Donovan et al. v. Flamingo Palms Villas, LLC, et al.

Filing 725

ORDER Granting in part, with leave to amend in part #585 Motion to Dismiss Crossclaim. IT IS FURTHER ORDERED that #661 Motion to Dismiss is DENIED. Signed by Chief Judge Robert C. Jones on 10/5/11. (Copies have been distributed pursuant to the NEF - EDS)

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UNITED STATES DISTRICT COURT

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DISTRICT OF NEVADA

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FRAN DONOVAN,
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Plaintiff,
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vs.
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FLAMINGO PALMS VILLAS, LLC et al.,
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Defendants.
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2:08-cv-01675-RCJ-RJJ
ORDER

The present case arises out of an alleged conspiracy to defraud investors in a

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condominium development in Las Vegas. Plaintiffs are those who purchased units in the

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Development. Defendants are those who developed, promoted, sold, appraised, and financed the

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Development. The Court has already ruled on dozens of motions to dismiss and motions for

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summary judgment. Defendant David Schwarz has now moved to dismiss the Third Amended

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Complaint (“TAC”) for failure to state a claim, and Defendant Sarasota Coast Investors, LLC

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(“Sarasota”) has moved to dismiss the Crossclaim filed against it by Defendant Las Vegas Cay

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Club Homeowners Association (“the HOA”). For the reasons given herein, the Court denies the

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motion to dismiss the TAC as against Schwarz and grants the motion to dismiss the HOA’s

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Crossclaim in part, with leave to amend in part.

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I.

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FACTS
Plaintiffs are eighty-seven individuals who, from 2005 to 2007, purchased condominium

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units in a development called the Palm Villas, Las Vegas Cay Club Condominiums (the

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“Development”). Originally, there were 139 Defendants, 121 of whom remained in the Second

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Amended Complaint (“SAC”) (ECF No. 183). Defendants are individuals and entities who

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allegedly defrauded Plaintiffs, or assisted in defrauding Plaintiffs, into purchasing units in the

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Development. The Development consists of an approximately 12-acre plot of land on which sit

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sixteen three-story apartment buildings, containing a total of 360 rental units. The three

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apartment buildings occupy 2.64 acres. The remaining 9.44 acres consist of several hundred

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parking spaces, swimming pools, and other open land (the “Common Area”).

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Beginning in 2004, Defendants began promoting and selling the 360 units in the

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Development to buyers. Defendants promoted the Development as a “resort community” that

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would be developed into a hotel. Initially, and before assuming its current name, the

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Development was called the Las Vegas Cay Club Resort & Marina. Defendants allegedly

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represented that the Development already boasted numerous valuable amenities, such as large

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covered patios, weight rooms, and spas, and that Defendants planned to enhance the

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Development with many other amenities, such as a game room, a water park, a restaurant, and

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conference facilities. By paying a non-refundable $5,000 payment, Plaintiffs were allowed to

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enter into a Reservation Agreement, which required a $10,000 non-refundable payment per unit

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reserved for purchase. Plaintiffs were later provided with a price list for the units, ranging from

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$199,000 to $499,900. After Plaintiffs invested, Defendants circulated various brochures and

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letters to Plaintiffs, informing Plaintiffs of the status of the Development. These letters and

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brochures described or displayed images of the various improvements that were being done to

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the Development. Defendants also circulated a map of the Development.

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Plaintiffs allege that the deeds they received in the purchase of each unit represented that

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Plaintiffs had an interest not only in their purchased units, but also in the Common Area, which

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included parking spaces, swimming pools, and many other valuable amenities that Defendants
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promised to add to the Development. After the deeds were signed, Plaintiffs allege that

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Defendants circulated a fifty-seven page declaration stating that Plaintiffs’ interests in the

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Development did not in fact include the Common Area, but were limited to their individually

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purchased rental units and the area common to their particular buildings. As a result, Plaintiffs’

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purchased units did not even include any of the Development’s parking spaces. Plaintiffs

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contend that the representations made in the fifty-seven page declaration conflicted with the

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advertising and other promotional representations made by Defendants, the deeds, and the

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appraisals on the units upon which Plaintiffs relied in deciding to invest in the Development.

