When Your 1031 Exchange Goes Bad: Delaware Statutory Trust (DST) Litigation

MDF Law PLLC represents investors in matters involving 1031 exchange lawsuits and Delaware Statutory Trust (“DST”) litigation arising from distressed or failed investment offerings. The firm is currently evaluating and pursuing claims on behalf of investors whose DST interests have experienced suspended distributions, refinancing failures, material valuation declines, or foreclosure proceedings.

MDF Law conducts a comprehensive review of offering materials, subscription agreements, financial statements, and communications to determine whether investors were provided with full and accurate disclosures at the time of sale. In many cases, investors were not adequately informed of leverage risks, refinancing exposure, liquidity constraints, or conflicts of interest associated with the sponsor or broker-dealer. The firm also investigates whether licensed securities professionals satisfied their obligations under FINRA rules to conduct reasonable due diligence before recommending Regulation D offerings. Where evidence shows material misrepresentations, omissions, or unsuitable investment recommendations, MDF Law pursues recovery through FINRA arbitration, state and federal litigation, and related proceedings. Our objective is to hold responsible parties accountable and seek meaningful financial recovery for investors who relied on professional advice in complex real estate securities transactions.

What is a DST?

A Delaware Statutory Trust is often marketed as a turnkey real estate solution for individuals completing a 1031 exchange under Section 1031 of the Internal Revenue Code. In many cases, investors sell appreciated property and are encouraged to roll the proceeds into a DST in order to defer capital gains taxes while receiving passive income. While DST investments are promoted as real estate replacements, the legal reality is that DST interests are securities. This distinction is critical in any 1031 exchange lawsuit or DST litigation because securities transactions are governed by federal and state securities laws and fall under the regulatory authority of the Financial Industry Regulatory Authority (FINRA).

The classification of DST interests as securities has significant legal consequences. Real estate brokers are generally prohibited from selling DST investments[1] for a commission unless they are also properly licensed securities representatives. If a real estate professional who does not hold a FINRA securities license solicited, recommended, or facilitated the purchase of a DST in exchange for compensation, that conduct may constitute the unlawful sale of a security. In a 1031 exchange lawsuit, determining whether the salesperson was properly licensed is often a threshold issue.

When a licensed securities broker is involved, the law imposes strict obligations. In the context of DST litigation, the central question is often whether the broker and brokerage firm conducted reasonable due diligence before recommending the investment. FINRA rules require that brokers have a reasonable basis to believe that a recommended security is suitable and that its risks have been adequately investigated and disclosed. A broker cannot simply rely on sponsor marketing materials or assume that a well-known sponsor guarantees safety.

Investors learned this the hard way in 2026 when Inspired Healthcare Capital[2] filed for bankruptcy protection. Even before the bankruptcy filing, claims against registered representatives and broker-dealers were already increasing as concerns mounted about underwriting standards, leverage, and refinancing risk in certain DST offerings, including many offered by Inspired Healthcare Capital. For example, Real Estate Transition Solutions[3] has been the subject of multiple 1031-related claims involving alleged due diligence failures and unsuitable recommendations. These disputes underscore a broader trend: when distressed DST investments unravel, investors often examine not only the sponsor’s conduct, but also whether the selling broker complied with FINRA rules governing private placements and Regulation D offerings.

Understanding DST Due Diligence

Reasonable due diligence in a Delaware Statutory Trust offering requires a substantive and independent investigation into the sponsor’s track record and prior DST performance, the property’s projected cash flow assumptions and their sensitivity to changing market conditions, the debt structure including interest rate exposure and refinancing timelines, tenant concentration and lease stability, appraisal methodology and valuation assumptions, conflicts of interest and compensation arrangements, and the overall exit strategy and liquidity constraints associated with the investment. When these factors are not carefully analyzed, verified, and clearly explained to the investor prior to the recommendation, the failure may form the basis for a 1031 exchange lawsuit or DST litigation.

Suitability is another core issue in DST litigation. Many investors who enter into 1031 exchange transactions are retirees or conservative individuals seeking income stability and capital preservation. They may have relied on the representation that the DST would provide consistent distributions with minimal management responsibility. If a broker recommended a highly leveraged DST with significant refinancing risk, interest rate sensitivity, or speculative tenant exposure to a conservative investor, that recommendation may violate FINRA’s suitability standards.

Importantly, the failure of a Delaware Statutory Trust does not automatically mean that investors are without recourse. Securities law focuses not only on the performance of the investment but also on the conduct of the broker and firm at the time of sale. If risks were minimized, material facts were omitted, the investment was described as “safe” or “guaranteed,” or the due diligence was superficial, those facts may support a 1031 exchange lawsuit or DST litigation. In addition, brokerage firms have a duty to supervise their registered representatives. If a brokerage firm failed to properly oversee the sale of DST products, ignored red flags regarding sponsor stability, or allowed unlicensed individuals to participate in securities sales, the firm itself may bear liability in FINRA arbitration.

DST Litigation Through FINRA

Many 1031 exchange lawsuits and DST litigation matters proceed through FINRA arbitration because most brokerage account agreements require disputes to be resolved in that forum. FINRA arbitration allows investors to seek compensatory damages, interest, and other available relief when brokers or firms violate securities laws or industry rules. Unlike traditional real estate disputes, these claims are evaluated under securities law standards that impose affirmative duties of investigation, disclosure, and suitability.

MDF Law PLLC represents investors nationwide in matters involving failed Delaware Statutory Trust investments, unsuitable 1031 exchange recommendations, unlawful sales by unlicensed individuals, and failures of broker due diligence. The firm focuses exclusively on protecting individuals who have suffered financial harm due to securities misconduct and regulatory failures. Investors who have experienced suspended distributions, refinancing distress, sponsor bankruptcy, property foreclosure, or substantial losses in a DST purchased as part of a 1031 exchange should consider consulting experienced counsel to evaluate whether a 1031 exchange lawsuit or DST litigation claim may be appropriate. Time limits may apply, and early legal review can be critical to preserving rights.

Contact MDF Law about your DST

For more information about potential 1031 exchange lawsuits or DST litigation, contact MDF Law PLLC for a confidential consultation.