Antitrust Law Daily Wrap Up, ANTITRUST—EDCal: Home Buyers’ Fraud-Based and Illegal Tying Claims Against Homebuilder Dismissed, (Apr 3, 2013)

By Peter Reap, J.D., LLM

The fraud-based claims in an action brought by several purchasers of homes in communities in California’sYuba County against homebuilder Lennar Corporation and several of its subsidiaries suffered from a lack of specificity in pleading and failed to adequately plead an inability to make earlier discovery of the alleged misrepresentations despite reasonable diligence, the federal district court in Sacramento has decided (Irving v. Lennar Corp., March 30, 2013, Mueller, K.).

Further, the plaintiffs’ rescission, RICO, other claims under California’s Unfair Competition Law, and illegal tying claims were inadequately pled. The claims were dismissed and, with the exception of the RICO claim. The plaintiffs were given leave to replead. In addition, the defendants’ motion to transfer the action to the Central District of California, where a similar putative class action had been pending, was denied.

Background. The plaintiffs filed suit on February 27, 2012, alleging seven causes of action: (1) violation of the Interstate Land Sales Act ("ILSA") by means of untrue statements in the sale of subdivided lots, 15 U.S.C. § 1703; (2) unfair competition and business practices ("UCL"), CAL. BUS. & PROF. § 17200; (3) false and misleading advertising or statements in the sale of real property, CAL. BUS. & PROF. § 17500; (4) rescission based on fraud or mistake, CAL. CIV. CODE § 1689; (5) RICO violation, 18 U.S.C. §§ 1961, et seq., (6) Sherman Act and California anti-trust violations, 15 U.S.C. § 1 and CAL. BUS. & PROF. CODE § 16700, et seq.; (7) violation of the Covenants, Conditions and Restrictions ("CC&RS").

The plaintiffs allege that the Lennar defendants are in the business of developing, constructing and selling new homes; that they have expanded their business to include sales, lending, appraisals and insurance through related companies, all of which gave potential buyers easy access to financing, not otherwise available in the marketplace, in order to purchase defendants’ homes. Because Lennar controlled every aspect of the project, it was able to, and did, sell to people without determining whether they were qualified and indeed sold to unqualified buyers who posed an abnormally high risk of foreclosure, the plaintiffs allege.

According to the complaint, by making money available to plaintiffs, the defendants induced plaintiffs and others to buy houses in the "artificially inflated, localized, relatively isolated, and therefore readily controlled marketplace in reliance on both the expressly made and implied representations that the appreciated home values would continue to rise or–at a minimum–would remain stable, and would outperform competing markets elsewhere in the region . . . ." Lennar sold houses to investors, knowing that the investors would not occupy the houses but instead would rent them, undermining the stable neighborhood the sales representatives had promised.

The resulting foreclosures and short sales stemming from the sales to unqualified buyers had a negative impact on the plaintiffs’ creditworthiness and on the value of their properties, the plaintiffs allege. In fact, many houses are vacant, yards are unfinished, multiple families are living in single-family homes, renters live in other homes, and crime has increased. Plaintiffs are informed and believe the extent of Lennar’s subprime financing in these developments resulted in a "saturation" of subprime buyers, a material fact that should have been disclosed. Lennar’s failure to disclose misled plaintiffs into purchasing houses they would not have bought had there been adequate disclosure.

Motion to Transfer Venue

The defendants contended that this case should be transferred to the Central District of California because a similar case, Stephens v. Lennar Corporation, No. EDCV 09-1668 VAP (DTBx), a putative class action, was pending there and the complaint in the instant case borrowed many claims directly from the Stephens litigation. However, the Stephens case has since been dismissed, the court noted. Further, because the convenience and interests of justice factors did not, as a whole, weigh in favor of transfer, the motion to transfer was denied.

Convenience factors. The deeds of trust and purchase agreements in this case concern land in Yuba County, in this district. In addition, plaintiffs allege violations of the CC&RS for both developments, documents recorded in Yuba County. Thus, the location of the relevant agreements favored venue in this district. As both the Central and Eastern Districts were familiar with California law, the governing law factor was neutral, according to the court.

