Sewell et al v. D'Alessandro & Woodyard, Inc. et al

Filing 290

OPINION AND ORDER granting in part and denying in part 257 Motion to dismiss; granting in part and denying in part 258 Motion to dismiss; granting in part and denying in part 259 Motion to dismiss; granting in part and denying in part 260 Mot ion to dismiss; granting in part and denying in part 261 Motion to dismiss; granting in part and denying in part 263 Motion to dismiss; denying 263 Motion for summary judgment; granting in part and denying in part 264 Motion to dismiss; granting in part and denying in part 265 Motion to dismiss; granting nunc pro tunc 272 Motion for Leave to File Excess Pages. See Opinion and Order for details. Signed by Judge John E. Steele on 9/10/2009. (NHY)

UNITED STATES DISTRICT COURT MIDDLE DISTRICT OF FLORIDA FORT MYERS DIVISION RANDOLPH SEWELL, DAPHNE SEWELL, MOSES ESHKENAZI, THERESE ESHKENAZI, and HENRIETTE ESHKENAZI, individually and on behalf of all others similarly situated, Plaintiffs, vs. D'ALESSANDRO & WOODYARD, INC., a Florida for profit corporation; GATES, D'ALESSANDRO & WOODYARD, LLC, a Florida limited liability company; K. HOVNANIAN FIRST HOMES, LLC, a Florida limited liability company; FIRST HOME BUILDERS OF FLORIDA, a Florida general partnership; FIRST HOME BUILDERS OF FLORIDA I, LLC, a Florida limited liability company; JAN BAILLARGEON, as Personal Representative of the Estate of Frank D'Alessandro, deceased; SAMIR CABRERA, an individual; HONORA KREITNER, an individual; BRUCE A. ROBB, an individual; and PATRICK LOGUE, an individual, Defendants. ___________________________________ OPINION AND ORDER This dismiss. matter comes before the Court on eight motions to Case No. 2:07-cv-343-FtM-29SPC

In an Opinion and Order (Doc. #203) filed on September

29, 2008, the Court dismissed plaintiffs' First Amended Class Action Complaint (Doc. #82) for non-compliance with Federal Rule of Civil Procedure 9(b), but granted "one final opportunity" for plaintiffs to file an amended complaint. Plaintiffs have now filed

their Second Amended Class Action Complaint (Doc. #205), to which all defendants have again filed motions to dismiss (Docs. ## 257, 258, 259, 260, 261, 263, 264, 265). Plaintiffs filed a

consolidated Response (Doc. #273) to all motions, and Replies (Docs. ## 283, 285) were filed by some of the defendants. I. The Second Amended Complaint The Second Amended Class Action Complaint ("Second Amended Complaint") (Doc. #205) alleges that in 2003, defendants First Home Builders1 and D&W2 devised an investment scheme in which the two companies would sell new houses to be constructed by First Home Builders in Cape Coral and Lehigh Acres, Florida. These new houses were sold as having been "pre-leased" to tenants, and the targeted investors were low-to-middle-income persons eager for double-digit returns (which were represented to be in excess of fourteen percent (14%)). States Potential investors were recruited throughout the United in person, by mail, and through the presentation of

traveling "road shows."

The typical sales pitch included the

following representations: that a "ready-made" tenant, procured through the sole efforts of First Home Builders and D&W, would immediately occupy a house built by First Home Builders upon completion of construction; that the tenant would rent, and

Defendants First Home Builders of Florida and First Home Builders of Florida I, LLC are collectively referred to as "First Home Builders" in the Second Amended Complaint (Doc. #205, ¶11).
2

1

Defendant D'Alessandro & Woodyard, Inc.
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ultimately purchase, the house from the investor, resulting in the promised fourteen percent (14%) rate of return; that the targeted investor would only be required to make a small down payment and to enter into a construction loan agreement, the interest on which First Home Builders would pay until construction of the house was completed; that once construction was completed, the investor would be required to convert the interim construction financing to permanent financing, if qualified; and that the investor would not incur any additional costs or expenses other than the minimal initial down payment. An offering document titled, (the "First Home Lease was Purchase given to

Investment

Opportunity"

"Prospectus"),

prospective investors. This guaranteed an annual rate of return of fourteen percent (14%) based upon the leasing and eventual resale of the properties to third parties, which would be achieved solely through the efforts of First Home Builders and D&W. The provision

of ready-made tenants and a guaranteed rate of return artificially inflated the values of the properties, which made them more

profitable to sell than unoccupied properties. This Prospectus was the template for the representations made by defendants to

potential investors.

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Defendants First Home Builders, D&W, D'Alessandro,3 Cabrera,4 and Kreitner5 marketed thousands of these real estate investment properties to investors throughout the United States as part of a common promotional plan. This common promotional plan involved the same developer (First Home Builders) executing each contract of sale (the "Purchase Agreement"), common sales agents and sales facilities, common advertising, common marketing brochures, and common inventory. Additionally, First Home Builders authorized

D&W, D'Alessandro, and Cabrera to use its name in the Prospectus and to set up a satellite sales office in the same location as First Home Builders. Plaintiffs allege that the Prospectus and various oral

representations made by defendants contained the following false and misleading statements: (1) That tenants would be procured for each investment property through the sole efforts of First Home Builders; (2) that the investor would receive a fourteen percent (14%) rate of return on his/her investment based upon a tenant occupying, and then purchasing, the property; (3) that the investor would have no out-of-pocket costs other than the initial down payment; and (4) that the tenant procured by First Home Builders would ultimately purchase the property from the investor.

Defendant Jan Baillargeon, in her capacity Representative of the Estate of Frank D'Alessandro.
4

3

as

Personal

Defendant Samir Cabrera. Defendant Honora Kreitner.
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5

Each of the plaintiffs alleges that he or she purchased one or more lots from defendants based upon their written and oral

representations.

Plaintiffs Randolph and Daphne Sewell purchased

three lots; plaintiff Henriette Eshkenazi purchased two lots; and plaintiffs Moses and Therese Eshkenazi purchased four lots. The

Purchase Agreements obligated plaintiffs, among other things, to acquire "interim `construction financing' for the purpose of

acquiring the property and constructing a home and improvements thereon, and then, upon completion of the home, to secure permanent mortgage financing, or an `end-loan' to . . . pay off the interim construction financing loan." (Doc. #205, ¶38.) After the

Purchase Agreements were signed, First Home Builders and/or D&W arranged for plaintiffs to receive interim construction financing from First Home Builders' and/or D&W's preferred lenders in the principal amounts of approximately 100% of the full purchase price (thus including sales profit to First Home Builders in addition to construction costs). Each construction loan had a one-year term.

The borrowed amounts greatly exceeded plaintiffs' ability to repay, and plaintiffs assert that they were induced to enter into such loans based upon the following false and misleading assurances by defendants: (1) That plaintiffs' total cash outlay would be limited to their initial contract deposits; (2) that First Home Builders would make all loan payments during the course of construction; and (3) that upon completion of construction and procurement of an endloan, the rental payments received from tenants procured by First
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Home Builders and/or D&W would exceed any amounts that would otherwise be due and owing under the permanent loan. In late October 2006, the Sewells expressed concerns that First Home Builders and D&W had not yet procured tenants for the properties, as promised. Hovnanian financing. financing began In response, First Home Builders and the Sewells to secure permanent

pressuring

The Sewells were unable to obtain permanent mortgage and became defendants in state court foreclosure

proceedings.

