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Foster v. EquityKey Real Estate Investments L.P.

United States District Court, N.D. California

May 9, 2017

AARON FOSTER, Plaintiff,


          HOWARD R. LLOYD United States Magistrate Judge

         Plaintiff Aaron Foster (“Plaintiff”), as an individual and as Trustee of the Michael P. Foster Trust, sues defendant EquityKey Real Estate Investments L.P. (“EquityKey”). The complaint includes seven claims related to an agreement concerning real property between EquityKey and Plaintiff's father, Michael Foster (“Mr. Foster”), from whom Plaintiff inherited his interest in the real property at issue in this action. Dkt. No. 1, Ex. A. EquityKey moves to dismiss all of Plaintiff's claims on the grounds that they are time-barred and fail to state a claim upon which relief may be granted. Dkt. No. 8. For the reasons explained below, the court grants the motion to dismiss.


         Plaintiff alleges the following facts. In 2010, Mr. Foster, then in his early seventies and “still competent, ” was living alone at his residence at 28 Pennsylvania Avenue, Los Gatos, CA (“the property”). Dkt. No. 1, Ex. A., ¶ 12. Prior to 2010, a fallen tree had damaged Mr. Foster's beloved car, and he sought funds to restore the vehicle. Id.

         Mr. Foster entered into a contract with EquityKey in June 2010. Id., ¶ 13. The contract states that EquityKey will pay Mr. Foster a $196, 000 “option payment” in exchange for Mr. Foster granting EquityKey the right to participate in 100% of the appreciation of his property, if any, for up to fifty years from the date of the agreement. Id., ¶ 14. The contract is secured by a Performance Deed of Trust and confirmed in a Memorandum of Option (the latter dated March 20, 2012). Id. Both the contract and the Memorandum of Option state that the arrangement is an option payment and “not a loan.” Id. Plaintiff asserts that Mr. Foster entered into this contract based on “false and deliberately misleading” representations by EquityKey, which Mr. Foster reasonably believed “given his age and mental status, ” that the transaction was an option contract rather than, as Plaintiff claims, a “disguised . . . high cost mortgage.” Id., ¶ 19-21. Given that EquityKey's intentionally deceptive efforts prevented Mr. Foster from understanding the true nature of the transaction, Plaintiff alleges, there was no meeting of the minds and no valid contract was formed. Id., ¶ 21.

         Mr. Foster passed away in 2016, and Plaintiff became the executor of his estate and the Trustee of the Michael P. Foster Trust. Id., ¶ 15. Prior to his passing, Mr. Foster had told Plaintiff that he “had made a deal for essentially ‘free money' and believed that he could not be forced from the home at any time or for any reason.” Id., ¶ 16. Only after his father's death, when Plaintiff was going through his late father's records, did he discover the EquityKey arrangement. Id., ¶ 15. Plaintiff alleges that “[d]ue to Michael Foster's age and the complexity of the contract, as well as EquityKey's deliberate effort to hide the nature of the transaction, . . . it was not possible for Michael Foster to understand and/or discover the true nature of the agreement with EquityKey . . . .” Id., ¶ 16. Plaintiff asserts that he himself only realized the “exact nature and terms” of the EquityKey agreement with the assistance of counsel. Id. If Plaintiff were to have sold the property at the time of the filing of the complaint, the amount due to EquityKey would have been approximately $705, 000.00. Id., ¶ 17.

         Plaintiff filed his complaint in Santa Clara Superior Court in November 2016. Dkt. No. 1, Ex. A. The complaint asserts that the contract is actually a high-interest loan secured by the property that was issued without the required disclosures or counseling and that EquityKey fraudulently concealed the nature of the agreement. Id., ¶¶ 1-2. The complaint alleges claims for (1) Rescission for Fraud, (2) Declaratory Relief, (3) Elder Financial Abuse (Cal. Welf. & Inst. Code § 15610.30), (4) Cancellation of Instruments (Cal. Civ. Code § 3412), (5) Quiet Title, (6) Violations of the Truth in Lending Act (“TILA”) (15 U.S.C. § 1601, et seq.), and (7) Unfair Business Practices (Cal. Bus. & Prof. Code § 17200, et seq.). Dkt. No. 1, Ex. A.