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Plaintiffs are suing several groups of Defendants. First, Plaintiffs are suing those

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individuals who were directly behind purchasing the Development and concocting the alleged

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scheme, as well as the companies they formed to carry out the scheme. These Defendants

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include David Schwarz, F. Dave Clark, W. Scott Callahan, David Band, Stanley Kane, Craig

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Holt, Jeffrey Aeder, Kevin Connor, Harvey Birdman, Herbert Hirsch, Michael Werner, Marc

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Roberts, Harris Friedman, Donneil Hecer, and Louis Birdman. Entity Defendants in this group

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include nineteen entities formed, owned, and operated by Schwarz and Clark; two entities

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formed, owned, and operated by Schwarz, Callahan, and Clark; one entity formed, owned, and

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operated by Clark alone; three of Band’s companies; one entity formed by Holt and Schwarz;

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one entity formed by Aeder and Connor; and twelve entities formed, owned, and operated by

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Harvey Birdman, Hirsch, Werner, Roberts, Friedman, Hecer, and/or Louis Birdman. Plaintiffs

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allege that these individuals owned, operated, or managed many entities in an effort to carry out

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the alleged scheme, which entities are also named as Defendants. Collectively, Plaintiffs call

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these Defendants the “LVCC Defendants.”

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Second, Plaintiffs are suing individuals who formed, owned, and/or operated a company

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called International Association of Investors, LLC (“IAI”). These individuals include Don

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Burnham, Justin Burnham, Marc Burnham, George Homick, and Cindy Richichi. IAI was
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allegedly significantly involved with getting buyers to invest in the Development. Plaintiffs are

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also suing IAI itself, and they refer to these Defendants collectively as the “IAI Defendants.”

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Third, Plaintiffs are suing two individuals, Dianne Sealey and Faye Rivera, who served

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as appraisers of the Development’s rental units. Plaintiffs are also suing The Appraisal Team,

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LLC, the company owned or operated by Sealey and Rivera. Plaintiffs refer to these Defendants

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collectively as the “Appraiser Defendants.” Plaintiffs allege that the Appraiser Defendants were

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agents of the LVCC Defendants and worked with them to carry out the scheme by overvaluing

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the rental units by as much as 80%.

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Fourth, Plaintiffs are suing individuals or companies that acted as sales agents for the

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Development’s rental units or who acted as loan brokers in connection with the financing

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obtained to purchase the rental units: Barry Graham, Phil Graham, Georgia Ann Johnson,

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Mortgage Loan Specialists, Inc. (formed by Johnson), Ross Pickard, John Sinclair, Ricky Stokes,

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Fred Clark, Colin Brechbill, Mike Olivera, Frank Dowd, Allison Tolson, Kelly Schnorenberg,

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Todd Bradford, Susan Russell, Adiel Gorel, Dan Beit, and Trudy Herrell. Plaintiffs refer to

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these Defendants collectively as the “Seller/Broker Defendants.”

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Fifth, Plaintiffs are suing thirty-nine companies that provided the lending to Plaintiffs in

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connection with the purchase of the rental units. Plaintiffs refer to these Defendants as the

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“Financial Institution Defendants.”

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Sixth, Plaintiffs are suing Commonwealth Land Title Insurance Company (“CLTI”), one

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of the title companies involved in the transactions. Plaintiffs refer to this Defendant as the “Title

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Insurance Company Defendant.”

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Plaintiffs allege that the Defendants acted in concert in a “convoluted interrelationship

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each with the other” to carry out the alleged scheme, which resulted in the sale of 342 of the 360

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rental units in the Development, producing approximately $120 million in sales. Plaintiffs allege

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that the IAI Defendants, the Seller/Broker Defendants, and the Appraiser Defendants acted,
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directly or indirectly, with the LVCC Defendants to carry out the scheme. Plaintiffs allege that

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the Seller/Broker Defendants acted as agents for the Financial Institution Defendants, and that

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the Financial Institution Defendants thereby are charged with the fraudulent acts of the

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Seller/Broker Defendants.

