Fuls v. Shastina Properties, Inc.

• Decision Date: 17 February 1978
• Docket Number: No. C-77-1000-CBR.,C-77-1000-CBR.
• Parties: Otto P. FULS and Elva Fuls, his wife, Plaintiffs, v. SHASTINA PROPERTIES, INC., a California Corporation, Beverly Enterprises, a California Corporation, Shastina Realty, Inc., a California Corporation, Golden West Associates, Inc., a California Corporation, Diversified Mortgage Investors, a Business Trust, Continental Mortgage Investors, a Massachusetts Business Trust, Continental Investment Corporation, a Massachusetts Corporation, Diversified Advisers, Inc., a Florida Corporation, Mortgage Consultants, Inc., a Florida Corporation, Mountain Home Properties, Ray West, T. J. Bettes Company of New England, Inc., Ten Weed Corp., a California Corporation and Mount Shasta Title and Escrow Company, a substituted trustee, Defendants.
• Court: U.S. District Court — Northern District of California

448 F. Supp. 983

Otto P. FULS and Elva Fuls, his wife, Plaintiffs, v. SHASTINA PROPERTIES, INC., a California Corporation, Beverly Enterprises, a California Corporation, Shastina Realty, Inc., a California Corporation, Golden West Associates, Inc., a California Corporation, Diversified Mortgage Investors, a Business Trust, Continental Mortgage Investors, a Massachusetts Business Trust, Continental Investment Corporation, a Massachusetts Corporation, Diversified Advisers, Inc., a Florida Corporation, Mortgage Consultants, Inc., a Florida Corporation, Mountain Home Properties, Ray West, T. J. Bettes Company of New England, Inc., Ten Weed Corp., a California Corporation and Mount Shasta Title and Escrow Company, a substituted trustee, Defendants.

No. C-77-1000-CBR.

United States District Court, N. D. California.

February 17, 1978.

COPYRIGHT MATERIAL OMITTED

William K. Wilburn, San Jose, Cal., for plaintiffs.

John E. Carne, Crosby, Heafey, Roach & May, Oakland, Cal., for defendants Shastina Properties, Inc. and Shastina Realty, Inc.

Morton G. Rosen, Fulop, Rolston, Burns & McKittrich, Beverly Hills, Cal., for defendant Diversified Mortgage Investors.

Stephen P. Harbison, Argue, Freston & Myers, Los Angeles, Cal., for defendants Beverly Enterprises and Golden West Associates, Inc.

MEMORANDUM OF OPINION

RENFREW, District Judge.

This action arises out of plaintiffs' purchase of three parcels of real property in a recreational subdivision known as "Lake Shastina." Plaintiffs have alleged violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 thereunder, violations of the Interstate Land Sales Full Disclosure Act ("ILSFDA"), 15 U.S.C. § 1703(a)(2), violations of the California subdivision laws, common law fraud, and breach of trust.

The matter is presently before the Court on the motions of defendants Shastina Properties, Inc. ("Shastina Properties"), Shastina Realty, Inc. ("Shastina Realty"), Beverly Enterprises ("Beverly"), Golden West Associates, Inc. ("Golden West"), and Diversified Mortgage Investors ("DMI") to dismiss or for summary judgment.¹

I. FACTUAL BACKGROUND

It appears from the complaint that on December 20, 1972, plaintiffs purchased three lots from certain defendants in a recreational subdivision known as "Lake Shastina." Shastina Properties is alleged to have been the developer and seller of lots in Lake Shastina. Shastina Realty and Golden West are alleged to have the exclusive sales agents for Lake Shastina lots. Beverly is alleged to have dominated, controlled, and been the alter ego of Shastina Properties, Shastina Realty, and Golden West. DMI is alleged to have been one of the primary financiers of Lake Shastina, and to have dominated and controlled Shastina Properties through its loan agreements with the latter.

The lots were purchased by plaintiffs as part of a joint venture with defendant Ray West, a former salesman for Shastina Properties. Under the joint venture agreement, plaintiffs were required to make an initial down payment and monthly payments. After plaintiffs had paid $15,000 on the lots, West was required to make all remaining monthly payments. Plaintiffs performed their obligations and have paid $15,000 for the lots. West has not made the remaining monthly payments. Notices of default on the lots were recorded by holders of the deeds of trust on February 15, 1977, and on February 17, 1977.

Plaintiffs allege that they purchased the lots on the basis of defendants' fraudulent representations that the lots were in short and rapidly diminishing supply, that the demand for such lots was great and urgent, and that an investment in the lots would appreciate rapidly and substantially under pressure of the diminishing supply and increasing demand. These and other allegedly fraudulent representations are the basis of plaintiffs' claims. Plaintiffs seek compensatory damages, rescission, exemplary damages, and declaratory and injunctive relief.

