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Kenneally v. Bank of Nova Scotia

April 28, 2010


The opinion of the court was delivered by: William Q. Hayes, United States District Judge


The matters before the Court are (1) the Motion to Dismiss the First Amended Complaint filed by Defendants Bosa California, LLC and Bosa Development California, Inc. (collectively, "Bosa") (Doc. # 23); (2) the Motion to Dismiss the First Amended Complaint filed by Defendants Bank of Nova Scotia and HSBC Bank USA, N.A. (collectively, "Lenders") (Doc. # 24); and (3) the Motion to Dismiss the First Amended Complaint and the Motion to Strike Certain Allegations in the First Amended Complaint, filed by Defendant First American Title Co. ("First American") (Doc. # 46 and 47).

I. Background

On September 18, 2009, Plaintiff initiated this action by filing a Complaint in this Court. (Doc. # 1).

On November 20, 2009, Plaintiff filed a First Amended Complaint. (Doc. # 3).

A. Allegations of the First Amended Complaint

Bosa and the Lenders are each "developer[s] of Bayside..., a recently completed condominium tower in San Diego, California." (Id. ¶¶ 5-7, 9). "First American is the designated escrow holder for Bayside." (Id. ¶ 8).

"In November 2006 Plaintiff ... signed a form purchase contract provided by Bosa ... to purchase unit No. 2302 in Bayside and deposited the sum of $202,170 into an escrow account maintained by First American." (Id. ¶ 11). "Plaintiff did not receive a federal property report before signing the purchase contract." (Id. ¶ 12). "The purchase contract stated unit No. 2302 would be 1404 square feet.... The Bayside website maintained by Bosa ... further represented that units with the floorplan of No. 2302 would be '1395-1404 sq. ft. approx.'" (Id. ¶¶ 13-14). "In fact, the size of the unit, as measured by an independent appraiser, is 1248 square feet, 156 square feet smaller than the size claimed in the contract and 148 square feet smaller than the lower bounds of the range on the Bayside website.... This discrepancy greatly lowered the value of the unit. The difference between what [Plaintiff] was promised and what Bosa proffered is equal to the omission of an entire 12x13 bedroom." (Id. ¶¶ 15-16).

"Bosa supplies purchasers a 'Residential Unit Floorplan' as Addendum No. 1 to the purchase contract. This page contains a visual schematic of the unit, many dimension measurements, and a statement containing language such as 'all references to square footage or floor area are approximate' and that 'Buyer should not rely upon any advertising materials to determine the size of Buyer's Residential Unit.'" (Id. ¶ 22). "This statement, however is insufficient to act as a disclaimer in that it (1) is inconspicuously nested within, and covered by, several gridlines and various numerical calculations of the floor plan; (2) is printed down the page at a nearly 90-degree angle clockwise from the orientation of the page as it was presented to buyers, including [Plaintiff]; (3) is in small, hard-to-read, .10-point font; (4) misleadingly purports to disclaim the accuracy of all Bosa square footage calculations on the very page containing a vast array of precise (to the nearest inch) numerical measurements that collectively represent the area of the respective unit." (Id. ¶ 23).

"Additionally, as elsewhere in Bosa's purchase documents and advertising materials, the statement in Addendum No. 1 uses the misleading, non-standard term 'gross square footage' ('GSF') to describe the unit rather than gross living area ('GLA'), the standard method of measurement used in condominium appraisals." (Id. ¶ 24). "Utilizing the non-standard GSF methods results in substantially larger and highly misleading measurements than those attained using standard GLA measurement methods, has not been and is not now common practice among condominium developers." (Id. ¶ 25).

"The purchase contract at §3.2 notes square footages presented in its advertisements, purchase documents, and verbal representations are approximations. This section states that 'Buyer by its execution of this Agreement agrees that it is not relying upon any brochures, sales documents, or oral statements by Seller or Seller's agents regarding the square footage of the Condominium.'" (Id. ¶ 26). "This statement does not properly disclose that the constructed unit will be of a substantially smaller size than represented, only that Buyer is not purchasing 'a certain amount of footage, but rather air space' despite that Defendants use 'square footage,' rather than 'air space,' calculations ubiquitously in sales documentations and statements." (Id. ¶ 27). "As §3.2 attempts to waive Buyer's reliance on such documentation and statements as they relate to the purchase of units at Bayside, effectively allowing the Seller to offer a unit of any size and composition it chooses, the contract is illusory." (Id. ¶ 28).

