Summary
holding that a fraudulent concealment claim did not exist where the material information was publicly available where a prudent investor would have noticed it
Summary of this case from Johnson v. Mitsubishi Digital Electronics America, Inc.Opinion
No. C 01-03110 WHA
May 9, 2002
ORDER GRANTING DEFENDANTS' MOTION TO DISMISS
INTRODUCTION
In this securities-fraud suit, plaintiff Margaret Clayton alleges that defendants' fraudulent misrepresentations and omissions induced her to purchase and retain shares in a real-estate investment fund. The value of her shares fell precipitously in the late 1980s, and early 1990s, and plaintiff ultimately recovered only about $4,000 of her original $16,000 investment. She brought suit in the District of Columbia, her place of residence, in December 1996. After more than four years of proceedings in the local and federal courts of that forum, the case was completely dismissed as to certain defendants. What remained of the suit was transferred here. On December 21, 2001, this Court granted the remaining defendants' (also known as the "Landddsing Defendants") motion to dismiss, with leave to amend. Plaintiff has now submitted a second amended complaint, and the Landsing Defendants have moved to dismiss it, this time without leave to amend. This order GRANTS the Landsing Defendants' motion.
Former co-plaintiff Inga Malik is not named in the caption of the second amended complaint, but has not officially withdrawn from the action.
The Landsing Defendants consist of Landsing Realty Partners-II; Landsing Institutional Properties Trust VI; Landsing Pacific Fund; Landsing Pacific Fund, Inc.; Landsing Pacific Fund Liquidating Trust; and Martin I. Zankel.
STATEMENT
The facts of this case were discussed in detail in the December 2001 order. Plaintiff brings suit as an individual, not on behalf of a class of shareholders. In brief, plaintiff alleges that in 1985 defendants fraudulently induced her to buy shares of LIPT-VI, a real-estate trust that was later merged into another investment fund, the Landsing Pacific Fund. After suffering substantial losses, the Landsing Pacific Fund was liquidated in 1996. Plaintiff realized a loss of more than $10,000 from her original investment. Plaintiff also alleges that defendant Zankel, a fund officer, breached his fiduciary duties by approving certain transactions with former fund executives. Plaintiff originally filed suit in December 1996 in Washington, D.C., where she resides. After removal to federal court, the United States District Court for the District of Columbia dismissed several defendants from the case entirely, and on jurisdictional grounds dismissed all local-law claims against the remaining defendants. After an appeal and affirmance, the case was transferred to the United States District Court for the Northern District of California, where the Landsing Defendants are deemed to reside.
Plaintiff had been represented by counsel in Washington, D.C.; she is proceeding in propria persona here. Soon after the case's arrival in this court, the Landsing Defendants moved to dismiss the first amended complaint's sole remaining claim against them, brought under S.E.C. Rule 10b-5 for violation of Section 10(b) of the Securities Exchange Act of 1934. They argued that plaintiff had not brought suit inside the three-year statute of repose applicable to Rule 10b-5 claims. The December 2001 order agreed that no violation within the three-year period had been pled, at least not with the specificity required under FRCP 9 (b). Therefore, the motion to dismiss was granted, with leave to amend. Significantly, plaintiff was advised this would be her last chance to amend. The Landsing Defendants were also ordered to file a declaration, sworn to under penalty of perjury, attesting to whether or not any dividend reinvestments had been made on plaintiff's account inside the three-year period. Their responsive declaration provided that no such reinvestments had been made.
This declaration was requested for plaintiff's benefit; she was free to cite to or ignore it in framing a new pleading, if any. This order does not rely on its contents, except to the extent plaintiff incorporated them into her second amended complaint.
Plaintiff timely filed a second amended complaint. This complaint realleges a violation of Section 10(b), and adds several California state-law claims. The Landsing Defendants have moved to dismiss this complaint with prejudice.
ANALYSIS
The second amended complaint alleges six causes of action: (1) federal securities fraud in violation of Section 10(b) of the Exchange Act, brought under Rule 10b-5; (2) state securities fraud in violation of California Corporations Code Section 25400, brought under Section 25500 of the same code; (3) negligent misrepresentation in violation of California Corpororations Code Section 25401, brought under Section 25501 of that code; (4) common-law fraud; (5) breach of fiduciary duties; and (6) negligent misrepresentation. The Landsing Defendants argue that all of plaintiff's claims are time-barred. This order agrees that plaintiff brought suit too late.
