Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_08-cv-03535/USCOURTS-cand-5_08-cv-03535-6/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1331 Fed. Question

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United States District Court

For the Northern District of California

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ORDER GRANTING BUCHHOLZ DEFENDANTS' MOTION TO DISMISS CERTAIN STATE LAW CLAIMS AND GRANTING

IN PART AND DENYING IN PART GRACE DEFENDANTS' MOTION TO DISMISS THE FOURTH AMENDED COMPLAINT—No.

C-08-03535 RMW

CCL

United States District Court

For the Northern District of California

E-FILED on 4/30/10

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

YU-SZE YEN, et al.,

Plaintiffs,

v.

RONALD BUCHHOLZ, et al.,

Defendants.

No. C-08-03535 RMW

ORDER GRANTING BUCHHOLZ

DEFENDANTS' MOTION TO DISMISS

CERTAIN STATE LAW CLAIMS AND

GRANTING IN PART AND DENYING IN

PART GRACE DEFENDANTS' MOTION TO

DISMISS THE FOURTH AMENDED

COMPLAINT

[Re Docket Nos. 131, 132]

Defendants Ronald Buchholz, Charice Fischer, Solomon Capital, Inc., RNC Holdings, LLC,

Luxury Development, Inc., Equity Enterprises, Inc., Equity Enterprises-Nevada, Inc., Alabanza, Inc.,

and RDB Development, Inc. (collectively, the "Buchholz Defendants") move to dismiss plaintiffs'

claims relating to all investments other than the Luxury Development Fund, the Erie Land Fund, and

the Colorado Condos Fund for lack of subject matter jurisdiction. 

Separately, defendants Jonathan Vento, Grace Capital, LLC, Donald Zeleznak, Zeleznak

Property Management, LLC, Z-Loft, LLC, Vento Investments, LLC, Zeltor, LLC, and Vento Family

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United States District Court

For the Northern District of California

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ORDER GRANTING BUCHHOLZ DEFENDANTS' MOTION TO DISMISS CERTAIN STATE LAW CLAIMS AND GRANTING

IN PART AND DENYING IN PART GRACE DEFENDANTS' MOTION TO DISMISS THE FOURTH AMENDED COMPLAINT—No.

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Trust (collectively, the "Grace Defendants") move to dismiss plaintiffs' Fourth Amended Complaint

("FAC") for lack of personal jurisdiction, improper venue, and failure to state a claim. For the

reasons set forth below, the court grants the Buchholz Defendants' motion and grants in part and

denies in part the Grace Defendants' motion.

I. BACKGROUND

Plaintiffs are investors in a variety of real-estate related investment opportunities that they

allege were part of a series of transactions by defendants to defraud plaintiffs. The FAC alleges,

generally speaking, that the Grace Defendants and the Buchholz Defendants collaborated in making

various misrepresentations and omissions regarding real estate projects, which plaintiffs invested in

to their detriment. 

II. ANALYSIS

A. Buchholz Defendants' Motion to Dismiss for Lack of Subject Matter Jurisdiction

In the FAC, plaintiffs assert both state law claims and federal securities fraud claims arising

out of investments in the Luxury Development Fund, the Erie Land Fund, and the Colorado Condos

Fund ("LEC Claims"). In addition, plaintiffs assert only state law claims arising out of investments

in Solomon Towers, Patriot Courtyards, Gilbert Office, Osborn Commons, Ray Ranch, St. Charles,

Wailea Town Center, Mesa Point, OC Investors, LLC, and Chicago Condo Fund ("Non-LEC

Claims"). 

The Buchholz Defendants do not dispute that the court has subject matter jurisdiction over

the LEC Claims based on federal question (for the federal securities fraud claims) and supplemental

jurisdiction (for the state law claims). However, they contend that the court lacks subject matter

jurisdiction over the Non-LEC Claims. It is clear that the court does not have subject matter

jurisdiction over these claims based on either federal question or diversity of citizenship. The

question therefore is whether the court has supplemental jurisdiction over the Non-LEC claims.

Contrary to plaintiffs' assertions, the mere fact that some plaintiffs asserting Non-LEC

Claims have also asserted federal claims over which the court has subject matter jurisdiction does

not suffice to provide the court with supplemental jurisdiction over the Non-LEC Claims. A district

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1

 Consequently, the court need not reach the question of whether it would be proper to decline to

exercise supplemental jurisdiction pursuant to the exceptions set forth in 28 U.S.C. § 1367(c). 

