De Marco et al v. LaPay et al

Filing 195

MEMORANDUM DECISION and ORDER granting in part and denying in part 141 Motion for Partial Summary Judgment; granting 157 Motion for Leave to File. Signed by Judge Ted Stewart on 08/20/2012. (tls)

IN THE UNITED STATES COURT FOR THE DISTRICT OF UTAH
CENTRAL DIVISION

JAMES DEMARCO, et al.,
Plaintiffs,

MEMORANDUM DECISION AND
ORDER GRANTING IN PART AND
DENYING IN PART DEFENDANTS’
MOTION TO DISMISS AND FOR
PARTIAL SUMMARY JUDGMENT

vs.

MICHAEL LAPAY, et al.,

Case No. 2:09-CV-190 TS

Defendants.

This matter is before the Court on Defendants’ Paladin Development Partners, L.L.C.
(“Paladin”), Michael LaPay, Rory Murphy, George Bryan, and Chris Conabee (collectively
“Defendants”) Motion to Dismiss and for Partial Summary Judgment. For the reasons discussed
below, the Court will grant the Motion in part and deny it in part.
I. BACKGROUND
This case arises out of a real estate development in Park City, Utah. The specific facts
pertinent to this Motion will be discussed in more detail below, but the basic facts are as follows.
Defendant Paladin developed and marketed the Silver Star at Park City Development. Plaintiffs

1

entered into Real Estate Purchase Contracts to purchase four units within the development.
Plaintiffs eventually closed on only one of the units, Unit C-19.
Plaintiffs bring a breach of contract claim in relation to each of the units. Defendants do
not move for dismissal or summary judgment on any of the breach of contract claims. In
addition to their contract claims, Plaintiffs bring claims for intentional misrepresentation, fraud
and deceit via false statements; intentional misrepresentation, fraud and deceit via nondisclosure; negligent misrepresentation; negligence; constructive fraud; rescission of contract and
declaratory relief; and violation of the Federal Interstate Land Sales Full Disclosure Act.
II. STANDARD OF REVIEW
Defendants move under both Rule 12(c) and Rule 56 of the Federal Rules of Civil
Procedure.
Summary judgment is proper if the moving party can demonstrate that there is no genuine
dispute as to any material fact and it is entitled to judgment as a matter of law.1 In considering
whether a genuine dispute of material fact exists, the Court determines whether a reasonable jury
could return a verdict for the nonmoving party in the face of all the evidence presented.2 The
Court is required to construe all facts and reasonable inferences in the light most favorable to the
nonmoving party.3

1

Fed. R. Civ. P. 56(a).

2

See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986); Clifton v. Craig, 924
F.2d 182, 183 (10th Cir. 1991).
3

See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986);
Wright v. Sw. Bell Tel. Co., 925 F.2d 1288, 1292 (10th Cir. 1991).
2

“A motion for judgment on the pleadings under Rule 12(c) is treated as a motion to
dismiss under Rule 12(b)(6).”4 The same standard is used when evaluating 12(b)(6) and 12(c)
motions.5 In considering a motion to dismiss for failure to state a claim upon which relief can be
granted under Rule 12(b)(6), all well-pleaded factual allegations, as distinguished from
conclusory allegations, are accepted as true and viewed in the light most favorable to Plaintiffs as
the nonmoving party.6 Plaintiffs must provide “enough facts to state a claim to relief that is
plausible on its face,”7 which requires “more than an unadorned, the-defendant-unlawfully
harmed-me accusation.”8 “A pleading that offers ‘labels and conclusions’ or ‘a formulaic
recitation of the elements of a cause of action will not do.’ Nor does a complaint suffice if it
tenders ‘naked assertion[s]’ devoid of ‘further factual enhancement.’”9 “The court’s function on
a Rule 12(b)(6) motion is not to weigh potential evidence that the parties might present at trial,
but to assess whether the plaintiff’s complaint alone is legally sufficient to state a claim for
which relief may be granted.”10 As the Court in Iqbal stated, “only a complaint that states a
plausible claim for relief survives a motion to dismiss. Determining whether a complaint states a

4

Atl. Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d 1138, 1160 (10th Cir. 2000).

5

Jacobsen v. Deseret Book Co., 287 F.3d 936, 941 n.2 (10th Cir. 2002).

6

GFF Corp. v. Associated Wholesale Grocers, Inc., 130 F.3d 1381, 1384 (10th Cir.

7

Bell Atl. Corp. v. Twombly, 550 U.S. 544, 547 (2007).

8

Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009).

9

Id. (quoting Twombly, 550 U.S. at 557) (alteration in original).

1997).