To the plaintiff’s choice of forum factor, the complaint in this case was not brought on behalf of a class, and raised claims that arose in this district, which is also plaintiffs’ home district. As defendants did not show that the plaintiffs engaged in forum shopping, plaintiffs’ choice of forum here counseled against transfer. As the plaintiffs had substantial contacts with the forum and the defendants failed to show that their contacts with the Central District were any greater than with this district, this factor did not favor transfer.

It was defendants’ decision to develop, build, market, sell and finance houses in this district that gave rise to this litigation. As the plaintiffs’ claims had their genesis in actions defendants undertook in this district, the contacts with the forum relating to the claims factor also did not favor transfer. In addition, the defendants did not identify potential witnesses and so did not suggest the difficulties, if any with compulsory process. On the other hand, the plaintiffs asserted that all the witnesses, including the defendants, are in Yuba County. Thus, the defendants did not meet their burden of showing that the convenience of the witnesses favored transfer. Finally, the costs of litigation and ease of access to sources of proof factors did not favor transfer.

Interests of justice. As the defendants observed, although the Central and Eastern Districts both had heavy caseloads, the Eastern District has one of the highest weighted case loads per judge in the nation. Thus, the docket congestion factor marginally favored transfer.

As to the conservation of judicial resources, the presence of additional claims in this case and the impossibility of consolidation with the now dismissed Stephens litigation on the one hand and the Central District’s familiarity with some of the central issues on the other rendered this factor neutral on transfer.

Overall, the interests of justice favored transfer only slightly, and this court’s congestion did not outweigh the convenience factors, which favored retaining the case, the court determined.

Motion to Dismiss.

Fraud-based claims. The defendants argued that plaintiffs’ first through fifth causes of action all stem from defendants’ alleged fraudulent representations and omissions, yet all suffered from a lack of specificity in the pleading, could not incorporate justifiable reliance because any alleged promises conflicted with the terms of the contracts, and did not establish any actionable misrepresentation. They also argued that the claims generally were barred by the statute of limitations.

The plaintiffs alleged that defendants’ sales representatives and their marketing materials assured them that defendants would provide fully developed neighborhoods even though they never intended to do so. Similarly they alleged that defendants said they would not sell to investors, but rather would sell only to those who intended to occupy the homes, when in fact defendants sold many of the properties to investors. Thus, the plaintiffs adequately described how the statements were false, the court held.

However, the plaintiffs failed to allege with any specificity what statements were contained in the marketing materials and what claims were made orally by the sales representatives or others, or to identify the time period during which the claims were made. As such, their allegations are not specific enough to give defendants notice of the specific misconduct against which they must defend.

The defendants argued that the plaintiffs could not demonstrate reliance as a matter of law. However, reliance was not an element of a cause of action under the ILSA and the court would not dismiss the claims on this basis. Further, while reliance could may be an element under the UCL and FAL, California courts treated reliance as a factual issue and said that "a per se rule that an integration/no representations clause establishes, as a matter of law, that a party claiming fraud did not reasonably rely on representations not contained in the contract is inconsistent with California law." Hinesley v. Oakshade Town Ctr., 135 Cal. App. 4th 289, 302 (2005).

The defendants next argued that they had no duty to disclose the financial condition of other purchasers in the development. However, the plaintiffs alleged that defendants failed to reveal the extent of the subprime lending in the neighborhood, which led to depressed property values in the wake of foreclosures and short sales. The court was not willing to say, on a motion to dismiss, that these allegations were insufficient.

The defendants next argued that their alleged statements about the nature of the investment and the desirability of the neighborhood were "puffery" and not actionable. The defendants read the complaint too narrowly, at least as to some of the claims, according to the court. Although they claimed that the alleged promise not to sell to investors was puffery because of the vagueness of the term "investors," the plaintiffs identified investors as those buyers who would not live in the houses. This was sufficiently specific.

To the extent, however, that plaintiffs relied on the predictions about value, the claim appeared to be based on puffery, as it was not sufficiently linked to defendants’ alleged promises to complete the neighborhoods, develop desirable infrastructure, and sell only to those with plans to live in the houses and contribute to the quality of the neighborhood as giving value to the houses in the development, the court decided. The plaintiffs were given leave to amend their complaint, if they were able while complying with Federal Rule of Civil Procedure 11.

