the legal question without deference to the decision of the trial court.
Whether a DBSI TIC is a security under the Maryland Securities Act
Maryland Securities Act
The Maryland Securities Act, which is codified at Maryland Code, Corporations & Associations Article ("CA") §11-101 et seq., regulates the offer and sale of securities in Maryland, as well as the individuals who advise on and effect such transactions. In particular, any security offered for sale must be registered pursuant to the Act, unless the particular security is excepted from the registration requirement by statute or regulation. CA §11-501. Subject to certain exceptions, securities broker-dealers (popularly known as brokerage firms) and their agents (popularly known as stockbrokers) must be registered under the Act. CA §§11-401(a), 11-402(a). Similarly, firms and financial advisers that fit the statute's definitions of "investment adviser" and "investment adviser representative" are also subject to a registration requirement. CA §§11-401(b), 11-402(b).
The statute contains several anti-fraud provisions. Pertinent to the allegations in this case, CA §11-301 broadly prohibits fraud in the offer or sale of securities; CA §11-302 similarly prohibits fraud and misrepresentation in connection with advisory activities.
The Act creates the position of Maryland Securities Commissioner ("Commissioner") and the Maryland Securities Division within the Office of the Attorney General and charges them with various regulatory duties under the Act. CA §11-201 et seq. The Commissioner is to adopt regulations implementing the Act and to coordinate with federal and state securities officials in other jurisdictions in the interpretation and enforcement of the securities laws. CA §11-203(a), (b). The Commissioner may investigate alleged violations of the Act and institute administrative and judicial actions to enforce the provisions of the Act. CA §11-701 through §11-702.
The Act also provides a private cause of action to enforce various provisions of the Act. CA §11-703. In particular, under CA §11-703(a)(1)(i), a purchaser of a security has a cause of action against the seller for a registration violation, a misleading statement concerning the significance of registration, or a failure to comply with a regulation concerning approval of advertising. Under CA §11-703(a)(1)(ii), a purchaser has a cause of action against the seller for untrue statements – or omissions – of material fact in connection with the offer or sale of a security. Under CA §11-703(a)(2), a seller of a security has a cause of action for false statements – or omissions – of material fact by the buyer. CA §11-703(a)(3) creates a cause of action against persons acting as investment advisers or investment adviser representatives for registration violations and fraud.
The General Assembly has directed that the Maryland Securities Act be construed to carry out the general purpose of encouraging uniformity in state laws regulating securities and investment professionals and "to coordinate the interpretation and administration of this title with the related federal regulation." CA §11-804. This is no doubt related to the shared lineage of the Act with the federal securities laws and securities laws of many ...