A federal judge in California has dismissed racketeering claims against more than 30 defendants, including the brokerage Marcus & Millichap and its top Manhattan-based broker Glen Kunofsky, The Real Deal has learned.
Kunofsky, one of Marcus & Millichap’s top-ranked brokers, and others were accused of defrauding investors in a series of retail sale-leaseback transactions in New York and three other states during the real estate boom. But last month, U.S. District Judge Ronald Whyte, of the Northern District of California, threw out the alleged violations of the Racketeer Influenced and Corrupt Organizations, or RICO, statutes, effectively removing the case from federal jurisdiction, and leaving the plaintiffs to pursue their claims in state court.
The case stemmed from the mid-2000s, when investors from California, Florida and Nevada bought 22 properties occupied by Jiffy Lube and Church’s Chicken franchises, using tax-deferred (known as 1031) exchanges. But as the market declined, the tenants abandoned the properties, and the new owners were not able to re-lease the space at the same rent.
In 2009, the investors filed a federal lawsuit against the brokers who represented them in the transactions, including nine Marcus & Millichap professionals. The plaintiffs said the properties were overvalued and accused the defendants of violating RICO provisions, including negligent misrepresentation and fraudulent concealment.
There are some 30 defendants in California, Florida and New York. None of the properties named in the suit were located in New York City, but did include buildings in West Rochester, N.Y., and Binghamton, N.Y.
Whyte’s decision, filed March 5, said the plaintiffs “failed to sufficiently allege a fraudulent scheme in the context of a RICO claim.” However, the plaintiffs “allege a series of misrepresentations and omissions in the course of each transaction that may support state law claims against some defendants.”
Y. David Scharf, a partner at the law firm Morrison Cohen who represented Kunofsky and other defendants during portions of the proceedings, said the decision to throw out the case did not come as a surprise.
“Plaintiffs have tried to make this case into a major conspiracy and fraud, when all that happened is that they bought into a market that turned against them,” Scharf said. “They are not taking responsibility for their own investment decisions,”
It would be hard for the plaintiffs to continue the case in state court, because they will “lose the economies of scale of a larger lawsuit,” Scharf said. “I would expect far fewer to follow through to prosecute state claim suits.”
Paul Mudrich, managing director and chief legal officer for Marcus & Millichap, said the transactions were done at the market level at the time, and were not overvalued, as the plaintiffs alleged.
“All the rents were made at a market level, during a robust economy. Then the economy tanked and tenants all over the country were suffering, and many [locations] went dark,” Mudrich said.
Marcus & Millichap ranked Kunofsky as one of the firm’s top brokers nationwide for 2011. Kunofsky and the lead law firm representing the plaintiffs did not immediately respond to a request for comment.