CBRE To Pay $100M To Settle Class-Action Suit By TIC Investors
A class-action lawsuit against real estate giant CBRE in connection with the embezzlement of tenant funds by executives of Cabot Investment Properties is nearing its close.
CBRE opted to settle with the group of 179 plaintiffs for $100M ahead of a scheduled multiweek trial, and plaintiffs requested a federal judge approve the settlement last week.
The suit, filed in the U.S. District Court for the Southern District of Florida, stems from the recession-era embezzlement of funds from a tenant-in-common structure in Florida that owned six office buildings. Carlton Cabot and Timothy Kroll, who controlled the TIC sponsor Cabot Investment Properties in addition to LeaseCos, the subsidiary asset manager for each property, stole about $17M from mostly elderly TIC investors beginning in 2008.
Cabot and Kroll both pleaded guilty to the fraud and are now in prison. The investors named them in a lawsuit to recover damages, but Cabot Investment Properties and LeaseCos were both in default by that time.
In the suit, the 179 plaintiffs also accused CBRE, and its employee Gloria Hernandez, of helping Cabot and Kroll embezzle funds. LeaseCos had hired CBRE to manage the properties, and Hernandez worked for CBRE as a property manager at some of the properties. Four of the properties are in South Florida, with one each in Orlando and Jacksonville.
According to the plaintiffs, the cascade of financial difficulties caused by the embezzlement — including defaults on the loans financing the acquisition of the properties — resulted in damages far in excess of the amount stolen. They asserted that they lost more than $139M.
Earlier this year, U.S. District Judge William P. Dimitrouleas certified the 179 investors as a class. A trial was scheduled to begin Sept. 4 in Fort Lauderdale.
CBRE and Hernandez vigorously denied they had anything to do with the theft. In a motion earlier this year asking to appeal the certification of the investors as a class — which was ultimately denied — CBRE said that it and Hernandez had no contract with the plaintiffs and never saw the quarterly reports to investors.
"... without CBRE's and Hernandez's knowledge or participation, Cabot and Kroll falsified information in CIP's investor reports to hide [the embezzlement]," the motion said. "CBRE and Hernandiz have demonstrated (and presented documentary support) that they neither participated in nor knew about Cabot and Kroll's criminal actions."
Indeed, the motion put some of the blame on the plaintiffs for not paying attention.
"As early as December 2008, the East Broward LeaseCo stopped making 'distributions' (called base rents) to investors. This alarmed some of the investors and should have been a warning to all of them that something was not right... [the plaintiffs] took no actions to protect themselves, nor did they inform CBRE or Hernandez of their concerns," the motion said.
"Not only was there no collusion, but CBRE, like Plaintiffs, is a victim, having terminated its management of the properties and obtained a judgment against the LeaseCos for over $3M owed for fees and reimbursements," the motion said.
Even so, CBRE and Hernandez agreed to settle the case earlier this month, which led to the cancellation of the trial. The $100M settlement, which will be distributed among the plaintiffs, accounts for 71.6% of the plaintiffs’ total damages, according to the motion for preliminary approval.
"CBRE settled the class action litigation to avoid the time, cost and uncertainty associated with a lengthy jury trial and years of appellate proceedings — regardless of the verdict," CBRE spokesman Robert McGrath told Law360. "We believe the settlement was a prudent business decision given an unsuccessful appeal of the trial court’s class certification decision and with a multiweek jury trial set to begin soon."