Sewell v. D'Alessandro & Woodyard, Inc.

• Decision Date: 10 September 2009
• Docket Number: Case No. 2:07-cv-343-FtM-29SPC.
• Citation: 655 F.Supp.2d 1228
• Parties: Randolph SEWELL, Daphne Sewell, Moses Eshkenazi, Therese Eshkenazi, and Henriette Eshkenazi, individually and on behalf of all others similarly situated, Plaintiffs, v. D'ALESSANDRO & WOODYARD, INC., a Florida for profit corporation; Gates, D'Alessandro & Woodyard, LLC, a Florida limited liability company; K. Hovnanian First Homes, LLC, a Florida limited liability company; First Home Builders of Florida, a Florida general partnership; First Home Builders of Florida I, LLC, a Florida limited liability company; Jan Baillargeon, as Personal Representative of the Estate of Frank D'Alessandro, deceased; Samir Cabrera, an individual; Honora Kreitner, an individual; Bruce A. Robb, an individual; and Patrick Logue, an individual, Defendants.
• Court: U.S. District Court — Middle District of Florida

655 F.Supp.2d 1228

Randolph SEWELL, Daphne Sewell, Moses Eshkenazi, Therese Eshkenazi, and Henriette Eshkenazi, individually and on behalf of all others similarly situated, Plaintiffs, v. D'ALESSANDRO & WOODYARD, INC., a Florida for profit corporation; Gates, D'Alessandro & Woodyard, LLC, a Florida limited liability company; K. Hovnanian First Homes, LLC, a Florida limited liability company; First Home Builders of Florida, a Florida general partnership; First Home Builders of Florida I, LLC, a Florida limited liability company; Jan Baillargeon, as Personal

Representative of the Estate of Frank D'Alessandro, deceased; Samir Cabrera, an individual; Honora Kreitner, an individual; Bruce A. Robb, an individual; and Patrick Logue, an individual, Defendants.

Case No. 2:07-cv-343-FtM-29SPC.

United States District Court, M.D. Florida, Fort Myers Division.

September 10, 2009.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Gary C. Rosen, Daniel L. Wallach, Becker & Poliakoff, PA, Ft. Lauderdale, FL, for Plaintiffs.

Philip J. Snyderburn, William M. Rishoi, Snyderburn, Rishoi & Swann, Maitland, FL, Jon Douglas Parrish, Parrish, Lawhon & Yarnell, PA, Naples, FL, Raquel M. Fernandez, Cozen O'Connor, Melissa Cade Pallett-Vasquez, Robert William Turken, Bilzin Sumberg Baena Price & Axelrod, LLP, Miami, FL, Charles Wachter, Holland & Knight, LLP, Gianluca Morello, Fowler White Boggs, P.A., Steven Douglas Knox, Ronald Sturgis Holliday, DLA Piper US, LLP, Tampa, FL, Allison S. Bernstein, Butzel Long, Palm Beach, FL, Barry A. Postman, S. Jonathan Vine, Cole, Scott & Kissane, PA, West Palm Beach, FL, Ronald L. Buschbom, Conroy, Simberg, Ganon, Krevans & Abel, PA, Ft. Myers, FL, Jack C. Auspitz, Jamie A. Levitt, Stacy L. Kaplan, Morrison & Foerster, LLP, New York, NY, Robert J. Pratte, DLA Piper US, LLP, Minneapolis, MN, for Defendants.

OPINION AND ORDER

JOHN E. STEELE, District Judge.

This matter comes before the Court on eight motions to dismiss. In an Opinion and Order (Doc. # 203) filed on September 29, 2008, 2008 WL 4459260, the Court dismissed plaintiffs' First Amended Class Action Complaint (Doc. # 82) for non-compliance with Federal Rule of Civil Procedure 9(b), but granted "one final opportunity" for plaintiffs to file an amended complaint. Plaintiffs have now filed their Second Amended Class Action Complaint (Doc. # 205), to which all defendants have again filed motions to dismiss (Docs. ## 257, 258, 259, 260, 261, 263, 264, 265). Plaintiffs filed a consolidated Response (Doc. # 273) to all motions, and Replies (Docs. ## 283, 285) were filed by some of the defendants.

I. The Second Amended Complaint

The Second Amended Class Action Complaint ("Second Amended Complaint") (Doc. # 205) alleges that in 2003, defendants First Home Builders¹ and D & W² devised an investment scheme in which the two companies would sell new houses to be constructed by First Home Builders in Cape Coral and Lehigh Acres, Florida. These new houses were sold as having been "pre-leased" to tenants, and the targeted investors were low-to-middle-income persons eager for double-digit returns (which were represented to be in excess of fourteen percent (14%)). Potential investors were recruited throughout the United States in person, by mail, and through the presentation of traveling "road shows." The typical sales pitch included the following representations: that a "ready-made" tenant, procured through the sole efforts of First Home Builders and D & W, would immediately occupy a house built by First Home Builders upon completion of construction; that the tenant would rent, and ultimately purchase, the house from the investor, resulting in the promised fourteen percent (14%) rate of return; that the targeted investor would only be required to make a small down payment and to enter into a construction loan agreement, the interest on which First Home Builders would pay until construction of the house was completed; that once construction was completed, the investor would be required to convert the interim construction financing to permanent financing, if qualified; and that the investor would not incur any additional costs or expenses other than the minimal initial down payment.

