Legal Update 2020
Instructor: John Henderson
Was Defendant Responsible for Statements Made Regarding Continued Leasing by Tenant
NNN Durham Office Portfolio 1, LLC, et al v. Highwoods Realty Ltd., et al, 820 S.E.2d 322 (2018)
North Carolina Court of Appeals
Facts: In 2007, Plaintiff NNN purchased interests in five parcels of land consisting of medical offices and clinic buildings from Defendant Highwoods as seller. In 2006, a Confidential Offering Memorandum prepared by Highwoods' real estate broker McMillan was provided to potential purchasers and disclosed information including that the two primary occupants, both affiliated with Duke Medical, leased the majority of the parcels with leases set to expire in 2009 and 2010. The leases did not include any renewal options. Prior to closing, Highwoods' parent company began negotiating relocating Duke Medical. Also prior to closing, NNN called McMillan to ask why Duke Medical had not started negotiating new lease terms since the end of their lease was approaching. McMillan stated to NNN that there was no known reason why Duke had not started to renew their lease. Upon acceptance of NNN's bid, NNN created a NNN, a private-placement memorandum which listed risk factors including the large dependence on Duke Medical as a tenant and the expiration dates of their leases. The PPM and other offering materials were used to sell tenants in common interests to investor buyers. During a tour of the property (during due diligence), Highwoods representatives stated that they did not think Duke Medical would leave the property if a good deal was struck. Eight months after the 2007 closing, Duke Medical announced the decision to not renew its lease at the property. The property was foreclosed in 2011. NNN sued and Highwoods was granted a dismissal as to Plaintiff's primary liability claims and granted summary judgment as to the Plaintiff's secondary liabilities under the Securities Act. NNN appealed.
Issue: Whether Plaintiffs alleged sufficient evidence that the Defendants sold a security or provided material aid with the requisite actual knowledge required under the Securities Act.
Held: Affirmed. Primary liability is imposed on someone who sells a security which the defendants did not do nor was material aid provided to create secondary liability of Securities Act claims. Individual plaintiffs never alleged they saw the COM itself. No Plaintiff directly relied upon the information in the COM to make their investment. The very statements in the COM that Plaintiff's claim were misrepresentations upon which they indirectly relied were not copied and republished in PPM. Plaintiffs also retained an independent appraiser to provide an appraisal and opinion of value of the Property.