While the Eshkenazis were able to obtain permanent

mortgage financing for their houses, they face difficulties in meeting their loan obligations without the benefit of rental income and risk losing their properties in foreclosure proceedings. Plaintiffs' nine-count Second Amended Complaint alleges the following Securities Builders, claims: Act D&W, of and (1) 1933 GDW) violation (by of Section 12(a)(2) of the Home

defendants I); (2)

Hovnanian,

First

(Count

"controlling

person"

liability under Section 15(a) of the Securities Act of 1933 (by defendants D'Alessandro, Cabrera, Robb,6 and Logue7) (Count II); (3) fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 (by all defendants) (Count III); (4) "controlling Securities person" liability Act of 1934 under (by Section defendants 20(a) of the

Exchange

D'Alessandro,

6

Defendant Bruce A. Robb. Defendant Patrick Logue.
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7

Cabrera, Robb, and Logue) (Count IV); (5) violation of Sections 1703(a)(1)(A) and (B) of the Interstate Land Sales Full Disclosure Act (by all defendants) (Count V); (6) fraud in violation of Sections 1703(a)(2)(A)-(C) of the Interstate Land Sales Full

Disclosure Act (by all defendants) (Count VI); (7) breach of contract (by defendants First Home Builders, Hovnanian, D&W, and GDW) (Count VII); (8) breach of duty of good faith and fair dealing (by defendants Hovnanian, First Home Builders, D&W, and GDW) (Count VIII); and, (9) deceptive and unfair trade practices (by all defendants) (Count IX). of the following class: All persons who purchased one or more real properties for investment purposes from First Home Builders in either Cape Coral or Lehigh Acres, Florida between September 1, 2003 and December 31, 2006 (the `Class Period'), based upon representations made by First Home Builders or any of its agents, including, but not limited to the real estate brokerage firm of D'Alessandro & Woodyard, Inc., that: (a) investors would receive a fourteen percent return on their investment based upon a tenant occupying, and then ultimately purchasing, the property; (b) the tenants for each property would be procured solely through the efforts and expertise of First Home Builders and/or D'Alessandro and Woodyard (and/or their respective affiliates or co-brokers); and (c) no cash outlay would be required from investors other than the initial down payment. (Doc. #205, ¶54.) II. Motion to Dismiss Standard The applicable standards for motions to dismiss were set forth in the Court's previous Opinion and Order (Doc. #203) dated Plaintiffs also seek class certification

September 29, 2008, and are adopted herein without repetition.
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Additional cases decided since that time set forth and apply the same standards. E.g., Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009);

Rosenberg v. Gould, 554 F.3d 962 (11th Cir. 2009); Mizzaro v. Home Depot, Inc., 544 F.3d 1230 (11th Cir. 2008). III. Successor Liability Defendants Hovnanian and GDW assert that they should be

dismissed from the case because the Second Amended Complaint fails to sufficiently allege the existence of successor liability against them. Defendant GDW also seeks, in the alternative, summary on this issue. Under are Florida law, not a predecessor on its

judgment

corporation's

liabilities

generally

imposed

successor unless: (1) the successor expressly or impliedly assumes the obligations of the predecessor; (2) the transaction is a de facto merger; (3) the successor is a mere continuation of the predecessor; or (4) the transaction is a fraudulent effort to avoid the liabilities of the predecessor. Centimark Corp. v. A to Z

Coatings & Sons, Inc., 288 Fed. Appx. 610, 614 (11th Cir. 2008) (citing Bernard v. Kee Mfg. Co., 409 So. 2d 1047, 1049 (Fla. 1982)); Lab. Corp. v. Prof'l Recovery Network, 813 So. 2d 266, 269 (Fla. 5th DCA 2002). Plaintiffs assert that defendant Hovnanian is

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liable under the first and second bases of successor liability,8 and that GDW is liable under the second basis.9 Plaintiffs assert that the Purchase Agreements entered into by plaintiffs were "[a]mong the assets purchased (and liabilities assumed) by Hovnanian" and that Hovnanian "replaced First Home Builders as the `seller/builder' with respect to each subject agreement," "took over the performance of all remaining contractual obligations," and "either expressly or implicitly assumed the liabilities associated with those purchase agreement." (Doc. #205, ¶12.) The Court finds this sufficient to satisfy the first basis

for successor liability. As to their "de facto merger" theory, plaintiffs allege that Hovnanian "was formed by Hovnanian Enterprises, Inc. in July 2005 for the purpose of continuing the business of First Home Builders," "replaced First Home Builders as the `seller/builder' with respect to each subject purchase agreement" and "has taken over the full performance thereof." Plaintiffs further allege that since August

The Second Amended Complaint asserts that Hovnanian is the successor-in-interest to defendant First Home Builders because "on or about August 2005, Hovnanian . . . purchased the assets (and assumed the liabilities) of First Home Builders," (Doc. #205, ¶12), and that Hovnanian and First Home Builders entered into a "de facto merger" (id.). The Second Amended Complaint asserts that defendant GDW is liable as the successor-in-interest to D&W "by virtue of a July 28, 2006 transaction, the effect of which was to create a merger and/or a de facto merger between D&W and another prominent real estate firm, Gates McVey, to form a new entity called `Gates, D'Alessandro & Woodyard, LLC. . . ." (Doc. #205, ¶9.)
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8

2005, First Home Builders "has ceased all homebuilding activities" and that Hovnanian "has completely taken over the business

operations of First Home Builders."

(Doc. #205, ¶12.)

Plaintiffs

assert that several of First Home Builders' officers are now officers of Hovnanian, that many of the employees have transferred from First Home Builders to Hovnanian, that Hovnanian is located at the same address as First Home Builders, and that Hovnanian is in the same business as First Home Builders. "In essence, the By

business of First Home Builders has been absorbed by Hovnanian.

virtue of the foregoing, there has been a clear relay-style passing of the baton from First Home Builders to Hovnanian . . . ." (Id.)

As to GDW, Plaintiffs cite various press releases and public statements made by GDW, D&W, D&W's principal, and Gates McVey, which indicate that GDW and D&W share the same address, share at least two of the same officers, and share employees (id.).

Plaintiffs claim that the "continuity of management, personnel and physical address, coupled with GDW's and D&W's own statements that a merger had occurred between the companies [] supports a finding of a de facto merger under Florida law." these allegations (Id.) The Court finds

sufficient to satisfy the second basis for

successor liability as to each defendant. The Court finds, upon consideration of the Second Amended Complaint in its entirety, that plaintiffs have adequately pled the existence of successor liability as to Hovnanian and GDW. As

Therefore, the motion to dismiss on this basis will be denied.
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to GDW's motion for summary judgment on this issue, the Court finds that, in the absence of any discovery conducted in this case, the Court will deny summary judgment. See FED. R. CIV. P. 56(f).

