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California Appellate Court Upholds Dismissal of Argus TIC Lawsuits

The California 4th Circuit Court of Appeal upheld the lower court’s rulings that eight lawsuits brought by tenant-in-common investors against Argus Realty Investors and others were barred on the grounds that the statute of limitations had expired.

The cases are known as the ARI group of cases, referring to Argus Realty Investors, which sponsored the associated TIC programs. Argus was purchased by Thompson National Properties in 2008.

The appeals sought to overturn the trial court’s dismissal of the cases on demurrer, a motion that challenges the claims on a basis other than its factual merits. The demurrer motion was originally heard and granted in March 2014 by Superior Court Judge Gail Andler.

The appellate court maintained that the statute of limitations period started when the investors received their investment documents which “clearly” stated the risk factors and fee structures for the TIC programs they were invested in.

Catanzarite Law Corporation, led by attorney Kenneth Catanzarite of Orange County, represented the TIC investors. The attorney has a history of bringing litigation against TIC sponsors and others, as court records show numerous cases still pending in the California court system.

In the original ARI cases, attorney Catanzarite named upwards of 20 different defendants in each case, many of which were later dismissed by the court. The court commented that the “plaintiffs appear in some of the pleadings to simply sue anyone and everyone who had anything to do with the transactions, regardless of how remote the participation of some of the defendants might be.”

The investors, who claimed breach of fiduciary duty, intentional misrepresentation, and fraud against the defendants, were seeking a return of their investment money on the grounds that “they would not have invested in the TIC properties had they known the total up-front costs, or sales load, exceeded the 15 percent capital gains tax they sought to defer by making the investment.”

Section 1031 of the Internal Revenue Code allows investors to defer paying capital gains taxes on investment property sales by reinvesting the proceeds into a similar investment property within a specified time frame. In the early-to-mid 2000’s, 1031/TIC programs were the investment structure of choice for investors seeking to defer capital gains charges. However, the 1031/TIC industry was hit particularly hard during the Great Recession, as rental rates plummeted and numerous tenants went out of business.

The ARI TIC investors alleged that the true costs of their investments were concealed and that “the transaction was a real estate scam put together by [defendants] to line their own pockets.”

However, the court said that their commission payment obligations were “plainly clear” in the program’s private placement memorandum.

“The PPM’s first page plainly stated the investor was expected to pay a percentage of the purchase price plus a large promotional fee, a large brokerage commission, and selling commissions and expenses,” the court noted. This information was also repeated on another page in the investment document.

The various TIC properties were purchased between 2005 and 2006, however, the initial complaints were not filed until 2012. The defendants argued that the statute of limitations, which is three years in these cases, barred all of the investors’ claims.

Catazarite argued that the “delayed discovery rule” should apply to suspend the statute of limitations because the “fraud” was not discovered until much later.

The court noted that the delayed discovery rule does not apply because the fees and risk factors were explicitly disclosed in the PPM, and the plaintiffs had notice of their claims more than three years before they sued in 2012. Citing another Catanzarite TIC case that was “essentially identical” to the ARI cases, the court opinion noted:

“The private placement memorandum provided to plaintiffs prior to their investments clearly disclosed the fees, expenses, and commissions that would be paid out of their cash investments, as well as the risky nature of the investments. These were illiquid, unregistered securities, which were only made available to accredited investors. Reasonable diligence in such circumstances does not consist of ignoring a private placement memorandum received prior to making an investment.”

The opinions relating to the ARI cases are unpublished in official reports, meaning they are not citable and cannot be used to set precedent. However, a nearly identical case brought by attorney Catanzarite involving WA Southwest 2 TIC investors was certified for publication last year by the same California appellate court and cited in the ARI cases.

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