Filed 6/23/16 ARI-AOB 8 v. Hirschler Fleischer CA4/3

NOT TO BE PUBLISHED IN OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for 

publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication

or ordered published for purposes of rule 8.1115. 

IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

FOURTH APPELLATE DISTRICT

DIVISION THREE

ARI-AOB 8, LLC, et al.,

 Plaintiffs and Appellants,

v.

HIRSCHLER FLEISCHER, APC et al.,

 Defendants and Respondents.

 G050848

 (Super. Ct. No. 30-2012-00555504)

 O P I N I O N

Appeal from judgments of the Superior Court of Orange County, Gail 

Andrea Andler, Judge. Affirmed.

Catanzarite Law Corporation, Kenneth J. Catanzarite, Nicole M. 

Catanzarite-Woodward and Eric V. Anderton for Plaintiffs and Appellants.

Lester & Cantrell, Mark S. Lester, David Cantrell and Colin A. Northcutt 

for Defendant and Respondent Hirschler Fleischer, APC.
2

Brown Rudnick and Joel S. Miliband; Berkowitz Oliver Williams Shaw & 

Eisenbrant, Anthony J. Durone and Jennifer B. Wieland for Defendant and Respondent 

Burch & Company, Inc.

Morgan, Lewis & Bockius, Susan F. DiCicco, J. Warren Rissier and Jordan 

M. McCrary for Defendant and Respondent RBS Financial Products Inc.

* * *

In March 2014, Judge Gail Andler entered rulings on 49 motions made in 

eight different superior court cases in a single minute order. She explained all the 

motions were filed in “what has become known as the ‘ARI’ group of cases.” Judge 

Andler stated, “As with the prior rounds of challenges to the pleadings, since the motions 

raise issues and arguments common to all cases, the court will reflect the rulings . . . on a 

single [m]inute [o]rder to be placed in each individual case file.” 

This appeal arises out of judgments entered in what Judge Andler referred 

to as “Case 5,” following the sustaining of three separate demurrers to the second 

amended (operative) complaint (SAC) without leave to amend. The four appealing 

plaintiffs are two Delaware limited liability companies (ARI-AOB 8, LLC & ARI-AOB 

23, LLC) and two individuals who acquired these entities (Ronald D. Hart and Theresa 

Habra). For convenience and clarity in this opinion we will refer to the appealing ARIAOB entities and their owners collectively as Plaintiffs. We affirm the three judgments 

of dismissal at issue in this appeal based on our conclusion the applicable statute of 

limitations bars recovery. 

PROCEDURAL HISTORY

The case concerns Plaintiffs’ failed multi-million dollar investment in 

commercial real estate. In 2005 and 2006, Plaintiffs invested in an office building known 

as The Atrium at Empire Lakes, located in the City of Rancho Cucamongo, California 

(the Property). The transaction was promoted by ARI-AOB, LLC (the Company), and its 
3

related entities and affiliates, referred to collectively by the parties as the “ARGUS 

Defendants.”1 

The purchases were part of an Internal Revenue Code section 1031 

exchange, which allowed Plaintiffs to defer capital gains taxes on the sale of other real 

estate assets they owned. However, all did not proceed as planned and the investment 

property was “deeded to the lender in 2013” resulting in “a total loss.” 

In 2012, Plaintiffs (in a class action complaint) sued 30 defendants but only 

three, on the periphery of the transaction, are involved in this appeal after the court 

sustained their demurrers and entered judgments of dismissal. The defendants are 

securities broker and dealer Burch & Company (Burch), RBS Financial Products, Inc. 

(RBS),

2

and the law firm Hirschler Fleischer (Hirschler). For convenience and the sake 

of clarity these three entities will be referred to collectively as Defendants, unless the 

context requires otherwise. 

Plaintiffs amended their complaint several times in response to motion 

practice by the Defendants.

3

 The operative SAC alleges 13 causes of action and groups 

the Defendants into three categories. First, there are seven groups titled “Class 

Defendants” because they are named by the “Class Plaintiffs.” Second, there are “Non-

 

1

The trial court sustained the ARGUS Defendants’ demurrer, however, these 

entities are not parties to this appeal. 

2

RBS is the successor in interest to Greenwich Capital Financial Products, 

Inc., the entity that loaned funds needed to purchase the Property.

3

The court sustained demurrers to the original complaint without leave to 

amend on Plaintiffs’ claims for disgorgement and unfair business practices under 

Business and Professions Code section 17200. Because Plaintiffs do not appeal from the 

court’s dismissal of their accounting and disgorgement claims they are not mentioned in 

this opinion. The court granted Plaintiffs leave to amend the other causes of action. The 

court rejected the first amended complaint (FAC) on procedural grounds, and thereafter, 

the Plaintiffs filed the SAC which is identical in substance to the FAC. 
4

Class Defendants” subject to individual claims. Third, there are “Doe Defendants.” This 

appeal concerns only three “Class Defendants,” namely, RBS, Burch, and Hirschler. For 

purposes of this appeal, the causes of action against these Defendants can be boiled down 

to the breach of various fiduciary duties, intentional misrepresentation, and fraud claims. 

In addition, there is a legal malpractice claim against Hirschler.