1. Motion to Dismiss.
Defendants have moved to dismiss the second amended complaint pursuant to FRCP 12(b)(6). Under FRCP 12(b)(6), a motion to dismiss should not be granted unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957). When attacked pursuant to FRCP 12(b)(6), factual allegations in a complaint must be treated as true, and all reasonable inferences drawn in plaintiff's favor. See North Star Int'l v. Arizona Corp. Comm'n, 720 F.2d 578, 590 (9th Cir. 1983). In ruling on a motion to dismiss, a district court may consider documents whose contents are alleged or relied on in a complaint, and the authenticity of which no party questions. Parrino v. FHP, Inc., 146 F.3d 699, 706 (9th Cir. 1998).
2. Section 10(b)/Rule 10b-5.
The present complaint, like the first amended complaint, alleges a violation of Section 10(b) of the Securities Exchange Act of 1934. The claim is brought under Rule 1110b-5. Once again, plaintiff pleads no violations of Section 10(b) occurring on or after December 5, 1993 — three years before she filed her original complaint in this case. Plaintiff's arguments to the contrary notwithstanding, her Rule 10b-5 claim is thus barred by the statute of repose.
A three-year statute of repose applies to Rule 10b-5 claims. The purpose of the three-year limit is "clearly to serve as a cutoff" Lampf, Pleva, Lipkind, Prupis Petigrow v. Gilbertson, 501 U.S. 350, 363 (1991); see also Griggs v. Pan American Group, Inc., 170 F.3d 877, 881 n. 3 (9th Cir. 1999). As such, it cannot be equitably tolled because of a defendant's fraudulent concealment of a cause of action. See Lampf, 350 U.S. at 363.
Plaintiff argues, however, that her claim did not accrue until shortly before she sued because defendants were engaged in a continuing violation of Rule 10b-5 up through 1996, the same year she filed suit. It is established in the Ninth Circuit, however, that a Rule 10b-5 claim accrues upon the purchase or sale of a security. Durning v. Citibank, Int'l, 990 F.2d 1133, 1136 (9th Cir. 1993). The fact that plaintiff was fraudulently induced to hold her shares within the limitations period is irrelevant insofar as Rule 10b-5 is concerned, since the rule does not provide a cause of action for claims that fraudulent statements caused a shareholder not to sell her stock. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737-78 (1975). Since plaintiff does not allege any purchases or sales induced by fraud in the three-year repose period, her Rule 10b-5 claim must be dismissed.
Plaintiff's continuing-violation argument relies on a number of decisions that either deal with causes of action other than Rule 10b-5 or were decided before Lampf which settled the one — and three-year framework for Rule 10b-5 claims. Durning is more instructive. In Durning, plaintiffs purchased four bonds issued under a prospectus that failed to mention that the bonds were callable under certain conditions at any time. The transaction was completed in 1981. Plaintiffs said they would not have made the purchase had they known the bonds were callable. In 1985, one of plaintiffs' bonds was redeemed. Plaintiffs brought suit under Section 10(b) and Rule 10b-5 just a few months later. Id. at 1135. The district court dismissed their suit as untimely, given the three-year statute of repose. Plaintiffs appealed. They argued that the defendants' fraud consisted of both the misrepresentations in the prospectus (in 1981) and the subsequent redemption of the bonds (in 1985). Durning rejected this claim, holding that plaintiffs' claim arose in 1981 when the misrepresentations were made and purchase consummated. Id. at 1136. "Essentially," Durning held, "[plaintiffs] are trying to dress an equitable tolling argument in new clothing to avoid the harsh result that the Lampf rule requires. We will not accept [plaintiffs'] invitation to ignore the Supreme Court's clear dictate." Id. at 1137.
The same is true here. The logic behind Durning dictates rejection of both plaintiff's continuing-violation argument as well as her similar contention that her claim did not accrue until she suffered damages through the 1996 liquidation of her investment. Rather, the allegations in the second amended complaint establish that plaintiff's claim accrued more than three years before she filed suit. Plaintiff has been given multiple opportunities to plead otherwise. Her Rule 10b-5 claim is time-barred.