IV. Securities Claims - Counts I through IV Plaintiffs allege in Count I that defendants Hovnanian, First Home Builders, D&W, and GDW violated Section 12(a)(2) of the Securities Act of 1933, first 63 15 U.S.C. § of 77l(a)(2).10 the Second After Amended

incorporating

the

paragraphs

Complaint, plaintiffs assert that the Purchase Agreements and the properties represented thereby are "in the nature of an `investment contract,' and, hence, are considered a `security' subject to the federal securities laws . . . ." (Doc. #205, ¶65.) Plaintiffs

further assert that defendants First Home Builders, Hovnanian, and D&W are "seller[s]" of a "security," (id. at ¶¶ 66, 67); that the

Section 12(a)(2) of the Securities Act of 1933 imposes liability on: Any person who­ .... (2) offers or sells a security . . . by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of a prospectus or oral communication, which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading (the purchaser not knowing of such untruth or omission), and who shall not sustain the burden of proof that he did not know, and in the exercise of reasonable care could not have known, of such truth or omission, . . . . 15 U.S.C. § 77l(a)(2).
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10

"First Home Lease Purchase Investment Opportunity" document is a "Prospectus" within the meaning of the federal statute; and that each defendant has "offered to sell or sold a security by means of a prospectus or oral communication which included untrue statements of material facts and omissions of material facts necessary to make the statement made . . . not misleading," in violation of Section 12(a)(2). (Doc. #205, ¶69.) Plaintiffs further allege that this

constituted a "public offering" and that defendants should have been required to furnish investors with a registration statement. (Id. at ¶70.) Count II alleges "controlling person" liability, pursuant to Section 15 of the Securities Act of 1933, 15 U.S.C. § 77o,11 against defendants D'Alessandro, Cabrera, Robb, and Logue, "by virtue of their top-level executive positions" within D&W (as to D'Alessandro and Cabrera) and within First Home Builders (as to Robb and Logue). (Doc. #205, ¶¶ 75-76, 78-79.) Incorporating prior paragraphs,

Section 15 of the Securities Act of 1933 imposes joint and several liability on: [e]very person who, by or through stock ownership, agency, or otherwise, or who, pursuant to or in connection with an agreement or understanding with one or more other persons by or through stock ownership, agency, or otherwise, controls any person liable under sections 77k or 77l of this title, . . . unless the controlling person had no knowledge of or reasonable ground to believe in the existence of the facts by reason of which the liability of the controlled person is alleged to exist. 15 U.S.C. § 77o.
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11

plaintiffs claim that these defendants "were culpable participants in the fraudulent scheme" and "caused their companies to engage in the acts and omissions which give rise to liability under Section 12(a)(2) of the Securities Act." (Id. at ¶77.)

Plaintiffs allege in Count III that defendants First Home Builders, Hovnanian, D&W, GDW, D'Alessandro, Cabrera, Kreitner, Logue, and Robb engaged in fraud in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b),12 and Rule 10b-5, 17 C.F.R. § 240.13 Incorporating prior paragraphs,

12

Section 10(b) of the Securities Exchange Act of 1934 makes

it: unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange­ .... (b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors. 15 U.S.C. § 78j(b).
13

Rule 10b-5 makes it:

unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, (continued...)
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plaintiffs

assert

that

each

of

these

defendants

violated

subsections (a) and (c) of Rule 10b-5 when they "directly or indirectly, by use of the means and instrumentality of interstate commerce, and of the mails in connection with the purchase or sale of securities . . . knowingly, willfully and/or recklessly (a) employed devices, schemes or artifices to defraud, and/or (c) engaged in acts, practices and courses of business which have operated as a fraud upon purchasers of such securities." #205, ¶84.) (Doc.

Plaintiffs allege that these defendants "were the

masterminds" and "devised a scheme through which vacant lots in Cape Coral and Lehigh Acres would be marketed and sold as `tenantoccupied' and generating `double-digit' returns based upon the tenant (procured through the sole efforts of D&W and First Home Builders) initially renting and then purchasing the property from the initial investor." Count III also (Id. at ¶85.) alleges that these defendants violated

subparagraph (b) of Rule 10b-5 by making the following specific misstatements of material fact in order to induce plaintiffs to purchase the various real estate investments: (a) That tenants would be provided for each property purchased; (b) that investors would receive a fourteen percent (14%) rate of return on each
13

(...continued) practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. 17 C.F.R. § 240.10b-5.
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investment

property

based

upon

a

tenant

occupying,

and

then

purchasing, the property; (c) that no cash outlay would be required other than the initial down payment; and (d) that First Home Builders and/or D&W would take care of everything, including, but not limited to, the procurement of tenants through their sole efforts. (Doc. #205, ¶86.)

Count IV alleges "controlling person" liability under Section 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a),14 against D'Alessandro, Cabrera, Robb, and Logue, "by virtue of their top-level executive positions" within their respective companies. (Id. at ¶¶ 101, 102.) Incorporating prior paragraphs, plaintiffs

claim that these defendants caused their respective companies to "engage in the acts and omissions" that constituted violations of Section 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240. A. (Id. at ¶¶ 101, 102.)

Purchase Agreements as "Securities": The defendants named in Counts I through IV assert that those

counts

must

be

dismissed

because

the

purported

investment

opportunity described in the Second Amended Complaint did not
14

Section 20(a) imposes joint and several liability on:

[e]very person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder . . . unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action. 15 U.S.C. § 78t(a).
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involve

the

offer

or

sale

of

"securities."

The

defendants

variously phrase the issue in terms of subject matter jurisdiction, failure to state a claim, or a lack of standing.1 5 respond that the Purchase Agreements constitute Plaintiffs "investment

contracts" and are therefore "securities" within the meaning of the statutes, and that the Second Amended Complaint adequately sets forth facts to establish this contention. (1) General Legal Principles: To establish claims under Counts I through IV, the Second Amended Complaint must adequately allege that the transactions at issue involved a "security" within the meaning of the relevant federal statutes. Fin. Sec. Assur., Inc. v. Stephens, Inc., 500

F.3d 1276, 1285 (11th Cir. 2007), reh'g en banc denied, 261 Fed. Appx. 280 (11th Cir. 2008). There is no doubt that a "security"

includes "investment contracts," 15 U.S.C. § 77b(a)(1), and the Second Amended Complaint alleges that this case involves such investment contracts (Doc. #205, ¶65). Defendants argue, however,

that the facts alleged in the Second Amended Complaint do not establish that investment contracts were involved. An investment contract is "a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is

To have standing to bring a claim under Rule 10b-5, plaintiff must be a purchaser or seller of securities, or someone with a contract to purchase or sell securities. Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975); Fin. Sec. Assur., Inc. v. Stephens, Inc., 500 F.3d 1276, 1283 (11th Cir. 2007).
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15

led to expect profits solely from the efforts of the promoter or a third party." SEC v. Merchant Capital, LLC, 483 F.3d 747, 754

(11th Cir. 2007) (quoting SEC v. W. J. Howey Co., 328 U.S. 293, 298-99 (1946)), rev'd and remanded on other grounds, 311 Fed. Appx. 250 (11th Cir. 2009). It is clear that the purchase of lots or

houses for personal use does not constitute an investment contract and is therefore not a security. Rice v. Branigar Organization, The purchase of lots

Inc., 922 F.2d 788, 790-91 (11th Cir. 1991).

or houses for investment purposes, however, may constitute a security. Gordon v. Terry, 684 F.2d 736 (11th Cir. 1982). The

Eleventh Circuit uses either a three or four-part test to determine whether an investment contract exists: "(1) an investment of money, (2) a common enterprise, (3) the expectation of profits, and (4) the expectation of profits to be derived solely from the efforts of others." SEC v. ETS Payphones, Inc., 408 F.3d 727, 731-32 (11th This is intended to be a broad definition and a SEC v. Edwards, 540 U.S. 389, 393 (2004); SEC v.