The trial court sustained Defendants’ demurrers to the SAC, without leave 

to amend, in part, on the basis that all causes of action were barred by the applicable 

statute of limitations. In the minute order, Judge Andler commented, “It is an 

understatement to say that much time and effort has been spent by counsel and the court 

discussing these pleadings, in some cases for years, in order to determine if a pleading 

could be crafted which could survive a challenge. Each version of each complaint 

generated demurrers and motions to strike. Although recognizing the valid concerns 

expressed by a number of defendants, leave to amend was previously granted in 

recognition of the great liberality the law provides for amending pleadings. There were 

specific discussions as to what the concerns were, and counsel for plaintiffs had asserted, 

at oral argument, that the deficiencies could and would be cured. . . . [P]laintiffs were put 

on notice as to the need to plead with greater specificity regarding the roles played by 

each of the defendants and their alleged acts or omissions. [¶] The court previously 

commented that 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 trial court stated that in addition to sustaining the demurrers on statute 

of limitations grounds, the court also considered and ruled on causes of action for 

alternative grounds alleged by Defendants. For example, the court determined some of 

the fraud-based causes of action failed because Plaintiffs “still pled elements of . . . each 

cause of action in general terms-identifying the alleged responsible defendant by group, 

and failing to plead each element with specific facts. It strains credibility to believe that 
5

none of the plaintiffs have any recall or records on which to rely in sufficiently pleading 

these causes of action, given the nature of these transactions and the amount of money 

involved.” Judge Andler added the aiding and abetting allegations fail because Plaintiffs 

failed to allege facts “that said defendants had ‘actual knowledge’ that the directly liable 

defendant intended to commit ‘a specific wrongful act’ and that said defendants gave 

substantial assistance to the directly liable defendant.” The court repeated the pleadings 

were defective because, despite “having been previously admonished” by the court, 

Plaintiffs “have continued to use ‘group pleading’ for apparently related entities . . . and 

the parties must be able to differentiate the specific roles, acts and omissions alleged as to 

each defendant ‘lumped together’ in the group allegations.” (Emphasis omitted.)

Plaintiffs challenge this ruling on appeal, maintaining they timely filed their 

complaint and adequately complied with the delayed discovery rule. We recognize the 

trial court’s ruling was made after it took judicial notice of the parties’ Private Placement 

Memorandum (PPM), and for purposes of this appeal, we granted RBS’s motion for 

judicial notice of the same applicable PPM. 

FACTS

“In conducting our de novo review, we ‘must “give[ ] the complaint a 

reasonable interpretation, and treat[ ] the demurrer as admitting all material facts properly 

pleaded.” [Citation.] Because only factual allegations are considered on demurrer, we 

must disregard any “contentions, deductions or conclusions of fact or law alleged . . . .”’ 

[Citation.]” (WA Southwest 2, LLC v. First American Title Ins. Co. (2015) 

240 Cal.App.4th 148, 151 (WA Southwest).)

The Allegations of Wrongdoing

The pertinent facts are alleged in Plaintiffs’ pleadings and the PPM. In the 

SAC, Plaintiffs seek the return of their investment money on the grounds they would not 

have invested in the Property had they known the total up-front costs, or “Sales Loads,” 

actually exceeded the 15 percent capital gains tax they sought to defer by making the 
6

investment. Specifically, they allege there was an undisclosed $1,305,000 mark up in the 

purchase price. They complain, “The transaction was nothing more than a real estate 

scam put together by [Defendants] to line their own pockets.” 

The PPM disclosed the Company was “formed to acquire and operate all 

of, or an undivided interest in” the Property. It stated one of the ARGUS Defendants, 

ARI-Atrium Office Building, LLC (ARI) would first purchase the property from a third 

party seller for $66,505,000 using a $50,895,000 loan from RBS. ARI’s affiliate, ARI 

Commercial Properties, Inc. (ARICP), acted as the real estate broker (and is listed as one 

of the ARGUS Defendants). 

Plaintiffs alleged the ARGUS Defendants used a PPM and marketing 

materials to offer two types of “‘Securities’” in the “‘Offering.’” Using cash from a prior 

sale of real property, investors could purchase either tenancy in common (TIC) interests 

or LLC membership interests. The Offering required the help of several interrelated 

ARGUS Defendants.

4

 

Plaintiffs alleged their class action included persons who purchased 

securities as membership interests in the Company and “Special Purpose Entities” (SPEs) 

organized by defendants under the names ARI-AOB 1, LLC through ARI-AOB 33, LLC, 

each of which acquired separate TIC interests. Of the 33 SEPs who purchased TIC 

interests, two are appealing. 

 

4

ARI was the managing member of the Company, and these entities were 

affiliated with several other ARGUS Defendants. As previously mentioned, ARICP was 

a real estate broker and later served as a property manager of the Property. ARI-AOB 

Mezzanine, LLC was formed to provide mezzanine financing to ARI and the Company. 

Argus Realty Investors, L.P. was the managing member of General Partner (Managing 

Member). Argus Realty, LLC (Argus Realty) was the general partner of Managing 

Member and sponsored ARI’s sale of the TIC interests. Also included within the 

grouping of ARGUS Defendants were several individuals who managed and ran the 

various entities (Richard Gee, Maxwell Drever, Timothy Snodgrass, Harris Totakhail, 

Joseph Corpal, and David Wong). 
7

In their complaint, Plaintiffs stated, “The ARGUS Defendants orchestrated 

a scheme whereby the Property was placed under contract by straw-buyer ARI, a newly 

organized company with nominal capital and unable to close the purchase. In a 

simultaneous closing [the Plaintiffs] provided virtually all of the down payment funds 

which combined with the purchase money bank loan from [RBS], allowed the Property 

closing to occur. . . . The [Plaintiffs] were deceived through the use of double escrows 

which made it appear ARI was selling them the TIC [i]nterests in the Property when in 

fact they were direct purchasers providing virtually all of the funds to close the deal. 

Thereafter, over a roughly seventy-five day period, ARI would sell the remainder of the 

property ownership to those members of the [c]lass who could purchase TIC [i]nterests 

post-closing of the Property, thereby pocketing those funds as well.” 