3. California Corporations Code.
Plaintiff is also suing defendants for fraud and misrepresentation under California statutory law. Her fraud claim is brought under California Corporations Code Sections 25400(d) and 25500. Section 25500 provides a cause of action for violations of Section 25400(d), which makes unlawful any false or misleading statement, or omission or material fact, when made "for the purpose of inducing the purchase or sale of [a] security by others." Similarly, Section 25501 authorizes suits for violations of Section 25401, which makes it unlawful for any person to offer or sell a security by means of any written or oral communication that includes an untrue statement of a material fact or material omission. The limitation period applicable to claims brought under Section 25500 and 25501 is "four years after the act or transaction constituting the violation or the expiration of one year after the discovery by the plaintiff of the facts constituting the violation, whichever shall first expire." Cal. Corp. Code 25506 (emphasis added). Like the three-year statute of repose for Rule 10b-5 claims, the four-year period applicable to Section 25500 and 25501 claims is an "absolute" limit on claims. S.E.C. v. Seaboard Corp., 677 F.2d 1301, 1308 (9th Cir. 1982).
The second amended complaint does not allege any purchases of securities in the four-year period before December 5, 1996. Nor does it allege that the liquidation in 1996 was effected by fraud or negligent misrepresentations, resulting in losses. For the reasons stated in connection with this order's discussion of plaintiff's Rule 10b-5 claim, the four-year absolute bar applies here to extinguish her state statutory claims.
4. Common-Law Fraud.
Plaintiff is also suing for common-law fraud. The Landsing Defendants assert that her claims are inadequately pled, and time-barred in any event.
In California, fraud must be pled specifically; general allegations do not suffice. This necessitates pleading facts that indicate how, when, where, to whom, and by what means the misrepresentations were tendered. Lazar v. Superior Court, 12 Cal.4th 631, 645 (1996); Tarmann v. State Farm Mut. Ins. Co., 2 Cal.App.4th 153, 157 (1991). This specificity requirement has the dual purposes of providing definite notice to the defendant and allowing the trial court to weed out nonmeritorious claims. Committee on Children's Television, Inc. v. General Foods Corp., 35 Cal.3d 197, 216-17 (1983).
Under California law, a three-year limitations period applies to fraud claims. This period does not accrue until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake. Cal. Civ. Proc. 338(d). When a defrauded person has actual notice or knowledge of facts sufficient to make a reasonably prudent person suspicious of fraud, the victim has a duty to investigate. Hobart v. Hobart Estate Co., 26 Cal.2d 412, 437-38 (1945). If the investigation would have disclosed the fraud, the victim will be charged with a discovery as of the time the inquiry should have given him knowledge. Vai v. Bank of America, 56 Cal.2d 329, 343 (1961).
It being an unsettled issue under California law whether a shareholder can sue for fraud based on statements that caused her to hold onto (as opposed to buy or sell) a security, this order assumes for the sake of argument that an adequately pled allegation of a misrepresentation that had this alleged effect would be actionable. See Greenfield v. Fritz Cos., 82 Cal.App.4th 741 (2000),,, petition for review granted and opinion superseded, 12 P.3d 1068 (2000).
The second amended complaint sets forth several statements attributed to the Landsing Defendants. Plaintiff's allegations can be divided into two categories: alleged affirmative misrepresentations and alleged omissions of material facts. The first class of allegations fails to include essential specifics of fraud — such as when and by whom the statements were made, and how the challenged assertions were false or misleading. For example, Paragraph 17 of the second amended complaint provides as follows:
To induce Plaintiff to invest in the fund, defendants represented and assured Plaintiff of their competence, integrity, honesty, fair dealing and their expertise in real estate. Defendants represented in the offering documents, inter alia, that approximately 20,000 investors participate in Landsing-sponsored limited partnerships and six real estate trusts; "cumulative contributed capital of these investment programs now exceeds $200 million"; "since its founding in 1972, Landsing has purchased approximately $500 million in real estate assets, primarily shopping centers, office buildings and apartment communities."
Plaintiff, however, does not allege how any of these assertions were false. It is not alleged that fewer than 20,000 investors participated in Landsing partnerships or trusts; that the cumulative capital was less than $200 million; or that Landsing had not purchased approximately $500 million in real estate assets since its founding. Even if this statement is only alleged to be misleading, the complaint never avers with specificity what information the Landsing Defendants should have provided to make their representations not misleading.