10

Miller v. Glanz, 948 F.2d 1562, 1565 (10th Cir. 1991).
3

plausible claim for relief will . . . be a context-specific task that requires the reviewing court to
draw on its judicial experience and common sense. But where the well-pleaded facts do not
permit the court to infer more than the mere possibility of misconduct, the complaint has
alleged—but it has not show[n]—that the pleader is entitled to relief.”11
III. DISCUSSION
Defendants first argue that all of Plaintiffs’ tort claims are barred by the economic loss
rule. Defendants next argue that Plaintiffs’ tort claims are deficient as a matter of law.
Defendants further argue that Plaintiffs’ Interstate Lands Sales Full Disclosure Act fails. Finally,
Defendants argue that Plaintiffs’ claim for piercing the corporate veil should be dismissed. Each
argument will be discussed below.
A.

ECONOMIC LOSS RULE
Defendants’ first argument is that all of Plaintiffs’ tort-based claims are barred by the

economic loss rule.
“The economic loss rule is a judicially created doctrine that marks the fundamental
boundary between contract law, which protects expectancy interests created through agreement
between the parties, and tort law, which protects individuals and their property from physical
harm by imposing a duty of reasonable care.”12 “Simply put, the economic loss rule holds that

11

Iqbal, 129 S. Ct. at 1949-50 (alteration in original) (internal quotation marks and
citations omitted).
12

SME Indus., Inc. v. Thompson, Ventulett, Stainback & Assoc., Inc., 28 P.3d 669, 680
(Utah 2001).
4

‘economic damages are not recoverable in negligence absent physical property damage or bodily
injury.’”13
Importantly here, the Utah Supreme Court has stated that at least some fraud claims “lie
outside the scope of the economic loss rule.”14 In particular, a claim for fraud in the inducement
is not barred by the economic loss rule in Utah. As the Tenth Circuit has stated, interpreting
Colorado law,
Where a negligence claim is based only on breach of a contractual duty, the law of
contract rightly does not punish the breaching party, but limits the breaching
party’s liability to damages that naturally flow from the breach. It is an altogether
different situation where it appears two parties have in good faith entered into a
contract but, in actuality, one party has deliberately made material false
representations of past or present fact, has intentionally failed to disclose a
material past or present fact, or has negligently given false information with
knowledge that the other party would act in reliance on that information in a
business transaction with a third party. The breaching party in this latter situation
also is a tortfeasor and may not utilize the law of contract to shield liability in tort
for the party’s deliberate or negligent misrepresentations.15
In this case, Plaintiffs argue that their tort claims are not barred by the economic loss rule
because they are claims for fraud in the inducement. A review of Plaintiffs’ Second Amended
Complaint reveals that many of Plaintiffs’ tort claims are based on alleged statements or

13

Id. (quoting Am. Towers Owners Ass’n, Inc. v. CCI Mech., 930 P.2d 1182, 1190 (Utah

1996)).
14

Davencourt at Pilgrims Landing Homeowners Ass’n v. Davencourt at Pilgrims
Landing, LC, 221 P.3d 234, 247 (Utah 2009); see also SME Indus., Inc., 28 P.3d at 680 n.8
(stating that “plaintiffs may recover purely economic losses in cases involving intentional torts
such as fraud, business disparagement, and intentional interference with contract”).
15

United Int’l Holdings, Inc. v. Warf (Holdings) Ltd., 210 F.3d 1207, 1227 (10th Cir.

2000).
5

omissions made to induce Plaintiffs to enter into the Real Estate Purchase Contracts.16
Defendants acknowledge that the economic loss rule would not apply to such claims.17 Thus, to
the extent that Plaintiffs allege pre-contract fraud claims, these claims are not barred by the
economic loss rule.
In addition, Plaintiffs argue that certain of their claims are not barred because Defendants
owed them an independent duty based on certain relationships.18 Such claims would also not be
barred by the economic loss rule. 19
As a result, the Court must reject Defendants’ argument that all of Plaintiffs’ tort-based
claims are barred by the economic loss rule. Rather, the Court will consider each of Plaintiffs’
claims and will address the applicability of the economic loss rule where pertinent.
B.

TORT CLAIMS
1.

Intentional Misrepresentation, Fraud and Deceit via False Statement

Plaintiffs’ Fifth Cause of Action alleges intentional misrepresentation, fraud and deceit
via false statements. Plaintiffs specifically point to five statements allegedly made by Defendants

16

See Docket No. 104, ¶¶ 108, 131.

17

Docket No. 153, at 10.