Cir. 2005).16 flexible test.

Mut. Bens. Corp., 408 F.3d 737, 742 (11th Cir. 2005). (2) Application to Present Case: Defendants argue that the second and fourth elements of the test are missing from this case. Viewing the well-pled factual

allegations in the light most favorable to plaintiffs, the Court disagrees. The three-part test simply combines the third and fourth elements.
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(a) Common Enterprise: A "broad vertical commonality test" is used to determine whether investors operated under a common enterprise. ETS

Payphones, 408 F.3d at 732.

This test "requires the movant to show

that the investors are dependent upon the expertise or efforts of the investment promoter for their returns." Id. (internal citation and quotation omitted). A common enterprise exists "where the

fortunes of the investor are interwoven with and dependent on the efforts and success of those seeking the investment or of third parties." SEC v. Unique Fin. Concepts, Inc., 196 F.3d 1195, 1199"[T]he thrust of the

1200 (11th Cir. 1999) (citations omitted).

common enterprise test is that the investors have no desire to perform the chores necessary for a return." at 1200 (citation omitted). The Court finds that the Second Amended Complaint satisfies the pleading requirements as to the common enterprise element. Paragraphs 18 through 53 allege repeatedly that plaintiffs Unique Fin., 196 F.3d

purchased the properties as investment opportunities based upon the assurances that defendants would do all of the essential work necessary to ensure a fourteen percent (14%) rate of return; that nothing other than the purchase would be required of plaintiffs, including no out-of-pocket expenses other than a down payment; and that the failure of defendants to successfully perform those functions would and did adversely affect the success of the

investment opportunity.

This is sufficient at this stage of the
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proceedings.

While defendants argue that the outcome was simply

the result of external market forces and that no entrepreneurial or managerial skills were involved, this alternative view of the facts cannot be resolved on a motion to dismiss, even under the subject matter jurisdiction theory. (b) Solely From Efforts of Others: Defendants do not dispute that there was an expectation of profit, but assert that the fourth element­-that the expectation of profits be derived "solely" from the efforts of others­has not been satisfied. Defendants argue that the investors retained sufficient power and control to defeat this required element. defendants dependent argue on the that plaintiffs' of the investment promoters' Additionally, was but not was

return efforts,

success

entirely dependent upon external market forces,

i.e., on the

existence of prospective home buyers interested in leasing homes with options to purchase. In this context, "`solely' is not interpreted restrictively," but is governed by economic reality and focuses on the dependency of the investor on the entrepreneurial or managerial skills of the other party. Merchant Capital, 483 F.3d at 754-55. "The fourth

element of the Howey test asks the amount of control that the investors retain[ed] under their written agreements. The more

control investors retain[ed], the less likely it becomes that the contract qualifies as a security." ETS Payphones, 408 F.3d at 732 The first step is

(internal citation and quotation omitted).
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therefore to look to the contracts.

Albanese v. Florida Nat'l Control given to the

Bank, 823 F.2d 408, 410 (11th Cir. 1987).

investors that is illusory or insufficient, however, does not disqualify the transaction from being an investment contract. Eberhardt v. Waters, 901 F.2d 1578, 1581-82 (11th Cir. 1990); Albanese, 823 F.2d at 412. The Court finds that the Second Amended Complaint satisfies the pleading requirements as to the fourth element at the motion to dismiss stage of these proceedings. measure of control under the While plaintiffs retain some of their respective

provisions

Purchase Agreements, paragraphs 18 through 53 of the Second Amended Complaint contain sufficient well-pled factual allegations to

preclude the Court from finding that this element of the claim is not plausible. denied. B. Unregistered Security: Defendant Hovnanian (and others, by adoption) argue that Counts I and II must be dismissed even if the investment Accordingly, this aspect of the motions will be

opportunity program is designated a "security" because Section 12(a)(2) only applies to registered public offerings (see Doc. #265, pp. 26-29). Defendants argue that the Second Amended

Complaint does not allege that the "securities" were registered with the Securities and Exchange Commission (SEC). Defendants rely upon Gustafson v. Alloyd Co., 513 U.S. 561 (1995) as their sole binding authority.
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The issue in Gustafson was

whether the contract between the parties was a "prospectus" as that term is used in the statute. Id. at 568. The Court found that

Congress intended § 12 to apply only to public offerings, and not private transactions. Id. at 584. Nothing requires, however, that the public offering be "registered" before a claim can be

actionable. investment

The Second Amended Complaint does allege that the scheme constituted a "public offering" (albeit

apparently unregistered), and provided sufficient facts to make the allegation plausible (Doc. #205, ¶70). Accordingly, this aspect of the motions will be denied. C. Statute of Limitations: All of the defendants named in Counts I through IV assert that the statutes of limitations bar these counts because the original Complaint (Doc. #1), filed on May 30, 2007, was filed outside of the applicable statutory periods. Defendants argue that various

provisions of the Purchase Agreements entered into by the Sewell and Eshkenazi plaintiffs were so inconsistent with defendants' alleged representations that plaintiffs were on inquiry notice of the facts underlying their claims as of the date they entered into the Purchase Agreements. argue that additional Additionally, some of the defendants set forth in the Second Amended

facts

Complaint also show that the Sewells were on inquiry notice at a time that renders the Second Amended Complaint untimely.

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(1) General Legal Principles: The claims in Counts I and II, being brought under the Securities Act, must be brought "within one year after the

discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of due diligence." 15 U.S.C. § 77m. The claims in Counts III and IV, being brought

under the Securities Exchange Act, "may be brought not later than the earlier of . . . 2 years after the discovery of the facts constituting the violation; or . . . 5 years after such violation." 28 U.S.C. § 1658(b). A statute of limitations bar is an affirmative defense, and as such, generally needs not be negated by plaintiffs in their

complaint.

E.g., La Grasta v. First Union Sec., Inc., 358 F.3d A dismissal based upon statute of

840, 845 (11th Cir. 2004).

limitations grounds is appropriate under FED. R. CIV. P. 12(b)(6) "only if it is apparent from the face of the complaint that the claim is time-barred." Id. at 845 (citation and internal quotation omitted). In the securities context, the statute of limitations

begins to run when a potential plaintiff has inquiry or actual notice of a violation. Id. at 846. "Whether a plaintiff had

sufficient facts to place him on inquiry notice of a claim for securities fraud . . . is a question of fact, and as such is often inappropriate for resolution on a motion to dismiss under Rule 12(b)(6)." Id. at 848 (citation and internal quotation omitted).

