Aizuss v. Commonwealth Equity Trust

• Decision Date: 21 December 1993
• Docket Number: Civ. No. S-93-712 DFL PAN.
• Citation: 847 F. Supp. 1482
• Parties: Robert and Donna AIZUSS, et al., Plaintiffs, v. COMMONWEALTH EQUITY TRUST, et al., Defendants.
• Court: U.S. District Court — Eastern District of California

847 F. Supp. 1482

Robert and Donna AIZUSS, et al., Plaintiffs, v. COMMONWEALTH EQUITY TRUST, et al., Defendants.

Civ. No. S-93-712 DFL PAN.

United States District Court, E.D. California.

December 21, 1993.

Michael Andrew Bishop, Matheny Poidmore and Sears, Sacramento, CA, for plaintiffs Shaun T. Gloude, Shaun Tara Gloude, P.C.

Richard G. Osborn, Osborn and Associates, Los Angeles, CA, for defendant Stephen H. Gold.

Frederic A. Fudacz, Thomas D. Long, Jean Spitzer, John D. Adkisson, Nossaman Guthner Knox and Elliott, Los Angeles, CA, for defendants William D. Markenson and Nossaman, Gunther, Knox & Elliott.

Dean S. Krystowski, Shearman and Sterling, San Francisco, CA, for defendants Tjarda Clagett and Merrill Lynch BFS.

Alan G. Perkins, Matthew W. Powell, Paul A. Dorris, Wilke Fleury Hoffelt Gould and Birney, Sacramento, CA, for defendants KPMG Peat Marwick and Leland King.

William I. Edlund, William O. Fisher, Morgan R. Smock, Pillsbury Madison and Sutro, San Francisco, CA, for defendants Jeffrey B. Berger and Howard E. Cohn.

Carrie Lee Early, Brodovsky and Brodovsky, Sacramento, CA, for defendants B & B Property and Joyce Berger.

Alvin R. Wohl, Robin Kerry Perkins, Wohl and Eggleston, Sacramento, CA, for defendants Doris V. Alexis, Richard Rathfon, Albert S. Rodda and Sonia Allen, sued as Sonia Sworak.

William B. Brodovsky, Carrie-Lee Early, Brodovsky and Brodovsky, Sacramento, CA, for Joyce Berger and B & B Property Inv. Development and Management Co., Inc.

MEMORANDUM OF DECISION AND ORDER

LEVI, District Judge.

Plaintiffs are 163 shareholders of defendant Commonwealth Equity Trust ("CET"), a California Real Estate Investment Trust. They bring this action against CET, as well as several of CET's past and present trustees, its investment advisors, attorneys, investment bankers, and accountant.

Plaintiffs assert twelve causes of action in their first amended complaint. Three of the claims for relief are based on federal law: (1) claims for violations of §§ 12(2) and 15 of the Securities Act of 1933 (the "'33 Act"), against all defendants except KPMG Peat Marwick ("Peat Marwick") and Nossaman, Guthner, Knox & Elliott ("Nossaman, Guthner"); (2) a claim under § 10(b) of the Securities Exchange Act of 1934 (the "'34 Act"), and Rule 10b-5 promulgated thereunder, against all defendants; and (3) a claim for violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), against all defendants. The remaining claims are premised upon California law: (1) breach of fiduciary duty, against defendants Alexis, Gold, Markenson, Rathfon, and Rodda, who were or are trustees of CET; (2) violation of Cal.Corp.Code § 25401, against all defendants except Nossaman, Guthner; (3) fraud, against all defendants; (4) negligent misrepresentation, against all defendants; (5) negligence, against all defendants; (6) civil conspiracy, against all defendants; (7) professional negligence, against Peat Marwick; (8) professional negligence, against Nossaman, Guthner; and (9) alter ego liability, against defendants Jeffrey Berger and Joyce Berger.

All defendants except CET have moved for dismissal of the first amended complaint. Several defendants also have moved for sanctions. For the reasons discussed below, defendants' motions to dismiss are granted with respect to all federal claims. The court declines to exercise supplemental jurisdiction over plaintiffs' state law claims. Defendants' motions for sanctions under Fed.R.Civ.P. 11 and § 11(e) of the '33 Act are granted.

I

Plaintiffs began this action on April 27, 1993 and filed a first amended complaint on May 24, 1993. The first amended complaint alleges that the various plaintiffs purchased shares of CET from 1981 through 1990. CET was established in 1973 for the primary purpose of acquiring income-producing real property investments. CET conducted a continuous intrastate offering of its securities from approximately July 1973 through July 5, 1989. During that time, a dividend reinvestment program also was available to shareholders of CET. CET is operated under a Declaration of Trust, dated July 31, 1973, which sets forth the powers of CET's Board of Trustees. The Declaration of Trust authorizes the Board to retain and consult an investment advisor; defendant B & B Property Investment ("B & B"), or an affiliate of B & B, served as CET's investment advisor beginning approximately in 1978. Defendants Jeffrey Berger and Joyce Berger are principal shareholders of B & B.