An offering document titled, "First Home Lease Purchase Investment Opportunity" (the "Prospectus"), was given to prospective investors. This guaranteed an annual rate of return of fourteen percent (14%) based upon the leasing and eventual resale of the properties to third parties, which would be achieved solely through the efforts of First Home Builders and D & W. The provision of ready-made tenants and a guaranteed rate of return artificially inflated the values of the properties, which made them more profitable to sell than unoccupied properties. This Prospectus was the template for the representations made by defendants to potential investors.

Defendants First Home Builders, D & W, D'Alessandro,³ Cabrera,⁴ and Kreitner⁵ marketed thousands of these real estate investment properties to investors throughout the United States as part of a common promotional plan. This common promotional plan involved the same developer (First Home Builders) executing each contract of sale (the "Purchase Agreement"), common sales agents and sales facilities, common advertising, common marketing brochures, and common inventory. Additionally, First Home Builders authorized D & W, D'Alessandro, and Cabrera to use its name in the Prospectus and to set up a satellite sales office in the same location as First Home Builders.

Plaintiffs allege that the Prospectus and various oral representations made by defendants contained the following false and misleading statements: (1) That tenants would be procured for each investment property through the sole efforts of First Home Builders; (2) that the investor would receive a fourteen percent (14%) rate of return on his/her investment based upon a tenant occupying, and then purchasing, the property; (3) that the investor would have no out-of-pocket costs other than the initial down payment; and (4) that the tenant procured by First Home Builders would ultimately purchase the property from the investor.

Each of the plaintiffs alleges that he or she purchased one or more lots from defendants based upon their written and oral representations. Plaintiffs Randolph and Daphne Sewell purchased three lots; plaintiff Henriette Eshkenazi purchased two lots; and plaintiffs Moses and Therese Eshkenazi purchased four lots. The Purchase Agreements obligated plaintiffs, among other things, to acquire "interim `construction financing' for the purpose of acquiring the property and constructing a home and improvements thereon, and then, upon completion of the home, to secure permanent mortgage financing, or an `end-loan' to . . . pay off the interim construction financing loan." (Doc. #205, ¶ 38.) After the Purchase Agreements were signed, First Home Builders and/or D & W arranged for plaintiffs to receive interim construction financing from First Home Builders' and/or D & W's preferred lenders in the principal amounts of approximately 100% of the full purchase price (thus including sales profit to First Home Builders in addition to construction costs). Each construction loan had a one-year term. The borrowed amounts greatly exceeded plaintiffs' ability to repay, and plaintiffs assert that they were induced to enter into such loans based upon the following false and misleading assurances by defendants: (1) That plaintiffs' total cash outlay would be limited to their initial contract deposits; (2) that First Home Builders would make all loan payments during the course of construction; and (3) that upon completion of construction and procurement of an end-loan, the rental payments received from tenants procured by First Home Builders and/or D & W would exceed any amounts that would otherwise be due and owing under the permanent loan.

In late October 2006, the Sewells expressed concerns that First Home Builders and D & W had not yet procured tenants for the properties, as promised. In response, First Home Builders and Hovnanian began pressuring the Sewells to secure permanent financing. The Sewells were unable to obtain permanent mortgage financing and became defendants in state court foreclosure proceedings. While the Eshkenazis were able to obtain permanent mortgage financing for their houses, they face difficulties in meeting their loan obligations without the benefit of rental income and risk losing their properties in foreclosure proceedings.

Plaintiffs' nine-count Second Amended Complaint alleges the following claims: (1) violation of Section 12(a)(2) of the Securities Act of 1933 (by defendants Hovnanian, First Home Builders, D & W, and GDW) (Count I); (2) "controlling person" liability under Section 15(a) of the Securities Act of 1933 (by defendants D'Alessandro, Cabrera, Robb,⁶ and Logue⁷) (Count II); (3) fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 (by all defendants) (Count III); (4) "controlling person" liability under Section 20(a) of the Securities Exchange Act of 1934 (by defendants D'Alessandro, Cabrera, Robb, and Logue) (Count IV); (5) violation of Sections 1703(a)(1)(A) and (B) of the Interstate Land Sales Full Disclosure Act (by all defendants) (Count V); (6) fraud in violation of Sections 1703(a)(2)(A)(C) of the Interstate Land Sales Full Disclosure Act (by all defendants) (Count VI); (7) breach of contract (by defendants First Home Builders, Hovnanian, D & W, and GDW) (Count VII); (8) breach of duty of good faith and fair dealing (by defendants Hovnanian, First Home Builders, D & W, and GDW) (Count VIII); and, (9) deceptive and unfair trade practices (by all defendants) (Count IX). Plaintiffs also seek class certification of the following class:

All persons who purchased one or more real properties for investment purposes from First Home Builders in either Cape Coral or Lehigh Acres, Florida...