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According to Plaintiffs, no improvements were ever made to the Development as was

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represented, and Plaintiffs have enjoyed no interest in their purchased units. Plaintiffs allege that

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Defendants have managed and controlled the purchased units since their sale, utilizing them for

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hotel rentals and other means, or alternatively, have stripped the units of all their furniture and

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fixtures. The LVCC Defendants will not return possession of the purchased units to Plaintiffs

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and will not account for the rental income. In the end, Plaintiffs allege that they are left with

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“title to a downgraded physical unit only, without parking, have no interest in any of, what was

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identified in the subdivision map as, the ‘common element,’ owe homeowner association dues

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and levies for maintenance of ‘common areas,’ that the PLAINTIFFS investors did not and do

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not own, and are liable for millions in loans which funds were provided to the LVCC

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DEFENDANTS which funds were not used to create a resort property as represented.” As a

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result, Plaintiffs have filed the present lawsuit seeking rescission of the sales, a cancellation of

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the related loans, a return of the monies paid, a clearance of the adverse credit reports that have

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resulted from defaults on the loans, an appointment of a receiver to take over the Development,

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and an injunction to prevent any further encumbrances against the Development.

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II.

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PROCEDURAL HISTORY
Plaintiffs filed the Complaint on November 26, 2008. (Compl., ECF No. 1). Several

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Defendants filed motions to dismiss. On March 16, 2009, Plaintiffs filed their First Amended

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Complaint (“FAC”). (FAC, ECF No. 126). The FAC differed significantly from the original

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Complaint in how it classified the various groups of Defendants and in how it directed certain

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allegations at specific Defendants. The FAC sought to remedy some of the arguments brought
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out by the various motions to dismiss.
In response to the FAC, Defendant David Band filed a renewed Motion to Dismiss. On

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June 23, 2009, the Court granted six motions to dismiss, with leave to amend. In that Order

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(ECF No. 177), the Court noted that the FAC failed to present facts demonstrating wrongs by

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particular defendants, as required under Rule 9(b) for actions sounding in fraud. Specifically as

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to Band, the FAC failed to allege what section of the Securities Act of 1933 or the Securities and

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Exchange Act of 1934 Band allegedly violated, to identify each alleged fraudulent or misleading

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statement made by Band and why it was fraudulent or misleading, to allege facts giving rise to a

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strong inference of the scienter required for fraud, or to otherwise comply with Rule 9(b). Nor

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did the FAC identify what kind of “security” was allegedly at issue. The Court dismissed the

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claims against Band as to the Securities Act of 1933 and the Securities and Exchange Act of

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1934, the fraud claims under the Interstate Land Sales Full Disclosure Act, the RICO claims, the

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common law fraud claims, and the civil conspiracy and constructive trust claims, all because of

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failure to plead with the requisite particularity under Rule 9(b). The Court also dismissed all

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claims against the Financial Institution Defendants for failure to plead agency with the requisite

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particularity under Rule 9(b). The Court noted that Plaintiffs would have to allege which

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Seller/Broker Defendants were agents of which Financial Institution Defendants in order to

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implicate any of the latter in fraud. Plaintiffs would also need to identify which specific actions

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were taken by which Seller/Broker Defendants to constitute fraud, including “time, place, and

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specific content of the false representations as well as the identities of the parties to the

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misrepresentations.” Plaintiff then filed the SAC (ECF No. 183).