Plaintiffs allege that defendants committed numerous wrongful acts, which can be divided into several discrete episodes:

1) Parthenia Street — CET purchased the "Parthenia Street" shopping center for $5 million in 1985, and sold it some time in 1989 to Steve Wichard, an acquaintance of Jeffrey Berger, for $8 million. Wichard some time in 1990 resold Parthenia Street for $8.8 million to CET USA, a separate California Real Estate Investment Trust. Wichard received 100 percent financing from CET when he bought Parthenia Street; he repaid CET with the proceeds that he received from CET USA. CET in turn paid out dividends to shareholders from the $3 million profit it made as a result of the transactions.

Only one misrepresentation or omission to plaintiffs¹ concerning this episode is alleged: Defendants failed to disclose the Parthenia Street sale as the source of the dividends CET was distributing, thus falsely creating the impression that future dividends would be paid.

2) Self-Administration — On March 20, 1992, CET mailed a proxy statement to its shareholders, in which it disclosed that the Board had appointed a Self-Administration Committee. Plaintiffs allege that this proxy statement falsely represented that the Board intended to make CET self-administered,² in an attempt to discourage shareholders who were in favor of self-administration from withholding their proxy.

3) B & B Agreement—Plaintiffs allege that CET paid too much to amend its investment advisor agreement with B & B. Plaintiffs also allege that the multi-year term of the agreement violated Cal.Admin.Code § 260.140.94, which provides that an investment advisor service contract shall have a term of no more than one year. Plaintiffs allege three misrepresentations or omissions in this context. First, they allege that defendant Alexis misrepresented that defendant Markenson had obtained a waiver of the one-year term limitation. Second and third, plaintiffs allege that Nossaman, Guthner and Markenson fraudulently concealed the statutory term limitation set forth at § 260.140.94, as well as the existence of the multi-year contract with B & B.

4) Hotels — Plaintiffs allege that CET paid $2.4 million to the company that was managing four hotels for CET in order to terminate the management contract, despite the fact that the management company was indebted to CET. Another company owned by Jeffrey Berger then took over management of the hotels without having to bid competitively for the job. The only misrepresentation or omission alleged with respect to this episode is that the $2.4 million "loss" suffered by CET when it bought out the management company was never reflected on any CET financial statement.

5) Liquidation of CET Shares — Plaintiffs allege that CET liquidated some CET shares at a price greater than the actual value of the shares, even after CET stopped paying dividends to its shareholders. Plaintiffs do not allege any misrepresentations or omissions in this context.

6) Misleading Financial Statements — Plaintiffs allege that Peat Marwick and defendant King, the responsible principal in Peat Marwick, misled plaintiffs by failing to issue a "`going concern' opinion" after CET's fiscal year 1990 ended, despite over $10 million in losses in that fiscal year.³ There is also an allegation that King and Peat Marwick posted losses for CET for fiscal years 1990, 1991, and 1992 only in the last quarter of each fiscal year, even though they knew that the losses occurred over the entire fiscal years in question.

7) Consulting Fees — Plaintiffs allege that CET's "most recent" Form 10K misrepresented that CET has no full-time employees, despite the fact that defendant Allen has been paid $224,000 per year by CET to be a "consultant."

II

The second and third claims for relief involve alleged violations of the federal securities laws. The second cause of action alleges that defendants violated §§ 12(2) and 15 of the '33 Act, codified at 15 U.S.C. §§ 77l(2) & 77o, which prohibit misrepresentations to buyers of securities, either orally or in prospectuses, by sellers of securities and establish liability for persons who control such sellers. The third claim alleges violations of Rule 10b-5, promulgated under § 10(b) of the '34 Act, which prohibits material misrepresentations or omissions in connection with the purchase or sale of securities. See 15 U.S.C. § 78j(b). Defendants argue that these claims should be dismissed for several reasons.

A. Statutes of Limitations

The period of limitation for both a § 12(2) claim under the '33 Act and a § 10(b) action under the '34 Act has two components. First, there is a bar as to any action brought more than three years after the sale or purchase of the securities at issue. Second, an action must be brought within one year after plaintiffs obtain actual or inquiry notice of the facts constituting the violations. See 15 U.S.C. § 77m (period of limitations for § 12 claim); 15 U.S.C. § 78i(e) (period of limitations for a § 10(b) claim). The three-year component is an absolute bar that cannot be tolled. See S.E.C. v. Seaboard Corp., 677 F.2d 1301, 1308 (9th Cir.1982) (rejecting decisions that have applied equitable principles to toll the statute of limitations with respect to § 12 claims); Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, ___, 111 S.Ct. 2773, 2782, 115 L.Ed.2d 321 (1991) (no tolling permitted of three-year bar when applied to 10b-5 actions).

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