18

See Yazd v. Woodside Homes Corp., 143 P.3d 283, 289 (Utah 2006) (holding that a
contractor-seller owes an independent duty to a home purchaser to disclose known material
information regarding the real property); Hermansen v. Tasulis, 48 P.3d 235, 241 (Utah 2002)
(holding that real estate brokers owe an independent duty “to disclose facts materially affecting
the value or the desirability of the property that were known to him”); Loveland v. Orem City
Corp., 746 P.3d 763, 769 (Utah 1987) (imposing a duty of care upon a developer to disclose to
the purchaser latent conditions that made subdivided lots unsuitable).
19

See Davencourt at Pilgrims Landing Homeowners Ass’n, 221 P.3d at 247.
6

that Plaintiffs assert are false and fraudulent. First, Plaintiffs allege that Defendants represented
that the units would be competed in 18 months. Second, Plaintiffs allege that an agent of
Paladin/Prudential told Plaintiffs that the units would appreciate in value. Third, an agent of
Paladin/Prudential stated that the owners of the units would receive substantial rental income.
Fourth, the same agent stated that one of the units, C-19, was complete, had a legitimate
Temporary Certificate of Occupancy (“TCO”) and all that was required to obtain a Certificate of
Occupancy (“CO”) was to plant the landscaping. Finally, Plaintiffs allege that Plaintiffs made
false statements concerning the sinking of the entry corner at unit C-19.
“‘[I]n order to prevail on a claim of fraud [or misrepresentation], all the elements of fraud
must be established by clear and convincing evidence.’”20 These elements include:
(1) a representation; (2) concerning a presently existing material fact; (3) which
was false; (4) which the representer either (a) knew to be false, or (b) made
recklessly, knowing that he had insufficient knowledge on which to base such
representation; (5) for the purpose or inducing the other party to act upon it; (6)
that the other party, acting reasonably and in ignorance of its falsity; (7) did in fact
rely upon it; (8) and was thereby induced to act; (9) to his injury and damage.21
a.

Completion Date

Plaintiffs allege that Defendants represented that each unit in the development would be
completed within 18 months. In response, Defendants each present declarations stating that they
believed the units would be constructed within the 18-month period and that they never made any

20

Kuhre v. Goodfellow, 69 P.3d 286, 291 (Utah Ct. App. 2003) (quoting Secor v. Knight,
716 P.2d 790, 794 (Utah 1986)) (alteration in original).
21

Secor, 716 P.2d at 794 (citations omitted).
7

representations to Plaintiffs regarding the completion dates that was inaccurate or untrue.22 In
reply, Plaintiffs present evidence demonstrating that at the time Defendants made the alleged
statements concerning the completion of the units, the project was already behind schedule.
From this, Plaintiffs argue, a jury could infer that Defendants knew the units would not be
completed in the 18-month period and made the alleged statements to induce Plaintiffs to
purchase their units.
Having reviewed the evidence, the Court finds that Plaintiffs have presented evidence
upon which a reasonable jury could find that Defendants, when they allegedly made the
statements concerning the completion dates, knew those statements were false. It is undisputed
that the Silver Star project encountered difficulties from the outset. It is further undisputed that
at the time Defendants made the alleged misrepresentations, the project was well behind
schedule. Of particular importance to this issue is the evidence related to the building of the
retaining wall.
Harmon Tobler, who was the project manager for the general contractor involved in the
construction of the Silver Star project, testified that finishing the retaining wall was necessary
before construction on the rest of the project could commence.23 Mr. Tobler further testified that
completion of the wall delayed the entire project.24 However, he clarified that it would “[n]ot

22

Docket No. 142, Ex. B, ¶ 4; id., Ex. C, ¶ 4; id., Ex. D, ¶ 4; id., Ex. E, ¶ 6.

23

Docket No. 147, Ex. 9, Depo. of Harmon Tobler, 73:21-74:11.

24

Id. at 74:12-15.
8

necessarily” delay the entire project the same amount of time that the wall was delayed.”25 From
this testimony, the Court finds that a jury could find that Defendants’ statements concerning the
18-month completion window were false at the time they were made. There is further evidence
to support the other elements of fraud. Therefore, summary judgment must be denied on this
issue.
b.

Appreciate in Value and Receive Substantial Rental Income

Plaintiffs’ next two claims concern Defendants’ alleged statements that their units would
appreciate in value and that they would receive substantial rental income.
As an initial matter, Defendants deny making such a statement though, at the time, they
believed the units would appreciate in value.26 However, Plaintiffs have provided testimony that
Defendants did make such statements. Regardless of whether the statements were made,
Plaintiffs cannot, and have not, presented evidence of reasonable reliance. In Utah, “a party
cannot reasonably rely upon oral statements by the opposing party in light of contrary written
information.”27 Here, the contracts explicitly state:
Buyer acknowledges that neither Seller nor any of its agents or employees has
made any warranties or representations upon which Buyer has relied concerning:
(i) the investment value of the Silver Star residence; [or] (ii) the possibility or
probability of profit or loss resulting from ownership or rental of the Silver Star
residence . . . . Buyer acknowledges that the market value of the Silver Star
Residence may change from time to time due to market factors beyond the control
of the Buyer or Seller.

