Read the full decision: Gibson v. Bankofier, 365 P.3d 568 (Or. Ct. App. 2015).
An Oregon court has considered allegations against a real estate professional arising from her assistance of an elderly client who entered into section 1031 exchange transactions with the proceeds from the sale of her home.
In 1990, Veryl Gibson (“Seller”) and her husband created a trust into which they placed their assets, including their home and surrounding land. Shortly thereafter, the Seller’s husband died. In 2005, a developer contacted the Seller about its interest in her property and so the Seller contacted a friend of hers, Sharon Bankofier (“Licensee”). The Licensee held a real estate license. The parties attempted to negotiate a sale, but transaction fell through.
In 2007, the developer contacted the Licensee about its interest in the Seller’s property. The Seller remained interested in selling the property, and asked the Licensee about arranging a transaction where she could defer the taxable capital gains from the sale in order to pass along the proceeds to her children. The Licensee educated the Seller about section 1031 exchanges.
Section 1031 of the Internal Revenue Service Code allows a party to defer capital gains from the sale of property by investing the proceeds from the first sale into a replacement property. The replacement property needs to be identified within 45 days after the sale of the first property and the purchase of the second property must be completed within 180 days. The Licensee also told the Seller that investing in rental properties wouldn’t be a good idea for her since she had no experience managing these properties but she might want to invest in a tenant-in-common property, or “TIC”. A TIC is an investment where the property is owned in common by several different owners and can be used as a replacement property for a section 1031 exchange.
The Seller decided to invest in TIC properties and began exploring the options. The Seller signed an agreement with the Licensee where the Licensee would locate TIC investment opportunities for the Seller. The agreement also stated that the Licensee would not be responsible for providing professional services such tax advice or legal services. After reviewing the options received from the Licensee, the Seller selected four TICs as replacement properties.
Shortly after selecting the properties, the Seller began to suffer from cognitive impairment. While the Seller attempted to recover, the Licensee continued to work on completing the section 1031 exchange. Eventually, the Licensee received $24,000 in referral fees from two of the four TIC investments. The Seller’s mental state continued to worsen and eventually she was declared incompetent. Three of the TIC investments ultimately failed and only one continued to generate income.
The Seller’s children brought a lawsuit against the Licensee alleging elder abuse and negligence. The elder abuse claims were based on a state statute, while the negligence claim was based on the alleged “special relationship” between the Licensee and the Seller because the Licensee had a real estate license and the Seller had authorized the Licensee to exercise economic judgment on her behalf. The trial court entered judgment in favor of the Licensee, and Seller’s children appealed.
The Court of Appeals of Oregon affirmed the ruling of the trial court. The court first looked at the financial elder abuse claims. A party must allege that a “vulnerable person” (either an elderly person or an incapacitated person) has suffered from a taking or appropriation of money or property that belongs to them and the taking is wrongful. The Seller’s children argued that the Licensee received $24,000 in referral fees and also the Licensee’s control over the section 1031 exchange amounted to financial elder abuse.
The court ruled that there was no evidence that the Seller’s trust suffered any harm by the Licensee’s actions. First, the referral fees were paid by the TIC sponsors, not the Seller. Second, none of the Licensee’s conduct related to the purchase of the TICs was wrongful. Only two of the four TICs paid referral fees and so she hadn’t steered the Seller toward only TICs that paid referral fees. The Seller had also received independent advice from a financial advisor about her TIC investments. Since there was no misappropriation of money or other harm, the court ruled that the financial elder abuse claims failed.
Next, the court considered the negligence claims. The allegations centered on the Licensee’s alleged negligence in investing the sale proceeds. The court first looked at the duties a real estate professional owes to her client, and found that the Licensee had not violated any of those by identifying replacement properties. Indeed, the agreement specifically stated that the Seller should seek professional advice for areas outside the Licensee’s expertise such as for property valuations or tax advice.
The court also concluded that even if the Licensee was presumed to be managing the Seller’s investments, there was still no evidence of negligence because there was no evidence that the four TICs were unreasonable investments at the time they were made, as the real estate market collapse occurred after the investments were made. Therefore, the court affirmed the trial court’s judgment in favor of the Licensee.
Gibson v. Bankofier, 365 P.3d 568 (Or. Ct. App. 2015).