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The Court later granted Defendant Stump’s motion to dismiss the SAC, but granted

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Plaintiffs leave to amend “with respect to [Stump] only.” (Order 12:24–25, Mar. 15, 2010, ECF

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No. 326). Plaintiffs filed the Third Amended Complaint (“TAC”) (ECF No. 335), which made

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more than the permitted amendments, adding a total of ten pages and changing the structure of
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the complaint in ways clearly not permitted by the order. First, Plaintiffs have re-categorized

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Defendants into new groups: (1) the Fraudulent Enterprise Defendants (“FEPD”); (2) the

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Promoter/Broker Defendants; (3) the Appraiser Defendants; (4) the Financial Institution

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Defendants; and (5) the Title Company Defendants. The FEPD consist of seventeen Individual

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FEPD and 38 Corporate FEPD, and appear to be the same, or roughly the same, as the previous

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LVCC Defendants. The 25 Promoter/Broker Defendants appear to be the same, or roughly the

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same, as the previous Seller/Broker Defendants plus the previous IAI Defendants. The Title

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Company Defendant is now sued in “two capacities.” Second, the facts section is almost

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completely rewritten. It is so different from the facts section of the SAC that a line-by-line

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comparison to identify particular differences is impracticable. The Court has denied various

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Defendants’ dispositive motions against the TAC. Schwartz has now filed his own motion to

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dismiss the TAC. Also, Sarasota has moved to dismiss the HOA’s Crossclaim.

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III.

LEGAL STANDARDS

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Federal Rule of Civil Procedure 8(a)(2) requires only “a short and plain statement of the

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claim showing that the pleader is entitled to relief” in order to “give the defendant fair notice of

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what the . . . claim is and the grounds upon which it rests.” Conley v. Gibson, 355 U.S. 41, 47

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(1957). Federal Rule of Civil Procedure 12(b)(6) mandates that a court dismiss a cause of action

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that fails to state a claim upon which relief can be granted. A motion to dismiss under Rule

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12(b)(6) tests the complaint’s sufficiency. See N. Star Int’l v. Ariz. Corp. Comm’n, 720

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F.2d 578, 581 (9th Cir. 1983). When considering a motion to dismiss under Rule 12(b)(6) for

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failure to state a claim, dismissal is appropriate only when the complaint does not give the

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defendant fair notice of a legally cognizable claim and the grounds on which it rests. See Bell

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Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). In considering whether the complaint is

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sufficient to state a claim, the court will take all material allegations as true and construe them in

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the light most favorable to the plaintiff. See NL Indus., Inc. v. Kaplan, 792 F.2d 896, 898 (9th
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Cir. 1986). The court, however, is not required to accept as true allegations that are merely

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conclusory, unwarranted deductions of fact, or unreasonable inferences. See Sprewell v. Golden

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State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). A formulaic recitation of a cause of action

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with conclusory allegations is not sufficient; a plaintiff must plead facts showing that a violation

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is plausible, not just possible. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (citing Twombly,

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550 U.S. at 555).

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“Generally, a district court may not consider any material beyond the pleadings in ruling

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on a Rule 12(b)(6) motion. However, material which is properly submitted as part of the

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complaint may be considered on a motion to dismiss.” Hal Roach Studios, Inc. v. Richard Feiner

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& Co., 896 F.2d 1542, 1555 n.19 (9th Cir. 1990) (citation omitted). Similarly, “documents

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whose contents are alleged in a complaint and whose authenticity no party questions, but which

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are not physically attached to the pleading, may be considered in ruling on a Rule 12(b)(6)

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motion to dismiss” without converting the motion to dismiss into a motion for summary

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judgment. Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994). Moreover, under Federal Rule

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of Evidence 201, a court may take judicial notice of “matters of public record.” Mack v. S. Bay

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Beer Distribs., Inc., 798 F.2d 1279, 1282 (9th Cir. 1986). Otherwise, if the district court

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considers materials outside of the pleadings, the motion to dismiss is converted into a motion for

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summary judgment. See Arpin v. Santa Clara Valley Transp. Agency, 261 F.3d 912, 925 (9th

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Cir. 2001).

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IV.

ANALYSIS

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A.