ORDER GRANTING BUCHHOLZ DEFENDANTS' MOTION TO DISMISS CERTAIN STATE LAW CLAIMS AND GRANTING

IN PART AND DENYING IN PART GRACE DEFENDANTS' MOTION TO DISMISS THE FOURTH AMENDED COMPLAINT—No.

C-08-03535 RMW

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court may exercise supplemental jurisdiction over state law claims only if they are "so related to

claims in the action within such original jurisdiction that they form part of the same case or

controversy under Article III of the United States Constitution." 28 U.S.C. § 1367(a). State law

claims are considered to be part of the same case or controversy as federal claims "when they derive

from a common nucleus of operative facts and are such that a plaintiff would ordinarily be expected

to try them in one judicial proceeding." Trs. of the Constr. Indus. & Laborers Health & Welfare

Trust v. Desert Valley Landscape & Maintenance, Inc., 333 F.3d 923, 925 (9th Cir. 2003)

(quotations omitted). 

The LEC Claims and Non-LEC Claims do not derive from a common nucleus of operative

facts. As the Buchholz Defendants have pointed out, these two groups of claims arise out of

different investments, involving different contracts, different representations, and different time

periods. The operative facts that plaintiffs must prove to prevail on the Non-LEC Claims are not the

same as the facts plaintiffs would need to prove for the LEC Claims. Accordingly, plaintiffs would

not be expected to try the Non-LEC Claims together with the LEC Claims in one judicial

proceeding. The court concludes that it does not have supplemental jurisdiction over the Non-LEC

Claims1

 and thus dismisses the Non-LEC Claims for lack of subject matter jurisdiction. 

B. Grace Defendants' Motion to Dismiss for Lack of Personal Jurisdiction

California's long arm statute allows exercise of personal jurisdiction to the extent permitted

by the Due Process Clause of the United States Constitution. Cal. Civ. Proc. Code § 410.10. 

Therefore, the court may exercise personal jurisdiction over a nonresident defendant if that

defendant has "at least 'minimum contacts' with the relevant forum such that the exercise of

jurisdiction 'does not offend traditional notions of fair play and substantial justice.'" Schwarzenegger

v. Fred Martin Motor Co., 374 F.3d 797, 801 (9th Cir. 2004) (quoting Int'l Shoe Co. v. Washington,

326 U.S. 310, 316 (1945)). The Grace Defendants argue that this minimum contacts requirement

has not been met, and thus the court lacks personal jurisdiction over them. Plaintiffs respond that

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ORDER GRANTING BUCHHOLZ DEFENDANTS' MOTION TO DISMISS CERTAIN STATE LAW CLAIMS AND GRANTING

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the court has personal jurisdiction over the Grace Defendants based on: (1) the national service of

process provision in the securities fraud statutes; (2) imputation of local contacts by co-conspirators;

and (3) sufficient minimum contacts between the Grace Defendants and California.

1. Nationwide Service of Process for Securities Fraud Claims

Where a federal statute provides for nationwide service of process, the inquiry into minimum

contacts is "whether the defendant has acted within any district of the United States or sufficiently

caused foreseeable consequences in this country." Action Embroidery Corp. v. Atlantic Embroidery,

Inc., 368 F.3d 1174, 1180 (9th Cir. 2004) (quoting Securities Investor Protection Corp. v. Vigman,

764 F.2d 1309, 1316 (9th Cir. 1985)). Plaintiffs allege violations of Section 10(b) (and Rule 10b-5)

of the Securities Exchange Act of 1934 as well as violations of Section 12(a) of the Securities Act of

1933. Because both acts provide for nationwide service of process, if these securities fraud claims

have been adequately alleged, they would provide the court with the power to exercise personal

jurisdiction over the Grace Defendants based on minimum contacts with the United States. SEC v.

Ross, 504 F.3d 1130, 1139-40 (9th Cir. 2007). The court therefore considers whether the FAC

adequately alleges a securities fraud claim for which relief can be granted.

a. Section 10(b) and Rule 10b-5

Section 10(b) of the Securities Exchange act of 1934 makes it unlawful for any person to

"use or employ, in connection with the purchase or sale of any security . . . 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). One such rule promulgated by the Securities Exchange Commission is Rule

10b-5, which makes it unlawful for any person 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 . . . in connection with the purchase or

sale of any security." 17 C.F.R. § 240.10b-5(b). 