"Though a similar disclosure is made regarding square footage estimates, it is inconspicuously located in the third of the five addenda to the purchase contract rather than in the contract itself. It appears in the middle of the thirtieth of forty legal-sized pages Bosa supplied purchasers." (Id. ¶ 29). "Though this disclosure does mention that Bosa's measurement 'may' differ from 'the actual square footage of the air space' for a given unit, it fails to adequately explain that Bosa's measurement methods uniformly result in larger measurements than standard methods would otherwise attain." (Id. ¶ 31).

"While the statements in §3.2 and Addenda Nos. 1 and 3 impliedly disclose that unit sizes cannot be estimated to the exact square foot, they fail to disclose that units, from the commencement of the Bayside project, were intended to be substantially and uniformly smaller in size than described. They thus fail to adequately serve as disclaimers to representations found in all advertising and contract documents that state an exact or near-exact unit measurement." (Id. ¶ 32). "Further, because federal and private lenders require appraisers to use the standard GLA method, mortgage financing is not available on standard terms where the property's price was based on non-standard GSF measurements." (Id. ¶ 33).

"[The Lenders] are the construction and development lenders for Bayside. Because of the poor sales performance of the Bayside project, Bosa was forced to apply to [the Lenders] for a restructuring of the loan, including forgiving part of the loan principal, but had to offer substantial concessions in return for the forebearance." (Id. ¶ 20). "Bosa's inability to perform on the terms of the original loan gives [the Lenders] effective control over the Bayside project given they hold the leverage of refusing further modifications and instead foreclosing on the property." (Id. ¶ 21).

The First Amended Complaint contains eight Counts: (1) fraud, in violation of California Civil Code § 1709, against Bosa; (2) breach of contract against Bosa; (3) false advertising, in violation of California Business and Professions Code § 17500 et seq., against Bosa and the Lenders; (4) unjust enrichment, constructive trust and equitable lien against all Defendants; (5) untrue statements in the sale of subdivided lots, in violation of 15 U.S.C. § 1703(a)(2)(B),*fn1 against Bosa and the Lenders; (6) failure to provide a property report, in violation of 15 U.S.C. §§ 1703(a)(1)(B), 1703(a)(1)(C) and 1709, against Bosa and the Lenders; (7) failure to satisfactorily complete and provide a statement of record, in violation of 15 U.S.C. §§ 1703(a), 1705 and 1709, against Bosa and the Lenders; and (8) violation of the California unfair competition law, California Business and Professions Code § 17200 et seq. against Bosa and the Lenders.

Plaintiff brings this action on behalf of himself and the following putative class: "All persons and entities (excluding officers, directors, and employees of Defendants) who signed a purchase contract for a residential condominium unit at Bayside." (Id. ¶ 34).

Plaintiff seeks "rescission of the purchase contract"; "a constructive trust or equitable lien to be placed on all funds in the possession of Defendants and their affiliated entities and subsidiaries which were paid by Plaintiff and the Class in their performance of the terms of the purchase contract"; compensatory and punitive damages; and attorneys' fees and costs. (Id. at 14).

B. Pending Motions

On November 20, 2009, Plaintiff filed a Motion for Class Certification and Appointment of Class Counsel. (Doc. # 4).

On December 28, 2009, Bosa filed its Motion to Dismiss. (Doc. # 23).

On December 28, 2009, the Lenders filed their Motion to Dismiss. (Doc. # 24).

On January 6, 2010, the Court issued an Order vacating the hearing date for Plaintiff's Motion for Class Certification and Appointment of Class Counsel. (Doc. # 31).

On January 19, 2010, Plaintiff filed a response in opposition to Bosa's Motion to Dismiss. (Doc. # 34).

On January 25, 2010, Bosa filed a reply brief. (Doc. # 36).

On February 2, 2010, Plaintiff filed a response in opposition to the Lenders' Motion to Dismiss. (Doc. # 40).

On February 4, 2010, Plaintiff filed a surreply brief in opposition to Bosa's Motion to Dismiss. (Doc. # 42).

On February 9, 2010, the Lenders filed a reply brief. (Doc. # 45).

On February 12, 2010, First American filed its Motion to Dismiss and Motion to Strike. (Doc. # 46 and 47).

On March 8, 2010, Plaintiff filed responses in opposition to First American's Motion to Dismiss and Motion to Strike. (Doc. # 48 and 49).

On March 15, 2010, First American filed reply briefs. (Doc. # 50 and 51).

II. Discussion

A. Standard of Review

Federal Rule of Civil Procedure 12(b)(6) permits dismissal for "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). Dismissal under Rule 12(b)(6) is appropriate where the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory. See Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990). Courts may "consider ... matters of judicial notice without converting the motion to dismiss into a motion for summary judgment." U.S. v. Ritchie, 342 F.3d 903, 908 (9th Cir. 2003).

