Decided: January 14, 2013
The bankruptcy trustee (the “Trustee’) for debtor Total Realty Management Company (“TRM”) appealed the district court’s dismissal of his adversary action against R.A. North Development, Inc. and R.A. North Development I, Inc. (collectively, “R.A. North”). In his complaint, the Trustee sought contribution from R.A. North for TRM’s liabilities under the Land Sales Full Disclosure Act (the “Disclosure Act”). The Disclosure Act prohibits developers from making fraudulent and misleading statements to real estate buyers, and the Trustee alleged that TRM and R.A North had jointly sold properties at artificially inflated prices in North and South Carolina. The Court of Appeals held that TRM was not entitled to contribution as a matter of law because it had failed to make payments to aggrieved purchasers stemming from its violations of the Disclosure Act.
According to the Trustee, TRM and R.A. North engaged in a real estate fraud scheme in 2006 and 2007. TRM would purchase a number of subdivision parcels from R.A. North at fair market value and would then, hours later, resell the parcels to individual purchasers at substantially above fair market value. TRM then used the proceeds from the sales to finance its purchases from R.A. North, and R.A. North and TRM would keep the differences in value as profit. To attract purchasers, TRM held seminars for potential investors. During these seminars, R.A. North and TRM representatives made several false and misleading representations regarding the investment potential of the properties. Subsequently, one group of aggrieved purchasers sued TRM and R.A. North under the Disclosure Act in the U.S. District Court for the Eastern District of Virginia. That group then put TRM into involuntary bankruptcy in 2009. On April 19, 2011, the Trustee brought an adversary proceeding against R.A. North in bankruptcy court. R.A. North then successfully moved the Trustee’s action to district court in Virginia. Thereafter, R.A. North moved to dismiss the Trustee’s action under Federal Rule of Civil Procedure 12(b)(6). The district court granted R.A. North’s motion, and the Trustee appealed.
The Fourth Circuit explained that in order to state a claim for contribution under the Disclosure Act, a complaint must allege the following: (1) the plaintiff is liable under the statute; (2) the defendant is independently liable for the same conduct; and (3) the plaintiff is entitled to “contribution” from the defendant. The court assumed without deciding that TRM was liable to the property purchasers, so the case turned on the second two requirements of the Disclosure Act. The Trustee argued that R.A. North was independently liable because it participated in the marketing and sale of the properties. R.A. North, on the other hand, argued that under the Disclosure Act, purchasers are required to look to the developer from whom they purchased the lot. Since TRM was the developer, R.A. North reasoned that TRM alone was liable to the purchasers. The court noted that the issue of whether liability under the Disclosure Act extends to entities that were not actually involved in the challenged real estate transaction was one of first impression in the Fourth Circuit. By examining the Disclosure Act’s plain language, Congressional intent, and precedent in other circuits, the court held that the Disclosure Act’s fraud provision encompassed an entity that was ultimately not a party to the transaction. However, despite holding that R.A. North was potentially liable to the purchasers for its role in TRM’s sales, the court held that TRM was not entitled to contribution from R.A. North. The court explained that Congress intended to draw precedent from the 1933 Securities Act in drafting the Disclosure Act, and the contribution provision of the Securities Act had consistently been interpreted as requiring payment by a potentially liable party as a precondition from a jointly liable party. Therefore, the court held that a party liable under the Contribution Act is not entitled to contribution until it has actually made payment to the aggrieved parties.