On the other hand, the Eleventh Circuit has, in several cases,
-22-

found it to be apparent on the face of the complaint that an action was barred by the statute of limitations. E.g., Theoharous v.

Fong, 256 F.3d 1219 (11th Cir. 2001); Franze v. Equitable Assur., 296 F.3d 1250 (11th Cir. 2002); Grippo v. Perazzo, 357 F.3d 1218 (11th Cir. 2004). Defendants bear the burden of proving the Tello v. Dean Witter Reynolds,

statute of limitations defense.

Inc., 494 F.3d 956, 974 (11th Cir. 2007) ("Tello II"). Since at least Theoharous, inquiry notice has been defined in the Eleventh Circuit as "knowledge of facts that would lead a reasonable person to begin investigating the possibility that his legal rights had been infringed." 256 F.3d at 1228. "Plaintiff

need not . . . have fully discovered the nature and extent of the fraud before he was on notice that something may have been amiss. Inquiry notice is triggered by evidence of the possibility of fraud, not full exposition of the scam itself." (citation omitted) (emphasis in original). Id. at 1228

See also Franze, 296

F.3d at 1254; Grippo, 357 F.3d at 1224; Tello v. Dean Witter Reynolds, Inc., 410 F.3d 1275, 1283 (11th Cir. 2005) ("Tello I"); Tello II, 494 F.3d at 968-78. reasonable person standard. F.3d at 1224. The Court applies an objective

Franze, 296 F.3d at 1254; Grippo, 357

Determination of the existence of inquiry notice is Tello II, 494 F.3d at 971.

done on a case-by-case basis.

The Court must limit its consideration to well-pleaded factual allegations, documents central to or referenced in the complaint, and matters judicially noticed. La Grasta, 358 F.3d at 845. The

-23-

Court may consider documents that are central to a plaintiff's claim whose authenticity is not challenged, whether the document is physically attached to the complaint or not, without converting the motion into one for summary judgment. Day v. Taylor, 400 F.3d

1272, 1276 (11th Cir. 2005); Maxcess, Inc. v. Lucent Techs., Inc., 433 F.3d 1337, 1340 n.3 (11th Cir. 2005). Accordingly, the Court

will take judicial notice of the various signed and unsigned copies of the Purchase Agreement that are attached as exhibits to

documents filed by the parties. (2) Application to Present Case: The primary issue is whether, after accepting all well-pled facts in the Second Amended Complaint as true, the contractual provisions establish that plaintiffs were on inquiry notice at a time that renders the claim time-barred. at 1288 n.12, 13. E.g., Tello I, 410 F.3d

The original Complaint (Doc. #1) was filed by

the Sewells on May 30, 2007; the First Amended Complaint (Doc. #82), which added the Eshkenazis as plaintiffs, was filed on October 19, 2007. Because there is a one-year statute of

limitations as to Counts I and II, these claims will be barred if plaintiffs were on inquiry notice of the alleged violations before May 30, 2006. See Theoharous, 256 F.3d at 1228. Likewise, because

there is a two-year statute of limitations as to Counts III and IV, these claims will be barred if plaintiffs were on inquiry notice before May 30, 2005. See id.

-24-

Some of the provisions in the Purchase Agreements upon which defendants rely to indicate constructive or inquiry notice are simply generic integration and merger provisions. Such clauses are common contractual provisions and do not, standing alone,

inherently constitute inquiry notice.

These generic provisions, Clause XVI of each of

however, did not stand alone in this case. the Sewell Purchase Agreements provided:

NO LEGAL, TAX, OR INVESTMENT ADVICE: Builder/Seller, its subsidiaries or affiliates, its ownership, management, or employees cannot be relied upon to offer advice concerning the legal, tax or investment implications of purchasing this home. Buyer hereby waives any claim against Builder/Seller, its subsidiaries or affiliates, its ownership, management, or employees that may otherwise be made concerning the legal, tax or investment performance of the purchase of this home. Buyer further acknowledges that Builder/Seller had made no guarantees that relate to appreciation of the value of this home or any other real estate, to the rental rates or vacancy factors associated with any real estate, nor to the ability to secure renters or subsequent buyers for this home or any other real estate. Buyer states that Buyer has conducted adequate research and investigation and that the decision to purchase this home was not influenced in any part by statements made by Builder/Seller with regard to legal, tax, or investment considerations . . . . (Doc. #1-4, pp. 4-5; Doc. #1-5, p. 4; Doc. #1-6, pp. 4-5.) Three

of the Eshkenazi Purchase Agreements contain this same paragraph XVI (Docs. ## 128-5, 128-6, 128-7); another three of the Eshkenazi Purchase Agreements contain the same paragraph, but designated as Paragraph XIV in those contracts (Docs. ## 128-8, 128-9, 128-10). Plaintiffs are charged with having read this provision, whether they actually did so or not. Franze, 296 F.3d at 1254-55.
-25-

In Franze, the Eleventh Circuit held that plaintiffs were on inquiry notice when they received a prospectus and variable life insurance policy because they "could have discovered the alleged misrepresentations simply by reading these documents." 1254. Id. at

The same is true of the Purchase Agreements in this case. Second Amended the Complaint lots and alleges houses repeatedly in reliance that upon

The plaintiffs

purchased

defendants' representations that plaintiffs would earn a fourteen percent (14%) rate of return; that defendants, through their sole efforts, would obtain tenants ready to immediately rent the houses and then purchase the houses after a year; that defendants would take care of everything, including procurement of tenants; that the fourteen percent (14%) profit margin would be contractually agreedupon by the tenants; and, that the fourteen percent (14%) profit margin was to be realized once the tenant refinanced the home and bought plaintiffs out of the deal. Thus, it was clear that

obtaining suitable tenants was essential to achieving the promised return of fourteen percent (14%). With plaintiffs this understanding Purchase of the investment for a opportunity, of nine

entered

Agreements

total

properties, each of which contained at least four statements that plaintiffs knew or should have known directly contradicted their understanding of the investment opportunity. Paragraphs XIV and

XVI, respectively, informed plaintiffs that: (1) they could not rely upon the advice provided by defendants or their employees,
-26-

etc., concerning the "investment implications of purchasing this home"; (2) they waived any claim against defendants or their employees, etc., concerning the "investment performance of the purchase of this home"; (3) they acknowledged that defendants "had made no guarantees that relate . . . to the rental rates or vacancy factors associated with any real estate, nor to the ability to secure renters or subsequent buyers for this home or any other real estate"; and, (4) they by were "not influenced with regard in to any part by

statements

made

defendants

investment

considerations . . . ." Reasonable investors, faced with these fundamental

discrepancies between what they had been told orally and in writing and the terms of their Purchase Agreements, would have been on inquiry notice that something was amiss with the "investment

opportunity" promoted by these defendants. The Purchase Agreements negated the entire raison d'être of the proposed investment. These contradictions are even stronger than in Gerin v. Aegon USA, Inc., 242 Fed. Appx. 631 (11th Cir. 2007), where plaintiffs asserted that they were misled by prospectuses that failed to reveal that taxdeferred, variable annuities were not generally appropriate

investments for placement into qualified retirement plans, which are already subject to tax-deferred growth. The Court found, in

that case, that appellants were placed on inquiry notice by the prospectuses, which warned in three separate sections that they should consider whether it was appropriate to buy the tax-deferred,
-27-

variable accounts,

annuities and

for

placement them to

into

already with

tax-deferred independent

advised

consult

professionals about the tax and legal consequences of such action. Therefore, the Court finds that the Purchase Agreements in this case placed plaintiffs on inquiry notice for purposes of triggering the statutes of limitations. (a) Sewell Plaintiffs: The Second Amended Complaint asserts that the Sewell

plaintiffs purchased the properties on July 15, 2005. ¶36.)

