Fogel v. Sellamerica, Ltd.

• Citation: 445 F. Supp. 1269
• Decision Date: 17 February 1978
• Docket Number: No. 75 Civ. 6487.,75 Civ. 6487.
• Parties: Theodore FOGEL and Ruth Fogel, Plaintiffs, v. SELLAMERICA, LTD., Pocono Pleasant Valley Lake Estates, Inc., Pocono International Corporation, Resort Properties, Inc., Rick Ebenstein, Charles Goldberg, Ebeco Associates, Inc. and Nicholas Kotovos, Defendants.
• Court: U.S. District Court — Southern District of New York

445 F. Supp. 1269

Theodore FOGEL and Ruth Fogel, Plaintiffs, v. SELLAMERICA, LTD., Pocono Pleasant Valley Lake Estates, Inc., Pocono International Corporation, Resort Properties, Inc., Rick Ebenstein, Charles Goldberg, Ebeco Associates, Inc. and Nicholas Kotovos, Defendants.

No. 75 Civ. 6487.

United States District Court, S. D. New York.

February 17, 1978.

COPYRIGHT MATERIAL OMITTED

Turchin & Topper, New York City, for plaintiffs.

Bernard Novick, New York City, for defendants Sellamerica, Ltd., Pocono Intl. Corp., Resort Properties, Inc., Ebenstein, Goldberg and Ebeco Assoc., for defendants.

OPINION

GAGLIARDI, District Judge.

This action arises out of defendants' allegedly fraudulent sale to plaintiffs of a parcel of real property consisting of two lots in a subdivided residential development located in eastern Pennsylvania. Plaintiffs Theodore and Ruth Fogel have sued various sales agents and developers of the property alleging violations of the Interstate Land Sales Full Disclosure Act of 1968 ("Land Sales Act"), 15 U.S.C. §§ 1701-1720; § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b); and common law fraud. Jurisdiction is based on § 1420 of the Land Sales Act, 15 U.S.C. § 1719, § 27 of the Exchange Act, 15 U.S.C. § 78aa, and diversity of citizenship, 28 U.S.C. § 1332.

Presently before the court is defendants'¹ motion for summary judgment pursuant to Rule 56, Fed.R.Civ.P., dismissing the complaint on the grounds that the Land Sales Act cause of action is barred by the statute of limitations, that the real estate interests involved do not constitute a "security" within the meaning of the Exchange Act, and that certain defendants were not involved with the sale to plaintiffs. For the reasons which follow, the motion is granted in part and denied in part.

Facts

Plaintiffs, residents of New York State,² allege that on February 25, 1973³ they purchased approximately three acres of real property from the defendants in Penn Forest Township, Carbon County, Pennsylvania, in a development known as Pocono Forest Lake ("the property") for a total deferred payment price of $23,709. The moving defendants, see footnote 1, supra, are the corporations which were the original developers and sellers of the property, or their agents, as well as the individuals who are the officers and sole shareholders of the original developers.⁴ All of these defendants are alleged to have made various inaccurate, misleading or fraudulent representations to the plaintiffs in order to induce them to enter into the real estate transaction which is the subject of the complaint. These misrepresentations form the basis of the statutory and common law violations alleged.

In particular, the defendants are charged with knowingly issuing an offering statement and making other representations to the plaintiffs which were false and misleading in that they described the property which was offered for sale as being wooded, levelled and graded for roads and without need of special drainage facilities, when in fact the property is under water, without adequate roads and is unreachable by car. Plaintiffs further allege that defendants represented that they would construct swimming and other recreational facilities and provide paved roads and bus service; that below ground waste disposal systems were practical and economically feasible; and that the property was a good investment because it could readily be resold at a profit. These representations were knowingly false and misleading, plaintiffs allege, in that the property is still without recreational or community developments, is unsuited for below ground waste disposal due to its submerged condition, and is "virtually worthless" and "impossible to resell." Plaintiffs claim that they relied on these various representations and purchased the property at excessive and artificially inflated prices.

