Langille v. Berthel, Fisher & Company Financial Services, Inc. ( 2019 )

1 2 3 4 5 6 7 UNITED STATES DISTRICT COURT 8 FOR THE EASTERN DISTRICT OF CALIFORNIA 9 10 ROBINSON L. LANGILLE, et al., Case No. 2:19-cv-00454-KJM-AC 11 Plaintiffs, 12 v. ORDER 13 BERTHEL, FISHER & COMPANY FINANCIAL SERVICES, INC., 14 Defendant. 15 16 Plaintiffs allege defendant’s former employee, a financial advisor, steered plaintiffs 17 into high risk, high cost investments ill-suited for their financial needs and goals. Defendant moves 18 to dismiss, or, in the alternative, for summary judgment. As explained below, the court finds 19 summary judgment is not warranted at this juncture but GRANTS the motion to dismiss. 20 I. BACKGROUND 21 Plaintiffs Robinson Langille and Linda Langille, a married couple, both retired, 22 bring this suit against defendant Berthel, Fisher & Company Financial Services, Inc., an Iowa 23 corporation doing business in California as an independent broker-dealer, subject to all Financial 24 Regulatory Authority (“FINRA”) rules as a FINRA-registered broker-dealer. First Am. Compl. 25 (“FAC”), ECF No. 15, ¶¶ 2−5. Shawn B. Davis acted as Berthel’s agent and FINRA-registered 26 representative in providing investment advice and recommendations to plaintiffs. Id. ¶ 6. 27 Plaintiffs allege they “entrusted Mr. Davis with virtually all of the money that they 28 had worked for and saved for over their entire lives,” that “Davis was very familiar with [their] [] 1 circumstances, and their general desire to protect their savings along with some growth and 2 income. . . . and [aware] that [they] [] would be relying entirely on him to make appropriate 3 investment decisions for the accounts.” Id. ¶¶ 8–9. Nonetheless, according to plaintiffs, Davis 4 recommended plaintiffs invest in “two high-risk illiquid [direct participation programs (“DPPs”)].” 5 Id. ¶ 10. In November 2006, on Davis’s recommendation, plaintiffs invested in two DPPs, investing 6 $278,000 in United Development Funding III (“UDF”) and $275,000 in Atel Growth Capital Fund 7 (“Atel”). Id. 8 Plaintiffs allege Davis recommended the UDF and Atel investments “solely because 9 these securities were massive commission-generating products” that “resulted in the Langilles 10 paying exorbitant commissions and fees,” even though neither investment was suitable given 11 plaintiffs’ needs and goals. Id. ¶¶ 11, 19−20. Davis allegedly misrepresented the investments as 12 “a secure way to invest [plaintiffs’] retirement money” and represented that the investments would 13 provide “a full return of [plaintiffs’] principal investment along with income,” without properly 14 disclosing the risks or characteristics of the investments or the “extremely large commissions he 15 and his brokerage firm generated as a result of these transactions.” Id. ¶¶ 13−17. According to 16 plaintiffs, “[t]he major wirehouses . . . prohibit their brokers from selling these types of products to 17 their customers . . . . because the products are so blatantly against the customers’ interest.” Id. ¶ 12. 18 Plaintiffs contend they relied on Davis’s misrepresentations and omissions to their detriment. Id. 19 ¶ 18. Davis was no longer employed by Berthel as of August 20, 2012 but “continued to serve as 20 the Langilles’ broker from the purchase of these DPPs through May 2017, when he ceased being a 21 registered broker with FINRA.” Id. ¶ 25. 