According to the complaint, plaintiffs purchased the houses between 2006 and 2008. The statute of limitations for actions under California Business and Professions Code §§17200 and 17500 is four years. For ILSA fraud claims under 15 U.S.C. § 1703(1)(2)(A)-(c), "no action shall be maintained . . . [¶] more than three years after discovery of the violation or after discovery should have been made by the exercise of reasonable diligence." 15 U.S.C. § 1711(a)(2).

In California, a party relying on the delayed discovery rule must plead facts showing the time and manner of the discovery and the inability to have made earlier discovery despite reasonable diligence; conclusory allegations were not sufficient, the court noted. Under the federal standard, the limitations period is not triggered by a mere suspicion about the elements of the claim, but a plaintiff must explain how and when he discovered his claim.

In this case the plaintiffs alleged generally that they discovered their claims when they tried to secure credit based on their home equity, but they did not address why they could not earlier have discovered the basis of their claims. They would be given leave to amend, if they were able, to correct the pleading deficiency, according to the court.

Rescission. To the extent that the plaintiffs relied on the underlying fraud as a basis for this claim, its viability was linked to the discussion of the fraud causes of action discussed above. Any amendments to the fraud claims, which would be allowed, would control the viability of the rescission claim.

RICO. The Ninth Circuit requires a party asserting a RICO cause of action to properly plead distinctness of the person and the enterprise, the court observed. The plaintiffs utterly failed to so plead, but rather described that the entities "were jointly engaged in an enterprise" and that "their individual corporate personalities no longer exist."

They also alleged that the "businesses have few of the characteristics of a separate company, and instead have virtually all of the characteristics of a division that simply facilitates the implementation of the home sales business of Lennar Corporation." The plaintiffs then listed the ways in which Lennar Corporation controlled the activities of the other defendants. This claim was dismissed without leave to amend, as it did not appear that the plaintiffs could allege distinctiveness in good faith, the court stated.

Other UCL theories. An action is unlawful under the UCL and independently actionable if it constitutes a violation of another law. As the plaintiffs did not adequately plead that their ILSA claim was timely, their UCL claim based on unlawfulness was similarly not adequately pled, the court ruled.

An act is "unfair" under the UCL if it significantly threatened or harmed competition, even if it was not specifically proscribed by another law. As noted, plaintiffs’ claims based on various laws were dismissed with leave to amend and plaintiffs did not describe how the defendants’ alleged actions threatened or harmed competition, only that they harmed the plaintiffs. This claim was dismissed with leave to amend, if proper amendment was possible, the court determined.

Illegal tying. A four year statute of limitations governs federal antitrust violations and begins on the date the defendant commits the act that injures another. When a plaintiff alleges that an agreement is an illegal tying agreement, he must bring suit within four years after the agreement was executed, as a general rule. California’s Cartwright Act also is governed by a four year statute of limitations.

As noted above, the plaintiffs did not sufficiently support their claim of delayed discovery. They were given leave to amend this claim, if they were able, the court stated.

Even so, plaintiffs’ illegal tying claim was not sufficient, the court held. As the Ninth Circuit has recognized, mere sales pressure did not constitute evidence of coercion.

The plaintiffs stated that "[a]s a required condition of sale . . . the Defendants purposefully steered – and most often– mandated that the home buyers utilize the financing to be provided by UAM (a Lennar subsidiary)" and that "each sale was wrongfully conditioned– either by mandate or empty incentives–to the requirement to obtain financing from UAM . . . ." However, the plaintiffs did not describe how the defendants "steered" or "mandated" them to obtain financing through UAM. Thus, there was insufficient factual support for their claims. They were given leave to amend this claim, if they were able, according to the court.

The case is No. CIV S-12-290 KJM EFB.

Attorneys: Glen A. Van Dyke (Van Dyke Law Group) for Donald W. Irving. Richard S. Ruben (Jones Day) for Lennar Corporation.

Companies: Lennar Corporation.

Cases: Antitrust RICO StateUnfairTradePractices CaliforniaNews