Arbitrators Award Over $2 Million for Unsuitable Tenants In Common Real Estate Transactions

March 9, 2012

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in January 2011, Claimants alleged that Respondents sold to them Tenants-In-Common ("TIC") real estate investments, which were unsuitable in light among other considerations, the customers' age, financial condition, cash flow needs, risk tolerance,  and over concentration in real estate . In seeking compensatory and punitive damages, Claimants alleged various causes of action, including failure to supervise, breach of fiduciary duty, and negligence. At the close of the hearing, Claimants amended their damages claim to $3,285,789.04, inclusive of interest through January 16, 2012, the last day of the hearing. In the Matter of the FINRA Arbitration Between Joseph F. Lightfoot on behalf of himself and as trustee of the Lightfoot Living Trust; and Marilyn C. Lightfoot on behalf of herself and as trustee of the Lightfoot Living Trust, Claimants, vs. Pacific West Financial Group; Pacific West Securities, Inc.; William M. Swayne,II; William M. Swayne, III; Joshua D. Swayne; WMS Financial LLC; and WMS Financial Planners, Inc., Respondents (FINRA Arbitration 11-00230, March 6, 2012).

Respondents generally denied the allegations, asserted various affirmative defenses, and requested an expungement from the Central Registration Depository ("CRD") system.

Spoiler Alert

As will readily become apparent, this case appears to be yet another TIC dispute. Although in the wake of the Great Recession, some major firms such as Bank of America, JP Morgan, Wells Fargo and Citigroup have had to answer for their own dalliances in the mortgage market, many smaller players continue to have exposure to unhappy customers who were invested into now questionable real estate investments, of which TICs have certainly earned their share of notoriety.

SIDE BAR: TIC investments became increasingly popular as a way for a seller of real estate to qualify for a so-called 1031 Tax Free Exchange via the acquisition of an ownership interest in another property.  Sales of fractional ownership interests to sellers of appreciated realty became an attractive business for many FINRA brokerage firms, who marketed this transaction as a way to preserve the tax-free status of a property exchange.

However, as with most flavor-of-the-month investment ideas, TIC transactions have seen their share of consumer complaints.  Among the most common source of friction is the alleged lack of adequate pre-sale due diligence by the brokerage firm, and the failure of the firm to reasonably monitor ongoing developments at the subject properties.  A cursory glance at the litigation in this area shows disagreements between claimant investors and respondent brokerage firms as to the quality of the latter's review of financial statements; the thoroughness of background checks involving promoters; and the validity of any appraisals done on the property in dispute.

The Past That's Now The Prelude: Read this helpful 2005 commentary by the NASD (now FINRA): Private Placements of Tenants-in-Common Interests: NASD Issues Guidance on Section 1031 Tax-Deferred Exchanges of Real Property for Certain Tenants-in-Common Interests in Real Property Offerings (Notice to Members 05-18, March 2005).

Also, READ:

LPL Sued for $8 Million In Real Estate Investment Dispute("Street Sweeper" February 15, 2012)

TIC-ed Off Customers Sue Over Tenants In Common Investment ("Street Sweeper" October 6, 2011)


The FINRA Arbitration Panel found Respondents jointly and severally liable and ordered them to pay to Claimants:

  • $1,862,960.65 (includes pre-judgment interest at the statutory rate of 8% to January 31, 2012 minus distributions), which is the sum of the amounts paid for TSG Midwest, Evergreen Springs, Argus TriWest, Passco River Park and Passco Promenade;
  • $346.59 per diem interest (at 8% statutory rate);
  • $200,000.00 in attorneys' fees, pursuant to RCW 21.20.420 of the Securities Act of Washington; 
  • $200.00 in costs; and
  • $250.00 reimbursement for FINRA filing fee

The FINRA Arbitration Panel acknowledged the timely tenders by Claimants of their interests in ten Direct Participation investments, inclusive of Claimants' interests in TSG Midwest, Evergreen Springs, Argus TriWest, Passco River Park and Passco Promenade.  Accordingly, the Panel ordered that Respondents, jointly and severally, shall within 30 days from the date of service of the Arbitration Award, notify Claimants in writing as to whether they will accept any or all of the tenders. In the event Respondents accept any or all of the tenders, Claimants were ordered to  cooperate fully with Respondents to transfer all of their rights, title and interest in these securities to the Respondents.  In the event Respondents accept any of these tenders. Respondents were found responsible for any capital calls from the date the tender(s) are accepted. The monetary damages awarded to Claimants would not be diminished whether or not Respondents elect to accept any or all of the tenders.

Finally, Respondents' request for CRD expungement was denied.


Finally, let me permit the FINRA Arbitration Panel to offer its own explanation of its rationale in this case:

The Panel has determined that due to the age, overall financial position, concentration of investments in real estate, the nature of these securities, the timing of these specific sales to Claimants, the conduct of Respondents in selling these securities to Claimants, including various material omissions and other factors, these securities were sold to Claimants in violation of the Securities Act of Washington. Among other evidence of a violation of a standard of care under the Securities Act of Washington was the disavowal by Respondents of any obligation to conduct a suitability analysis for the sale of TICs in the circumstances of a Section 1031 - like kind assets exchange for tax deferral purposes. Under all of the circumstances presented, the Panel has determined that the sale of these securities to these Claimants violated the duty of reasonable care.

As they say, match, set, point. Compliments to this FINRA Arbitration Panel for a succinct presentation and a compelling explanation.