The Supreme Court has made clear that there is no private cause of action for aiding and

abetting a violation of Section 10(b). Cent. Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164,

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ORDER GRANTING BUCHHOLZ DEFENDANTS' MOTION TO DISMISS CERTAIN STATE LAW CLAIMS AND GRANTING

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177 (1994). Thus, allegations that the Grace Defendants aided and abetted the Buchholz Defendants

in violating Section 10(b) and Rule 10b-5 are insufficient to state a claim for relief. Therefore, the

court must consider whether plaintiffs have sufficiently alleged all five elements required to state a

claim for primary violation of Rule 10b-5: "(1) a material misrepresentation or omission of fact, (2)

scienter, (3) a connection with the purchase or sale of a security, (4) transaction and loss causation,

and (5) economic loss." Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 990 (9th Cir. 2009)

(quoting In re Daou Aystems, Inc. Sec. Litig., 411 F.3d 1006, 1014 (9th Cir. 2005)). 

With the passage of the Private Securities Litigation Reform Act ("PSLRA"), Congress

imposed heightened pleading requirements on actions brought under Section 10(b) and Rule 10b-5. 

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 321 (2007). "Under the PSLRA's

heightened pleading instructions, any private securities complaint alleging that the defendant made a

false or misleading statement must: (1) specify each statement alleged to have been misleading and

the reason or reasons why the statement is misleading; and (2) state with particularity facts giving

rise to a strong inference that the defendant acted with the required state of mind." Id. (internal

quotations and citations omitted). For the inference of scienter to qualify as strong, it "must be more

than merely plausible or reasonable – it must be cogent and at least as compelling as any opposing

inference of nonfraudulent intent." Id. at 314. 

The FAC fails to meet this heightened pleading requirement with respect to the Grace

Defendants. Plaintiffs allege that the representation to potential investors that funds being solicited

for the Luxury Development Fund would be invested in specific designated projects (office condos

in the Chicago area, the Monroe project, and the Portales project) was misleading because the

Buchholz Defendants never intended to invest in these projects. FAC ¶¶ 247-250. The alleged

involvement of the Grace Defendants in this misrepresentation is: (1) information about these

designated real estate projects which "could only have come from one or more of the Grace

Defendants" was included in the Confidential Private Offering Memorandum ("Memorandum")

distributed to potential investors; (2) Zeleznak (one of the Grace Defendants) spoke at a presentation

where the Memorandum was distributed, and investment in the Luxury Development Fund was

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ORDER GRANTING BUCHHOLZ DEFENDANTS' MOTION TO DISMISS CERTAIN STATE LAW CLAIMS AND GRANTING

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solicited; (3) "[t]he Memorandum and presentation included multiple statements and representations

of an unequivocal nature as to what percentage of funds and/or amounts thereof would be invested"

in these designated projects; and (4) Zeleznak did not say anything to contradict these

representations. Id. at ¶¶ 234-236, 240, 243, 247. In short, plaintiffs' securities fraud claim against

the Grace Defendants appears to be based on the allegation that Zeleznak made a material omission

when speaking to potential investors by failing to contradict misrepresentations made by the

Buchholz Defendants in the Memorandum and presentation. 

Although the FAC specifies the misleading statements and the reason they were misleading,

it fails to "state with particularity facts giving rise to a strong inference that the [Grace Defendants]

acted with the required state of mind." Tellabs, 551 U.S. at 321. "To adequately demonstrate that

the defendant acted with the required state of mind, a complaint must allege that the defendants

made false or misleading statements either intentionally or with deliberate recklessness." Zucco, 552

F.3d at 991 (quotations omitted). Deliberate recklessness is viewed as a form of intentional or

knowing misconduct. Id. Thus, in order to establish a strong inference of deliberate recklessness, a

plaintiff must plead more than just "merely simple, or even inexcusable negligence, but an extreme

departure from the standards of ordinary care, and which presents a danger of misleading buyers or

sellers that is either known to the defendant or is so obvious that the actor must have been aware of

it." Id. (quoting In re Silicon Graphics Sec. Litig., 183 F.3d 970, 976 (9th Cir. 1999)). 

As evidence of fraudulent intent, plaintiffs allege: (1) no funds were ever invested in the

Monroe project or the Portales project; (2) only 10% of funds were invested in office condos in

Chicago (not the 20% allocation represented to investors); (3) 90% of all Luxury Development Fund

investor money went into a different project known as Spirit at Spectrum; (4) while soliciting

investors for the Luxury Development Fund, the Buchholz Defendants entered into a purchase

agreement to buy vacant land known as Spirit at Spectrum from the Grace Defendants; and (5) as

soon as investment in the Luxury Development Fund was closed, the Spirit at Spectrum sale was

finalized and recorded. Id. at ¶¶ 250, 256-59. 