25

Id. at 74:16-19.

26

Docket No. 142, Ex. B, ¶ 5; id., Ex. C, ¶ 5; id., Ex. D, ¶ 5; id., Ex. E, ¶ 5.

27

Gold Standard, Inc. v. Getty Oil Co., 915 P.2d 1060, 1068 (Utah 1996).
9

Based on this language, Plaintiffs could not reasonably rely on Defendants’ alleged precontract statements that the units would appreciate in value or generate substantial rental income.
Therefore, summary judgment in favor of Defendants is warranted on this claim.
c.

Unit C-19

Plaintiffs’ next two claims concern Unit C-19, but are better addressed as fraudulent nondisclosure claims. Therefore, these claims for fraudulent misrepresentation will be dismissed
and Plaintiffs’ claims relating to fraudulent non-disclosure will be discussed in further detail
below.
2.

Intentional Misrepresentation, Fraud and Deceit via Non-disclosure

Plaintiffs allege in their Sixth Cause of Action that Defendants concealed and withheld
certain facts from Plaintiffs of which Defendants were aware at or before the time Plaintiffs
signed the Real Estate Purchase Contracts. Specifically, Plaintiffs argue that Defendants failed to
disclose soil settlement issues with regard to Unit C-19.
To prevail on a claim of fraudulent nondisclosure, a plaintiff must prove by clear and
convincing evidence that (1) the defendant had a legal duty to communicate information, (2) the
defendant knew of the information he failed to disclose, and (3) the nondisclosed information
was material.28
In Yazd v. Woodside Homes Corporation, the Utah Supreme Court held that “a
developer-builder may owe his buyer a duty to disclose information known to him concerning
real property, including property other than that conveyed to the buyer, when that information is

28

Hess v. Canberra Dev. Co., LC, 254 P.3d 161, 169 (Utah 2011).
10

material to the condition of the property purchased by the buyer.”29 In this case, there does not
appear to be a dispute that Defendants owed Plaintiffs a duty and that they were aware of the
infomation they allegedly failed to disclose. Thus, the question becomes whether the information
was material. In Yazd, the court clarified that “[t]o be material, the information must be
“important.” Importance, in turn, can be gauged by the degree to which the information could be
expected to influence the judgment of a person buying property or assenting to a particular
purchase price.”30
With this in mind, the Court turns to the facts concerning the soil issues at and around
Unit C-19. Portions of the Silver Start project were built on mine overburden. As a result of
this, Defendants encountered various difficulties during construction, including problems with
the retaining wall discussed above. Specific to Unit C-19 there are three different events of
importance. The first event occurred early on in the building of the project and relates to the
entry corner. During building, the entry corner of Unit C-19 started to sink. Defendants became
aware of this issue during construction and were able to take remedial measures. There is no
evidence of any ongoing soil issues related to the entry corner.
Next, in August 2007, Defendants were informed by their geotechnical consultants of
voids beneath the garage slabs in Units 18-19 and 21-22.31 The geotechnical consultant felt that
it was unnecessary to remove the slabs, provided that the voids were filled “with a low strength

29

Yazd, 143 P.3d at 289.

30

Id.

31

Docket No. 153, Ex. J, Letter from Bill Gordon.
11

sand-cement flowable fill.”32 Defendants have presented evidence that they followed the
recommendation of their consultant and injected grout under the garage slab.33 As Defendants
believed this resolved the issue, they thought there was no reason to disclose this to Plaintiffs,
who closed on Unit C-19 in November 2007.
The final soil issue occurred the following year. An issue with a water pipe fitting at
another unit caused flooding and substantial damage. Defendants were concerned that the cause
of this problem was the result of inadequate compaction and support under the garage slab of that
unit. At that time, there was no evidence of insufficient compaction or support under the garage
slab in Unit C-19. However, because of the incident in the other unit, Defendants decided to take
remedial action at all similarly designed units, including Unit C-19. As a result, Defendants
removed and replaced the garage slab from Unit C-19, despite their being no signs that
replacement was required.34 As with the entry corner, there is no evidence before the Court of
continued settlement with the garage slab.
As stated, the Court must determine whether the prior, resolved soil issues constitute
material information. In arguing that it does, Plaintiffs conflate these two soil issues relating to
the garage slab. Doing so, Plaintiffs argue that Defendants were aware of settlement issues as
early as August 2007 and failed to disclose them in order to induce Plaintiffs to close. The
evidence, however, is not so straightforward. Defendants became aware of a settlement issue in

32

Id.