22 Because UDF and Atel are private, non-traded products, plaintiffs contend they were 23 unable to determine the true value of their investments for several years. Id. ¶ 21. Plaintiffs’ initial 24 UDF investment was initially priced at $20 per share and continued at that valuation until at least 25 June 30, 2016, according to quarterly statements plaintiffs received. Id. ¶¶ 21, 23. The Federal 26 Bureau of Investigation raided UDF in late 2015 “due to potential fraud and insider activity[,]” but 27 plaintiffs’ statements continued to indicate a $20 per share price for UDF. Id. ¶¶ 22−23. As of late 28 2016 or early 2017, however, both plaintiffs and the public learned “the true value of UDF,” which 1 “is essentially worthless.” Id. ¶ 23. Similarly, plaintiffs were informed every quarter following 2 their investment until June 2018 that their Atel investment was valued at $275,000, the amount of 3 their initial investment. Id. ¶ 24. In June 2018, Atel informed plaintiffs and other investors that 4 Atel would make its final distribution and plaintiffs “would receive nothing additional from their 5 investment.” Id. Plaintiffs thus contend they discovered Berthel and Davis’s misconduct only in 6 fall 2016 “when the true valuation of the UDF product (essentially worthless) became clearer.” Id. 7 ¶¶ 27, 29−33 (alleging Berthel violated FINRA rules requiring it to supervise brokers, periodically 8 review transactions and take steps to ensure customers not led to unsuitable and fraudulent 9 investments). 10 Plaintiffs sued Berthel in state court on February 15, 2019, and Berthel removed the 11 case to this court on March 11, 2019. ECF Nos. 1, 1-1 (notice of removal and complaint). Berthel 12 moved to dismiss plaintiffs’ complaint but withdrew that motion upon agreeing to allow plaintiffs 13 to file a first amended complaint. ECF Nos. 4−7, 9, 12. Plaintiffs then filed their first amended 14 complaint, alleging: (1) breach of fiduciary duty; (2) fraud in the inducement; (3) negligence; and 15 (4) negligent supervision. See generally FAC. Berthel filed a motion titled “motion to dismiss” 16 but clarified it moves under “Rules 9(b), 12(b)(6), and 56,” providing a statement of undisputed 17 facts and evidence beyond the complaint, typically reserved to motions for summary judgment; 18 Berthel argues “[w]hichever course the Court chooses, each of Plaintiffs’ claims fails as a matter 19 of law.” Mot., ECF No. 16, at 21; Statement of Undisputed Facts (“SUF”), ECF No. 17, at 2 20 (providing undisputed facts “in support of [Berthel’s] motion to dismiss/motion for summary 21 judgment”). Plaintiffs have opposed without directly acknowledging or responding to Berthel’s 22 statement of undisputed facts or supporting exhibits, though they respond to the substance of 23 Berthel’s summary judgment arguments based on those facts and exhibits. Opp’n, ECF No. 22. 24 Berthel filed a reply. Reply, ECF No. 23. As explained further below, the court allowed the parties 25 to file supplemental briefing as to the propriety of summary judgment on this record and then 26 submitted the motion, which it resolves here. 27 1 All citations to the parties’ briefs refer to CM/ECF page numbers, not the briefs’ internal 28 pagination. 1 II. LEGAL STANDARDS 2 A. Motion to Dismiss 3 Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a party may move to 4 dismiss a complaint for “failure to state a claim upon which relief can be granted.” A court may 5 dismiss “based on the lack of cognizable legal theory or the absence of sufficient facts alleged 6 under a cognizable legal theory.” Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 7 1990). 8 Although a complaint need contain only “a short and plain statement of the claim 9 showing that the pleader is entitled to relief,” Fed. R. Civ. P. 8(a)(2), in order to survive a motion 10 to dismiss this short and plain statement “must contain sufficient factual matter . . . to ‘state a 11 claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting 12 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A complaint must include something 13 more than “an unadorned, the-defendant-unlawfully-harmed-me accusation” or “‘labels and 14 conclusions’ or ‘a formulaic recitation of the elements of a cause of action.’” Id. (quoting 15 Twombly, 550 U.S. at 555). Determining whether a complaint will survive a motion to dismiss 16 for failure to state a claim is a “context-specific task that requires the reviewing court to draw on 17 its judicial experience and common sense.” Id. at 679. Ultimately, the inquiry focuses on the 18 interplay between the factual allegations of the complaint and the dispositive issues of law in the 19 action. See Hishon v. King & Spalding, 467 U.S. 69, 73 (1984). 