Interstate Land Sales Act

Plaintiffs allege two causes of action under the Interstate Land Sales Full Disclosure Act. In brief, the Land Sales Act was enacted for the protection of purchasers in interstate land sales, and establishes federal anti-fraud provisions as well as registration and disclosure requirements for developers involved in nonexempt land transactions.⁵ Such developers must file a "statement of record" with the Secretary of Housing and Urban Development ("HUD"). This document must set out certain factual information deemed necessary for the protection of potential buyers, such as details regarding the identity and financing of the developer and anyone having an interest in the land, and the condition of the title to the property. §§ 1704, 1705.⁶ The statement of record becomes effective subject to HUD's review, and is made available for public inspection. § 1706. In addition, developers must prepare and deliver to each purchaser a "property report" containing such information as HUD determines to be "in the public interest or for the protection of purchasers." § 1707. In its disclosure provisions the Act provides that a nonexempt land sale is lawful only if a statement of record is in effect and the purchaser has received a property report before signing any contract. § 1703(a)(1), (b). It further proscribes fraud and material misrepresentations in the sale, lease or offer to sell or lease of nonexempt property. § 1703(a)(2).⁷

In addition, the Land Sales Act expressly establishes a civil cause of action maintainable in federal or state court, § 1719, on behalf of purchasers against developers and their agents who fail to comply with its requirements. § 1709. Pursuant to § 1709(a) and (b)(2), the developer may be sued if the effective statement of record, or the property report furnished to the purchasers, contained a material omission or untrue statement. Section 1709(b)(1) provides a cause of action for any violation of the terms of § 1703.⁸

Defendants' motion to dismiss the claims alleged under the Land Sales Act is based on 15 U.S.C. § 1711, the Act's statute of limitations, which provides as follows:

No action shall be maintained to enforce any liability created under section 1709(a) or (b)(2) of this title unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence, or, if the action is to enforce a liability created under section 1709(b)(1) of this title, unless brought within two years after the violation upon which it is based. In no event shall any such action be brought by a purchaser more than three years after the sale or lease to such purchaser.

Plaintiffs filed their complaint on December 30, 1975, having purchased the property on or about February 25, 1973, and defendants concede that the action has been brought within the three year maximum limitation period contained in the final sentence of § 1711. They argue, however, that all of plaintiffs' claims under the Land Sales Act are barred by either the one or two year limitations in that section. In order to rule on this contention, it is necessary to identify each of the specific statutory violations contained within the general allegations presented by plaintiffs. Based on this section-by-section analysis, the appropriate limitation period under § 1711 and its applicability to each particular violation alleged can then be determined.

Plaintiffs' second cause of action alleges simply that "defendants' conduct violated the provisions of the Interstate Land Sales Act, 15 U.S.C. § 1703(a)," and does not specify which provisions of § 1703(a) are involved. Since all violations of § 1703 are made actionable by § 1709(b)(1), and under § 1711 any claim alleging a violation of § 1709(b)(1) must be "brought within two years after the violation upon which it is based," this court must determine what specific "violations" of § 1703(a) have been charged, and when they occurred.

§ 1709(b)(1) — § 1703(a)(2)(B)

Plaintiffs' allegation includes, at a minimum, the claim that defendants obtained money from them by means of a material misrepresentation with respect to information pertinent to the property sold, a violation of § 1703(a)(2)(B). For such a violation, the two-year statute of limitation runs not from the date of the execution of the contract to purchase, but from the most recent payment of money by the defrauded purchaser. As observed in Bongratz v. WL Belvidere, Inc., 416 F.Supp. 27, 29 (N.D.Ill. 1976),

"the Land Sales Act could not state more clearly that the period of limitation begins to run on the date of the violation and that the violation under 15 U.S.C. § 1703(a)(2)(B) is the receipt of money or property. Indeed, had Congress intended that the period begin to run on the date of the sale, it undoubtedly would have so provided, since it did provide that in no event shall an action be brought more than three years from the date of sale."

The uncontradicted affidavit of plaintiff Theodore Fogel submitted in opposition to this summary judgment motion (the "affidavit") establishes that plaintiffs made an initial cash down payment and have been making continuous monthly payments up to the filing of the affidavit. If plaintiffs' allegations are true, these payments constitute a series of fresh violations of § 1703(a)(2)(B), and are therefore not barred by the two year statute of limitations applicable to § 1709(b)(1). Bongratz v. WL Belvidere, Inc., supra; Husted v. Amrep Corp., 429 F.Supp. 298, 307-08 (S.D. N.Y.1977); see Happy Investment Group v. Lakeworld Properties, Inc., 396 F.Supp. 175, 188 (N.D.Cal.1975); but cf. Davis v. Rio Rancho Estates, Inc., 401 F.Supp. 1045, 1048-49 (S.D.N.Y.1975) (complaint failed to state a claim under Land Sales Act where execution of installment contract preceded effective date of the Act).

§ 1709(b)(1) — § 1703(a)(2)(A) and (C)

Further, in considering a transaction such as the one before this court, where "the seller retains a...