(Doc. #205,

The First Amended Complaint had asserted that the Sewell (Doc. #82,

plaintiffs purchased the properties on May 10, 2005. ¶38.)

The original Complaint contained unsigned copies of the

Purchase Agreements (Docs. ## 1-4, 1-5, 1-6) which confirmed that the Purchase Agreement was "made and entered" on May 10, 2005. These unsigned copies note at the bottom of their pages, however, that they were printed on June 6, 9, and 13, 2005. Signed copies

of the Purchase Agreements submitted by defendant D'Alessandro & Woodyard, Inc. (Docs. ## 115-2, 115-3, 115-4) show that the

Purchase Agreements were signed by the Sewells on July 15, 2005. Thus, while the Sewells are deemed to have read documents that they signed, July 15, 2005 is the earliest date in the record on which the Court can determine that the Sewells signed the Purchase

-28-

Agreements.17

Accordingly, the Court concludes that the Sewells

were on inquiry notice as of July 15, 2005. Since the original Complaint was filed on May 30, 2007, it was filed beyond the expiration of the one-year statute of limitations (July 15, 2006) for Counts I and II as to the Sewells, but within the two-year statute of limitations (July 15, 2007) for Counts III and IV as to the Sewells. Accordingly, the motions to dismiss as

to the Sewell plaintiffs based upon the statutes of limitations will be granted as to Counts I and II as to all defendants, and denied as to Counts III and IV as to all defendants. Defendant Robb asserts that plaintiffs' securities claims against him are time-barred because he was not named as a defendant in plaintiffs' original Complaint, but was added to plaintiffs' First Amended Complaint (Doc. #82) filed on October 19, 2007. First Amended Complaint was thus filed after the statute The of

limitations had run on the securities claims in Counts III and IV (Doc. #258, pp. 4, 10). Defendant Logue was likewise unnamed in

the original Complaint and was subsequently added by the First Amended Complaint. issue. Plaintiffs do not specifically address this

The Court agrees with Garcia v. Santa Maria Resort, Inc, 528 F. Supp. 3d 1283, 1291-92 (S.D. Fla. 2007), that the statute of limitations begins when the Purchase Agreement is signed.
-29-

17

Federal Rule of Civil Procedure 15(c)(1) provides, in relevant part, that an amendment to a pleading to add a party "relates back" to the date of the original pleading under certain circumstances: (B) the amendment asserts a claim or defense that arose out of the conduct, transaction, or occurrence set out­or attempted to be set out­in the original pleading; or (C) the amendment changes the party or the naming of the party against whom a claim is asserted, if Rule 15(c)(1)(B) is satisfied and if, within the period provided by Rule 4(m) for serving the summons and complaint, the party to be brought in by amendment: (i) received such notice of the action that it will not be prejudiced in defending on the merits; and (ii) knew or should have known that the action would have been brought against it, but for a mistake concerning the proper party's identity. FED. R. CIV. P. 15(c)(1)(B), (C). "The purpose of Rule 15(c) is to

permit amended complaints to relate back to original filings for statute of limitations purposes when the amended complaint is correcting a mistake about the identity of the defendant." Krupski v. Costa Cruise Lines, N.V., LLC, No. 08-16569, 2009 WL 1743654, at *2 (11th Cir. June 22, 2009) (quoting Powers v. Graff, 148 F.3d 1223, 1226 (11th Cir. 1998)). "Even the most liberal

interpretation of `mistake' cannot include a deliberate decision not to sue a party whose identity [the] plaintiff knew from the outset." Krupski, 2009 WL 1743654, at *2 (quoting Powers, 148 F.3d

at 1227). While it seems unlikely the First Amended Complaint will relate back under the Powers principles, the motion to dismiss
-30-

record is not sufficiently developed for the Court to make the necessary factual findings. Counts III and IV on Therefore, the motions to dismiss of limitations grounds as to

statute

defendants Robb and Logue will also be denied. (b) Eshkenazi Plaintiffs: The Eshkenazi plaintiffs were added with the filing of the First Amended Complaint (Doc. #82) on October 19, 2007. The First

Amended Complaint asserts that the Eshkenazi plaintiffs purchased the properties on December 15, 2004. (Doc. #82, ¶38.) The Second

Amended Complaint asserts that the Eshkenazi plaintiffs purchased the properties on various dates: one Purchase Agreement for

Henriette Eshkenazi was signed by her on March 25, 2005 and another on November 7, 2006; three of the Purchase Agreements for Moses and Therese Eshkenazi were signed on March 23, 2005; and one of the Purchase Agreements for Moses and Therese Eshkenazi was signed on September 29, 2006. (Doc. #205, ¶37.) The Court concludes that

Henriette Eshkenazi was on inquiry notice as of the date she signed her first Purchase Agreement, on March 25, 2005, and that Moses and Therese Eshkenazi were on inquiry notice as of the date they signed their first Purchase Agreement, on March 23, 2005. Since the original Complaint was filed on May 30, 2007, even assuming the First Amended Complaint relates back as to the

Eshkenazis, it was filed beyond the expiration of both the one-year statute of limitations for Counts I and II and the two-year statute of limitations for Counts III and IV.
-31-

The Court notes that the

statutes of limitations as to the Purchase Agreements that were signed in September or November 2006 would not have expired based on the signing dates of those contracts. Since all three Eshkenazi plaintiffs had signed virtually the same Purchase Agreements in March 2005, however, they were on inquiry notice of the scheme as of that date even though they continued to sign new contracts in 2006. Therefore, each of the securities claims by all of the

Eshkenazi plaintiffs are barred by the applicable statutes of limitations, and the motions to dismiss Counts I, II, III, and IV as to the Eshkenazi plaintiffs will be granted as to all

defendants. (3) Statutes of Limitations Summary: Based upon the statutes of limitations, the claim in Count I by all plaintiffs is dismissed as to all defendants; the claim in Count II by all plaintiffs is dismissed as to all defendants; the claim in Count III by Moses Eshkenazi, Therese Eshkenazi, and Henriette Eshkenazi is dismissed as to all defendants; the claim in Count IV by Moses Eshkenazi, Therese Eshkenazi, and Henriette Eshkenazi is dismissed as to all defendants; and the claims in Counts III and IV by Randolph Sewell and Daphne Sewell are not dismissed as to any defendant. Thus, Counts I and II are dismissed

in their entirety, while Counts III and IV remain viable (at least as to the statute of limitations issue) as to the Sewells only.