Another example of deficient pleading can be found in Paragraph 40:
The 1992 audited balance sheet states that the Fund's assets are $124,455,000 and that total liabilities are $56,352,000, i.e., with net assets of some $80,000,000 in excess of liabilities. By these and other similar audited financials of the Fund from 1988 forward, defendants continued to portray the Fund to the shareholders and the general public as a going concern which offered an excellent value and investment opportunity to investors. Defendants misrepresented the Fund's balance sheet in order to induce investors to keep their investments in the Fund and to solicit additional investment from the shareholders and the general public.
Once again, this allegation lacks a crucial component: How were these figures false or misleading? The complaint never says, relying only on the boilerplate assertion that "[t]he Fund's audited financial statements since its inception were materially false and misleading and intended to deceive the Fund's shareholders including Plaintiff" (SAC ¶ 43). A final example of deficient pleading is this allegation (SAC ¶ 19):
In 1988, when the Landsing defendants solicited approval for the merger of the three trusts into the Landsing Pacific Fund, Landsing defendants touted "increased safety of capital." At the same time, Landsing and its principals represented that LIPT-VI was "producing positive cash flow after debt service," had an "excellent cash position" and a "low debt to equity ratio at 1:6." Landsing also represented to investors in the merger solicitation documents that there would be annual savings of $200,000 to $300,000 in general and administrative costs as a result of economies of scale and the elimination of duplicate services.
Yet again, the second amended complaint never alleges how several of these statements were false: that LIPT-VI was not producing positive cash flow after debt service, that its debt-to-equity ratio was something other than 1:6, or that the forecasts of reductions in expenses were never realized. Taking all facts alleged as true and casting all inferences in plaintiff's favor, the best that can be said for this allegation is that the statement "increased safety of capital" was belied by later events. But plaintiff never identifies when within the calendar year 1988, where, or by whom this statement was made. This allegation is thus plainly insufficient. See Tarmann, 2 Cal.App.4th at 157.
These defects plaintiff's going to affirmative cripple allegations misrepresentations, regardless of the discovery rule. At hearing, plaintiff was asked if she could cure these shortcomings by alleging specific facts bearing on falsity in any amended complaint. She said she could not. In light of the Landsing Defendant's attack on her pleading, the fraud claim based on misrepresentations must be dismissed with prejudice. See Carlson v. Farm Land Inv. Co., 32 Cal.App. 538, 545 (1917); Woodson v. Winchester, 16 Cal.App. 472, 477 (1911).
The alternative gravamen of the second amended complaint's fraud claim is that defendants did not inform plaintiff that her investment was declining in value, or that the fund had engaged in certain transactions with former insiders (SAC ¶ 28, 37). Here, however, in addition to the fact that plaintiff has pled no actionable omissions within the three-year limitation period, the information defendants allegedly "fraudulently concealed" was in fact readily available in the market. Plaintiff simply overlooked it.
It is worth noting at the outset that according to the second amended complaint, shares in the Landsing Pacific Fund were traded on the American Stock Exchange (SAC ¶ 7). Much of plaintiff's claim thus rests on the dubious proposition that the Landsing Defendants engaged in fraud for failing to remind her of information (the value of her shares) that was already publicly available and of which a prudent investor would clearly have taken notice. Even taken on these terms, however, her fraud claim based on omissions fails. Plaintiff plainly knew or should have known of her investment's woes more than three years before bringing suit. In her second amended complaint, plaintiff alleges she relied on statements in a letter sent to her by the Landsing Pacific Fund on June 15, 1989. At the Court's request, a copy of this document was produced prior to hearing. That letter provided, in pertinent part, that "[b]ecause we strongly believe in the Fund's long-term performance capabilities, we encourage (1) you to hold your stock and not sell and (2) consider investing in additional Landsing Pacific Fund shares or participating in the Fund's Dividend Reinvestment Plan if you are not already enrolled" (SAC ¶ 27; Pl. Exh. B).
The document is being noticed as an item incorporated by reference into the complaint.