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ORDER GRANTING BUCHHOLZ DEFENDANTS' MOTION TO DISMISS CERTAIN STATE LAW CLAIMS AND GRANTING

IN PART AND DENYING IN PART GRACE DEFENDANTS' MOTION TO DISMISS THE FOURTH AMENDED COMPLAINT—No.

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While these allegations may suggest that the Buchholz Defendants never intended to invest

in the designated projects, they do not give rise to a strong inference that the Grace Defendants had

the requisite scienter. The fact that the Grace Defendants later sold Spirit at Spectrum to the

Buchholz Defendants does not establish that Zeleznak knew or should have known that the

Buchholz Defendants did not plan on investing in the originally designated projects. As of June 8,

2005, the date of the presentation at which Zeleznak appeared, the Grace Defendants and the

Buchholz Defendants had not yet entered into a purchase agreement regarding Spirit at Spectrum. 

FAC ¶¶ 240, 258. Moreover, the FAC contains no facts suggesting that the Grace Defendants knew

or should have known that the Buchholz Defendants would fund the Spirit at Spectrum transaction

using investor money from the Luxury Development Fund, as opposed to from another source. 

Thus, plaintiffs have failed to present a persuasive basis for inferring simple negligence, much less

deliberate recklessness, by the Grace Defendants. Even when viewed holistically and taking into

account all of the allegations in the FAC, the malicious inferences urged by plaintiffs, though

plausible, are not "cogent and at least as compelling as any opposing inference of nonfraudulent

intent." Tellabs, 551 U.S. at 314; see Zucco, 552 F.3d at 1008 (finding that although complaints are

to be viewed "holistically, even such a comprehensive perspective of [plaintiff's] complaint cannot

transform a series of inadequate allegations into a viable inference of scienter"). As a result, the

court finds that the FAC fails to adequately allege a violation of Section 10(b) and Rule 10b-5 by the

Grace Defendants. 

b. Section 12(a)

Section 12(a) of the Securities Act of 1933 makes it unlawful for any person to offer or sell a

security "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" unless the person is able to prove

that he did not know and could not reasonably have known of the untruth or omission. 15 U.S.C. §

77l(a)(2). Claims brought under Section 12 are not subject to the heightened pleading requirements

of the PSLRA. Falkowski v. Imation Corp., 309 F.3d 1123, 1133 (9th Cir. 2002). 

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ORDER GRANTING BUCHHOLZ DEFENDANTS' MOTION TO DISMISS CERTAIN STATE LAW CLAIMS AND GRANTING

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Nonetheless, plaintiffs fail to adequately a violation of Section 12(a) by the Grace

Defendants. Under Section 12(a), "[a]ny person who . . . offers or sells a security [in violation of

various provisions] . . . shall be liable . . . to the person purchasing such security from him." 15

U.S.C. § 77l(a). This statutory language limits liability under Section 12(a) to those who offer or

sell securities. Plaintiffs do not allege that the Grace Defendants offered or sold any securities to

them. Consequently, the FAC fails to state a claim against the Grace Defendants for violation of

Section 12(a). 

Because plaintiffs have failed to adequately state a securities fraud claim against the Grace

Defendants, they cannot rely upon the nationwide service provisions of the securities fraud statutes

to establish personal jurisdiction over the Grace Defendants based on minimum contacts with the

United States. 

2. Conspiracy Theory of Personal Jurisdiction

Plaintiffs contend that "[t]he local acts of one conspirator may be imputed to non-resident coconspirators." Opp'n Grace Defs.' Mot. Dismiss 3. The idea that a conspirator's in-forum acts can be

attributed to his co-conspirators is referred to as the conspiracy theory of personal jurisdiction. The

Ninth Circuit has not yet ruled on the validity of this theory. See, e.g., Underwager v. Channel 9

Australia, 69 F.3d 361, 364-65 (9th Cir. 1995) (not reaching the question of whether the conspiracy

theory of personal jurisdiction is valid because plaintiff failed to allege facts suggesting a

conspiracy). However, the Ninth Circuit has rejected an analogous theory for venue purposes,

Piedmont Label Co. v. Sun Garden Packing, 598 F.2d 491, 492 (9th Cir. 1979), and California

courts have rejected the conspiracy theory of personal jurisdiction, see, e.g., Mansour v. Super. Ct.,

38 Cal. App. 4th 1750, 1760 (1995). In light of the Supreme Court's mandate that "[e]ach

defendant's contacts with the forum State must be assessed individually," Calder v. Jones, 465 U.S.