33

Docket No. 142, Ex. D, Decl. of Chris Conabee at ¶ 9.

34

Docket No. 153, Ex. K, Letter from Steve Perkins.
12

August 2007 and took steps to correct it. As they believed the issued had been resolved,
Defendants believed there was nothing to disclose. Then, the following year, when a similarly
designed unit had an issue that caused flooding, Defendants took steps to make sure that the
same thing did not happen in other units.
Based on the information before it, the Court cannot find that Plaintiffs have presented a
genuine issue of material fact concerning soil settlement. In essence, Plaintiffs seek to impose a
duty on developers requiring that they disclose all information that occurs during construction.
This is not what is required under Utah law. Rather, under Utah law, a developer need only
disclose material information.35 Plaintiffs have presented insufficient evidence upon which a
reasonable jury could find that the information Defendants allegedly failed to disclose in this
instance was material. Therefore, summary judgment in favor of Defendants is warranted on this
claim.
Plaintiffs assert a number of other allegations under their fraudulent non-disclosure claim.
The majority of these claims are barred by the economic loss rule because they occurred postcontract. Further, many of the alleged defects are not of the type that must be disclosed as they
are not material. Therefore, summary judgment in favor of Defendants is proper on Plaintiffs’
Sixth Cause of Action.

35

See Yazd, 143 P.3d at 289; see also Smith v. Moore, 158 P.3d 562, 573 (Utah 2007)
(holding that contractor-seller owes a duty to disclose material information to home purchaser).
13

3.

Negligent Misrepresentation

Plaintiffs’ Seventh Cause of Action is largely repetitive of Plaintiffs’ Fifth and Sixth
Causes of Action. However, rather than arguing that Defendants made intentional
misrepresentations, Plaintiffs allege that the representations discussed above were negligently
made. For the same reasons discussed above, summary judgment in favor of Defendants will be
granted on this claim, with the exception of Plaintiffs’ negligent misrepresentation claim based
on the 18-month completion date. The Court will permit Plaintiffs to pursue a negligent
misrepresentation in relation to the completion date as an alternative to their fraud claim.
4.

Negligence and Constructive Fraud

Plaintiffs’ Eighth Cause of action alleges negligence against Defendant LaPay.36
Plaintiffs allege that Defendant LaPay, as a licensed real estate professional, owed a duty to
Plaintiffs to: (1) exercise reasonable skill and care in the exercise of his agency duties; (2)
perform his duties with care and dilligence; and (3) disclose to Plaintiffs all information in his
possession that was relevant and material to the purchase of the units that could affect Plaintiffs’
decision. Plaintiffs further allege that Defendant LaPay breached his duty by failing to
investigate and disclose to Plaintiffs the material facts that were either misrepresented or not
disclosed.

36

Defendants originally brought their Eighth and Ninth Causes of Action against
Defendant Murphy as well, but have since abandoned those claims against him.
14

Under Utah law, real estate brokers owe a duty to disclose facts materially affecting the
value or the desirability of the property that were known to them.37 For the same reasons set
forth above, the Court finds that Plaintiffs have failed to present evidence that Defendant LaPay
failed to disclose such facts.
Plaintiffs’ Ninth Cause of Action alleges constructive fraud against Defendant LaPay. A
claim for “[c]onstructive fraud requires two elements: (i) a confidential relationship between the
parties; and (ii) a failure to disclose material facts.”38 Here, Plaintiffs have failed to present
evidence that Defendant LaPay was aware of and failed to disclose material facts. Therefore,
summary judgment is proper on this claim. However, as discussed above, Plaintiffs’ Fifth Cause
of Action remains against Defendant LaPay.
C.

RESCISSION OF CONTRACT AND DECLARATORY RELIEF
Plaintiffs’ Tenth Cause of Action is for rescission of contract and declaratory relief.

Plaintiffs state that, because of the fraud involved, the Real Estate Purchase contracts are
voidable and should be rescinded.
If Defendants committed fraud to induce Plaintiffs to enter into the Real Estate Purchase
Contracts, then those agreements are voidable.39 As the Court has held that at least one of
37

Hermansen, 48 P.3d at 241 (holding that real estate brokers owe an independent duty
“to disclose facts materially affecting the value or the desirability of the property that were
known to him”).
38

Jensen v. IHC Hosps., Inc., 944 P.2d 327, 339 (Utah 1997).

39

Baldwin v. Burton, 850 F.2d 1188, 1193 (Utah 1993); see also Restatement (Second) of
Contracts § 164(1) (“If a party’s manifestation of assent is induced by either a fraudulent or a
material misrepresentation by the other party upon which the recipient is justified in relying, the
contract is voidable by the recipient.”).
15

Plaintiffs’ fraud claims survive summary judgment, summary judgment cannot be granted on this
claim.
D.