Schwarz’s Motion to Dismiss the TAC

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Schwarz argues that the TAC has not cured the defects that caused the Court to dismiss

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the First Amended Complaint (“FAC”) as against David Band. A securities fraud defendant

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must have actually made the fraudulent statement and have had “ultimate authority over the

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statement, including its content and whether and how to communicate it.” Janus Capital Grp.,
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Inc. v. First Derivative Traders, No. 09-525, Slip op. at 6 (June 13, 2011). Schwarz argues that

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the TAC lumps Schwarz in with many other Defendants, as the FAC did, and therefore does not

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satisfy the requirements of Rule 9(b) with respect to the ILSA, RICO, or misrepresentation

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claims. He is not correct. The TAC mentions Schwarz in sixteen paragraphs: (1) to identify him

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as a Florida resident (Third Am. Compl. ¶ 109(17), Mar. 31, 2010, ECF No. 335); (2) to include

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him under the FEPD (Id. ¶ 125); (3) to note that he and Clark formed, operated, and owned

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twenty-two entities in order to carry out fraud (Id. ¶¶ 132–33); (4) that Schwarz was once a

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manager of Flamingo Palms Villas, LLC and DC704-LLC (Id. ¶¶ 194–95); (5) that Schwarz,

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Clark, and Callahan formed the HOA (Id. ¶ 211); (6) that Schwarz was a director of the HOA

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and managed Flamingo Palms Villas, LLC (Id. ¶ 213); (7) that Schwarz, Clark, and Callahan

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field the CC&R that excluded the Common Area that was included on the plat map (Id. ¶¶

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214–16); (8) that Schwarz and other Defendants participated in other alleged frauds in Florida

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(Id. ¶ 278); and (9) that Schwarz was a manager of Cristal Clear Commerce LLC, DC 7 LLC,

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DC 711 LLC, and CC704 LLC (Id. ¶¶ 280–82, 292). The third and seventh allegations, as

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numbered supra, are sufficient to state a fraud claim against Schwarz. Also, there is at least

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specific jurisdiction over Schwarz in Nevada based on these allegations, and perhaps even

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general jurisdiction.

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B.

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In its answer to the TAC, the HOA included a Crossclaim against Sarasota, Flamingo

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Palms Villas, LLC, and JDI Craps, LLC. (See Answer, Countercl., and Crosscl. 24, Mar. 17,

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2011, ECF No. 566). The Crossclaim lists five causes of action: (1) Quiet Title; (2), (3), (5)

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Declaratory Judgment; and (4) Slander of Title. Only the third through fifth crossclaims are

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brought against Sarasota.

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Sarasota’s Motion to Dismiss the Crossclaim

Sarasota argues that the HOA has failed to satisfy certain perquisites to suit by a
homeowners’ association in Nevada. The HOA responds mainly by arguing the merits of its
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crossclaims, but Sarasota has not challenged the crossclaims on the merits. The HOA does not

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adequately address the gravamen of Sarasota’s motion, which is that the HOA has not obtained

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the requisite approval from its members to bring the crossclaim.

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In Nevada, a homeowners’ association must as a general rule obtain the permission of its
members to bring a lawsuit:
The association shall provide written notice to each unit’s owner of a meeting
at which the commencement of a civil action is to be considered at least 21 calendar
days before the date of the meeting. Except as otherwise provided in this subsection,
the association may commence a civil action only upon a vote or written agreement
of the owners of units to which at least a majority of the votes of the members of the
association are allocated. The provisions of this subsection do not apply to a civil
action that is commenced:

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(a) To enforce the payment of an assessment;

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(b) To enforce the declaration, bylaws or rules of the association;

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(c) To enforce a contract with a vendor;

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(d) To proceed with a counterclaim; or

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(e) To protect the health, safety and welfare of the members of the
association.

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If a civil action is commenced pursuant to this paragraph without the required
vote or agreement, the action must be ratified within 90 days after the
commencement of the action by a vote or written agreement of the owners of the
units to which at least a majority of votes of the members of the association are
allocated. If the association, after making a good faith effort, cannot obtain the
required vote or agreement to commence or ratify such a civil action, the association
may thereafter seek to dismiss the action without prejudice for that reason only if a
vote or written agreement of the owners of the units to which at least a majority of
votes of the members of the association are allocated was obtained at the time the
approval to commence or ratify the action was sought.