Plaintiffs alleged the ARGUS Defendants and their counsel, Hirschler, 

prepared and distributed the PPM and marketing materials through Burch, the lead 

underwriter and managing broker-dealer, who in turn distributed the PPM to investors 

through a group of “soliciting broker-dealers”. 

Plaintiffs asserted the PPM represented the property’s purchase price “was 

the same as that which had been negotiated with the unrelated seller who was paying the 

commission” to ARICP. Plaintiffs stated they were led to believe the “price had been 

agreed upon that had the unrelated seller paying the commission to [ARICP] not 

[Plaintiffs].” They alleged Defendants “participated in marking up the purchase price to 

hide the true facts that both [ARICP] and CBRE were receiving commissions described 

as paid by the Property seller when the truth was the unknowing [Plaintiffs] were paying 

the buyers’ commission as a hidden ‘Sales Load’ (as described below).” 

Plaintiffs maintained they funded the entire down payment to acquire the 

Property and then ARI claimed “to have purchased the Property for the commissiongrossed-up price of $66,505,000 (the ‘Purchase Price’) (grossed up by at least $1,305,000

commission paid to [ARICP], the ‘Markup’) at ‘Closing.’” Plaintiffs alleged “the true 
8

costs and true purchase price of the Property was concealed through the use of double 

blind escrows where the [Plaintiffs] were falsely led to believe that ARI had acquired the 

Property and sold it to them when in fact they provided virtually all the required funds.” 

The SAC discussed several misrepresentations and non-disclosures. 

Plaintiffs alleged ARI and the Company raised $74,895,000 and represented the “Sales 

Loads,” “the amount disclosed as the cost to offer real estate Securities including 

securities sales commissions, fees and costs, to be a total of $2.67 million or 11.1 

[percent] of the Gross Offering Proceeds of $74,895,000.” 

Plaintiffs stated that had they known the Sales Loads would be 16.5 

percent, which is greater than capital gains taxes, they would not have purchased the 

Securities.

5

 In addition to the misrepresented Sales Loads, Plaintiffs questioned the 

amount of loan fees payable to ARICP, the need for carrying costs to pay expenses on a 

mezzanine loan, and complained the PPM falsely promised a suitability review of all TIC 

investors. Plaintiffs did not allege the loan fees or suitability review were material to 

their decision to make the investment. 

Information Disclosed at Time of Investment in the PPM

It was anticipated the Company would raise funds pursuant to the terms 

described in PPM and purchase some or all of the property from ARI. The PPM stated 

ARI would sell an “undivided interest in the Property to the Company at the price 

(determined on a pro rata basis) paid by ARI for the Property plus the Company’s share 

of transfer and due diligence expenses, carrying costs attributable to funds advanced . . . 

to acquire the Property, and other fees and expenses incurred in the acquisition and 

financing of the Property.” 

 

5

Plaintiffs calculate this figure as follows: $1,305,000 of the $24 million 

maximum equity contribution is 5.4 percent. The PPM disclosed a Sales Load of 11.1 

percent, but with the additional 5.4 percent, the Sales Load increased to 16.5 percent.
9

Under the PPM, the Company offered TIC and LLC interests in the 

Property as set forth in the memorandum and addendum. It explained, “For the purposes 

of this investment, the price of a Unit includes not only a percentage of the purchase price 

for the Property but also a percentage of (i) the Selling Commissions and Expenses (as 

set forth in the ESTIMATED USE OF PROCEEDS below), (ii) a real estate brokerage 

commission of $1,305,000 paid to [ARICP], an affiliate of ARI, and (iii) a promotional 

fee of $821,050 paid to ARI.” (Italics added.)

The “ESTIMATED USE OF PROCEEDS” is a detailed chart setting forth 

the estimated use of the $24 million investment proceeds raised from TIC investors. The 

chart did not classify the expenses the same way. Four categories of expenses 

(amounting to 11.1 percent) were subtracted from the gross offering proceeds of $24 

million, resulting in a line item labeled “Available for Investment” of $21,330,000. Thus, 

in the scenario in which the full amount of equity was raised as follows:

$1,800,000 (7.5 percent) would be used to pay “Selling Commissions”;

$480,000 (2 percent) would be held for a “Marketing Allowance”;

$240,000 (1 percent) would be for a “Due Diligence Allowance and 

Placement Fee”; and

$150,000 (0.6 percent) would be used to pay “Offering and Organization 

Expenses.” Three of these itemized expenses have a corresponding footnote containing 

further explanations, which we will discuss anon.

After these sums were subtracted from the gross offering proceeds, and 

below the line item of money “Available for Investment,” the chart lists the remaining six 

accounted for expenses. The first expense, titled, “Down Payment-Purchase of Property” 

(80.7 percent) is followed by a list of five sub-categories relating to the down payment. 

Footnote 3, inserted next to the “Down Payment” category advised that in addition to the 

down payment, ARI “anticipates obtaining” a loan and ARI would receive a promotional 

fee of $821,050 “for its role in the Offering.” This helps explain why directly under the 
10

line item “Down Payment” there are five expenses related to taking out a loan, including 

loan fees, loan costs, lender legal fees, carrying costs, and closing costs. The estimated 

amounts for these expenses were as follows:

$19,360,000 (80.7 percent) would be used as a down payment on the 

Property;

$821,050 (3.4 percent) would be used to pay the “Promotional Fee”; 

$508,950 (2.1 percent) would be used to pay loan fees and costs;

$300,000 (1.3 percent) would be used to pay estimated carrying costs; 

$300,000 (1.3 percent) would be used to pay the estimated closing costs; 

and

$40,000 (0.2 percent) would be used to pay lender legal fees. Several of 

these expenses have a corresponding footnote containing further explanations, which we 

will discuss anon.