         The contract itself, which Plaintiff attached to the complaint, is titled “Property Appreciation Option Agreement.” Dkt. No. 7. It states that EquityKey will pay Mr. Foster an “Option Premium” of $196, 000 to purchase the option to participate, at a rate of 100%, in the appreciation of the property, if any, from its initial value of $1, 200, 000. Id. at pg. 1; pg. 2, ¶ 1. The grant of the option does not give EquityKey “any present ownership or possession rights with respect to the Property.” Id., ¶ 2. EquityKey's right to exercise its option only comes into play if (1) it is informed of a pending sale of the property “or a transfer, conveyance, assignment or other loss of [] ownership, ” (2) if Mr. Foster breaches the agreement, or (3) if neither of the prior events occurs within the 50-year term of the agreement, EquityKey may call or exercise its option within 90 days of the end of the term. Id. At such time, EquityKey may, but need not, exercise its option. If EquityKey decides not to exercise its option, the agreement terminates. Id., ¶ 3. If EquityKey exercises the option at some point during the 50-year option period, Mr. Foster must pay it 100% of the appreciation of the property, which will be calculated by multiplying the percentage change in the S&P/Case-Shiller Home Price Index (for the Metropolitan Statistical Area in which the Property is located) since the date of the agreement by the initial property value. Id., ¶ 5. An Early Termination Charge-equal to the greater of (1) the Option Premium ($196, 000) plus 3% of the initial property value plus 12% annual interest, [1] or (2) the amount of appreciation of the property at the time of the breach-applies if Mr. Foster (or his heirs) sells or otherwise transfers the property within 10 years of the date of the agreement. Id., ¶ 11. The contract further states that Mr. Foster agrees to execute a Performance Deed of Trust and Memorandum of Option. Id., ¶ 14. Finally, the agreement states that Mr. Foster “understand[s], acknowledge[s] and agree[s] that it is binding upon his estate, heirs, successors, and beneficiaries. Id., ¶ 22.

         As noted in the Plaintiff's complaint, the agreement states that it is “[n]ot a Loan or Security, ” and is instead “an option in real property.” Id., at ¶ 26. The contract also warns that EquityKey's option “may result in you [(meaning Mr. Foster)] (including your heirs, estate, beneficiaries and legal representatives) receiving less from your Property in a sale or other Property Transfer than if you did not enter into this Agreement. We recommend you thoroughly discuss this transaction with your heirs and beneficiaries, as well as your legal, tax and financial advisors to make certain you, and those who may be affected by this transaction, understand and are comfortable being bound by this Agreement.” Id., ¶ 4. A similar warning, advising Mr. Foster not to sign unless he has read the entire agreement and encouraging him to seek legal counsel and financial advice before signing, is included in capital letters above the signature line. Id., ¶ 31.

         Defendant EquityKey removed this action to federal court in January 2017, Dkt. No. 1, and filed a motion to dismiss one week later, Dkt. No. 14. In its motion, EquityKey argues that all of Plaintiff's claims, each of which EquityKey asserts is founded on a claim of fraud, are time-barred, and that the complaint fails to state a claim upon which relief may be granted because the contract is not a loan as a matter of law. Dkt. No. 8. Plaintiff responds that the statute of limitations has not run on its claims, that the discovery rule or the doctrine of equitable tolling should apply, and that the true nature of the transaction reveals that it is a loan and not an option contract. Dkt. No. 14.

         Both parties have consented to magistrate judge jurisdiction. Dkt. Nos. 10, 11.


         To survive a motion to dismiss, a complaint must allege sufficient facts to state a claim for relief that is facially plausible. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Complaints that merely recite the elements of a cause of action are insufficient. Id. In considering a motion to dismiss, a court accepts all of the plaintiff's factual allegations as true and construes the pleadings in the light most favorable to the plaintiff. Manzarek v. St. Paul Fire & Marine Ins. Co., 519 F.3d 1025, 1031 (9th Cir. 2008). But “the court is not required to accept legal conclusions cast in the form of factual allegations if those conclusions cannot reasonably be drawn from the facts alleged.” Clegg v. Cult Awareness Network, 18 F.3d 752, 754-55 (9th Cir. 1994). Dismissal may also be based on the absence of a cognizable legal theory. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990).


         The court begins its discussion with an analysis of the federal claim.

         I. TILA.

         “Congress enacted TILA to promote ‘the informed use of credit' by consumers.” Davenport v. Litton Loan Servicing, LP, 725 F.Supp.3d 862, 872 (N.D. Cal. 2010) (quoting 15 U.S.C. § 1601(a)). Thus, the Act seeks to “assure a meaningful disclosure of credit terms” to aid consumers in making informed decisions and protect them from unfair credit practices. Beach v. Ocwen Fed. Bank, 523 U.S. 410, 412 (1998) (quoting 15 U.S.C. § 1601(a)). TILA defines “credit” as “the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment.” 15 U.S.C. § 1602(f); see also 12 C.F.R. § 226.2(14). A “creditor” ...

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