20 In making this context-specific evaluation, this court must construe the complaint 21 in the light most favorable to the plaintiff and accept as true the factual allegations of the 22 complaint. Erickson v. Pardus, 551 U.S. 89, 93-94 (2007). This rule does not apply to “a legal 23 conclusion couched as a factual allegation,” Papasan v. Allain, 478 U.S. 265, 286 (1986) quoted 24 in Twombly, 550 U.S. at 555, nor to “allegations that contradict matters properly subject to 25 judicial notice” or to material attached to or incorporated by reference into the complaint. 26 Sprewell v. Golden State Warriors, 266 F.3d 979, 988-89 (9th Cir. 2001). A court’s 27 consideration of documents attached to a complaint or incorporated by reference or matter of 28 judicial notice will not convert a motion to dismiss into a motion for summary judgment. United 1 States v. Ritchie, 342 F.3d 903, 907-08 (9th Cir. 2003); Parks Sch. of Bus. v. Symington, 51 F.3d 2 1480, 1484 (9th Cir. 1995); compare Van Buskirk v. Cable News Network, Inc., 284 F.3d 977, 3 980 (9th Cir. 2002) (noting that even though court may look beyond pleadings on motion to 4 dismiss, generally court is limited to face of the complaint on 12(b)(6) motion). 5 B. Rule 9(b): Fraud Allegations 6 “In alleging fraud or mistake, a party must state with particularity the 7 circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). To satisfy Rule 9(b), a 8 plaintiff must include “the who, what, when, where, and how” of the fraud. Vess v. Ciba–Geigy 9 Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (internal quotation marks and citations omitted). 10 Ultimately, a plaintiff’s fraud allegations “must be specific enough to give defendants notice of 11 the particular misconduct which is alleged to constitute the fraud charged so that they can defend 12 against the charge and not just deny that they have done anything wrong.” Swartz v. KPMG LLP, 13 476 F.3d 756, 764 (9th Cir. 2007) (citation omitted). 14 C. Rule 56(d) 15 Federal Rule of Civil Procedure 56(d) states: “[i]f a nonmovant shows by affidavit 16 or declaration that, for specified reasons, it cannot present facts essential to justify its opposition, 17 the court may: (1) defer considering the motion or deny it; (2) allow time to obtain affidavits or 18 declarations or to take discovery; or (3) issue any other appropriate order.” Fed. R. Civ. P. 56(d). 19 If summary judgment is filed “before a party has had any realistic opportunity to pursue discovery 20 relating to its theory of the case, district courts should grant any Rule 56[(d)] motion fairly freely.” 21 Burlington N. Santa Fe R.R. Co. v. Assiniboine & Sioux Tribes of Fort Peck Reservation, 323 F.3d 22 767, 773 (9th Cir. 2003) (citing, inter alia, Metabolife Int’l, Inc. v. Wornick, 264 F.3d 832, 846 (9th 23 Cir. 2001) (noting “the Supreme Court has restated [Rule 56(d)] as requiring, rather than merely 24 permitting, discovery ‘where the non-moving party has not had the opportunity to discover 25 information that is essential to its opposition.’”)). 26 A district court should defer ruling on a motion for summary judgment when the 27 party opposing summary judgment “makes (a) a timely application which (b) specifically identifies 28 (c) relevant information, (d) where there is some basis for believing that the information actually 1 exists.” VISA Int’l Serv. Ass'n v. Bankcard Holders of Am., 784 F.2d 1472, 1475 (9th Cir. 1986). 2 However, a Rule 56(d) motion may be denied when the party seeking deferral has not diligently 3 sought discovery or additional discovery would be futile or irrelevant to the dispute. Pfingston v. 4 Ronan Eng’g Co., 284 F.3d 999, 1005 (9th Cir. 2002). 