Nnn Durham Office Portfolio 1 Llc V Grubb Ellis Co Nnn Durham Office

Key Facts

Transaction Type

Issues

• The court addressed whether claims under the North Carolina Securities Act could extend to out-of-state plaintiffs. It concluded that only plaintiffs who received or accepted an offer to purchase in North Carolina could pursue such claims, dismissing the remaining plaintiffs' Securities Act allegations.
• The court evaluated whether the tenant-in-common (TIC) interests purchased by plaintiffs constituted 'securities' under the North Carolina Securities Act. This included analyzing whether the TICs retained sufficient control over the property's management to disqualify the investment as an 'investment contract,' a type of security.
• The court examined the enforceability of a conditional release in the Settlement Agreement between plaintiffs and the Grubb & Ellis Defendants. It determined that the filing of the lawsuit before the effective date of the release voided the release for the identified claims.

Holdings

• The court denied Highwoods' Motion for Partial Summary Judgment and granted summary judgment to plaintiffs on the issue that the TIC interests qualify as securities under the Securities Act. The court rejected arguments that the TICs' retained control disqualifies the investment as an investment contract.
• The court granted summary judgment to Highwoods and TLG on plaintiffs' secondary liability claims, concluding no evidence of material aid or actual knowledge required under the Securities Act. Secondary liability claims dismissed with prejudice.
• The court dismissed plaintiffs' claims of primary liability against Grubb & Ellis Co. and NNN Realty Advisors but found material factual disputes regarding the remaining Grubb & Ellis Defendants (Triple Net, NNN Capital, NNN Office). Summary judgment denied on primary liability for these defendants.
• Claims under the Securities Act are limited to the six North Carolina Plaintiffs who received or accepted an offer to sell in North Carolina. All other plaintiffs' Securities Act claims are dismissed with prejudice.
• All claims against Grubb & Ellis Co. and NNN Realty Advisors are dismissed with prejudice. Plaintiffs conceded no evidence of Grubb & Ellis Co.'s involvement, and NNN Realty Advisors' parent company status without direct participation was insufficient for liability.
• Plaintiffs' remaining claims (breach of contract, negligence, fiduciary duty, etc.) against Grubb & Ellis Defendants are dismissed with prejudice. Punitive damages claims under the Securities Act are also dismissed, except for North Carolina Plaintiffs' surviving primary liability claims.
• Final judgment is entered for all dismissed claims in the Grubb & Ellis Lawsuit under Rule 54(b), except for the North Carolina Plaintiffs' surviving Securities Act claims. The court denied plaintiffs' 54(b) motion to reinstate punitive damages as moot.
• The court denied the Grubb & Ellis Defendants' Motion for Summary Judgment on the issue of whether the Settlement Agreement released claims against them. The release was conditioned on plaintiffs not asserting claims by July 2, 2010, which they did not meet, making the release void.

Remedies

• The court denied plaintiffs' Rule 54(b) motion to modify its earlier dismissal of punitive damages claims, finding the motion moot after granting summary judgment on most claims. Punitive damages remained viable only for the six North Carolina Plaintiffs whose surviving Securities Act claims required proof of aggravating factors under N.C. Gen. Stat. § 1D-15.
• The court ruled that plaintiffs failed to prove Highwoods and TLG knowingly provided material aid in the alleged securities violation by the Grubb & Ellis Defendants. Secondary liability under N.C. Gen. Stat. § 78A-56(c)(2) required actual knowledge of the facts underlying the primary liability claim, which plaintiffs did not demonstrate.
• The court granted summary judgment in favor of Grubb & Ellis Co., dismissing all claims against the company with prejudice. Plaintiffs conceded that no evidence demonstrated Grubb & Ellis Co. participated in or assumed liability for the TIC offering.
• The court concluded the Highwoods Lawsuit by entering final judgment on all dismissed claims, citing no just reason for delay. This decision was based on overlapping legal issues with the Grubb & Ellis Lawsuit and to prevent prejudice to all parties from prolonged litigation.
• The court dismissed all claims against NNN Realty Advisors with prejudice, finding no evidence that the company offered or sold securities, made material statements, or met the requirements for control-person liability under the Securities Act.
• The court held that the Settlement Agreement's release provision was void because plaintiffs filed the Grubb & Ellis Lawsuit before the agreement's July 2, 2010 effective date. The filing of the summons alone triggered the release's invalidation, even without specific written notice of claims.
• The court concluded that the TIC interests in the Durham Property constituted 'securities' under the North Carolina Securities Act, rejecting the defendants' arguments that the TICs retained sufficient control to exclude them from this classification. This ruling was based on the economic realities of the investment and the marketing of the TIC interests as investment contracts.