To sufficiently state a claim to relief and survive a Rule 12(b)(6) motion, a complaint "does not need detailed factual allegations" but the "[f]actual allegations must be enough to raise a right to relief above the speculative level." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). "[A] plaintiff's obligation to provide the 'grounds' of his 'entitle[ment] to relief' requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Id. (quoting Fed. R. Civ. P. 8(a)(2)). When considering a motion to dismiss, a court must accept as true all "well-pleaded factual allegations." Ashcroft v. Iqbal, --- U.S. ----, 129 S.Ct. 1937, 1950 (2009). However, a court is not "required to accept as true allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences." Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). "In sum, for a complaint to survive a motion to dismiss, the non-conclusory factual content, and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief." Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009) (quotations omitted).

B. Bosa's Motion to Dismiss

1. Contentions of the Parties

Bosa contends two of Plaintiff's three claims which are based upon the Interstate Land Sales Full Disclosure Act ("Land Sales Act") should be dismissed because "documents that are subject to judicial notice and otherwise may be considered on a motion to dismiss show that Bosa has complied with the [Land Sales Act]." (Doc. # 23-1 at 2). Bosa explains: "The Department of Housing and Urban Development ('HUD') has determined that compliance with California law regarding subdivision disclosures constitutes compliance with the [Land Sales Act] registration and disclosure requirements. The California Department of Real Estate ... has issued an administrative order determining that Bosa has complied with those requirements and HUD has accepted that determination as constituting compliance with the [Land Sales Act]." (Id.) Bosa contends: "[T]he very language and provisions of the Purchase Agreement ... debunks all of the remaining claims alleged in the [First Amended Complaint] by undercutting Plaintiff's ability to allege (a) reliance and causation, which is necessary for his fraud based claims (Counts I, III, IV, V and VIII) and (b) breach for his contract based claims (Counts II and IV)." (Id.)

Plaintiff contends that Bosa's Land Sales Act argument relies upon "factual allegations, many unsupported-and ones which contradict the allegations in the Complaint, which must be taken as true on a motion to dismiss-and are therefore inappropriate for resolution at the motion to dismiss stage.... Even if the Court were to consider Bosa's factual allegations relating to the registration and disclosure process, it should find that the Public Report was insufficient under the Act." (Doc. # 34 at 15 (quotation omitted)). Plaintiff contends that the disclaimer provisions relied upon by Bosa are "insufficient to shield Bosa from liability because, while disclaiming a duty to provide an exact square footage, they do promise buyers that delivered units will be approximately the size represented-a promise which induced class members to purchase condos smaller than promised for more than they were worth." (Doc. # 34 at 1). Plaintiff contends that "Bosa interprets the Purchase Agreement to give Bosa complete discretion to determine the final size of its condos, even after the parties had already agreed to the sale and money had transferred hands, and notwithstanding the promise of a unit of an 'approximate' size, and in 'substantial compliance' with the floor plan shown. If Bosa is correct, it had carte blanche to deliver condos in any size, configuration and condition it wanted. For Bosa to prevail on this theory, it must maintain that delivery of a 10 square foot condo would have satisfied a Purchase Agreement for a 1,400 square foot condo." (Id.)

2. Request for Judicial Notice

"A district court ruling on a motion to dismiss may consider documents whose contents are alleged in a complaint and whose authenticity no party questions, but which are not physically attached to the plaintiff's pleading." Parrino v. FHP, Inc., 146 F.3d 699, 705-06 (9th Cir. 1998) (quotation omitted). Also, "a district court ruling on a motion to dismiss may consider a document the authenticity of which is not contested, and upon which the plaintiff's complaint necessarily relies." Id. at 706; see also Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir. 2005) ("We have extended the 'incorporation by reference' doctrine to situations in which the plaintiff's claim depends on the contents of a document, the defendant attaches the document to its motion to dismiss, and the parties do not dispute the authenticity of the document, even though the plaintiff does not explicitly allege the contents of that document in the complaint."). "[U]nder Fed. R. Evid. 201, a court may take judicial notice of 'matters of public record.'" Lee v. City of Los Angeles, 250 F.3d 668, 689 (9th Cir. 2001) (citation omitted).

Bosa requests that the Court take judicial notice of the following documents: (1) the Deposit Receipt, Offer to Purchase Property and Escrow Instructions between Bosa and Plaintiff (collectively, "Purchase Agreement"); (2) the Receipt for Public Report signed by Plaintiff; (3) the Final Subdivision Public Report Condominium -- HUD/OCRA, file no. 124390LA-F00 issued by the Commissioner of the California Department of Real Estate for Bosa's Bayside development ("Public Report"); (4) copy of a webpage of HUD regarding Bayside's registration with HUD under the Land Sales Act; and (5) a letter ...

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