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Media Alerts - Fourth Circuit: In re: Total Realty Management
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February 20, 2013
  Fourth Circuit: In re: Total Realty Management
Headline: Fourth Circuit Concludes Real Estate Marketers & Advertisers May Be Liable for Fraudulent Real Estate Schemes

Area of Law: Real Estate

Issue Presented: Whether an entity that is not a direct party to a fraudulent real estate transaction may be found liable for promoting or advertising the scheme.

Brief Summary: Total Realty Management ("TRM") was found liable for the fraudulent buying and selling of land. During the course of the fraudulent scheme, a separate entity, R.A. North, advertised and promoted the fraudulent scheme. After TRM was forced into bankruptcy, the trustee brought an adversary proceeding seeking contribution from R.A. North for participating in the scheme. The U.S. Court of Appeals for the Fourth Circuit held that R.A. North could potentially be found liable to TRM's purchasers under the antifraud provision of the Interstate Land Sales Act. The court further concluded, however, that TRM was not entitled to contribution from R.A. North because TRM had yet to make any payments stemming from its own liability.
Significance, if Any: This was the first time the Fourth Circuit addressed whether an entity that is not a direct party to a fraudulent real estate transaction, but instead engaged in advertising and marketing activities for the scheme, may be found liable under the Interstate Land Sales Act.

Extended Summary: The Interstate Land Sales Act ("ILSA") prohibits developers from engaging in transactions that would defraud or deceive a real estate purchaser. The ILSA also permits an entity that is found liable for violating the Act to seek contribution from any other party who, "if sued separately, would have been liable to make the same payment."

During 2006 and 2007, TRM was actively engaged in a real estate fraud scheme. Pursuant to the scheme, TRM sold parcels of land to purchasers at substantially above market value. R.A. North Development, Inc. ("R.A. North") was the initial seller of the parcels to TRM. During 2006 and 2007, R.A. North promoted and advertised TRM's sale of those same properties. Specifically, R.A. North sales and marketing affiliates distributed materials and made presentations to would-be real estate investors at seminars held by TRM. At the time, R.A. North knew that TRM was making false representations to prospective buyers. After being found liable to purchasers for the fraudulent scheme, TRM went into involuntary bankruptcy. Subsequently, the TRM Trustee brought an adversary action against R.A. North seeking contribution from R.A. North to satisfy payments that TRM would be forced to make to aggrieved purchasers. Prior to trial, the United States District Court for the Eastern District of Virginia granted R.A. North's motion to dismiss and concluded that, among other things, TRM's contribution claims failed because R.A. North could not be sued separately under the ILSA.

On appeal, the Fourth Circuit was asked to consider whether a promoter of a fraudulent real estate scheme could be found liable to aggrieved purchasers and whether payment by one entity is a precondition to seeking contribution from the other. The Fourth Circuit found that the plain reading of the ILSA supported a finding that marketers and advertisers of fraudulent real estate schemes may be found liable for participating in advertising or promotional events, even if they were not parties to the actual fraudulent transaction. In so finding, the court specifically noted Congress' intent to address the fraudulent promotion of real estate schemes.

In the second part of its opinion, the Fourth Circuit addressed whether payment by a directly liable party was a precondition to seeking contribution from the promoter. The court noted that the drafters of ILSA intended the statute to closely resemble the language of the Securities Act of 1933. Accordingly, the court found that a "party liable under the Interstate Land Sales Act is not entitled to seek contribution as an independent cause of action until it has made payment to injured parties." Because the trustee failed to allege that TRM had made any payments to injured parties, the court concluded that TRM was not yet entitled to seek monetary contribution from R.A. North.
To read the full opinion, please visit:
http://pacer.ca4.uscourts.gov/opinion.pdf/112101.P.pdf

Panel: Judges Wynn, Shedd, and Davis.

Argument Date: 10/25/12

Date of Issued Opinion: 01/14/13

Docket Number: No. 11-2101

Decided: Affirmed by published opinion

Case Alert Author: Zachary S. Schultz

Counsel: ARGUED: John Connell Altmiller, Jr., PESNER KAWAMOTO CONWAY, PLC, McLean, Virginia, for Appellant. Michael Wayne Robinson, VENABLE, LLP, Vienna, Virginia, Appellees. ON BRIEF: William D. Dolan, III,
VENABLE, LLP, Vienna, Virginia, for Appellees.

Author of Opinion: Wynn, J.

Case Alert Circuit Supervisor: Professor Renée Hutchins

Edited: 02/22/2013 at 11:33 AM by Renee Hutchins

    Posted By: Renee Hutchins @ 02/20/2013 01:35 PM     4th Circuit  

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