5 III. DISCUSSION 6 Berthel principally argues that documents provided to and executed by plaintiffs at 7 the time of their investments conclusively establish that plaintiffs’ claims are time-barred, 8 warranting entry of summary judgment in Berthel’s favor. Mot. at 12−18. In the alternative, 9 Berthel argues plaintiffs have not satisfied Rule 9(b)’s heightened pleading standard in alleging 10 fraud and, at the least, have not sufficiently alleged tolling of the statute of limitations, warranting 11 dismissal of plaintiffs’ claims. Id. at 18−20. As explained below, the former argument cannot 12 prevail on this record. Finding some merit in the latter argument, however, the court construes 13 Berthel’s motion as a motion to dismiss and grants that motion. 14 A. Rule 56(d) 15 In response to Berthel’s motion, and with leave from the court, plaintiffs’ counsel 16 filed a declaration stating plaintiffs “need to take discovery to provide the Court with evidence 17 (1) rebutting Defendant’s alleged undisputed facts and (2) to provide the Court with evidence 18 regarding Defendant’s broker’s various breaches of the fiduciary duty that are separate and apart 19 from his misrepresentations and omissions regarding the nature of the two private alternative 20 investments.” Sommers Decl., ECF No. 29, ¶ 5; see also ECF No. 27 (order permitting plaintiffs 21 to file Rule 56(d) affidavit and permitting Berthel to file response); Def. Resp., ECF No. 30. 22 More specifically, the Langilles raise a dispute regarding whether, in June 2006, 23 they completed a Berthel “Account Suitability Form” in which they identified their annual income 24 as between $100,000 and $199,999, with net liquid assets and net worth both between $1,000,000 25 and $4,999,999, and whether they attested to 25 years of investment experience with stocks, bonds 26 and mutual funds, 3 years with annuities, and zero years with options and “LTD Partnerships.” 27 Sommers Decl. ¶ 7 (“Plaintiffs will testify that they did not complete these forms, and that the forms 28 contain inaccurate information regarding the Langilles’ financial condition and their experience.”); 1 see UMF 18−20; Murphy Decl., ECF No. 6, Ex. 1. They similarly dispute the authenticity of Mr. 2 Langille’s initials on an “investor questionnaire.” Sommers Decl. ¶ 7. Plaintiffs’ counsel 3 represents, subject to Rule 11,2 that “[p]laintiffs will testify that they did not complete these forms, 4 and that the forms contain inaccurate information regarding the Langilles’ financial condition and 5 their experience.” Sommers Decl. ¶¶ 6, 7, 9. Further, citing an unidentified “California regulation” 6 that purportedly requires an investor to have a minimum liquid net worth of at least ten times an 7 investment, plaintiffs argue, “[d]iscovery is needed to determine if Defendant breached this 8 California regulation regarding concentration suitability because Plaintiffs’ liquid net worth at the 9 time was nowhere near this level.” Id. ¶ 14. In response to Berthel’s claims it required customers 10 to complete “a subscription agreement and similar forms or questionnaires created by the 11 investment sponsor” and a “Prospectus/Private Placement Memorandum Acknowledgement/ 12 Representations” to purchase a non-traded security, Murphy Decl., ECF No. 6, ¶ 5, “Plaintiffs will 13 testify that they never actually received the prospectuses” and contend they require discovery to 14 determine whether “withholding [prospectuses] would have further prevented Plaintiffs from 15 16 2 Under Rule 11: 17 By presenting to the court a pleading, written motion, or other paper . . . an attorney . . . certifies that to the best of the person’s knowledge, 18 information, and belief, formed after an inquiry reasonable under the circumstances: 19 (1) it is not being presented for any improper purpose, such as to 20 harass, cause unnecessary delay, or needlessly increase the cost of litigation; 21 (2) the claims, defenses, and other legal contentions are warranted by 22 existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law or for establishing new law; 23 (3) the factual contentions have evidentiary support or, if specifically 24 so identified, will likely have evidentiary support after a reasonable opportunity for further investigation or discovery; and 25 (4) the denials of factual contentions are warranted on the evidence 26 or, if specifically so identified, are reasonably based on belief or a lack of information. 