FEDERAL INTERSTATE LAND SALES FULL DISCLOSURE ACT
Plaintiffs’ Eleventh Cause of Action alleges a violation of the Federal Interstate Land

Sales Full Disclosure Act. Plaintiffs allege that Defendants violated the Act because: (1) they did
not make a statement of record; (2) they did not file a property report; (3) they engaged in
prohibited types of advertising; (4) they made false and fraudulent statements to Plaintiffs; and
(5) they did not disclose many material facts relating to the development which would have
affected Plaintiffs’ decision to purchase units in the development.
Defendants argue that the Federal Interstate Land Sales Full Disclosure Act does not
apply to this action. Specifically, Defendants point to 15 U.S.C. § 1702(a)(2) which provides
that the Act does not apply to “the sale or lease of any improved land on which there is a
residential, commercial, condominium, or industrial building, or the sale or lease of land under a
contract obligating the seller or lessor to erect such a building thereon within a period of two
years.” Defendants argue that the Real Estate Purchase Contracts required substantial
completion of the units within 18 months. Therefore, this exception is at issue and the Act does
not apply.
In response, Plaintiffs argue that § 1702(a)(2) requires an unqualified and unconditional
guarantee to complete the building within two years, and that the Real Estate Purchase Contracts
do not provide for such a guarantee. Plaintiffs argue that this is the case because: (1) the

16

Contracts bar plaintiffs from suing for contract damages for Defendants’ failure to complete the
construction by the 18-month deadline; and (2) the Contracts contain a force majeure clause that
purports to be broader in scope than the legal defenses of impossibility and frustration of
purpose. Each of these arguments will be discussed in turn.
1.

Limitation of Damages

Plaintiffs’ first argument concerns the language of the exemption which obligates the
seller to erect the building within a period of two years. Plaintiffs argue that, through the
Contract language, Defendants were not truly obligated to complete the building. Specifically,
Plaintiffs point to language in the Contract that limits Plaintiffs’ damages if the seller defaults to
a return of the earnest money deposit and specific performance. Plaintiffs argue that since the
Contracts do not allow for contract damages, Defendants’ obligation to finish the project within
the time frame permitted is illusory.
The Tenth Circuit has not ruled on this issue. However, the Eleventh Circuit recently
rejected the precise argument being made by Plaintiffs. In Stein v. Paradigm Mirasol, LLC,40 the
contract specified that the condominium at issue would be built within two years. In addition,
the contract contained a force majure clause and limited the plaintiffs’ available remedies to
specific performance or getting back their deposit with interest and any actual damages. The
contract did not allow for speculative, punitive, or special damages. The plaintiffs argued that
the two-year completion exemption did not apply because the limitation of damages provision
rendered the obligation illusory.

40

586 F.3d 849 (11th Cir. 2009).
17

The Eleventh Circuit considered the exemption set out in § 1702(a)(2) and specifically
the meaning of the word “obligating” in that provision. This required the court look at both
federal and state law. The court considered federal law in determining the term “obligating” and
looked to state law “to see what remedies the [plaintiffs] would have under the contract if
[defendant] had not constructed the condominium within the two-year period specified in the §
1702(a)(2) exemption.”41
In considering the term “obligating,” the court held that “the § 1702(a)(2) exemption
applies when a contract imposes a legal duty on the developer to perform his promise to
construct the condominium or other building within two years.”42 The nature and extent of the
duty imposed by the contract becomes “a matter of state contract law.”43
The court noted that, “[i]f it appeared to the [plaintiffs] that [Defendant] was not going to
complete construction within two years, they had available the remedy of specific performance to
force [defendant] to live up to its agreement.”44 The plaintiffs could have also sought rescission,
got their money back, and recovered actual damages.45 The plaintiffs argued that these remedies
were insufficient to “obligate” the defendant to construct the condominium in two years without
the remedies of special, consequential, punitive, speculative, and indirect damages.

41

Id. at 854.

42

Id.

43

Id.

44

Id. at 855.