783, 790 (1984), the court declines to exercise personal jurisdiction over the Grace Defendants based

on acts by alleged co-conspirators. See Kipperman v. McCone, 422 F. Supp. 860, 873 n.14 (N.D.

Cal. 1976) ("personal jurisdiction over any non-resident individual must be premised upon forumCase 5:08-cv-03535-RMW Document 142 Filed 04/30/10 Page 8 of 17
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ORDER GRANTING BUCHHOLZ DEFENDANTS' MOTION TO DISMISS CERTAIN STATE LAW CLAIMS AND GRANTING

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related acts personally committed by the individual. Imputed conduct is a connection too tenuous to

warrant the exercise of personal jurisdiction."). 

3. Minimum Contacts with California

The court therefore considers whether plaintiffs have shown that the Grace Defendants have

sufficient "minimum contacts" with California such that the exercise of jurisdiction "does not offend

traditional notions of fair play and substantial justice." Int'l Shoe Co. v. Washington, 326 U.S. 310,

316 (1945). In order for the court to have general jurisdiction over a defendant, the defendant must

"engage in continuous and systematic general business contacts that approximate physical presence

in the forum state." Schwarzenegger v. Fred Martin Motor Co., 374 F.3d 797, 801 (9th Cir. 2004)

(internal quotations and citations omitted). This "exacting standard" has not been met based on the

limited contacts that the Grace Defendants have with California. Id.; see FAC ¶ 10. Plaintiffs

appear to concede that the court cannot exercise general jurisdiction over the Grace Defendants and

argue instead that there is a sufficient basis to exercise specific jurisdiction. 

A court may exercise specific personal jurisdiction over a defendant when the following

three-prong test has been met: 

(1) The non-resident defendant must purposefully direct his activities or consummate

some transaction with the forum or resident thereof; or perform some act by which he

purposefully avails himself of the privilege of conducting activities in the forum,

thereby invoking the benefits and protections of its laws;

(2) the claim must be one which arises out of or relates to the defendant's forumrelated activities; and

(3) the exercise of jurisdiction must comport with fair play and substantial justice, i.e.

it must be reasonable.

Schwarzenegger, 374 F.3d at 802 (quoting Lake v. Lake, 817 F.2d 1416, 1421 (9th Cir. 1987)). 

The plaintiff bears the burden of satisfying the first two prongs of this test, after which the burden

then shifts to the defendant to "present a compelling case" that the exercise of jurisdiction would not

be reasonable. Id. (quoting Burger King Corp. v. Rudzewicz, 471 U.S. 462, 476-78 (1985)). 

Plaintiffs argue that this three-prong test has been met by: (1) the Grace Defendants' creation

and provision of written information regarding real estate projects to the Buchholz Defendants,

knowing that the information would be used to solicit investors in California; and (2) Zeleznak's

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ORDER GRANTING BUCHHOLZ DEFENDANTS' MOTION TO DISMISS CERTAIN STATE LAW CLAIMS AND GRANTING

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speaking, on behalf of himself and the rest of the Grace Defendants, to potential investors at a

presentation in California on June 8, 2005, during which the Buchholz Defendants solicited

investment in the Luxury Development Fund. FAC ¶ 10. 

a. Purposeful Direction

Under the "effects" test articulated by the Supreme Court in Calder v. Jones, 465 U.S. 783

(1984), purposeful direction is met when a defendant allegedly: "(1) committed an intentional act,

(2) expressly aimed at the forum state, (3) causing harm that the defendant knows is likely to be

suffered in the forum state." Schwarzenegger, 374 F.3d at 803 (quoting Dole Food Co. v. Watts, 303

F.3d 1104, 1111 (9th Cir. 2002)). In the context of this test, the only intent required for an

"intentional act" is the intent to perform the actual, physical act, not the intent to accomplish the

consequences of the act. Id. at 806. There is no question that the Grace Defendants committed an

intentional act by creating and providing information about real estate projects to the Buchholz

Defendants. Since the Grace Defendants have not challenged plaintiffs' assertion that Zeleznak

spoke on behalf of himself and the rest of the Grace Defendants, it appears that his speaking at the

presentation was also an intentional act by the Grace Defendants.