27 Fed. R. Civ. P. 11(b). An attorney who violates Rule 11 may be subject to sanctions. Fed. R. 28 Civ. P. 11(c). 1 understanding the true nature and cost (commissions) of these alternative investments.” Sommers 2 Decl. ¶ 11 (emphasis omitted). 3 Plaintiffs also raise a point they referred to obliquely in their opposition and relied 4 on heavily at hearing: “Defendants’ core contention – that discovery is not needed regarding 5 misrepresentations because it contends that mere receipt of a prospectus automatically always 6 imputes knowledge to the investor regardless of contradictory oral representations – is simply 7 incorrect.” Id. ¶ 12 (citing Luksch v. Latham, 675 F. Supp. 1198, 1204−05 (N.D. Cal. 1987) 8 (finding “mere receipt of a prospectus containing information that contradicts material 9 representations made orally to investors, standing alone, does not put such investors on constructive 10 notice of [federal claims under] section 10(b) and rule 10b–5 [] as a matter of law” and finding “it 11 highly unlikely that the California Supreme Court would adopt this far-reaching concept of 12 constructive notice” in addressing similar state law claims); Casella v. Webb, 883 F.2d 805, 809 13 (9th Cir. 1989) (finding “[c]onstructive knowledge cannot bar a purchaser’s recovery under section 14 12(2) [of the 1933 Securities Act]” because “actual knowledge of the untruth or omission” is 15 required)). 16 Berthel responds that plaintiffs’ requested discovery and anticipated testimony will 17 not materially affect the current record on summary judgment. Def. Resp. at 2−4. That record, 18 according to Berthel, conclusively establishes that “[t]he Langilles were [] on notice of their claims” 19 upon acknowledging receipt of certain disclosures, regardless of whether the Langilles actually 20 received those disclosures, rendering their claims time-barred as a matter of law. Id. at 3−4. Berthel 21 further argues that California courts have held, “contrary to the court’s prediction in Luksch, receipt 22 of a prospectus is sufficient to trigger the statute of limitation under California law,” and notes that 23 Casella addressed a claim under section 12(2), which plaintiffs do not assert here. Id. at 5 24 (emphasis omitted). Finally, Berthel argues, “[a]fter Davis’s departure [from Berthel in August 25 2012], the Langilles did not have any relationship with Berthel Fisher, and any basis for equitable 26 tolling ended.” Id. at 6 (citations omitted). 27 On this record and at this juncture, summary judgment is not warranted. As 28 plaintiffs note, courts have not granted summary judgment on limitations grounds where a plaintiff 1 purportedly received disclosures, but triable issues of fact remained as to whether the defendant 2 breached his or her fiduciary duties in recommending investments allegedly unsuitable for the 3 plaintiff’s needs. See Sommers Decl. ¶ 13 (citing state trial court order denying summary judgment 4 on these grounds); ECF No. 29-6 (order); Opp’n at 9−10; see also Sakai v. Merrill Lynch Life Ins. 5 Co., No. C 06-2581 MMC, 2008 WL 687243, at *2 (N.D. Cal. Mar. 7, 2008) (vacating order 6 granting motion for summary judgment on statute of limitations defense upon finding defendant 7 had not “demonstrated [plaintiff] knew, or was on notice, . . . that the Annuity was an ‘unsuitable’ 8 investment”); cf. Judicial Council of California, Civil Jury Instruction 4105 (“Duties of 9 Stockbroker—Speculative Securities”) (stockbroker must ensure “client understands the 10 investment risks in light of his or her financial situation”; “inform the client that speculative 11 investments are not suitable if the