Contract Value

Legal Principles

• The court applied the four-part Howey test to determine if a TIC interest constitutes an 'investment contract' under the Securities Act, emphasizing the expectation of profit derived from the managerial efforts of others. It also analyzed North Carolina's definition of 'investment contract' under Rule 06A.1104(8)(a)-(b), focusing on the investor's dependency on the promoter's expertise and the economic realities of the transaction.
• The court emphasized that the economic realities of the TIC investment, including the TICs' limited actual control despite contractual provisions, must be considered over formal legal structures. This principle was used to determine that the TIC interests were investment contracts under the Securities Act, even with some reserved control rights.
• The court noted that claims under N.C. Gen. Stat. § 78A-56(a)(2) require proof of material misstatements or omissions, with the burden shifting to the defendant to demonstrate they exercised reasonable care. Punitive damages under chapter 1D require clear and convincing evidence of an aggravating factor.
• The court applied the 'material aid' and 'actual knowledge' requirements for secondary liability under § 78A-56(c)(2), concluding that Highwoods and TLG lacked the necessary knowledge to be liable. It also addressed the conditional release of claims in the Settlement Agreement, interpreting the contract to exclude claims timely asserted.

Precedent Name

• SEC v. Merch. Capital, LLC
• Omnicare, Inc. v. Laborers District Counsel Construction Industry Pension Fund
• SEC v. W. J. Howey Co.
• Gasner v. Bd. of Supervisors
• In re Donald J. Trump Casino Sec. Litig.—Taj Mahal Litig.
• Sanofi (In re Sanofi Sec. Litig.)
• Raab v. Gen. Physics Corp.
• Williamson v. Tucker

Key Disputed Contract Clauses

• The Purchase Agreement (§ 7.2) included an 'as is' provision stating that the seller had limited knowledge of the property's condition. This clause was relevant to plaintiffs' breach-of-contract claims, which the court dismissed due to the absence of covenants about title or condition.
• The Management Agreement (§ 2.5.1) allowed TICs to approve the annual budget, which controlled capital expenditures. However, the court noted that the TICs' ability to object was diluted by the manager's control over information, limiting its impact on the investment's profitability.
• The PPM (92) included disclaimers that forward-looking statements (e.g., lease renewal probabilities) might differ materially from actual results. These disclaimers were central to the court's determination that Triple Net's statements were nonactionable opinions, even if plaintiffs claimed omissions made them misleading.
• The Management Agreement (§ 2.6.2) mandated that the TICs' unanimous consent was required to approve new lease terms. If no TIC explicitly rejected a proposed lease, it was considered approved. This clause was central to the court's analysis of whether the TICs retained sufficient control to avoid securities classification.
• The TIC Agreement (¶ 1.5) explicitly restricted any TIC from acting on behalf of or binding other TICs in decisions. This provision was cited to argue that TICs' reserved contractual rights were insufficient to confer meaningful control over the property's management, reinforcing the securities classification.
• The Settlement Agreement (¶ 2.4) contained a conditional release that became void if plaintiffs filed claims prior to July 2, 2010. The court held that plaintiffs' lawsuit filing on July 1, 2010, triggered the release's ineffectiveness, preserving their claims against the Grubb & Ellis Defendants.
• The PPM (iv) stated that purchasers should not rely on outside information and that management decisions were exclusively made by the Manager. This clause supported the argument that the TICs' investment was an 'investment contract' under securities law, as it highlighted dependency on the manager's efforts.
• The Management Agreement (§ 10.1) granted TICs the right to terminate the agreement annually without cause. However, termination was conditioned on TICs paying a pro rata share of setup fees and could default the loan. The property manager could also purchase a TIC's interest to prevent termination. These terms were contested as evidence of TICs' actual control over management.

Cited Statute

• North Carolina Securities Act
• North Carolina Unfair And Deceptive Trade Practices Act
• North Carolina Rules Of Civil Procedure

Judge Name

Passage Text

• The Court denies the Grubb & Ellis Defendants' request for summary judgment and instead grants summary judgment for Plaintiffs on the issue whether Plaintiffs' claims against the Grubb & Ellis Defendants were released by the Settlement Agreement.
• The Court concludes that the exercise of control by the TICs after the collapse of the Business Plan is inadequate to prevent their investment from qualifying as a securities transaction.
• The Court further concludes that the transfer of title in North Carolina from Triple Net to the TICs for property located in North Carolina did not itself constitute a sale of securities within North Carolina, and was neither the offer nor the acceptance for the sale of a security in North Carolina for any Plaintiff other than the North Carolina Plaintiffs.

Damages / Relief Type

• Punitive damages claims under the Securities Act dismissed with prejudice, except for surviving claims by North Carolina Plaintiffs.
• Non-Securities Act claims (breach of contract, negligence, etc.) against Grubb & Ellis Defendants dismissed with prejudice.
• Dismissal with prejudice of all claims against Grubb & Ellis Co. and NNN Realty Advisors due to lack of evidence of involvement.
• Settlement Agreement did not release claims against Grubb & Ellis Defendants due to timely lawsuit filing.
• Secondary liability claims against Highwoods and TLG dismissed with prejudice for lack of material aid or actual knowledge.
• Final judgment entered for all dismissed claims in the Highwoods Lawsuit under Rule 54(b).
• Summary judgment granted to plaintiffs on the issue of TIC interests qualifying as securities under North Carolina law.