Bank Had No Duty of Disclosure to Investors in Real Estate Development

By Weissman, Michael L. | The RMA Journal, July-August 2012 | Go to article overview

Bank Had No Duty of Disclosure to Investors in Real Estate Development


Weissman, Michael L., The RMA Journal


In Badger Capital, LLC v. Chambers Bank of North Arkansas, No. 10-3067 (United States Court of Appeals for the Eight Circuit, August 16, 2011), the court, applying Arkansas law, held that a group of investors in a real estate project had no fraudulent concealment claim against a bank that made a development loan and allegedly had acted as escrow agent for the investors' funds.

The developer, Mitchell Massey, planned a residential development of 220 units called Eastpoint Landing. Massey organized Eastpoint Redevelopment, LLC on June 21, 2005, to purchase a 17-acre plot of land for $19 million. The purchase was financed largely through a $14 million loan from Chambers Bank of North Arkansas and through a private offering to accredited investors.

Investors were solicited by use of a private offering memorandum. Eastpoint offered 10,000 shares at $1,000 per share. The offering began June 20, 2005, and was to end either when 10,000 shares were sold, or on June 30, 2005. It could be extended to December 31, 2005, but the effectiveness of the offering did not hinge on any minimum number of shares being sold.

The offering memorandum stated that so long as the shares were being offered, the bank would hold the investors' funds in an interest-bearing escrow account. The subscription for shares in Eastpoint also indicated that investors' funds would be held by the bank in escrow. Even though the bank was identified as escrow agent in the private offering memorandum and subscription agreement, the investors had no communication with the bank regarding their Eastpoint investments.

One of the investors in Eastpoint was J.R. Meeks, an employee of the bank and the nephew of the bank's president. Meeks also was related to three of the bank's directors, and he owned a small equity interest in the bank. He assisted Eastpoint in getting its loan from the bank, having been briefed about Eastpoint's financial condition prior to the closing of the loan. He also communicated with the attorneys who prepared the private offering memorandum and attended the loan closing. Meeks received 1,000 shares in Eastpoint on June 27, 2005, one day before Eastpoint closed its loan with the bank. Meeks provided a $2 million personal guarantee of Eastpoint's loan from the bank. However, on August 1, 2005, Meeks returned the 1,000 shares in exchange for Massey, the developer, assuming responsibility for Meeks's guarantee.

After Eastpoint acquired the site for the proposed development, Florida real estate values crashed. Ultimately, the bank foreclosed its mortgage in January 2009. The bank was the purchaser at the foreclosure sale when the property was appraised at $1.69 million.

On June 19, 2008, the investors sued Massey and the bank for fraudulent concealment. They lost. The bases for the claim of fraudulent concealment were threefold: 1) Eastpoint had not raised $10 million when the offering was closed, 2) Eastpoint had obtained an additional loan from the bank to pay closing costs on the real estate purchase, and 3) Meeks and an entity controlled by his father had received an equity interest in Eastpoint without making any cash investment. …

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