Relevant to this case, the ESTIMATED USE OF PROCEEDS’s chart is on 

the same page as, and immediately above, a paragraph describing the buyer’s obligation 

to pay a $1,305,000 real estate brokerage commission (the ARICP Paragraph). Plaintiffs’ 

maintain this $1,305,000 was a hidden fee used to gross up the purchase price. They 

believed the PPM promised this fee was the seller’s obligation. 

The ARICP Paragraph begins with the statement ARICP “will receive 

$1,305,000 from the [s]eller as a real estate brokerage commission on the purchase of the 

Property.” The second sentence clarifies, “Commissions are normally paid by the seller 

rather than the buyer. However, the purchase price will generally be adjusted upward to 

take into account this obligation of the [s]eller so that in effect the [TICs], including the 

Company, as the buyers, will collectively bear all of this real estate brokerage 

commission in the purchase price of the Property. The [TICs], including the Company, 

also expect to pay commissions in connection with the sale of the Property, which will 

reduce the net proceeds to the [TICs], including the Company, of any such sale.” (Italics 
11

added.) In short, the TIC investors were warned they would be responsible for paying a 

portion of the seller’s broker’s commission ($1,305,000) in addition to other 

commissions earned during the sale of the Property. 

The $1,305,000 commission is not separately listed on the ESTIMATED

USE OF PROCEEDS chart of expenses, however, there was listed an estimated 

$1,800,000 in “Selling Commissions.” It is unclear from the chart whether ARICP’s 

$1,305,000 commission is included within this larger sum of “Selling Commissions.” 

The PPM contained additional information regarding commissions and 

further defined “Selling Commissions and Expenses.” For example, footnote 2, typed 

next to “Selling Commissions” explained the nature of the expenses listed below it. 

Footnote 2 stated, “ARI . . . may accept subscriptions for Units and Interests net of all or 

a portion of the Selling Commissions otherwise payable as described under 

DISTRIBUTION PLAN below and in the Addendum” This sentence is difficult to 

understand without also reviewing the DISTRIBUTION PLAN (the Distribution Plan), 

found on page 82 of the PPM. 

The Distribution Plan portion of the PPM stated the $24 million Offering is 

for a maximum of 1,000 Units ($24,000 per Unit.). The Distribution Plan next explained 

how the Company intended to distribute the net proceeds from the sale of each Unit “to 

the Company’s capital.” It defined the $24 million collected during the Offering as gross 

proceeds. It was anticipated the Company would be capitalized with net proceeds, 

calculated by subtracting “Offering and Organization Expenses and Selling Commissions 

and Expenses” from the gross proceeds. 

These two terms (“Offering and Organization Expenses” and “Selling 

Commissions and Expenses”) were defined elsewhere in the PPM. Footnote 1 of the 

chart explained the “Offering and Organization Expenses” represented a reimbursement 

of funds owed to “the Manager,” also known as ARI. Footnote 2 and the Distribution 

Plan read together explain the “Selling Commissions and Expenses” would not exceed 
12

10.5 percent of the gross proceeds of the Offering and would be paid to both the “BrokerDealers” and “the Managing Broker-Dealer.”

Specifically, the Distribution Plan anticipated “Broker-Dealers (collectively 

the ‘Selling Group’)” would offer and sell the units to qualified investors to raise the cash 

needed for capitalization. The Managing Broker-Dealer would supervise and coordinate 

the Selling Group members, who “will receive Selling Commissions of up to 7.5 

[percent] of the gross proceeds of the Offering.” The Managing Broker-Dealer can also 

receive a 2 percent “nonaccountable marketing allowance,” plus a 0.5 percent 

“nonaccountable due diligence allowance” and a 0.5 percent “placement fee.” Therefore, 

the Managing Broker-Dealer and Selling Groups were owed “Selling Commissions and 

Expenses” comprised of “Selling Commissions,” a placement fee, a marketing allowance,

and a due diligence allowance totaling (and not to exceed) 10.5 percent. 

As mentioned earlier, the ESTIMATED USE OF PROCEEDS chart did not 

classify all the expenses the same way and listed four expenses (amounting to 11.1

percent) that were subtracted first from the gross offering proceeds of $24 million, 

resulting in a line item labeled “Available for Investment” of $21,330,000. After 

reviewing the footnotes and the Distribution Plan, it becomes apparent these four 

expenses (totaling 11.1 percent) refer specifically to the “Offering and Organization 

Expenses and Selling Commissions and Expenses” as defined in footnotes 1 and 2 and 

the Distribution Plan. These expenses are classified differently than the others because it 

was anticipated the Company could only be capitalized with net proceeds from the 

Offering (calculated by subtracting from the gross proceeds the “Selling Commissions,” 

which included a placement fee, a marketing allowance, and a due diligence allowance, 

plus the “Offering and Organization Expenses.” Thus, 11.1 percent was subtracted first 

from the $24 million representing gross proceeds. The second grouping of expenses (the 

down payment, loan costs and promotional fees) were listed separately. 
13

In summary, the ESTIMATED USE OF PROCEEDS chart, the ARICP 

paragraph, and various footnotes revealed a potential “Selling Commission” of 

$1,800,000 in the category of expenses used to calculate net proceeds to capitalize the 

Company. We recognize it is unclear whether ARICP’s $1,305,000 brokerage 

commission was included as part of this category of expense or was intended to be a 

separate and additional obligation. There is no evidence the investors were told one way 

or the other. However, what is plainly clear is the PPM disclosed to Plaintiffs their 

obligation to pay a Selling Commission and ARICP’s commission. 