45

Id.
18

The Eleventh Circuit rejected this argument, holding that “[s]pecific performance or
injunctive relief, if vigorously pursued, ordinarily will be enough to force a seller to fulfill its
contractual obligations within the time a contract requires.”46 Because the contract allowed the
plaintiffs to pursue the remedy of specific performance, the court found that the contract
“obligated” the defendant to complete the project within the two-year window.
Plaintiffs argue that the Court should not follow the approach in Stein, but should rather
follow the approach taken by the Florida Supreme Court in Samara Development Corp. v.
Marlow.47 In Samara, the court addressed the issue of whether a contract was exempt under the
Interstate Land Sales Full Disclosure Act when the contract restricted the buyer’s remedies to a
return of the deposit or specific performance, but did not allow for the alternative remedy of a
suit for damages. The court held that in order for the exemption to apply, “the contract must
unconditionally obligate the developer to complete construction within two years and must not
limit the purchaser’s remedies of specific performance or damages.”48
The Eleventh Circuit’s analysis in Stein is more persuasive than that in Samara. The
Samara court relied heavily on Florida law to determine wether an obligation is illusory. In so
doing, the court stated “that without the availability of at least both specific performance and
damages the obligation to complete the construction within two years is illusory.”49 The court

46

Id.

47

556 So. 2d 1097 (Fla. 1990).

48

Id. at 1098.

49

Id. at 1101.
19

noted that “[s]pecific performance alone is not sufficient because the developer could sell the
property to a third party in the interim, thereby nullifying the availability of specific
performance.”50 The Eleventh Circuit rejected this argument, finding that specific performance
would generally be sufficient. The court further rejected the argument that specific performance
would not be sufficient because the builder could sell the property. The court noted that,
notwithstanding the contract provision, Florida law permitted damages when a seller frustrates
the buyer’s specific performance right.51
It is helpful to consider Utah law on specific performance when deciding this issue.52
Utah law provides that “where a plaintiff seeks specific performance of a contract and that relief
is not available, the trial court may grant monetary damages for breach of contract.”53 Thus,
“[w]hen specific performance is granted, it is the obligation of the courts to evaluate the equities
of the parties and to formulate a remedy that seeks to place the parties in a position as similar as
possible to that which they would have been in had the conveyance been made according to the
terms of the contract.”54 Therefore, under Utah law, Plaintiffs’ remedy is not illusory. Plaintiffs

50

Id.

51

Stein, 586 F.3d at 856.

52

See id. at 854 (“The nature and extent of the duty a contract imposes . . . is a matter of
state contract law.”).
53

Richards v. Baum, 914 P.2d 719, 721 (Utah 1996); see also Wagner v. Anderson, 250
P.2d 577, 580 (Utah 1952) (stating that “when decreeing specific performance, a court of equity
may award damages also to the plaintiff if the decree of specific performance will not give
complete relief”).
54

Eliason v. Watts, 615 P.2d 427, 430 (Utah 1980).
20

had the ability to sue for specific performance and a court sitting in equity has the authority to
award Plaintiffs such damages necessary to place them “in a position as similar as possible to
that which they would have been in had the conveyance been made according to the terms of the
contract.”55 Therefore, the Court finds that the limitation of damages provision in the Contracts
does not remove the Contracts from the exception to the Interstate Land Sales Full Disclosure
Act.
This conclusion is supported by the guidelines on the Interstate Land Sales Full
Disclosure Act provided by the United States Department of Housing and Urban Development
(“HUD Guidelines”). The HUD Guidelines provide the following statement in determining
whether the exemption in § 1702(a)(2) applies:
The contract must not allow nonperformance by the seller at the seller’s
discretion. Contracts that permit the seller to breach virtually at will are viewed as
unenforceable because the construction obligation is not an obligation in reality.
Thus, for example, a clause that provides for a refund of the buyer’s deposit if the
seller is unable to close for reasons normally within the seller’s control is not
acceptable for use under this exemption. Similarly, contracts that directly or
indirectly waive the buyer’s right to specific performance are treated as lacking a
realistic obligation to construct. HUD’s position is not that a right to specific
performance of construction must be expressed in the contract, but that any such
right that purchasers have must not be negated. For example, a contract that
provides for a refund or a damage action as the buyer’s sole remedy would not be
acceptable.56
As set forth above, the HUD Guidelines only state that contracts waiving a buyer’s right
to specific performance are treated as lacking a realistic obligation to construct. The HUD

55

Id.

56

Supplemental Information to Part 1710: Guidelines for Exemptions Available Under the
Interstate Land Sales Full Disclosure Act (emphasis added).
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Guidelines mention nothing about contract that waive the right to receive contract damages.
Thus, it appears that HUD, the agency responsible for providing guidance on the Interstate Land
Sales Full Disclosure Act, only sees those contracts that limit the ability to seek specific
performance as illusory. As the Contracts here specifically provide for the right of specific
performance, the exemption in § 1702(a)(2) applies here.
2.