-32-

D. Securities Pleading Requirements: In light of these rulings, the Court need only address the pleading requirements as to the claims in Counts III and IV by the Sewell plaintiffs against the named defendants. Count III alleges liability against First Home Builders, D&W, GDW, Hovnanian, D'Alessandro, Cabrera, Kreitner, Logue, and Robb on two distinct bases: misrepresentations under Rule 10b-5(b) and "scheme liability" under Rules 10b-5(a) and (c). The portion of

Count III that relies upon Rule 10b-5(b) must allege six elements: (1) a material misrepresentation or omission; (2) made with

scienter; (3) a connection with the purchase or sale of a security; (4) reliance on the misstatement or omission; (5) economic loss; and (6) a causal connection between the material misrepresentation or omission and the loss, commonly called "loss causation."

Mizzaro, 544 F.3d at 1237.

The portion of Count III relying upon

Rule 10b-5(a), which proscribes a "device, scheme, or artifice to defraud," must allege not only that defendants concocted a plan to defraud, but that the plan was successful--that is, that the defendants, acting with scienter, misrepresented a material fact on which the plaintiffs relied to their detriment. Ledford v.

Peeples, 568 F.3d 1258, 1313 (11th Cir. 2009).

Similarly, the

portion of Count III relying upon Rule 10b-5(c) must allege an "act, practice or course of business which operates or would operate as a fraud or deceit upon any person." Rule 10b-5(c).

-33-

As to Count IV, which alleges "controlling person" liability under Section 20(A) of the Robb, Exchange and Act against the defendants Amended

D'Alessandro,

Cabrera,

Logue,

Second

Complaint must allege three elements: (1) that D&W committed a primary violation of the securities laws; (2) that the individual defendants had the power to control the general business affairs of D&W; and (3) that the individual defendants had the requisite power to directly or indirectly control or influence the specific

corporate policy which resulted in primary liability. Mizzaro, 544 F.3d at 1237; Rosenberg v. Gould, 554 F.3d 962, 966-67 (11th Cir. 2009). If the Second Amended Complaint fails to allege primary

liability under § 10(b), there can be no control liability under § 20(a). Rosenberg, 554 F.3d at 967.

(1) Particularity of Fraud Allegations: The Court has previously summarized the standards under Rule 9(b) and the Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. § 78u-4(b) (1998), as to the requirement for particularity of the fraud allegations. (See Doc. #203.) In sum, a fraud-based

complaint is required to set forth: (1) precisely what statements or omissions were made in which documents or oral representations; (2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) them; (3) the content of such statements and the manner in which they misled the plaintiff; and (4) what the defendants obtained as a consequence of the fraud. Ziemba v. Cascade Int'l, Inc., 256
-34-

F.3d 1194, 1202 (11th Cir. 2001); Garfield v. NDC Health Corp., 466 F.3d 1255, 1262 (11th Cir. 2006). The Second Amended Complaint (Doc. #205) sets forth what it purports to be "The Actionable Misrepresentations and Omissions Attributable to the Defendants," at paragraphs 26 through 35. The

false representations18 are all contained in the "First Home Lease Purchase Investment Opportunity" document provided to the Sewells and oral representations made to the Sewells that followed the "template" of that document. This portion of The Second Amended

Complaint alleges ten disclosures and representations (Doc. #205, ¶29) and one further representation (id. at ¶30), literally all of which plaintiffs contend were materially false and misleading. (Id. at ¶34 ("[t]he foregoing representations and disclosures made by the above-named Defendants were materially false and

misleading.").) In contrast, a fair reading of the Second Amended Complaint demonstrates that there are really only four misrepresentations properly alleged by plaintiffs. As set forth explicitly in Count

III, the misrepresentations are: (1) that tenants would be provided for each property purchased; (2) that investors would receive a fourteen percent (14%) rate of return on each investment property based upon a tenant occupying, and then purchasing, the property;

No omissions are identified in the Second Amended Complaint, and plaintiffs do not argue that omissions are part of their claims (Doc. #273, pp. 20-24).
-35-

18

(3) that no cash outlay would be required other than the initial down payment; and (4) that First Home Builders and/or D&W would take care of everything, including, but not limited to, the

procurement of tenants through their sole efforts. ¶86.)

(Doc. #205,

The Court concludes that these allegations in Count III,

coupled with paragraphs 27 through 28 and 31, satisfy the pleading requirements set forth above as to defendants Kreitner, D&W, First Home Builders, D'Alessandro, Cabrera, Robb, and Logue.19 (2) Scienter: All of the defendants allege that Counts III and IV by the Sewells fail to adequately allege scienter. For the reasons stated below, the Court agrees. Mizzaro contained a significant discussion of the scienter pleading requirements, concluding: Putting the PSLRA and our substantive scienter case law together yields the following stringent standard: to survive a motion to dismiss in this case, Bucks County must (in addition to pleading all of the other elements of a § 10(b) claim) plead "with particularity facts giving rise to a strong inference" that the defendants either intended to defraud investors or were severely reckless when they made the allegedly materially false or incomplete statements. 544 F.3d at 1238. The Court continued:

Any discussion of what constitutes a "strong inference" of scienter must begin with the Supreme Court's recent decision in Tellabs. In that case, the Court held that a "strong inference" of scienter means an inference that is "cogent and at least as compelling as any opposing The Court assumes, for purposes of the false statements portion of the motion, that group pleading is permissible.
-3619

inference one could draw from the facts alleged." Tellabs, 127 S. Ct. at 2510. Because the strong-inference inquiry asks "whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard," "courts must consider the complaint in its entirety," and "omissions and ambiguities count against inferring scienter." Id. at 2509, 2511. Moreover, the inquiry is "inherently comparative" because courts "must take into account plausible opposing inferences." Id. at 2510, 2509. Tellabs explained how to balance opposing inferences this way: To determine whether the plaintiff has alleged facts that give rise to the requisite "strong inference" of scienter, a court must consider plausible nonculpable explanations for the defendant's conduct, as well as inferences favoring the plaintiff. The inference that the defendant acted with scienter need not be irrefutable, i.e., of the "smoking-gun" genre, or even the "most plausible of competing inferences." . . . Yet the inference of scienter must be more than merely "reasonable" or "permissible"--it must be cogent and compelling, thus strong in light of other explanations. Id. at 2510. "In sum, the reviewing court must ask: When the allegations are accepted as true and taken collectively, would a reasonable person deem the inference of scienter at least as strong as any opposing inference?" Id. at 2511. Notably, this test is not the same as the standard we employ for summary judgment under FED. R. CIV. P. 56, because it asks what a reasonable person would think, not what a reasonable person could think. Mizzaro, 544 F.3d at 1238-39 (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007)). The Second Amended Complaint cites to eight factors to support plaintiffs' claimed showing of a strong inference of scienter.

-37-

(Doc. #205, ¶88.)