The PPM also warned “[T]he purchase price to be paid by investors for 

the Interests and Units exceeds the appraised value of the Property. ARI intends to 

purchase the Property for $66,505,000, plus additional carrying costs, due diligence 

expenses, and other fees and expenses incurred in the acquisition and financing of the 

Property. . . . ARI and the Company intend to acquire proceeds from the sale of all of the 

Interests and the Units, together with the Loan, equal to $74,895,000. The purchase price 

for the Units and Interests is determined unilaterally by ARI and the Company and likely 

does not reflect the current market value of the Property, and is not based on an arm’s 

length negotiation with the Purchasers or Members or supported by an appraisal of the 

Property. In fact, the total purchase price . . . will be significantly higher than the 

aggregate price to be paid by ARI in its acquisition of the Property.” In summary, the 

PPM revealed the sale price was being marked up to cover other fees and costs. 

And finally, simple arithmetic shows the investment totaled $74,895,000

($24 million equity from investors plus a $50,895,000 bank loan), which far exceeded the 

reported purchase price of the property ($66,606,000). Additionally, the PPM contained 

multiple risk warnings, in bold italicized print, that the venture was “highly speculative 

and involve[d] substantial risks.” Investors were advised to consult their own legal and 

tax advisors “to ascertain the merits and risks of an investment in the Units before 

investing.” The PPM also warned in bold type, “This Memorandum contains forward-
14

looking statements that involve risks and uncertainties. The Company’s results may 

differ significantly from those disclosed in this Memorandum.” (Bold emphasis omitted.) 

DISCUSSION

1. Standard of Review

A demurrer is used to test the sufficiency of the factual allegations of the 

complaint to state a cause of action. (Code Civ. Proc., § 430.10, subd. (e).) The facts 

pled are assumed to be true and the only issue is whether they are legally sufficient to 

state a cause of action. “In reviewing the sufficiency of a complaint against a general 

demurrer, we are guided by long-settled rules. ‘We treat the demurrer as admitting all 

material facts properly pleaded, but not contentions, deductions or conclusions of fact or

law. [Citation.] We also consider matters which may be judicially noticed.’ [Citation.] 

Further, we give the complaint a reasonable interpretation, reading it as a whole and its 

parts in their context. [Citation.] When a demurrer is sustained, we determine whether 

the complaint states facts sufficient to constitute a cause of action. [Citation.] And when 

it is sustained without leave to amend, we decide whether there is a reasonable possibility 

that the defect can be cured by amendment: if it can be, the trial court has abused its 

discretion and we reverse; if not, there has been no abuse of discretion and we affirm. 

[Citations.] The burden of proving such reasonable possibility is squarely on the 

plaintiff. [Citation.]” (Blank v. Kirwan (1985) 39 Cal.3d 311, 318.) 

Moreover, “As a general rule in testing a pleading against a demurrer the 

facts alleged in the pleading are deemed to be true, however improbable they may be. 

[Citation.] The courts, however, will not close their eyes to situations where a complaint 

contains allegations of fact inconsistent with attached documents, or allegations contrary 

to facts which are judicially noticed.” (Del E. Webb Corp. v. Structural Materials Co.

(1981) 123 Cal.App.3d 593, 604.)
15

2. Applicable Statutes of Limitations & Delayed Discovery Rule

The gravamen of Plaintiffs’ complaint is they overpaid for the Property 

because the purchase price was bumped up to extract additional fees. Plaintiffs claim 

they would not have invested if they knew the “Sales Loads” (i.e., the fees, expenses, and 

commissions paid) exceeded the capital gains tax rate of 15 percent. In their demurrers, 

Defendants argued the applicable statute of limitations barred all claims. On appeal, the 

parties agree the applicable statute of limitations was three years. (Code Civ. Proc., 

§ 338, subd. (d).) Plaintiffs purchased the property in 2005 and the initial complaint was 

not filed until 2012. 

“Generally speaking, a cause of action accrues at ‘the time when the cause 

of action is complete with all of its elements.’ [Citations.] An important exception to the 

general rule of accrual is the ‘discovery rule,’ which postpones accrual of a cause of 

action until the plaintiff discovers, or has reason to discover, the cause of action. 

[Citations.]” (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 806-807.) “A 

plaintiff has reason to discover a cause of action when he or she ‘has reason at least to 

suspect a factual basis for its elements.’ [Citations.] Under the discovery rule, suspicion 

of one or more of the elements of a cause of action, coupled with knowledge of any 

remaining elements, will generally trigger the statute of limitations period. [Citations.]” 

(Id. at p. 807.) “The discovery rule only delays accrual until the plaintiff has, or should 

have, inquiry notice of the cause of action.” (Ibid.) “The discovery rule . . . allows 

accrual of the cause of action even if the plaintiff does not have reason to suspect the 

defendant’s identity.” (Ibid.) 

In their appeal, Plaintiffs argue the court should have applied the delayed 

discovery rule to toll the statute of limitations in their case. “‘By their reliance on the 

“discovery rule,” [P]laintiffs concede by implication that, without it, their claims are 

barred by one or more statutes of limitations.’ [Citation.] Unless the discovery rule 

applies, the statute of limitations began running when [P]laintiffs made what they now 
16

deem to be unsuitable investments, paid what they now deem to be an unreasonable (and 

undisclosed) ‘Sales Loads,’ and had in their possession documents disclosing the 

downsides of the investment (e.g., the risks of the investment and the expenses beyond 

the acquisition price of the Property).” (WA Southwest, supra, 240 Cal.App.4th 

at p. 156.)

