Antitrust Law Daily Wrap Up, ANTITRUST—EDCal: Developers of New Subdivision Did Not Illegally Tie Home Sales to Financing, (Dec 6, 2012)

By E. Darius Sturmer, J.D.

The developer, builder, and sellers of homes in a new residential subdivision in San Joaquin, California, did not engage in a tying arrangement prohibited per se by federal antitrust law by allegedly tying home sales to financing through designated “captive” lenders, the federal district court in Sacramento, California, has ruled. The plaintiffs, a group of consumers who had bought homes in the subdivision, failed to show that they were coerced into buying a tied product, the court held. The suit, which also included claims under the Interstate Land Sales Full Disclosure Act (ILSFDA) and California law, was dismissed in its entirety (Cherrone v. Florsheim Development, December 4, 2012, Shubb, W.).

The complaining homeowners claimed that the allegedly unlawful tying arrangement was part of a broader conspiracy with the captive mortgage, appraisal, and financing companies in which the defendants manipulated and misrepresented the market value of the homes in the subdivision to attract buyers and bolster sales.

Arbitration

At the outset, the court found that the claims were not subject to mandatory arbitration pursuant to the terms of the homeowners’ purchase agreements. The arbitration clause defendants pointed to was in a Home Buyers Warranty Booklet supposedly incorporated by reference in the dispute resolution clause of the purchase agreements. However, factual development was needed to determine what arbitration or dispute resolution process, if any, the plaintiffs had consented to in the purchase agreements and whether that process was enforceable. Without such a determination, the court could not find that the homeowners had entered into a valid arbitration agreement. Dismissal or stay of the action pending arbitration would therefore have been inappropriate.

Tying

The complaining homeowners could not satisfy the coercion element of a per se tying violation under Sec. 1 of the Sherman Act, the court held. The homeowners failed to allege that any of them had actually purchased or obtained the “tied” product—financing through any of the captive lenders. Moreover, the court noted, the plaintiffs had made no allegations beyond broad and conclusory statements as to how the defendants mandated that they obtain financing through any specified lender.

Other Claims

The homeowners failed to plead their ILSFDA claim with the requisite particularity, the court added. As the alleged market manipulation scheme underlying the claim was based on (1) false promises to refund the difference between the price paid for a home and its market value at year’s end, (2) misrepresentations of the stability of the market in the neighborhood, (3) the marketing/selling of financing to unqualified buyers, and (4) false promises to facilities within the neighborhood, the claim sounded in fraud. However, the plaintiffs’ allegations did not meet the heightened standard of Federal Rule of Civil Procedure 9(b) for pleading fraud because they were not specific enough to allow the defendants to prepare an adequate defense. The plaintiffs’ assertion that the defendants made false statements about the development that were included in sales brochures, model home displays, and other advertisements failed to identify which defendants made the allegedly false statements, the time and place of the statements, or the specifics of the statements.

As no federal claims remained and none of the litigants raised any extraordinary circumstances suggesting that the court should retain jurisdiction over the remaining state law claims, the claims were dismissed by the court.

The case is No. Civ. 2:12-02069 WBS CKD.

Mark LaMar Hardy (Law Office of Mark Hardy) for Connie Cherrone. James Grosvenor Lucier (Clapp, Maroney, et al.) for Florsheim Development.

Cases: Antitrust CaliforniaNews