Koehler v. Pulvers
Decision Date | 09 July 1985 |
Docket Number | Civ. No. 82-1076-E. |
Citation | 614 F. Supp. 829 |
Parties | Agnes KOEHLER, et al., Plaintiffs, v. Daniel L. PULVERS, et al., Defendants. |
Court | U.S. District Court — Southern District of California |
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Law Offices of Michael J. Aguirre, and Michael J. Aguirre, Brian D. Miller, and Patricia A. Meyer, San Diego, Cal., for plaintiffs.
McInnis, Fitzgerald, Rees, Sharkey & McIntyre, James R. Milliken, Lewis, D'Amato, Brisbois & Bisgaard, Hector E. Salitrero and R. Gaylord Smith, San Diego, Cal., for defendant Jeffrey M. Cheyne.
Rogers & Wells, and Edward I. Silverman, San Diego, Cal., for defendants Daniel L. Pulvers, Common Sense Capital Corp., and Western Investors Network, Inc.
Lawrence J. Borphy, pro se.
Plaintiffs filed this action on August 25, 1982, alleging on behalf of themselves and those similarly situated registration violations and misrepresentations in the sale of securities in the Twenty-One Thirty-One limited partnership ("21-31 Ltd."). The developer defendants formed this partnership to own and develop real property consisting of an office building and adjacent lots situated at 2131 Third Avenue, San Diego, California, including Lots A-D inclusive, of block 246, and Lots H, I, and J of block 247, Horton's Addition.
Three types of security interests were sold: limited partnership interests in 21-31 Ltd., fractionalized trust deed interests in Lots A-D secured by the office building, and fractionalized trust deed interests in Lot J, a parcel adjacent to the office building. On March 29, 1984, this court certified this action for class determination, segregating the injured security holders into two groups, the limited partnership investors and the trust deed investors. Combined, the plaintiff class comprises seventy-three separate claims.
Trial of this action to the court under the Fourth Amended Complaint began on March 21, 1985, and concluded on April 11, 1985. Only five of the fourteen named defendants remained in the case through the conclusion of trial, the others having settled. On April 11, 1985, this court stated for the record its decision, and the essential reasons for that decision. It also indicated that a Memorandum Decision setting forth its findings in greater detail would issue, supplementing and incorporating its oral observations.
Based upon the evidence at trial, the court hereby sets forth its findings and conclusions as follows.
Defendants Common Sense Capital Corporation ("CSCC"), Lawrence J. Brophy, and Daniel L. Pulvers are referred to collectively as the developer defendants.
CSCC was 21-31 Ltd.'s general partner. It also conducted business under the name Creative Financial Planning. Defendants Brophy and Pulvers founded and controlled CSCC. Mr. Pulvers owned approximately 30% of its outstanding shares, and served as a director and as its secretary. Mr. Brophy owned approximately 35% of its shares, and served as a director and as its president.
CSCC was primarily in the business of real estate syndication. It formed and was the general partner of numerous limited partnerships in addition to 21-31 Ltd., including, in order of formation: Creative Financial Planning 78-1 Ltd., Creative Financial Planning 78-2 Ltd., Creative Financial Planning 78-3 Ltd., Creative Financial Planning 78-4 Ltd., Wexford Ltd., Mountain Springs Estate Ltd., Valley Oaks Ltd., Loma Vista Ltd., Indian Rocks Estates Ltd., Mission Industrial Ltd., Sparks B Street Ltd., and 1108 Bluebird Canyon Ltd. CSCC closed its offices in September 1982, and ceased being a California corporation in good standing in 1983.
The developer defendants obtained investment capital from the public by posing as financial planners. CSCC employed a small group of so-called "financial planners" whom it supplied with CSCC office space, and to whom it paid commissions for the sale of investments to "clients." The financial planners typically had a background in either insurance or real estate sales. Both defendants Brophy and Pulvers acted as financial planners in addition to their other duties.
As an alleged financial planning company, CSCC, dba Creative Financial Planners, contacted potential investors by conducting Creative Financial Planning seminars open to the public. Utilizing a slick presentation normally presented by Mr. Brophy, CSCC attempted to lure investment capital out of savings accounts, home equity, insurance policies, and other conservative investment vehicles and into the speculative real estate ventures it controlled. CSCC conducted these seminars on a regular basis at the Rancho Bernardo Inn and the Mission Viejo Country Club. Several of the plaintiffs also attended CSCC sponsored seminars at their mobile home parks.