“California law recognizes a general, rebuttable presumption, that Plaintiffs 

have ‘knowledge of the wrongful cause of an injury.’ [Citation.] In order to rebut that 

presumption, ‘“[a] plaintiff whose complaint shows on its face that his claim would be 

barred without the benefit of the discovery rule must specifically plead facts to show 

(1) the time and manner of discovery and (2) the inability to have made earlier discovery 

despite reasonable diligence.” [Citation.] In assessing the sufficiency of the allegations 

of delayed discovery, the court places the burden on the plaintiff to “show diligence”; 

“conclusory allegations will not withstand demurrer.’ [Citation.]” (Grisham v. Philip 

Morris U.S.A., Inc. (2007) 40 Cal.4th 623, 638.) 

In their operative complaint, Plaintiffs denied knowledge of facts that 

would make them question the reliability of Defendants’ representations regarding the 

TIC investments. On appeal, Plaintiffs maintain the court erred in finding conclusory 

their allegations of time, manner of discovery, and inability to have made an early 

discovery. 

Plaintiffs assert they adequately alleged the time and manner of discovery 

in the SAC. The complaint alleged the fraud was not discovered by Plaintiffs until the 

TIC interests were “brought to counsel for consultation following the Medtronics’ 

relocation representations” in a different real estate litigation case, referred to as the 

“Shoreview Litigation” involving the ARGUS Defendants. Plaintiffs alleged, “During 

counsel’s investigation of Shoreview Property they discovered the seller-paid 

commission/purchase price mark-up fraud. The investigation led from one transaction to 

another until reaching [p]laintiffs here who requested in . . . . 2012 that counsel review 
17

the Offering documents in this case.” Plaintiffs assert this allegation clearly states when 

and how they discovered the wrongdoing.

Plaintiffs also assert the court erroneously determined they did not allege 

the inability to discover the misconduct earlier despite reasonable diligence. In the SAC, 

Plaintiffs alleged they could not have with diligence discovered the fraud because they 

reasonably relied on the ARGUS Defendants’ representations and marketing. They 

asserted that after the acquisition the ARGUS Defendants continued to provide services 

as a fiduciary to the Plaintiffs in the form of property management, leasing, accounting, 

and other property-related services. 

3. The WA Southwest Case

After briefing was completed in this appeal, a different panel of this court 

published the WA Southwest case and we gave the parties an opportunity to submit letter 

briefs to discuss its relevance to this appeal. The case is essentially identical to the one 

before us now. 

Both cases concern failed real estate investments in which investors sought 

to defer payment of capital gains taxes by investing in TIC interests in real property 

marketed by investment firms. (WA Southwest, supra, 240 Cal.App.4th at pp. 152-153.) 

In both cases, plaintiffs invested after receiving a PPM containing detailed disclosures 

and risk warnings. The cases involved deals whereby a company expected to purchase 

property from a third party and then offer investors the opportunity to purchase TIC 

interests in the property. (Id. at p. 153.) And, in both cases, the investors lost their 

money and (represented by the same law firm) sued seemingly every entity or individual 

with any connection whatsoever to the investments, claiming they would not have 

invested had they known about hidden fees that increased the Sales Loads above the 

capital gains tax rate. (Ibid.) In our case, and in WA Southwest, the trial court sustained 

demurrers and entered judgment for certain defendants based on, among other things, the 

applicable statutes of limitations. (Id. at p. 150.)
18

In WA Southwest, the court affirmed the judgment of dismissal, holding that 

the plaintiffs were on inquiry notice of their injury at the time of their investments 

because of detailed disclosures in the PPM they received prior to investing. (WA 

Southwest, supra, 240 Cal.App.4th at pp. 157-158.) The disclosures in WA Southwest

revealed that the negotiated purchase price of the property was $11.6 million, but 

$13,170,000 was being raised so that other expenses could also be paid, including a 

$505,000 fee payable to an investment organizer/promoter company. (Id. at pp. 153-

154.) The disclosures did not suggest the seller of the property was paying the $505,000 

fee or any of the other expenses making up the difference between the negotiated 

purchase price and the total investment cost. (Ibid.) Accordingly, the WA Southwest

court rejected plaintiffs’ theory they were not on notice the additional fees created a Sales 

Load greater than the capital gains tax rate they wanted to avoid.

Similarly, in this case the front page of the PPM plainly disclosed the price 

for one Unit (i.e., the investment cost) included “not only a percentage of the purchase 

price” but also a percentage of three additional costs, namely (1) selling commissions and 

expenses set forth in the table of ESTIMATED USE OF PROCEEDS, (2) $1,305,000

paid to ARICP for “a real estate brokerage commission”, and (3) $821,050 paid to ARI 

for a promotional fee. This disclosure did not suggest the seller was paying the 

$1,305,000 commission or the other anticipated additional expenses. 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 investor’s obligation to pay these three expenses in addition to the 

purchase price is repeated on page 11 of the PPM. As mentioned above, the 

ESTIMATED USE OF PROCEEDS chart contains two groupings of expenses (1) the 

expenses related to capitalization of the Company, and (2) the down payment expenses. 

The $821,050 promotional fee listed on the first page is specifically included as a stand-
19

alone cost within the chart’s second group of expenses (of down payment costs). The 

first page’s reference to “Selling Commissions and Expenses” is one of the categories of 

expenses listed as part of the first group of expenses related to capitalization. The third 

expense listed on the first page, ARICP’s $1,305,000 commission, is not specifically 

identified on the chart. However, a detailed description of this expense was included in 

paragraph directly beneath the chart, i.e., the ARICP Paragraph. 