Significantly, this letter also provided that shares in the Landsing Pacific Fund closed at $9.50 per share as of June 12, 1989. The second amended complaint alleges that plaintiff purchased 1,600 shares of LIPT-VI at $10/share in 1985, and that in the 1988 merger of LIPT-VI with the Landsing Pacific Fund she received one share in Landsing Pacific Fund for every two shares she owned in LIPT-VI (SAC ¶¶ 13, 20). From simple math, it follows that the June 1989 letter informed plaintiff that her original $16,000 investment had already dropped to less than $8,000. This letter not only should have put plaintiff on inquiry to keep better tabs on her investment, it actually disclosed the information — the drop in her investment's value — plaintiff says was kept secret from her. Plaintiff has no claim based on a failure to disclose share price, much less equitably toll the limitations period through the discovery rule.
Plaintiff also predicates her fraud claim on an allegation that defendants failed to disclose to shareholders a "fraudulent scheme" that included LIPT-VI's cancellation of loans to an entity known as Landsing Realty Partners in the 1980s and certain "insider transactions" in the early 1990s with Gary Barr and Mark Wyman, two former Landsing Pacific Fund officers. Plaintiff excuses her failure to comply with the statute of limitations through vague allegations that defendants "fraudulently concealed" these transactions from her and other investors. Under the circumstances, this conclusory language is insufficient on its own to paper over several years' delay in bringing suit. Cf. Parsons v. Tickner, 31 Cal.App.4th 1513, 1525 (1995). Plaintiff fails even to specify when the information should have been revealed by the Landsing Defendants, but was not. (Nor, it bears noting, does plaintiff specifically plead that defendants knew it would be materially misleading to omit the above information.) The wisdom of the particularity rule in this context is underscored by the fact that the Fund's 1992 10-K report — file-stamped as received by the SEC on March 31, 1993 — did, in fact, discuss the Barr transaction in detail and even attached a copy of the settlement agreement with him (Exh. A to Mock Decl. of May 3, 2002, at 16, 41-60). Clearly, plaintiff's claim of "fraudulent concealment" is misguided. As with her investment's depreciation, the information was in full view; plaintiff just overlooked it until years later. Her omission-based fraud and negligent misrepresentation claims fail.
The Landsing Defendants have submitted several annual reports for judicial notice. Although the Landsing Defendants initially submitted a declaration to the effect that these reports were timely filed with the S.E.C., they could not produce copies file-stamped with the date they were received by the S.E.C. Since plaintiff denies receipt of these annual reports anytime prior to 1996, consideration of their contents for notice purposes would convert this motion into one for summary judgment under FRCP 56. Consistently with the standards for a motion to dismiss, this order declines to take their contents into account.
The alleged omission dealing with the Wyman transaction is also vulnerable on another independent ground. Plaintiff does not allege any injury arising out of the alleged nondisclosure of this deal, which (according to the facts pled in the complaint) occurred while Landsing Pacific Fund shares were on the upswing from their 1992 nadir. See Children's Television, 35 Cal. 3d at 219 (damage is an essential element to a fraud claim).
5. Breach of Fiduciary Duties.
Plaintiff also asserts that the waste of Fund assets and defendant Zankel's approval of transactions with former fund insiders constituted a breach of fiduciary duties. Although plaintiff denies this, her claim is plainly derivative in nature, rather than direct. In California, a shareholder may bring a derivative suit on behalf of a corporation where the shareholder alleges with particularity in their complaint that either he or she made a demand to pursue the issue to the board, which was refused; or the reasons for failing to do so. Cal. Corp. Code 800(b)(2). Plaintiff's complaint does not allege a demand, nor why a demand would have been futile. Her fifth cause of action therefore fails.
Plaintiff also appears to allege that the alleged misrepresentations and omissions discussed above constituted a breach of fiduciary duties. Since this order has found that there were no actionable omissions or misrepresentations, this claim necessarily fails.
6. Negligent Misrepresentation.
Finally, plaintiff alleges that defendants negligently misrepresented the fund's financial condition and status to her. This claim fails for the reasons given in connection with this order's discussion of plaintiff's fraud cause of action.
CONCLUSION
For the foregoing reasons, the Landsing Defendants' motion is GRANTED in its entirety. Given the age of this case, and the multiple opportunities to plead, further leave to amend will not be granted. Judgment will be entered on behalf of defendants. Plaintiff and co-plaintiff Inga Malik are reminded that they shall have 30 days from entry of judgment to file an appeal.