At the seminars, CSCC offered to draft a "Co-ordinated Financial Plan" for attendees at little or no charge. Individuals who accepted this offer received recommendations to purchase limited partnership or trust deed interests in CSCC controlled partnerships and projects, including 21-31 Ltd.
Defendant Western Investors Network, Inc. ("WIN") is a California corporation formed by defendant Brophy and controlled by CSCC. It officed in the same building as CSCC, acted as its real estate broker, and offered and sold interests in fractionalized notes and trust deeds ("trust deed interests") on CSCC's behalf, including trust deed interests secured by 21-31 Ltd.'s property.
The developer defendants and WIN used instrumentalities of interstate commerce to offer, sell, and deliver the 21-31 Ltd. partnership and trust deed interests. This included soliciting by mail and telephone, mailing purchase confirmation notices, and, in some instances, mailing prospectuses.
Defendant Jeffery M. Cheyne, Esquire, a Professional Law Corporation ("Cheyne"), is an attorney licensed to practice in California. He acted as counsel to CSCC from 1978 through 1982. He also acted as counsel to 21-31 Ltd. In this capacity, he served as the legal advisor for the offer and sale of 21-31 Ltd. partnership and trust deed interests.
Prior to the Spring of 1980, and the formation of 21-31 Ltd., Mr. Cheyne provided CSCC with advice, documentation, and other legal services in connection with at least five limited partnerships, including Loma Vista Ltd., Indian Rocks Estates Ltd., Mission Industrial Ltd., and Sparks B Street Ltd. His services included drafting offering documents for each partnership which, as in 21-31 Ltd., issued its securities in alleged private offerings and without registration under federal securities laws or qualification under California's securities laws.
On July 22, 1980, Mr. Cheyne wrote an opinion letter addressed to Financial Planners Equity Corporation to the effect that the 21-31 limited partnership offering was exempt from registration and qualification requirements. Settling defendant Financial Planners Equity Corporation, which served as CSCC's underwriter, had requested an opinion to the offering's status. Mr. Cheyne knew and intended that the letter would be distributed as part of the offering prospectus.
The Letter also stated that the developer defendants were not using seminars or public meetings to sell 21-31 Ltd. partnership interests and that, in effect, each of the offerees had a preexisting relationship with the developer defendants. During the early stages of his representing CSCC, however, Mr. Cheyne attended a CSCC sponsored Creative Financial Planning seminar. He was aware that CSCC's alleged financial planners solicited clients for investment in CSCC controlled limited partnerships and related trust deeds by means of public seminars.
The full extent of Mr. Cheyne's participation in the 21-31 project is described in detail below.
Most of the plaintiffs are and were unsophisticated investors. Few had a preexisting relationship with the developer defendants at the time they purchased their securities. Named plaintiff Francis J. Jackson dealt with the developer defendants in arms length transactions. He paid valuable consideration equal to his $170,000 21-31 Ltd. partnership interest, and relied in good faith on the developer defendants' purported financial planner status.
Plaintiffs relied upon the misrepresentations discussed in detail below. This reliance was reasonable in part because of the developer defendants' purported disinterested financial planner status. The court further finds that the plaintiffs could not have discovered their claims until approximately August 1982.
"21-31" Project and Offerings
21-31 Ltd.'s objective was to acquire, refurbish, and sell at an appreciated value within three years the office building at 2131 Third Avenue ("Lots A-D"). CSCC failed to disclose to most investors its prior ownership of this property. In June 1979, CSCC purchased Lots A-D for $685,000, selling it four months later for $895,000 to a group which double escrowed and immediately conveyed the same to Alfred Salgonick and Jerome Hoffman.
On March 20, 1980, the developer defendants opened escrow to repurchase Lots A-D for 21-31 Ltd.'s account. This time they agreed to pay $1,200,000, nearly double the amount CSCC had paid seven months earlier when purchasing for its own account. The developer defendants placed none of their own money at risk.
As originally planned, a joint venturer was to provide 21-31 Ltd. with the $500,000 required for down payment. When the joint venturer's financing failed to materialize, CSCC renegotiated the terms of purchase and escrow. Escrow was extended to August 21, 1980, the sellers doubled their purchase money trust deed to $595,000, and the down payment was reduced from $500,000 to $300,000.
With escrow still open, and without title to the property, CSCC caused 21-31 Ltd. to offer and sell between April 1980 and July 1980 approximately $321,000...
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