It is not clear that the act of creating and providing written information about various real

estate projects was expressly aimed at California. The real estate projects in question are located in

Illinois and Arizona rather than in California. FAC Ex. B. While plaintiffs allege that the Grace

Defendants knew that the information would be used to solicit investors in California, FAC ¶ 10, the

Ninth Circuit has construed the Calder "effects" test as requiring "something more than mere

foreseeability in order to justify assertion of personal jurisdiction." Schwarzenegger, 374 F.3d at

805 (quotations omitted). Since the FAC does not allege that the Grace Defendants knew or

intended for the information they provided to be used primarily to solicit California investors, the

court finds that the express aim prong has not been met by this intentional act. However, Zeleznak's

appearance and participation in a presentation to potential investors held in Santa Clara County,

California is unquestionably an intentional act expressly aimed at California. 

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2

 The Grace Defendants have not challenged the accuracy of any of the facts alleged in the FAC

relating to Zeleznak's appearance at the June 8, 2005 presentation.

ORDER GRANTING BUCHHOLZ DEFENDANTS' MOTION TO DISMISS CERTAIN STATE LAW CLAIMS AND GRANTING

IN PART AND DENYING IN PART GRACE DEFENDANTS' MOTION TO DISMISS THE FOURTH AMENDED COMPLAINT—No.

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Since the presentation occurred in California, the potential investors who were allegedly

misled by Zeleznak's statements and omissions are likely to be California residents. Accordingly,

the facts alleged in the FAC establish that the Grace Defendants caused harm that they knew was

likely to be suffered in California.2 Therefore, the court finds that the Grace Defendants

purposefully directed their activities toward California. 

b. Claim Arising Out of or Relating to Forum-Related Activities

Because the court lacks subject matter jurisdiction over the Non-LEC Claims, as discussed

above, the only remaining claims against the Grace Defendants are those relating to the Luxury

Development Fund. The Grace Defendants argue that these claims do not arise out of Zeleznak's

participation in the June 8, 2005 presentation at which the Buchholz Defendants solicited investment

in the Luxury Development Fund because at this presentation, Zeleznak pitched a real estate project

that never received funding from the Luxury Development Fund. However, plaintiffs' Luxury

Development Fund claims are based on their allegation that the Grace Defendants intentionally

misled potential investors at this presentation by creating the impression that Luxury Development

Fund money would be invested in the real estate projects described by Zeleznak, while knowing that

it would be used for a different project, the Spirit at Spectrum transaction. Thus, plaintiffs' Luxury

Development Fund claims against the Grace Defendants all arise out of or relate to Zeleznak's

participation in the June 8, 2005 presentation.

c. Reasonableness

Since plaintiffs have satisfied the first two prongs of the test for specific jurisdiction, the

Grace Defendants bear the burden of presenting a compelling case that the exercise of jurisdiction

would not be reasonable. Schwarzenegger, 374 F.3d at 802. The Grace Defendants have not met

their burden. The court finds that it may exercise specific jurisdiction over the Grace Defendants for

plaintiffs' Luxury Development Fund claims without offending "traditional notions of fair play and

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substantial justice," Int'l Shoe Co., 326 U.S. at 316, and therefore denies the Grace Defendants'

motion to dismiss for lack of personal jurisdiction.

 C. Grace Defendants' Motion to Dismiss for Improper Venue

The Grace Defendants also contend that venue is not proper in the Northern District of

California. Plaintiffs argue that venue is proper, both under the securities fraud statutes and under

28 U.S.C. § 1391(b)(2). Because plaintiffs have failed to adequately state a securities fraud claim

against the Grace Defendants, the securities fraud statutes cannot provide a basis for finding venue

to be proper. 28 U.S.C. § 1391(b)(2) allows a civil action to be brought in "a judicial district in

which a substantial part of the events or omissions giving rise to the claim occurred." Plaintiffs'

remaining claims against the Grace Defendants rely heavily upon Zeleznak's alleged material

omissions in the June 8, 2005 presentation to potential investors in Santa Clara County, California. 

See FAC ¶¶ 271-299, 313-321. Thus, the Northern District of California is a judicial district in

which "a substantial part of the events or omissions giving rise to the claim occurred," and venue is

proper on this basis. 28 U.S.C. § 1391 (b)(2). The court therefore denies the Grace Defendants'

motion to dismiss for improper venue. 

D. Grace Defendants' Motion to Dismiss for Failure to State a Claim

The Grace Defendants also move to dismiss each of plaintiffs' claims against them for failure

to state a claim upon which relief can be granted. As discussed above, the court lacks subject matter

jurisdiction over the Non-LEC Claims, and plaintiffs have failed to adequately state a claim for relief

based on violation of the securities fraud statutes. Because plaintiffs have already had five

opportunities to plead sufficient allegations stating a claim for relief under the securities fraud

statutes, the court dismisses plaintiffs' Section 10(b) and Section 12(a) claims against the Grace

Defendants without leave to amend. The only remaining claims against the Grace Defendants are

plaintiffs' claims of fraud and conspiracy relating to their investments in the Luxury Development

Fund.

