Kamm v. California City Development Co.

• Decision Date: 09 January 1975
• Docket Number: No. 73--3241,73--3241
• Parties: Martha C. KAMM, a widow, et al., Plaintiffs-Appellants, v. CALIFORNIA CITY DEVELOPMENT COMPANY, a corporation, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 205

509 F.2d 205

Martha C. KAMM, a widow, et al., Plaintiffs-Appellants, v. CALIFORNIA CITY DEVELOPMENT COMPANY, a corporation, et al Defendants-Appellees.

No. 73--3241.

United States Court of Appeals Ninth Circuit.

Jan. 9, 1975.

Thomas Elke (argued), San Francisco, Cal., for plaintiffs-appellants.

Ronald L. Olson (argued), of Munger, Tolles, Hills, & Richershauser, Los Angeles, Cal., for defendants-appellee.

Before CHAMBERS and KILKENNY, Circuit Judges, and JAMESON, ^* District Judge.

OPINION

JAMESON, District Judge:

This is an interlocutory appeal, pursuant to 28 U.S.C. § 1292(b), ¹ from an order dismissing plaintiffs-appellants' class action and striking class allegations from their first amended complaint. ²

Parties and Nature of Controversy

The 14 named plaintiffs and the estimated 59,000 members of the class whom they seek to represent are investors in a desert land promotion scheme known as California City. The defendants-appellees are the current promoters of California City, Great Western Cities; three of its affiliated real estate companies, California City Development Co., GWU Properties, Inc. and California City Realty Co.; N. K. Mendelsohn, officer, director and principal shareholder of California City Development Co.; Great Western United, the corporate parent of Great Western Cities and two other defendants, Shakey's Inc. and Great Western Sugar; and the incorporated City of California City.

California City is a body of barren land comprised of approximately 100,000 acres in the Mojave Desert. The defendant promotors bought the land, divided it into some 90,000 lots, and commenced selling the lots as part of a planned city. To date, the promoters have sold and resold an estimated 59,000 residential, commercial and industrial lots for an estimated $200 million. The lots were primarily purchased for investment reasons. About 2,000 people live in California City.

Allegations of Complaint

Alleging a class action pursuant to Rule 23(b)(3) of the Federal Rules of Civil Procedure, ³ plaintiffs charged that the defendants had defrauded the investors by failing to disclose fully to them the nature of the property and the risks inherent in the investment plan. Specifically, the first amended complaint alleged that (1) the California City lots constitute securities or investment contracts which were marketed by means of deceptive practices in violation of Section 10b of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)), and Rule 10b--5 thereunder; (2) the same deceptive practices violated the Interstate Land Sales Act; (3) the sale of California City lots violated the registration provisions of the Interstate Land Sales Act in that the defendants made material misrepresentations in the 'Statement of Record' filed with the Department of Housing and Urban Development pursuant to 15 U.S.C. § 1703(a)(2)(B); (4) the land scheme was falsely registered under the California Subdivided Lands Act; and (5) the defendants' actions were fraudulent and constituted a breach of trust.

Motion to Dismiss

Pursuant to Rule 23(c) and (d), the defendants moved to dismiss the class action and to strike all class allegations 'on the ground that the alleged class action is not the superior method for resolving the alleged controversy'. They contended that even if it were assumed that the alleged class satisfied all of the prerequisites of Rule 23(a) and the 'common issue requirement' of Rule 23(b)(3), the class action did not constitute a 'superior method for the fair and efficient adjudication of the controversy'. Defendants' motion was based primarily on the fact that state action had already been commenced by the California Attorney General and Real Estate Commissioner with respect to the same controversy and relief had been obtained.

State Litigation and Agreement

The Attorney General and the Real Estate Commissioner of California on March 8, 1973, acting pursuant to comprehensive statutory powers set forth in the California Subdivided Lands Act, Cal.Bus. & Prof.Code § 11000 et seq. (West Supp.1974) and regulations thereunder, and the California deceptive and misleading advertising statute, Cal.Bus. & Prof.Code § 17500 et seq. (West Supp.1974), commenced an action in state court against four of the defendants ⁴ for false and misleading advertising and deceptive sales practices. Concurrently, a stipulation of the parties and a proposed permanent injunction and final judgment were filed. Attached to the judgment as an exhibit was a copy of a settlement agreement, also dated March 8, 1973. In the stipulation the defendants accepted service of the complaint and consented to the entry of the final judgment and permanent injunction, without admitting the allegations of the complaint other than those alleging jurisdiction. The judgment, entered the same date, expressly approved the terms and conditions of the settlement agreement and ordered the parties 'to carry out the executory provisions contained therein'. The court retained 'continuing jurisdiction to the full extent provided by law . . .'.

