Arnson v. My Investing Place L.L.C

GREG ARNSON, et. al.,Plaintiffs,

v.MY INVESTING PLACE L.L.C, et al., Defendants.

Case No. 2:09-CV-254 DN

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

Dated June 7, 2012

MEMORANDUM DECISION AND

ORDER DISMISSING CASE

FOR LACK OF SUBJECT MATTER

JURISDICTION AND DENYING

MOTION TO AMEND COMPLAINT.

District Judge David Nuffer

Plaintiffs have many motions pending. The district judge has held hearings¹ while the case was referred to him as a magistrate judge to determine whether default judgments could be entered against many Defendants. At a hearing held May 31, 2011, the court questioned whether any instruments involved in this case constituted securities, a prerequisite for a violation of the securities laws.² Consequently, the court allowed plaintiffs to file a memorandum addressing the issue of the court's subject matter jurisdiction.³ Plaintiffs filed their memorandum with supporting evidence on June 20, 2011.⁴

Allegations in this Case

Plaintiffs allege that Defendants engaged in a scheme by which they offered for sale lots in a resort Defendants were developing in Missouri. The resort was to contain duplexes, luxury residential units, a golf course, a water park, shopping, and other amenities. Plaintiffs took title to the lots and on the strength of their credit obtained construction financing for the duplexes tobe built on the lots in exchange for Defendants' promise to pay a flat fee of $5,000 for each duplex financed. Defendants were to make the payments on the loans and clear Plaintiffs' credit by either selling the units after they were built or by refinancing the loans. Defendants failed to develop the project as promised and did not make the required payments on the construction loans. The loans went into default, leaving plaintiffs obligated for the construction financing and with damaged credit. Plaintiffs allege that Defendants violated the federal securities laws.

Plaintiffs assert that this court has subject matter jurisdiction under 28 U.S.C. § 1331 based upon the alleged securities fraud.⁵ After careful consideration, the court concludes that the investments at issue do not constitute "securities" as contemplated by the federal securities acts, and therefore, this court lacks subject matter jurisdiction.

BACKGROUND⁶

1. My Investing Place ("MIP"), Western Site Services/Tri Global, and David Drake and Don Snider, owners of WWS/Tri Global, set up the actual investment in Indian Ridge Resort Community ("IRRC") as an investment scheme. The scheme essentially involved using Plaintiffs' credit to finance construction of several duplexes in the IRRC. Each Plaintiff participated as a "credit partner," wherein they were required to take out construction loans in order to provide financing for the construction of individual units.

2. As credit partners, Plaintiffs were not required to make any financial outlay other than the use of their credit, and a $3,000 reservation fee per unit (half duplex), which itself was to be refundable once financing was successfully secured. Moreover, all payments—themortgage and interest payments, the initial down payment, and closing costs on all loans—would be made by WSS/Tri Global or other third parties.

3. Upon completion, which WSS/Tri Global represented to Plaintiffs would only take approximately four months, the units would be sold and the balance of the construction loans repaid with the funds from the sale.

4. WSS/Tri Global and other third parties managed all aspects of construction, financing and loan qualification, and marketing and resale of the financed units to secondary potential buyers.

5. In return for taking out these loans, Plaintiffs and other prospective investors would receive $5,000.00 for each individual unit ($10,000.00 for each duplex) they financed.

6. According to the Real Estate Partner Agreement ("Agreement"), each Plaintiff "proceeded with an application for a mortgage on real property in [Plaintiff's] name and under [Plaintiff's] social security number and credit." Each Plaintiff acknowledged an understanding that "this mortgage [would] be recorded in county records and on [Plaintiff's] credit information." Thus, although Defendants agreed to make interest payments and to pay off the loans upon completion, Plaintiffs accepted nearly all the financial risk involved in the partnership. If—and when—Defendants failed to make payments, the ramifications would—and did—fall entirely on Plaintiffs.

7. Defendants made numerous representations to Plaintiffs that this was an investment. At no time was it contemplated that Plaintiffs would be purchasing the units outright. This arrangement is evidenced in the Agreement:

Title: Partner understands and agrees that title to the property will be held in the name of the partner and My Investing Place, L.L.C. Partner shall sign and [sic] documents or deeds to effectuate the addition of title to My Investing Place, L.L.C. at closing. Partner shall have NO rights or access whatsoever tothe property. Partner may NOT place any liens on the property or use property for any securitized credit or collateral.

