Joint Equity Committee of Investors of Real Estate Partners, Inc. v. Coldwell Banker Real Estate Corp., --- F.R.D. ----, 2012 WL 1034501 (C.D.Cal.)
Plaintiffs Larsen et al. sought to represent an investor class who lost money in a fraudulent real estate securities scheme. The district court granted certification in part and denied it in part.
The problem began with a company, Real Estate Partners (REP); plaintiffs alleged that Coldwell was aware of REP’s fraudulent scheme and either aided it or failed to stop it.
From 2003 to 2006, REP sold unregistered securities in seven real estate investment funds, with over $50 million invested by around 1600 investors. In September 2007, the SEC sued REP and its principals for violations of the securities laws. REP and the funds quickly declared bankruptcy. The assets of REP and its principals were insufficient to cover the losses, and plaintiffs thus sued Coldwell.
What’s Coldwell’s role? In 2000, REP bought a Coldwell franchise, Coldwell Banker American Spectrum. Plaintiffs alleged that REP and CB/AS violated the terms of the franchise agreement soon after it was signed, but that though Coldwell was or should have been aware of this, Coldwell didn’t disassociate itself from REP. In 2003, Coldwell executed two franchise agreements with a real estate brokerage firm, OCC, in which REP allegedly owned a 40.5% stake, and then OCC formally changed its name to Coldwell Banker Commercial REP. Plaintiffs alleged that REP and CB/REP were alter egos.
Under the agreements, CB/REP paid fees to Coldwell, allegedly derived from class members’ investments. Plaintiffs alleged that Coldwell knew about the investment funds and agreed and conspired with REP to use the Coldwell Banker name to solicit investment. Coldwell disputed knowledge; Coldwell received less than $90,000 from REP and CB/REP during the life of the franchise. (If only we lived in a world in which it was implausible that a big entity would participate in a fraud just to skim off a little bit more money …)
At this point, plaintiffs’ claims were for negligence, fraud, negligent misrepresentation, California false advertising, and aiding and abetting. Plaintiffs asked for the certification of a nationwide class.
Plaintiffs submitted 132 declarations from named plaintiffs and absent class members in order to establish the uniformity of the alleged misrepresentations and the use of Coldwell’s name to promote the funds. The declarations were nearly identical, stating that each declarant was contacted by REP or CB/REP representatives soliciting investments in real estate securities and that these representatives claimed that the securities were affiliated with Coldwell in some manner. They stated that they’d never heard of REP or CB/REP before, but easily recognized the Coldwell name when the representative mentioned it. (Interesting resonances with products liability cases attempting to hold the TM licensor liable for the faulty manufacture of its licensee.)
Coldwell sought to depose all 132 declarants, and the court allowed it to depose up to 18. Coldwell did so and moved to strike the declarations. The court declined to do so, but considered them along with the other evidence regarding class certification.
On to certification: numerosity was easy. There were also numerous common questions of law and fact, including whether Coldwell approved, enabled, or ratified CB/REP and REP's alleged fraud. Coldwell argued that investors in two of the seven funds weren’t typical; the court disagreed. Finally, the court rejected Coldwell’s contention that the fact that plaintiffs were developing a factual record in a malpractice case against former REP advisors made them inadequate representatives.
Turning to Rule 23(b)(3): Did common questions predominate? Coldwell argued that individual issues of reliance and justifiable reliance predominated. Plaintiffs agreed that reliance was a necessary element of fraud and negligent misrepresentation, but argued that a class-wide inference of reliance was appropriate under these circumstances. The court agreed.
Coldwell argued that plaintiffs had to show “non-varying oral representations” because there was no way to infer class-wide reliance without showing uniformity of the representations. To the contrary, the 9th Circuit has refused to adopt a “talismanic” rule that a class action can’t be maintained if a fraud is committed principally through oral representations unless the representatives are “all but identical.” Instead, class treatment of fraud claims stemming from a “common course of conduct” can be appropriate. The exact wording of the oral misrepresentations isn’t the predominant issue. Instead, it’s the underlying scheme.
However, if the representations were dissimilar, then there’d be no predominance. So the court turned to the representations allegedly made to the class members. Plaintiffs contended that most of the misrepresentations commenced with cold calls based on substantially similar sales scripts. (Say that three times fast.) The script featured the Coldwell name prominently:
Hi __________, this is __________ with Coldwell Banker Commercial Real Estate Partners. How is your day going so far? Great. [I] wanted to take a second and let you know in the last 7 years we've become the 3rd largest Coldwell Banker franchise in the country with 1/2 Billion under management.
Coldwell argued that certain sales scripts didn’t contain references to Coldwell. But the record evidence was otherwise: it wasn’t significant that a script referred to a “Coldwell Banker franchise” instead of Coldwell Banker. There was one script that didn’t mention Coldwell, but there was no evidence on the frequency or nature of its use, and didn’t rebut plaintiffs’ showing that the pitches were substantially uniform.