Plaintiffs focus on the first sentence of the ARICP Paragraph that states 

ARICP “will receive $1,305,000 from the [s]eller as a real estate brokerage commission 

on the purchase of the Property.” However, the sentence cannot be viewed in a vacuum. 

The next sentence explains that the commission, “normally paid by the seller,” will in 

fact be paid by the buyers, and the purchase price “will generally be adjusted upward to 

take into account this obligation of the [s]eller so that in effect the [TICs] . . . as the 

buyers, will collectively bear all of this real estate brokerage commission in the purchase 

price of the Property.” (Italics added.) This paragraph confirms the statement made on 

the first page of the PPM that the buyers were obligated to pay the $1,305,000 and further 

explained the purchase price would be grossed up to cover this cost. The ARICP 

paragraph concludes, “The [TICs], including the Company, also expect to pay 

commissions in connection with the sale of the Property, which will reduce the net 

proceeds to the [TICs], including the Company, of any such sale.” This last sentence 

suggests the $1,305,000 would be in addition to the “Selling Commissions and Expenses” 

listed in the first group of costs in the ESTIMATED USE OF PROCEEDS chart. 

In the WA Southwest case, the court rejected plaintiffs’ argument the statute 

of limitations only began running when they consulted tax and accounting specialists six 

years after they made their investment, concluding this argument ignores the disclosures 

made in the PPM. It stated, “The problem with this position is that 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 
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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. (See Casualty Ins. Co. v. Rees Investment Co. (1971) 14 

Cal.App.3d 716, 719-720 [tenant plaintiff failed to plead reasonable diligence in 

discovering unfair terms of lease in its possession]; Marlow v. Gold (S.D.N.Y., June 13, 

1991, No. 89 Civ. 8589 (JSM)) U.S.Dist. Lexis 8106, p. *27 [‘plaintiff abrogated his duty 

of inquiry of reasonable diligence by recklessly failing to familiarize himself with the 

prospectus’].) This is not a case in which the plaintiff ‘possessed no factual basis for 

suspicion.’ (E-Fab, Inc. v. Accountants, Inc. Services (2007) 153 Cal.App.4th 1308, 

1326.) The information and disclosures in the private placement memorandum put 

plaintiffs on notice of the falsity of any communications they may have received about 

the Sales Loads, tax advantages, or risk-free nature of the investments. The delayed 

discovery rule does not apply.” (WA Southwest, supra, 240 Cal.App.4th at p. 157.) 

We agree with the WA Southwest case’s discussion that the existence of 

alleged fiduciary relationships does not give Plaintiffs in this case a free pass with respect 

to the statute of limitations. “‘Where a fiduciary obligation is present, the courts have 

recognized a postponement of the accrual of the cause of action until the beneficiary has 

knowledge or notice of the act constituting a breach of fidelity. [Citations.] The 

existence of a trust relationship limits the duty of inquiry. “Thus, when a potential 

plaintiff is in a fiduciary relationship with another individual, that plaintiff’s burden of 

discovery is reduced and he is entitled to rely on the statements and advice provided by 

the fiduciary.”’ [Citation.] But, even assuming for the sake of argument that each of the 

respondents had a fiduciary duty to plaintiffs, this does not mean that plaintiffs had no 

duty of inquiry if they were put on notice of a breach of such duty. [Citation.]” (WA 

Southwest, supra, 240 Cal.App.4th at p. 157.) As discussed earlier in this opinion, 

Plaintiffs relying on the discovery rule must plead “‘“the inability to have made earlier 
21

discovery despite reasonable diligence.”’ [Citation.] Plaintiffs have an obligation to 

plead facts [and no conclusory allegations] demonstrating reasonable diligence. 

[Citation.]” (Ibid.) 

Also applicable to this case is the WA Southwest case’s discussion that a 

potentially misleading disclosure in the PPM did not create an issue of fact as to whether 

Plaintiffs were on notice of the full Sales Loads. (WA Southwest, supra, 240 Cal.App.4th 

at p. 158.) In the WA Southwest case, the chart estimating the use of investment proceeds 

did not classify a $505,000 acquisition fee “as a cost to investors in the same way as 

selling commissions or organization and offering expenses.” (Ibid.) The plaintiffs 

argued this separation could be read as increasing the value of the property, even though 

elsewhere in the PPM the item was described as an expense not an asset. The court 

disagreed, stating, “But it cannot be denied that the entire sales load, including the 

$505,000 fee, was disclosed to plaintiffs in the [PPM]. The payment of these fees was 

the alleged harm suffered by plaintiffs. One can certainly question, particularly in 

retrospect, the value of the services provided by [the entity receiving the acquisition fee] 

and the reasonableness of the total sales load. But the only issue here is whether 

plaintiffs were on notice of the total sales load and the risks of the investment. They 

were.” (Ibid.) 

In our case, the $1,305,000 commission was not specifically classified 

anyplace on the ESTIMATED USE OF PROCEEDS chart, which supports Plaintiffs’ 

theory it was arguably misleading how they should categorize this anticipated expense. 

And in hindsight, they question the validity of the commission. But as was the case in 

WA Southwest, it cannot be denied that the entire Sales Load, including the $1,305,000

expense, was disclosed to Plaintiffs in the PPM. They were put on notice and cannot toll 

the statute of limitations by pleading delayed discovery.