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1. Fraud

Under California law, one is liable for fraudulent deceit when one "willfully deceives another

with intent to induce him to alter his position to his injury or risk." Cal. Civ. Code § 1709. The

alleged misrepresentation at the heart of plaintiffs' fraud claim against the Grace Defendants is the

representation that funds being solicited for the Luxury Development Fund would be invested in

specific designated projects owned or controlled by the Grace Defendants. FAC ¶ 247. According

to the FAC, despite having no intention of accepting money for these projects from the Luxury

Development Fund: (1) the Grace Defendants provided the Buchholz Defendants with information

about these designated projects, which was used in the Memorandum distributed to potential

investors; (2) Zeleznak spoke about these designated projects at a presentation where the Buchholz

Defendants solicited investment in the Luxury Development Fund; and (3) Zeleznak failed to

contradict misrepresentations in the Memorandum and presentation regarding how Luxury

Development Fund money would be invested. Id. at ¶¶ 234-236, 242-243, 247, 290. Thus,

plaintiffs' fraud claim against the Grace Defendants appears to be based on the allegation that

Zeleznak made a material omission by speaking to potential investors about specific real estate

projects and failing to disclose that Luxury Development Fund money would not be invested in

these designated projects.

Where a fraud claim is grounded solely on omissions, the complaint must allege facts

establishing some duty of disclosure on the part of the defendant. See Chiarella v. United States,

445 U.S. 222, 228 (1980); see also Goodman v. Kennedy, 18 Cal. 3d 335, 346 (1976). A duty of

disclosure exists when: (1) there is a confidential relationship between plaintiff and defendant; (2)

defendant made a representation that is likely to mislead unless disclosure is made; (3) defendant

actively concealed the undisclosed matters; or (4) one party to a transaction has sole knowledge or

access to material facts and knows that such facts are not known to or reasonably discoverable by

the other party. Goodman, 18 Cal. 3d at 346-47. 

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 The FAC states that the Grace Defendants "actively concealed their true intentions and activities

regarding orchestration of and intent to enter into the transaction that became known as Spirit at

Spectrum." FAC ¶ 294. Such a conclusory allegation, without any supporting facts, is insufficient

to establish active concealment. See Goodman, 18 Cal. 3d at 347 ("mere conclusory allegations . . .

are insufficient for the foregoing purposes [of establishing a duty of disclosure]"). 

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Plaintiffs have not alleged a confidential relationship between themselves and the Grace

Defendants, nor have they alleged facts suggesting active concealment by the Grace Defendants.3 

Plaintiffs and the Grace Defendants are not alleged to be parties to any transaction. However, the

FAC does contain allegations showing that Zeleznak, while speaking on behalf of himself and the 

rest of the Grace Defendants, made representations that were likely to mislead in the absence of full

disclosure. The FAC alleges that, at a presentation where the Buchholz Defendants solicited

investment in the Luxury Development Fund, Zeleznak spoke about the great opportunities offered

by specific real estate projects. FAC ¶ 242, 244. According to plaintiffs, by making these

statements and failing to disclose how the Luxury Development Fund money would actually be

used, Zeleznak contributed to the impression that money from the Luxury Development Fund would

be invested in the projects that he described. Id. at ¶ 243, 247-249. These allegations suffice to

establish that the Grace Defendants had a duty of disclosure. See Cal. Civ. Code § 1710 (defining

deceit as including "[t]he suppression of a fact, by one . . . who gives information of other facts

which are likely to mislead for want of communication of that fact"). 

Federal Rule of Civil Procedure 9(b) requires a party alleging fraud to "state with

particularity the circumstances constituting fraud" but allows for general allegations about the

conditions of a person's mind, such as intent and knowledge. Fed. R. Civ. Proc. 9(b). This ability to

plead generally one's state of mind contrasts with the requirements of the PSLRA, which mandate

that plaintiffs plead facts giving rise to a strong inference of scienter. The FAC satisfies Rule 9(b)'s

particularity requirements by specifying the omission and why it is misleading, identifying the

speaker and the occasion, establishing a duty of disclosure, and generally alleging knowledge as to

the omission. FAC ¶¶ 240, 242-243, 247-248, 290. Plaintiffs have alleged sufficient facts from

which one could reasonably infer that the Grace Defendants willfully deceived plaintiffs with the

intent to induce them to invest in the Luxury Development Fund to their detriment. The court

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therefore finds that plaintiffs have adequately pled a claim for fraud relating to the Luxury

Development Fund. 