Force Majeure Clause

Plaintiffs also argue that the force majeure clause in the Contracts makes the exemption
in § 1702(a)(2) inapplicable.
The clause at issue states:
In the event the Silver Star Residence is not Substantially Complete by the date
provided in Section 24(c) of this Contract due to interruption of transport,
unavailability of materials, strikes, fire, flood, weather, governmental regulations,
acts of God, or other similar occurrences beyond the control of Seller, the
Substantial Completion Deadline shall be extended for a reasonable period of time
based on the nature of the delay.
The Eleventh Circuit in Stein addressed a substantially similar clause and found that it did
not render a promise to complete within two years illusory. The clause at issue in Stein covered
“events that may or may not happen, but whether they do is ‘beyond the control of the Seller.’”57
Thus, the clause was “not an opt-out provision” and was “limited in scope.”58 As a result, the
court found that the clause did not make the two-year obligation illusory, nor did it make the
obligation subject to the seller’s discretion.59 The court focused on the fact that the Act “is an
57

Stein, 586 F.3d at 858.

58

Id.

59

Id.
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anti-fraud statute” and “[a]llowing for reasonable delays caused by events beyond the seller’s
control does not promote or permit fraud.”60
The same reasoning applies here. The force majeure clause covers events that are based
on “interruption of transport, unavailability of materials, strikes, fire, flood, weather,
governmental regulations, acts of God, or other similar occurrences beyond the control of Seller.”
Such a clause does not make the two-year obligation illusory, nor does it subject the duty to
Defendants’ discretion. The clause is limited in scope and only covers those things that are
beyond the control of Defendants. Therefore, the presence of the force majeure clause does not
take this case out of the exception set out in § 1702(a)(2).
Based on the above, the Court finds that the Interstate Land Sales Full Disclosure Act
does not apply to this case and Plaintiffs’ Eleventh Cause of Action will be dismissed.
E.

PIERCING THE CORPORATE VEIL
Finally, Defendants seeks dismissal of Plaintiffs’ piercing the corporate veil claim under

12(c), arguing that Plaintiffs have failed to state a claim for piercing the corporate veil.
To prevail on a piercing the corporate veil theory, Plaintiffs’ complaint must plead:
a concurrence of two circumstances: (1) there must be such unity of interest and
ownership that the separate personalities of the corporation and the individual no
longer exist, viz., the corporation is, in fact, the alter ego of one or a few
individuals; and (2) the observance of the corporate form would sanction a fraud,
promote injustice, or an inequitable result would follow.61

60

Id.

61

Narman v. Murray First Thrift & Loan Co., 596 P.2d 1028, 1030 (Utah 1979).
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Plaintiffs’ Second Amended Complaint sets out their piercing the corporate veil claim as
follows:
14. Defendants LAPAY, MURPHY, GEORGE BRYANT (“BRYANT”), AND
CHRISTOPHER CONABEE (“CONABEE”) are, and at all relevant times were,
employees and/or agents of PALADIN and, at all relevant times, were
simultaneously the alter egos of PALADIN as alleged more specifically below.
MURPHY, BRYANT and CONABEE are and were at all relevant times citizens
of the state of Utah.
....
17. LAPAY, MURPHY, BRYANT, CONABEE and PALADIN have
commingled funds and other assets, have held out one entity as being liable for the
debts of the others, have identical or substantially similar equitable ownership, use
of the same offices and employees, use one or the other(s) as a mere shell or
conduit for the affairs of one or more of the others, are inadequately capitalized,
have disregarded corporate formalities, and do not maintain segregation of entity
records.
18. PALADIN is being used by LAPAY, MURPHY, BRYANT and CONABEE
to perpetrate fraud, circumvent the law, and to accomplish the other wrongful and
inequitable purposes described below, such that this court should disregard
PALADIN as a separate entity and should treat its actions, errors and omissions as
if they are the actions, errors and omissions of the persons and/or entities actually
controlling PALADIN.
These allegations are clearly the type of conclusory allegations devoid of factual
development that the Supreme Court has rejected in Twombly and Iqbal. Therefore, they fail
under Rule 12(b)(6) and 12(c). Plaintiffs argue that Defendants cannot seek dismissal under
12(b)(6) because they have answered the Second Amended Complaint. However, this argument
misapprehends Rule 12(c), which allows for motions to be brought “[a]fter the pleadings are
closed” and utilizes the 12(b)(6) standard. Therefore, this Motion is properly before the Court
and, for the reasons stated, Plaintiffs’ piercing the corporate veil will be dismissed.

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IV. CONCLUSION
It is therefore
ORDERED that Defendants’ Motion to Dismiss and For Partial Summary Judgment
(Docket No. 141) is GRANTED IN PART AND DENIED IN PART. It is further
ORDERED that Plaintiffs’ Ex Parte Motion Requesting Leave to File Surreply (Docket
No. 157) is GRANTED.
DATED August 20, 2012.
BY THE COURT:

_____________________________________
TED STEWART
United States District Judge

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