II. DISCUSSION

A. Statutes of Limitations

Defendants have moved to dismiss Counts One, Two, and Three for failure to state a claim upon which relief can be granted, asserting that plaintiffs' claims therein are barred by applicable statutes of limitations.² For purposes of a motion to dismiss for failure to state a claim, the complaint must be construed in the light most favorable to the plaintiff, with every doubt resolved in his behalf. McKinney v. DeBord, 507 F.2d 501, 503 (9 Cir. 1974). Moreover, in appraising the sufficiency of the complaint, the Court must follow the accepted rule "that a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957) (footnote omitted).

1. Count One

Count One alleges violations of Section 10(b) of the Securities Act of 1934 and Rule 10b-5 thereunder. Since there is no federal statute of limitations applicable to Section 10(b) or Rule 10b-5, California's three-year fraud statute of limitations, Cal. Code of Civil Procedure § 338(4), is controlling. United California Bank v. Salik, 481 F.2d 1012, 1015 (9 Cir.) cert. denied, 414 U.S. 1004, 94 S.Ct. 361, 38 L.Ed.2d 240 (1973); Turner v. Lundquist, 377 F.2d 44, 47 (9 Cir. 1967). The statute begins to run only after the alleged fraud has been discovered or, in the exercise of reasonable diligence, could have been discovered. Rochelle v. Marine Midland Grace Trust Co. of N. Y., 535 F.2d 523, 531 (9 Cir. 1976); Turner v. Lundquist, supra, 377 F.2d at 46-47.

The complaint shows that plaintiffs purchased the lots on December 20, 1972, more than four years before the complaint was filed. The statute does not, however, necessarily begin to run at the date of purchase. It begins to run only when the alleged fraud was or should have been discovered.

There is nothing in the complaint to indicate when the alleged fraud was or should have been discovered. Defendants' motions to dismiss Count One are therefore denied. Kramer v. Loewi & Co., Inc., 357 F.Supp. 83, 88 (E.D.Wis.1973); cf. Warren v. Lawler, 343 F.2d 351, 360 (9 Cir. 1965).³

2. Counts Two and Three

Counts Two and Three allege violations of Section 1703(a)(2) of the ILSFDA.⁴ Liability for violations of § 1703(a) is imposed under § 1709(b)(1).⁵ Section 1711 provides that:

"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."

To be timely filed, therefore, these claims must have been filed within two years after the alleged violation, but in no event later than three years after the sale.

Defendants rely only upon the three-year or "umbrella" limitations periods. The complaint on its face shows that plaintiffs purchased the lots more than four years prior to the filing of the complaint. Plaintiffs allege, however, that they "continued to make installment payments on said investment as a consequence of defendants' continuing program of false representations, by newsletters, brochures and the like, indicating that the Recreational Community Promotion was a prosperous, active and growing community, and that plaintiffs' investments therein were appreciating in value." Complaint ¶ 14, at 10. These allegations indicate that a tolling of the statute may have occurred. Cf. Happy Investment Group v. Lakeworld Prop., Inc., 396 F.Supp. 175, 188 (N.D.Cal.1975). In light of these allegations, it cannot be said that it appears beyond doubt that plaintiffs can prove no set of facts to avoid the statute of limitations bar. Defendants' motions to dismiss Counts Two and Three are therefore denied.

B. The Agreement and Mutual Release

Defendants have moved for summary judgment on all counts on the ground that the claims asserted by plaintiffs are barred by an Agreement and Mutual Release ("Agreement") executed by plaintiffs on June 16, 1975, in settlement of a lawsuit plaintiffs had brought against Shastina Properties, Shastina Construction Company, Inc., and one Hal Messinger in the Superior Court of the State of California in and for the County of San Mateo.⁶ Section 3.9 of the Agreement provides:

"The parties do hereby release each other, and Fuls further releases Hal Messinger, their successors and assigns, and their agents and employees and no other third parties of and from any and all claims and demands of any kind or character, whether contractual or tortious in nature, including, without limitation of the generality of the foregoing, all claims based on oral or written contracts, agreements, understandings, statements, representations, assertions, promises or warranties."

The Agreement further provides:

"This release specifically includes all claims encompassed within the complaint in said action number 183695 in the Superior Court of the State of California, County of San Mateo, described above, and any and all matters directly or indirectly related to the issues therein, as well as any other claims, known or unknown not embraced within the issues contained therein." Section 3.11.

Some nine months prior to the execution of the Agreement, plaintiffs had been mailed a Notice of Proposed Class Action Settlement which set forth allegations made against Shastina Properties in a class action brought by other purchasers of lots in the Lake Shastina development charging Shastina Properties with making false and misleading statements,...