2. Conspiracy 

 "The elements of an action for civil conspiracy are the formation and operation of the

conspiracy and damage resulting to plaintiff from an act or acts done in furtherance of the common

design." Applied Equipment Corp. v. Litton Saudi Arabia Ltd., 7 Cal. 4th 503, 511 (1994) (quoting

Doctors' Co. v. Super. Ct., 49 Cal. 3d 39, 44 (1989)). The Grace Defendants argue that plaintiffs

have failed to plead acts done in furtherance of a common design because the FAC states that the

Buchholz Defendants directed money from the Luxury Development Fund to the Spirit at Spectrum

transaction instead of investing the money in the designated projects described to investors, which

were owned or controlled by the Grace Defendants. However, the common design of the alleged

conspiracy is a scheme in which the Grace Defendants collaborated with the Buchholz Defendants to

induce plaintiffs to invest in the Luxury Development Fund by making them believe the funds would

be invested in certain designated real estate projects when in reality the money would be used for the

Spirit at Spectrum transaction. FAC ¶¶ 240, 246-248, 315. As alleged in the FAC, the Spirit at

Spectrum transaction was a sale of vacant land from the Grace Defendants to the Buchholz

Defendants (using Luxury Development Fund money) at an artificially inflated price, creating a cash

profit of over two million dollars. Id. at ¶¶ 260, 266. Plaintiffs allege various acts in furtherance of

this scheme, including Zeleznak's participation in a presentation to potential Luxury Development

Fund investors and the Grace Defendants' role in the Spirit at Spectrum transaction. Id. at ¶¶ 240,

253-260. The FAC also alleges damage to plaintiffs resulting from the loss of the Spirit at Spectrum

land to foreclosure. Id. at ¶¶ 268-269. The court finds that the FAC contains sufficient factual

allegations establishing the formation and operation of a conspiracy, acts done in furtherance of a

common design, and resulting damage and therefore adequately states a claim for conspiracy. 

E. Grace Defendants' Motion for Sanctions

The Grace Defendants request sanctions against plaintiffs under Federal Rule of Civil

Procedure 11 for filing the FAC, which they assert contains false, groundless, and harassing claims. 

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"A motion for sanctions must be made separately from any other motion." Fed. R. Civ. Proc.

11(c)(2). In addition, Rule 11 provides for a 21-day safe harbor. A party seeking sanctions must

first serve the motion on the opposing party and may not file or present the motion for sanctions with

the court if the challenged claim or filing is withdrawn or corrected within 21 days. Id. Because the

Grace Defendants have failed to comply with these provisions of Rule 11, the court denies the

motion for sanctions. 

II. ORDER

For the foregoing reasons, the court: 

1. Dismisses plaintiffs' claims arising out of investments in Solomon Towers, Patriot

Courtyards, Gilbert Office, Osborn Commons, Ray Ranch, St. Charles, Wailea Town

Center, Mesa Point, OC Investors, LLC, or Chicago Condo Fund;

2. Denies the Grace Defendants' motion to dismiss the FAC for lack of personal

jurisdiction;

3. Denies the Grace Defendants' motion to dismiss the FAC for improper venue;

4. Dismisses plaintiffs' Section 10(b) and Rule 10b-5 claim against the Grace

Defendants;

5. Dismisses plaintiffs' Section 12(a) claim against the Grace Defendants;

6. Denies the Grace Defendants' motion to dismiss plaintiffs' remaining claims against

them (fraud and conspiracy) for failure to state a claim; and

7. Denies the Grace Defendants' motion for sanctions.

DATED: 4/30/10

RONALD M. WHYTE

United States District Judge

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Notice of this document has been electronically sent to:

Counsel for Plaintiffs:

Jeffrey Mark Forster jforstr@pacbell.net 

Steven R. Levy slevy@bigfoot.com 

Counsel for Defendants:

Michael George Descalso mgd@greenechauvel.com 

Dennis I. Wilenchik diw@wb-law.com 

Andrew A. August aaugust@pinnaclelawgroup.com 

William W. Schofield wschofield@pinnaclelawgroup.com 

Steven R Bangerter sbangerter@bangertersheppard.com 

Meagen Eileen Leary mleary@gordonrees.com 

Counsel are responsible for distributing copies of this document to co-counsel that have not

registered for e-filing under the court's CM/ECF program.

Dated: 4/30/10 CCL

Chambers of Judge Whyte

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