WA Southwest 2, LLC v. First American Title Insurance
240 Cal. App. 4th 148
| Cal. Ct. App. | 2015Background
- Seven investors bought tenancy-in-common interests in a Tempe, Arizona office building (Southwest Corporate Center) in Dec 2005–Mar 2006, collectively investing $5,050,000. The investment later foreclosed and investors lost their money.
- Plaintiffs sued ~30 parties in Nov 2012 alleging fraud, breach of fiduciary duty, legal malpractice (against Hirschler Fleischer), and conversion (against Trammell Crow/CBRE). This appeal concerns dismissal judgments in favor of four peripheral defendants: First American Title Insurance Co., Hirschler Fleischer (law firm), Trammell Crow Co., and CBRE, Inc.
- Plaintiffs claimed they were misled about the total “sales load” (fees/commissions/expenses) and that sales loads exceeded the 15% capital gains tax they sought to defer under IRC §1031; they argued defendants knew plaintiffs’ sensitivity to sales load but failed to disclose true costs.
- Before investing plaintiffs received and signed purchase agreements and a confidential private placement memorandum (PPM) that disclosed the purchase price, numerous fees (including a $505,000 acquisition fee), a chart allocating use of proceeds, and multiple risk warnings about illiquidity and speculative nature.
- Plaintiffs alleged they did not discover the alleged wrongdoing until September 2012 after foreclosure prompted tax/accounting review; they invoked the discovery rule to delay accrual of statutes of limitations and avoid time bars.
- The trial court sustained demurrers on statute-of-limitations grounds; the Court of Appeal affirmed, holding the PPM disclosures put plaintiffs on inquiry notice so the delayed-discovery rule did not toll accrual and dismissal without leave to amend was proper.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the discovery rule delayed accrual of claims beyond investor purchase date | Discovery occurred in Sept 2012 (tax/accounting review after foreclosure); plaintiffs lacked earlier suspicion | Receipt of the PPM and purchase agreements put plaintiffs on inquiry notice; reasonable diligence required reading disclosures | Held for defendants: PPM disclosures triggered inquiry notice; discovery rule does not apply |
| Whether fiduciary relationships tolled or reduced plaintiffs’ duty to inquire | Plaintiffs say fiduciary obligations reduced duty of inquiry until discovery in 2012 | Defendants say even with fiduciary duty, written disclosures put plaintiffs on notice and duty to inquire exists when red flags present | Held for defendants: fiduciary status does not obviate inquiry where disclosures would alert a reasonably diligent investor |
| Whether PPM disclosures were misleading enough to raise factual issue on notice | Plaintiffs point to potentially confusing presentation (e.g., treatment of $505,000 fee) and lack of per-% dollar breakdown | Defendants say total fees and allocation were disclosed; a calculator and the PPM suffice to reveal sales load | Held for defendants: disclosures, chart, and footnotes sufficiently disclosed fees and risks to put plaintiffs on notice |
| Whether plaintiffs pled reasonable diligence in delayed-discovery tolling | Plaintiffs alleged they had no suspicion and consulted experts only after foreclosure | Defendants argue plaintiffs failed to plead facts showing exercise of reasonable diligence after receiving PPM | Held for defendants: plaintiffs failed to plead facts showing due diligence; conclusory allegations insufficient |
Key Cases Cited
- People ex rel. Gallegos v. Pacific Lumber Co., 158 Cal.App.4th 950 (2008) (on demurrer review, courts treat exhibits as part of complaint and accept their contents over conflicting allegations)
- Fox v. Ethicon Endo-Surgery, Inc., 35 Cal.4th 797 (2005) (sets standard for discovery rule: accrual delayed until plaintiff discovers or should have discovered cause of action and must plead reasonable diligence)
- Eisenbaum v. Western Energy Resources, Inc., 218 Cal.App.3d 314 (1990) (fiduciary relationships can reduce duty of inquiry but do not eliminate inquiry notice when red flags exist)
- McKelvey v. Boeing North American, Inc., 74 Cal.App.4th 151 (1999) (plaintiff’s reliance on discovery rule concedes claims otherwise time-barred)
- Casualty Ins. Co. v. Rees Investment Co., 14 Cal.App.3d 716 (1971) (receipt of disclosure documents in plaintiff’s possession can trigger statute of limitations where they reveal unfair terms)