As in the WA Southwest case, the PPM in this case disclosed a long list of 

“RISK FACTORS.” One risk disclosed was that the purchase price paid by the investors 
22

exceeded the appraised value of the Property. The PPM explained ARI will purchase the 

property for “$66,505,000 . . . plus additional carrying costs, due diligence expenses, and 

other fees and expenses incurred in the acquisition and financing of the Property. . . . ARI 

and the Company intend to acquire proceeds . . . equal to $74,895,000. The purchase 

price . . . is determined unilaterally by ARI and the Company and likely does not reflect 

the current market value of the Property . . . .” Thus, the PPM did not hide the fact the 

purchase price could be grossed up significantly. One only needed to add up the PPM’s 

total maximum investment collected from the TIC investors ($24 million) plus the loan 

($50,895,000) to see it is obviously much higher than the amount ARI paid for the 

Property.

In conclusion, Plaintiffs were told the negotiated purchase price of the 

Property would be grossed up so that fees and costs, and an additional $1,305,000

commission, could be paid to ARICP. The disclosure explained this fee, normally paid 

by the seller, would be the buyers’ obligation. The entire Sales Loads, including the 

$1,305,000 fee, was disclosed in the PPM. It is the payment of this fee that is the alleged 

harm suffered by Plaintiffs. 

In the case before us, the SAC does not allege Plaintiffs were prohibited 

from asking questions about ARICP’s commission or advised not to seek independent 

legal, financial, or tax advice. They offer no explanation as to why the disclosures in the 

PPM failed to put them on inquiry notice before investing millions of dollars in a risky 

and highly speculative commercial real estate deal. We conclude that based on the 

PPM’s disclosures, Plaintiffs in this case were on inquiry notice. 

Plaintiffs attempt to factually distinguish the WA Southwest case on the 

grounds their SAC “does not allege that the investment was [orally] represented as ‘risk 

free,’ ‘not risky’ or that [Plaintiffs] believed that the investment was free of any risk.” In 

other words, Plaintiffs believe their case is distinguishable because there were no oral 

representations further misleading the Plaintiffs or that would have contradicted the 
23

documents describing the investment as being highly risky. They argue sustaining the 

demurrer would create a “new rule of law that investors are always on notice of fraud 

whenever an investment prospectus utters the word ‘high risk.’” RBS discussed this 

factual distinction as hurting not helping Plaintiffs because it shows the Plaintiffs have 

“even weaker claims than those in WA Southwest.” We agree with RBS. Unlike the WA 

Southwest plaintiffs, the Plaintiffs in this case have not alleged they were mislead by oral 

representations and as a result excused from reading the PPM’s disclosures. And, in any 

event, the WA Southwest’s court’s holding was not dependent on the existence of oral 

misrepresentations. To the contrary, the court’s analysis was not influenced by this fact 

one way or the other. 

The plaintiffs in WA Southwest alleged they received oral 

misrepresentations recommending the deal and promising the Sales Loads would be less 

than 10 percent. (WA Southwest, supra, 240 Cal.App.4th at p. 152.) This fact was 

mentioned in the factual summary of the case but was not relevant to the holding of the 

case affirming the judgment. The oral misrepresentations were not part of the analysis 

because these facts did not change the undisputed evidence those plaintiffs received 

actual written notice of the total Sales Loads and the risks of the investment because it 

was disclosed to them in the PPM. “[The PPM’s disclosures] was sufficient to put

plaintiffs on notice that the ‘sales load’ exceeded the capital gains tax rate. This is not 

akin to a situation in which a party relies on the statements of a fiduciary about, for 

instance, the legality of a complicated transaction. [Citation.] Plaintiffs only needed the 

private placement memorandum and a calculator to obtain the information they now 

deem essential.” (WA Southwest, supra, 240 Cal.App.4th at p. 158.) The oral 

misrepresentations neither excused plaintiffs from their duty of inquiry nor heightened 

their duty to investigate. The fact was deemed irrelevant.

In this opinion we are not suggesting investors should be on notice of fraud 

whenever a PPM warns the investment is high risk. Rather, we agree with the WA 
24

Southwest case’s holding that “reasonable diligence” does not consist of ignoring a PPM 

received prior to an investment that clearly discloses the anticipated fees, expenses, and 

commissions that would be paid out of the cash investment. 

In their letter brief, Plaintiffs assert their case is materially different from 

WA Southwest because the SAC included allegations the PPM promised a suitability 

review as to each of the TIC investors “in order to determine whether the investment was 

suitable.” Plaintiffs fail to explain why this is a factual distinction that makes a 

difference. How does this fact make WA Southwest’s holding inapplicable? We 

conclude this is a red herring argument. 

We acknowledge the SAC alleged ARGUS Defendants used the suitability 

review as pretext to collect personal and private financial information from the TIC 

investors and “the TIC Interests were sold to anyone who submitted a subscription.” On 

appeal, Plaintiffs do not explain why this qualifies as a material misrepresentation 

sufficient, standing alone, to maintain causes of action against these Defendants. It is not 

alleged an unsuitable TIC investor was a contributing cause to the damages caused by the 

investment’s failure or, for that matter, the cause of any damages. Nor do Plaintiffs claim 

they would not have invested in the Property had they known this fact at the time. They 

offer no additional facts that could be pled to create a viable cause of action against these 

specific Defendants based on this alleged misrepresentation. 

For all the above reasons, we find the WA Southwest case on all fours with 

ours. As in the WA Southwest case, Plaintiffs failed to meet their burden of alleging the 

necessary facts for the delayed discovery rule to apply. They were given the opportunity 

to amend and do not argue any way they could amend that would survive the statute of 

limitations obstacle. The trial court correctly sustained the demurrer.
25

DISPOSITION

The judgments are affirmed. Respondents shall recover costs incurred on 

appeal.

O’LEARY, P. J.

WE CONCUR:

BEDSWORTH, J.

MOORE, J.