NEW CA CASE WARNS INVESTORS IN REAL ESTATE PARTNERSHIPS AND HOLDS NO FRAUD WHERE DISCLOSURES MADE IN PRIVATE PLACEMENT MEMORANDUM

In the attached case published February 6, 2017, Stella v. Asset Management Consultants, Inc. , California Appellate Court in Los Angeles held that a long term “accredited” investor in several real estate limited partnerships could not sue for fraud because the risks of the real estate commissions and other fees were properly disclosed in the Private Placement Memorandum (PPM).

The investor in ten limited partnerships alleged in a class action that the “real estate commissions” disclosed in the Private Placement Memorandum were actually disguised “syndication fees” which were not payable by the Seller of the properties, but instead were paid by the investors.

The plaintiff sued for intentional misrepresentation, fraud by concealment and related causes of action and wanted relied from the bar of the statutes of limitations based on the “delayed discovery rule” which allows for a delay in the triggering of the statute of limitations where the plaintiff was unable to discovery the facts necessary to know that he or she had a legal cause of action to sue. The plaintiff alleged the delayed discovery rule should apply because he had found years after the initial investment from his lawyer who was working on another investment that the commissions were actually disguised syndication fees.

The Court found that the PPM adequately disclosed the fees and the risks of the investment and that the investor was on notice of them at the time of the investment. Thus the investor plaintiff was not allowed to invoke the “delayed discovery rule” and his claims were time barred.

Lessons from this case:
1. Investors, especially “accredited investors” who are deemed to be more sophisticated, should read and fully understand all the disclosed risks of the investment.
2. Investors should consider hiring a lawyer or other professional to advise them on the risks of such an investment and to conduct their own “due diligence” and cannot rely on a long-term “trusted” relationship.