Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—1stCir: Unfair Business Practice Claims over Arbitration Theory Change Rejected, (Jun 13, 2013)

By Tobias J. Gillett, J.D., LL.M.

A property exchange company could not state Connecticut and Massachusetts unfair business practice claims against individuals and companies whose funds it was found to have mismanaged and their attorneys, the U.S. Court of Appeals in Boston has ruled (Boston Property Exchange Transfer Co. v. Iantosca, June 12, 2013, Souter, D.). The company did not show any damages resulting from the decision by the individuals and companies to pursue a different theory in arbitration claims assigned to them than the company would have pursued.

Boston Property Exchange Transfer Co. (BPE) served as an intermediary for “like-kind” property exchanges under Section 1031 of the federal tax code. The tax code permitted a property owner to avoid capital gain taxes on a sale by using the proceeds from the sale to purchase a “like-kind” property within 180 days. The code requires sellers to leave the funds from the sale with a qualified intermediary, such as BPE, or use another regulatory safe harbor, until the funds are used to purchase the second property.

BPE’s principal used the funds deposited with BPE to open trading accounts at Merrill Lynch, later superseded in 2000 by accounts at PaineWebber. Rather than using the funds to make conservative investments, as provided in the escrow agreements, BPE’s principal used the funds to engage in aggressive, high-volume trading of technology stock options. When technology stocks declined sharply in 2000, BPE lost money quickly, and ultimately lost about $8.6 million of the exchangers’ money.

Following a civil trial, the exchangers obtained a judgment of approximately $19.2 million against BPE. The exchangers obtained a transfer of a BPE arbitration against PaineWebber in which BPE claimed that PaineWebber had caused the losses by halting BPE’s trading prior to a market rally in December 2000 and early January 2001 that could have erased the losses. BPE sought compensatory damages of $29.5 million and punitive damages of $58.8 million. Once the assignment was completed, the exchangers substituted a different theory of liability, resulting in an award of $12.7 million in compensatory damages and attorney fees, all of which went to the exchangers to partly repay the judgment against BPE.

BPE then filed suit in federal court against the exchangers and their attorneys, asserting a variety of claims including violations of the Connecticut Unfair Trade Practices Act (CUTPA) and Massachusetts unfair business practices law. BPE sought the $75.4 million difference between the amount of the arbitration judgment and the amount BPE was requesting in the arbitration, as well as $226.2 million in punitive damages. The district court dismissed CUTPA and Massachusetts law claims against the attorney defendants and the CUTPA claims against the exchangers, and later granted summary judgment to the exchangers on the Massachusetts law claim. BPE appealed.

The court initially observed that it was “puzzled that this lawsuit ever ended up in federal court or remained in the federal forum as long as it has.” The court noted that BPE could have raised its concerns about the assignment order before the state Superior Court, but instead waited nearly three years to bring a lawsuit in federal court. Therefore, a “strong argument” existed that BPE had waived the state law claim asserted in its lawsuit. However, the defendants had not raised the issue, and therefore the court went “no further here than to caution counsel in future cases about the risk of resorting to diversity jurisdiction as a substitute for a foregone opportunity in underlying state court litigation between the same parties.”

However, the court affirmed the district court’s decision to dismiss the claims under the Massachusetts and Connecticut unfair business practices statutes because BPE did not provide evidence that would show “that the defendants caused it to suffer damages.” BPE would have had to show that it would have recovered more than the $12.6 million arbitration award on its original theory.

“Here, BPE failed to put forward any evidence that its original arbitration theory against PaineWebber had any reasonable chance of leading to a recovery of more than $12.6 million,” the court observed. The record contained no discussion by BPE of the merits of the claim, and a BPE witness admitted that the only evidence he had was “the fact that they didn’t award more, because the statement of claim was amended.” The fact that the amended claim produced an award of $12.6 million said nothing about what the original claim would have produced, the court noted.

Moreover, the court considered “inconceivable” the possibility that PaineWebber would “be held liable for refusing to let BPE continue its proven unlawful trading,” when it “would have had to continue to put its own money at risk to support unlawful conduct that was piling up rapid losses.” In a footnote, the court observed that BPE’s theory was also doubtful because, following the brief market recovery in December 2000 and January 2001, the market plunged again. The “assumption of market clairvoyance” represented by BPE’s theory that it would have stopped trading following the rally was “not what the record suggests.” “[T]he lack of any evidence of damages seem[ed] as inevitable as it is fatal” to the court.

The case is No. 11-2475.

Attorneys: Joseph M. Pastore III for Boston Property Exchange Transfer Co. Anthony R. Zelle (Zelle, McDonough & Cohen, LLP) for Joseph Iantosca.

Companies: Boston Property Exchange Transfer Co.; Belridge Corp.; Bellemore Associates, LLC; Massachusetts Lumber Co., Inc.; Zelle McDonough & Cohen LLP; Anthony R. Zelle, P.C.; Nystrom, Beckman & Paris, LLP; Faxon Heights Apartments Realty Trust; Fern Realty Trust

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