Defendants respond that the factual allegations

fail to establish the required strong inference of scienter. (a) Severe Recklessness: Plaintiffs allege that defendants acted with scienter, as evidenced by the "severe recklessness in guaranteeing rentals and profitability to unsophisticated investors with respect to a

speculative real estate investment."

(Doc. #205, ¶88(a).)

The

Eleventh Circuit has stated that "severe recklessness" "is limited to those highly unreasonable omissions or misrepresentations that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must have been aware of it." Mizzaro, 544 F.3d at 1238. The Court

concludes that severe recklessness has not been properly pled because it is a stretch to say that defendants' "guaranteed" rentals and profitability, even taking into account the "First Home Lease Purchase Investment Opportunity" offering document (Doc. #205, ¶23). (b) Artificially-inflated Purchase Price and Loan Amount: Plaintiffs also allege that defendants acted with scienter as evidenced by "the artificially-inflated purchase price associated with each lot, which resulted from the guaranteed income stream and profit being factored into the purchase price" and the inflated
-38-

loan amount associated with each construction loan (Doc. #205, ¶¶ 88(f), 88(b)). These are references to: the allegations that the

amount of the construction loan was approximately 100% of the full purchase price, which necessarily included not only First Home Builders' construction costs but also its sales profits, therefore artificially inflating the appraised value of each property (id. at ¶40); and to the claim that the prospect of "ready-made" tenants and a guaranteed rate of return made the properties more profitable to sell than unoccupied properties (id. at ¶23). The Court finds

nothing unusual about such circumstances, as profit is a legitimate component of the costs of construction and typically may be

reflected in the loan amount.

As noted above, it is a stretch to

construe the facts pled as guaranteeing rentals or profitability. Thus, this is insufficient to plead scienter. (c) Exclusive Listing Agreement: Plaintiffs also allege that defendants acted with scienter as evidenced by the "Exclusive Listing Agreement (which purported to give Defendants up to 40 months to find a tenant, when they had previously represented to Plaintiffs that a tenant would be

provided not later than the date that Plaintiffs took delivery of their properties)." (Doc. #205, ¶88(c).) The September 2005 by any

Exclusive Listing Agreement, which was never executed

plaintiff, is equally compatible with defendants' view that they never guaranteed tenant rentals or profits, and that a fair reading

-39-

by plaintiffs of their materials would have clearly established this fact. Thus, this is insufficient to plead scienter. (d) Failure to Comply with ILSFDA Disclosure Requirements and Failure to Register Securities: Plaintiffs also allege that defendants acted with scienter, as evidenced by their purported failure to comply with two

requirements of the Interstate Land Sales Full Disclosure Act, i.e., the failure to file a "Statement of Record" with the U.S. Department of Housing and Urban Development and failure to furnish plaintiffs with a "Property Report" prior to entering into

agreements with plaintiffs.

(Doc. #205, ¶88(d).)

Additionally,

plaintiffs allege that scienter is evident based upon defendants' failure to register the securities with the Securities and Exchange Commission (id. at ¶88(g)). detailed allegations The Court finds that, absent more by specific facts as to each

supported

defendant, plaintiffs' allegations that defendants failed to file a statement of record and property report, or that they failed to register the purported securities with the Securities and Exchange Commission, are simply insufficient to plead scienter. (e) Defendants' Motives and Personal Financial Gain: Finally, plaintiffs allege that defendants acted with

scienter, as evidenced by their "motive and personal financial gain." (Doc. #205, ¶88(h).) Plaintiffs allege that First Home

Builders and Hovnanian have "profited greatly" and have enjoyed "unprecedented profits" from their "fraudulent scheme." Plaintiffs
-40-

also allege that defendants D&W, GDW, D'Alessandro, Cabrera, and Kreitner have profited from the sales by receiving commissions and/or fees from said sales. (See id. at ¶¶ 89-94.) Absent more,

the obtainment of profits alone­-even substantial or unprecedented profits--is simply insufficient to plead the existence of scienter. Further, plaintiffs allege in support of their allegation of scienter, that defendants "stand to profit again" when the loans are satisfied. The Court notes, however, that the Purchase

Agreements contain a "put" provision, which states: In the event that Buyer obtains and initially closes using a construction loan and is thereafter unable to obtain or qualify for the financing that would result in the end-closing, Buyer agrees to convey, via statutory deed to Builder/Seller the home and real property, at which time, Builder/Seller shall pay and satisfy the construction loan. (Doc. #265-9, p. 7.) The Court finds that the inclusion of these

provisions in the Purchase Agreements, which provided a mechanism for plaintiffs to relinquish the properties and shift the cost of the loans back to First Home Builders in the event that plaintiffs were unable to obtain financing, further calls into question

plaintiffs' claim that defendants' singular desire for profit constitutes sufficient proof to establish a strong inference of scienter. (f) Aggregated Facts/Group Pleading: The "factual allegations may be aggregated to infer scienter and must be inferred for each defendant with respect to each violation." Phillips, 374 F.3d at 1016.
-41-

Even when the Court

considers cumulatively the facts set forth, the Court finds that there is not a strong inference of scienter as to each individual defendant. (3) Conclusion: The Court finds that the Sewell plaintiffs have failed to properly plead that defendants acted with scienter, as required to establish the Rule 10b-5 violations set forth in Count III. e.g, Mizzaro, 544 F.3d at 1237; Ledford, 568 F.3d at 1313. See, Thus,

it is unnecessary for the Court to analyze the remaining elements required as to Count III. As to Count IV, which alleges Section 20(a) "controlling person" liability against defendants D'Alessandro, Cabrera, Robb, and Logue, the Court found that the Second Amended Complaint failed to properly allege primary liability under § 10(b) or Rule 10b-5 as to defendants D&W, GDW, First Home Builders, or Hovnanian;

therefore, there can be no control person liability under § 20(a) as to defendants D'Alessandro, Cabrera, Robb and Logue. See, e.g., Rosenberg, 554 F.3d at 967. Thus, the motions to dismiss will be

granted as to the Sewell plaintiffs' claims in Counts III and IV against all defendants. V. ILSFDA Claims - Counts V and VI A. Count V ­ ILSFDA Disclosure Requirements: Plaintiffs allege in Count V that all of the defendants violated subsections 1703(a)(1)(A) and (B) of the Interstate Land

-42-

Sales

Full

Disclosure

Act

(the

"ILSFDA"),

15

U.S.C.

§§

1703(a)(1)(A), (B).20

After incorporating the first 63 paragraphs

of the Second Amended Complaint, plaintiffs assert that all of the defendants failed to comply with the mandatory disclosure regime set forth by the ILSFDA, thereby rendering the Purchase Agreements "voidable at the absolute and conditional election" of plaintiffs and causing damages to plaintiffs. (Doc. #205, ¶¶ 113, 114, 118.)

Specifically, plaintiffs allege that defendants failed to file a "statement of record" with the U.S. Department of Housing and Urban Development ("HUD"); failed to provide plaintiffs with a printed "Property Report" prior to inducing them to enter into the Purchase Agreements; failed to include contractual language in the Purchase Agreements stating that if the printed property report was not provided to t