The settlement agreement between the Attorney General and Real Estate Commissioner and the defendant Great Western Cities, Inc., provided for offers of restitution of principal payments to certain purchasers. ⁵ The agreement defines a 'purchaser' as one who executed a purchase agreement for land in California City, between January 1, 1966 and December 31, 1970 or one who saw a certain sales film and executed a purchase agreement between January 1, 1971 and May 17, 1972, inclusive. Purchasers are divided into two groups--offerees and claimants. An offeree is a purchaser who prior to September 16, 1972 indicated either by means of a negative response to a questionnaire ⁶ or by a direct communication to the Attorney General or Real Estate Commissioner his belief that there was a material misrepresentation of fact in connection with his purchase of land. All purchasers who after September 16, 1972 appropriately responded to the questionnaire or complained about misrepresentation are claimants. Offerees were entitled to refunds aggregating about $2,300,000 in restitution. Claimants were entitled to an aggregate of $1,000,000.

With respect to other persons who purchased land, the agreement provided that Great Western Cities would 'use its best efforts to establish and implement a program to settle future disputes'. The company is required to 'render quarterly reports to the office of the Attorney General setting forth the names of complainants and summarizing the general nature of such complaints and the disposition thereof'.

Defendants were also permanently enjoined from engaging in deceptive sales practices and from making or disseminating, or permitting to be made or disseminated, any false or misleading representations relating to the sale of real property in California City.

There is nothing in the settlement agreement which would preclude any purchaser who did not accept an offer and execute a release from instituting action against the defendants or otherwise seeking recovery for any alleged damage. ⁷ Appellants concede that these alternate remedies are available.

Ruling of District Court

In opposing the motion to dismiss, plaintiffs-appellants contended that (1) the motion was premature because time was needed for discovery with respect to the class action issues; and (2) the class action was superior because the state action involved a different controversy and provided relief for only a small part of the class.

At the time of oral argument, the court denied plaintiffs' request for further discovery. An order was subsequently entered dismissing the class action aspects of the suit, the court finding that

'. . . a class action is not superior to other available methods for the fair and efficient adjudication of the controversy herein, especially in light of the proceedings already brought by the California Attorney General and Real Estate Commissioner . . . and of the relationship of these proceedings to the facts and posture of this particular case'.

Two issues are raised on appeal: (1) Whether the court erred in refusing to grant plaintiffs an opportunity for further discovery; and (2) whether the class action constituted a 'superior method' of adjudicating the controversy.

Discovery

In support of their motion to dismiss, the defendants filed an affidavit of Bruce Ducker, Vice President of Legal Affairs for Great Western United Corporation and Great Western Cities. The affidavit (comprising 26 pages) and appended exhibits (comprising 100 pages) detail the negotiations and settlement between the defendants and the Attorney General and Real Estate Commissioner and procedures followed pursuant to the settlement agreement.

No opposing affidavits were filed by plaintiffs. Rather they contended that discovery should be permitted with respect to all matters set forth in the Ducker affidavit which were not a part of the public record. At the hearing plaintiffs argued that in the absence of discovery the court could properly consider only those matters which were part of the public record, ⁸ i.e. the statutes authorizing the Attorney General and Real Estate Commissioner to seek relief for people injured by deceptive sales practices and misrepresentation, the complaint filed against the defendants in state court, the permanent injunction and judgment, and the settlement agreement. ⁹

Appellants contend on appeal that the statutes and the record of the proceedings in the state court action did not sufficiently apprise the district court of the nature of the state action or settlement agreement. ¹⁰ Relevant information, they argue, was contained in letters, records of meetings, and documents which were not before the state court, and the district court's reliance on this extraneous matter, without affording plaintiffs an opportunity for discovery, constituted error.

Whether or not discovery will be...