Litigation Update: Zazzali v. Goldsmith (In re DBSI Inc.)

In early September 2017, a trial team consisting of Dale E. Barney, Mark B. Conlan, and Brett S. Theisen successfully tried to conclusion the valuation phase of the fraudulent transfer lawsuit of Zazzali v. Goldsmith in the U.S. Bankruptcy Court for the District of Idaho in Boise. This last of the DBSI fraudulent transfer actions commenced by the firm on behalf of DBSI Estate Litigation Trustee James R. Zazzali involves a 177-acre parcel of development land located in Meridian, ID known as Tanana Valley. The DBSI group of companies were controlled by majority owner Douglas Swenson, who, along with two of his sons and DBSI’s general counsel, were convicted in the U.S. District Court for the District of Idaho on multiple counts of securities fraud and related charges in 2014; and affirmed by the Ninth Circuit Court of Appeals. The criminal defendants have until January 18, 2018 to seek further appellate review by the U.S. Supreme Court.

DBSI’s principal business between approximately 2003 and 2008, when approximately 170 of the DBSI entities filed bankruptcy in the United States Bankruptcy Court for the District of Delaware, was the syndication and sale of tenant in common (TIC) real estate products. TIC interests are fractional shares in investment real estate such as office, retail, and multifamily residential properties. Investors purchased interests in DBSI sponsored TIC entities, and a DBSI “Masterlessee” leased those properties back and paid guaranteed “TIC rent” to the investors. TIC products were popular with passive real estate investors because they qualified as Internal Revenue Code Sec. 1031 “like-kind” exchanges that permitted investors to defer capital gains. DBSI also raised investor money through the sale of various debt securities that were issued by “note and fund” subsidiaries.

Area real estate developer Marty Goldsmith purchased the Tanana Valley property in October 2005 from a family trust for $19.2 million. In April 2006, Goldsmith contracted to sell the property to a Swenson-controlled company called Kastera LLC for an initial contract price of $35.8 million. At the time, Tanana Valley was raw land with a 13,000 square foot luxury home located on approximately five acres. After obtaining certain development entitlements from the City of Meridian, Goldsmith sold the property to a DBSI subsidiary known as DBSI Tanana Valley LLC. That entity took an assignment of Kastera’s contract and purchased the property for $28.8 million in a transaction that closed in February 2007. That transaction was funded with $28.4 million raised from investors by two note and fund entities, DBSI 2006 Land Opportunity Fund and DBSI 2006 Secured Notes Corp. Kastera paid $400,000 of the purchase price. Gibbons instituted suit in October 2010 on behalf of DBSI Estate Litigation Trustee James R. Zazzali to recover the debtors’ transfers of the purchase price on various actual and constructive fraud theories arising out of the DBSI Ponzi scheme.

At trial, the Gibbons team utilized appraiser Robin Brady of Integra Realty Resources/Boise, who, after a thorough analysis, opined that the property had a value of $23.295 million as of the February 2007 closing date. Goldsmith’s appraiser opined that the property was worth $30.4 million as of that date. After considering the appraisers’ opinions and the testimony of transaction participants, the court determined the value to be $25.48 million, or $3.32 million less than the price paid by DBSI. The court placed significant weight upon Brady’s appraisal and was persuaded by Brady’s appraisal methodology, while discounting Goldsmith’s expert’s opinion.

The team is preparing for the fraud phase of the trial, which will be conducted in Boise, ID beginning in late February 2018, and is ably assisted by local counsel Keely Duke and Kevin Griffiths of Duke Scanlan & Hall, PLLC.