Defendants also challenged inconsistencies between the declarations and the declarants’ subsequent deposition testimony. Four of the 18, according to Coldwell, testified that they couldn’t remember what they were told. The court was unconvinced. One deponent, for example, testified that he couldn’t remember much about the content of the call more than 7 years past, but that he could remember that the salesperson who called him used the Coldwell name and discussed investments in distressed retail properties. Another couldn’t recall the “specific language” used by the CB/REP salesperson, but did in fact remember that the caller said he was from Coldwell Banker Real Estate Properties, among other things. Nor did differences in reported number of phone calls matter when the deponents still remembered being called with a pitch using the Coldwell name. This supported plaintiffs’ contention that common issues on reliance predominated.
Coldwell made some other unhelpful arguments: that the callers were actually independent contractors, not “representatives” as plaintiffs remembered, but this had “little, if any” bearing on predominance. It also argued that the sales scripts didn’t expressly state that the investment was a Coldwell or Coldwell-backed product. “But again, this argument—which concerns Coldwell's vicarious liability for REP and CB/REP's alleged misrepresentations—has little relevance to the predominance inquiry.”
Along with the sales pitches, plaintiffs identified similar misrepresenations in brochures that prominently featured the Coldwell logo and touted the Coldwell network, e.g.:
Real Estate Partners has acquired a Coldwell Banker Commercial franchise and created a Special Assets Group that utilizes Coldwell Banker Commercial's extensive network to implement Master Services Agreements with financial institutions.... By taking advantage of the Coldwell Banker Commercial network Real Estate Partners is able to fully service Real Estate assets nationwide. This allows Real Estate Partners ... to have early access to a wider portfolio of assets meeting acquisition criteria.
While Coldwell argued that the logos were franchise logos, that wasn’t the issue: the similarity of the brochures confirmed predominance.
Next, the court asked whether common issues of justifiable reliance predominated. Coldwell argued that the oral representations were contradicted by the written investment documents plaintiffs signed, which contained disclosures that REP, CB/REP, and CB/AS weren’t affiliated with Coldwell, e.g., “Coldwell Banker Commercial American Spectrum is an authorized DBA of Real Estate Partners, Inc. as filed with the appropriate government agencies and the franchisor of Coldwell Banker Commercial Corporation.”
The court held that this didn’t make plaintiffs’ reliance necessarily unjustifiable. Justifiable reliance requires showing only that an alleged misrepresentation was a substantial factor in inducing reliance. The question of whether disclaimers precluded reliance could also be answered on a class-wide basis. (Also, that is not in any way a plain English statement that REP etc. aren’t affiliated with, certified by, or otherwise approved by Coldwell, and the ordinary meaning of a franchise is to the contrary!)
The fraud and misrepresentation claims against Coldwell were based on a form of vicarious liability known as subsequent ratification. Plaintiffs alleged that Coldwell ratified the misrepresentations after becoming aware of them. Ratification normally requires actual awareness, but can also occur with willful blindness or an unreasonable failure to investigate. Anyway, this was an issue common to the class, as was the question of whether REP and CB/REP representatives purported to act on Coldwell’s behalf.
Similar reasoning applied to establish predominance on the negligence claim.
On the aiding and abetting claim, Coldwell argued that individual issues predominated over whether Coldwell caused the class members any injury. Liability is appropriate for one who aids and abets the commission of an intentional tort if that person knows the tortfeasor’s conduct constitutes a breach of duty and gives substantial encouragement to the tortfeasor to act. These questions of assistance and knowledge focus on Coldwell, not the victims, thus satisfying the predominance requirement.
Plaintiffs omitted argument on predominance for the state law false advertising claim in their initial motion, and thus waived any argument, so certification was denied.
Finally, Coldwell argued that the statute of limitations gave rise to individual issues. Each plaintiff could have discovered the problem at a different time. For example, one deponent stated that he became “greatly” concerned when he received a letter in November 2006 stating that CB/REP’s Coldwell franchise had ended. Two other deponents said they became suspicious around January 2007. In addition, Coldwell argued that questionnaires that the SEC sent putative class members in 2006—which asked if they were “told about [REP's] relationship with Coldwell Banker”—put them on inquiry notice of the alleged fraud.
Plaintiffs responded that the statute of limitations didn’t begin to run until all elements of the claim, including damages, accrued. They contended that the class members did not suffer damages until 2010, when it was “conclusively determined ... that the assets of REP, the Investment Funds, and the REP principals would be insufficient to make the class members whole.” Even if damages didn’t accrue during the statutory period, statute of limitations issues aren’t enough to defeat predominance where important common issues otherwise exist, especially in the investment fraud context.
The court then turned to superiority, which easily favored certification, despite Coldwell’s argument that “the average class members invested $35,850, a more than ample sum to attract legal representation.” Class treatment was still more efficient and there were no contending lawsuits.
Coldwell argued that the claims of investors in the Equity Fund and Growth Fund were not typical of the class claims, because the callers pitching them were instructed not to make statements about Coldwell, and because Coldwell terminated the CB/REP franchise before the Growth Fund opened and while shares of Equity Fund were still being sold. Moreover, the Equity and Growth Fund brochures did not contain any logo or representation about any Coldwell franchise.
The court disagreed. The typicality for the investors depends on whether REP or CB/REP representatives actually refrained from using Coldwell’s name. “While the date Coldwell terminated the franchise agreement may bear heavily on the issue of liability, it has little relevance to the typicality inquiry.” In fact, plaintiffs presented evidence that investors in those funds received similar representations, and the evidence showed that the Growth Fund did produce brochures with Coldwell logos.