Bankruptcy: In the event of [sic] Partner files for bankruptcy in any court, Partner understands and agrees that Partner has no equity position and no remainder of equity in the Property, that all equity and rights to proceeds belongs [sic] solely and exclusively to Principal, and that Property shall NOT be listed as an asset of Partner or attached in any bankruptcy proceeding.

Property Disposition: Principal will dispose of the property either by outright sale or, in the alternative, removal of the mortgage under Partner's name and credit by refinancing the loan no sooner than One (1) month and no longer than fifteen (60) [sic] months dated from the initial closing on the property. Partner hereby understands and agrees not to prohibit the disposition of the property.

Property Proceeds: All proceeds from the disposition of the property shall be due to and owned by My Investing Place, L.L.C. Partner shall have no rights in or to any proceeds, cash or otherwise, resultant from improvements, appreciation or any other accrual on the property. Partner shall execute, at Principal's request, any further documentation required to validate Principal's right to proceeds. Partner hereby understands and agrees to relinquish any and all current or future rights to any and al [sic] proceeds derived from the disposition of the property.

Per the Agreement, Plaintiffs would simply be financing the construction, with Defendants promising a fixed return.

8. MIP, WSS/Tri Global, and Drake and Snider pitched this scheme to Plaintiffs at a series of promotional meetings held in Sandy, Utah, in late 2006 and early 2007. At these meetings, Drake and Snider made representations to each of the Plaintiffs regarding the investment they would be making.

9. Among these representations were descriptions of various amenities available within the Indian Ridge Resort Community ("IRRC") that, Defendants explained, would boost the value of the property by making the IRRC a destination resort.

10. Shirato and the Indian Ridge Entity Defendants were instrumental in pitching the investment scheme.

* * * * 12. Also included in promotional materials published by Shirato and the Indian Ridge Entity Defendants were representations that the following amenities were included in the IRRC: [a golf course; a lifestyle center consisting of themed retail shopping and professional offices, upscale restaurants, a fitness club and day spa, and a courtyard; indoor/outdoor water parks; and a full service resort hotel].

13. These promotional materials showed Tract 34, where all of Plaintiffs' lots and units are located, as part of Phase I of the IRRC.

14. Shirato and the Indian Ridge Entity Defendants put together and released an Interactive Promotional DVD to encourage investment in the IRRC.

* * * *

19. Shirato presented the promotional materials to Drake and Snider, and My Investing Place, on his and the Indian Ridge Entity Defendants' behalf. He did so for the purpose of soliciting investments in the IRRC from My Investing Place's clients.

20. Mr. Shirato and the Indian Ridge Entity Defendants presented the information contained in these promotional materials to Plaintiffs, through Drake and Snider, in an attempt to persuade them to invest in the IRRC.

21. At the Sandy, Utah, promotional meetings, Drake and Snider discussed the IRRC as well as Shirator's [sic] success in previous projects. They did so to promote the soundness of the investment scheme.

22. Based on the several representations made by Defendants, each Plaintiff entered into the Agreement with MIP. Under the express terms of said agreements, Plaintiffs did not receive full control and ownership of the properties they would be financing. Instead, Plaintiffs agreed to hold title with MIP, and further acknowledged that all equity belonged to MIP.

23. Plaintiffs invested in Defendants' scheme solely to realize a profit. At no point did any individual Plaintiff view this as a simple real estate purchase in which Defendants were simply building a residence for Plaintiffs' own use and enjoyment.

DISCUSSION

A. Subject Matter Jurisdiction

Before a federal court may consider the merits of a case, it must first determine whether it has subject matter jurisdiction.⁷ Thus, the court is "obliged to inquire sua sponte whenever a doubt arises as to the existence of federal jurisdiction."⁸ If the court determines that subject matter jurisdiction is lacking, the court must dismiss the action.⁹

In this case, Plaintiffs allege federal question jurisdiction under 28 U.S.C. § 1331 based upon alleged violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. However, if the "investments" at issue in this case do not constitute "securities" within the meaning of the securities laws, this court would lack jurisdiction over the subject matter since no federal question would exist....