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Nev. Rev. Stat. § 116.31088(1)(a)–(e). Sarasota is itself a unit owner in the Development, so it

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has standing to challenge the HOA’s failure to follow procedural requirements. See id.

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§ 116.31088(3). The HOA notes that it may bring and defend claims on matters affecting the

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common-interest community under section 116.3102, but it fails to address the procedural

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requirements under section 116.31088. Sarasota notes that there is no evidence the HOA has the
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required approval, and the crossclaim does not fit under any of the enumerated exceptions.

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Next, the HOA argues that the Crossclaim is a “necessary appendage” to its compulsory

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counterclaims. But Sarasota correctly notes that crossclaims are always permissive and are not

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“necessary appendages” to counterclaims, as the HOA argues. See Gaddis v. Allison, 234 B.R.

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805, 814 (D. Kan. 1999) (“Unlike counterclaims, which are compulsory or permissive,

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crossclaims are always permissive. 6 Charles Alan Wright et al., Federal Practice and

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Procedure: Civil 2d § 1431, at 236. Therefore, ‘[a] party who decides not to bring his claim

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under Rule 13(g) will not be barred by res judicata, waiver, or estoppel from asserting it in a later

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action, as he would if the claim were a compulsory counterclaim under Rule 13(a).’ Id.”). The

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crossclaims against Sarasota are therefore a new action that must be approved or ratified by the

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HOA membership. The Nevada Legislature chose not to include “or crossclaim” after

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“counterclaim” in subsection (1)(d). In fact, the plain language of the statute indicates that any

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kind of counterclaim is exempted, whether compulsory or permissive, but crossclaims are simply

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not included under the enumerated exceptions. Perhaps this was an oversight, but even if so, the

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Legislature must correct it, not a court. The statute as written permits a homeowners’

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association to proceed with a defense and counterclaims without permission from the

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homeowners, but it does not permit a crossclaim without permission. The HOA argues that if it

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were to attempt to bring a future action in Nevada state court, it may be collaterally estopped

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even though the crossclaim here is permissive, because Nevada follows an unorthodox, minority

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rule in this area. See Exec. Mgmt., Ltd. v. Ticor Title Ins Co., 963 P.2d 465, 835–39 (Nev. 1998).

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But this is irrelevant to the fact that the HOA simply may not bring the present crossclaims

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unless and until it obtains the required permission from its members. The statute exempts

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“counterclaim[s],” not “claims which may be precluded if not brought in existing litigation.”

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At oral argument, the HOA also argued that the Crossclaim was brought to force payment
of an assessment. It does appear that one of the declaratory judgment crossclaims against
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Sarasota seeks a declaration that Sarasota is liable to pay HOA fees for those units it owns. The

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HOA also argued that the law requires CC&R to include common elements, but subsection (b) of

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the statute only creates an exemption for actions to enforce the HOA’s own ruled, not the laws of

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the state.
CONCLUSION

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IT IS HEREBY ORDERED that the Motion to Dismiss Crossclaim (ECF No. 585) is

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GRANTED in part, with leave to amend in part. All crossclaims against Sarasota are dismissed,

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except the crossclaim for declaratory judgment concerning HOA fees it is alleged to owe. The

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HOA may also amend the dismissed portions of the crossclaim within 120 days from the date of

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this order if it can obtain permission to do so from a majority of those HOA members voting,

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after 30 days notice to all HOA members, and after discounting any vote by Sarasota or any

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other Defendants. Sarasota may not lobby HOA members against such a vote or otherwise

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interfere.

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IT IS FURTHER ORDERED that the Motion to Dismiss (ECF No. 661) is DENIED.

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IT IS SO ORDERED.

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Dated this 5th day of October, 2011.

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ROBERT C. JONES
R C.
United States District Judge
s District

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