stockbroker believes that the client is unable to bear the financial 12 risks involved”; and “[n]ot [] solicit the client’s purchase of speculative securities that the 13 stockbroker considers to be beyond the client’s risk threshold”). Moreover, while Berthel relies 14 heavily on a California Court of Appeal’s decision finding “[r]eceipt of investment disclosures can 15 trigger the statute of limitations in appropriate cases,” thus preventing a plaintiff from successfully 16 invoking the discovery rule, the court is not satisfied so early in these proceedings that this is an 17 “appropriate case[]” for applying such a rule. See WA Sw. 2, LLC v. First Am. Title Ins. Co., 240 18 Cal. App. 4th 148, 156–58 n.6 (2015).3 Finally, while Berthel argues that plaintiffs’ “basis for 19 equitable tolling ended” when Davis’s employment with Berthel concluded, none of the authorities 20 Berthel cites clearly applies here or clearly supports Berthel’s argument. See Def. Resp. at 6 (citing 21 Sanchez v. S. Hoover Hosp., 18 Cal. 3d 93, 102 (1976) (finding statute of limitations for medical 22 malpractice claim “began to run no later than the date of plaintiff’s discharge from defendants’ 23 care”); Mark K. v. Roman Catholic Archbishop, 67 Cal. App. 4th 603, 611 (1998), as modified on 24 denial of reh’g (Oct. 28, 1998) (adult plaintiff alleging childhood sexual molestation by parish 25 priest had not “allege[d] lack of knowledge or appreciation of Father Llanos’s misconduct[, which] 26 27 3 WA Southwest “d[id] not involve the parties from whom plaintiffs actually purchased their investments,” but instead concerned “defendants . . . on the periphery of the transaction.” Id. 28 1 deprive[d] him of any basis upon which to disclaim inquiry notice that the church was a potential 2 tortfeasor.”); Twomey v. Mitchum, Jones & Templeton, Inc., 262 Cal. App. 2d 690, 725 (Ct. App. 3 1968) (“There is authority . . . for the proposition that where the victim is unaware of the negligence 4 of an agent or one acting in a fiduciary relationship, the commencement of the running of the 5 statutory period is suspended until either the relationship is terminated or there is discovery or 6 grounds for discovery of the negligent breach of duty.”)). 7 Accordingly, the court declines to resolve Berthel’s motion as a motion for summary 8 judgment and instead turns to the merits of its Rule 12 arguments. See Mot. at 2 (leaving to court 9 to determine whether motion should be resolved under Rule 56 or Rule 12). 10 B. Motion to Dismiss 11 1. Fraud in the Inducement 12 Fraud in the inducement is a subset of fraud that arises when “the promisor knows 13 what he is signing but his consent is induced by fraud, mutual assent is present and a contract is 14 formed, which by reason of the fraud, is voidable.” Hinesley v. Oakshade Town Ctr., 135 Cal. App. 15 4th 289, 294 (2005) (internal quotation marks and citations omitted). “The elements of fraud . . . 16 are (a) a misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of 17 falsity (or ‘scienter’); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and 18 (e) resulting damage.” 5 Witkin, Summary 11th Torts § 890 (2019). 19 Berthel complains that plaintiffs have “not specif[ied] what they contend Davis 20 actually said, let alone where or how he said it. . . . [or] why Davis’s statements (whatever they 21 may be) fell short of a ‘proper’ disclosure or what additional information . . . should have been 22 given to them.” Mot. at 19. Plaintiffs’ allegations are not as threadbare as Berthel suggests. 23 Plaintiffs set forth the alleged content of Davis’s purported misrepresentations. See FAC ¶¶ 13−14 24 (Davis represented investments “were a secure way to invest [plaintiffs] retirement money” and 25 “would provide the Langilles with a full return of their principal investment along with income”). 26 They also allege the content of Davis’s purported omissions. Id. ¶¶ 15−20 (Davis did not disclose 27 “serious risks” associated with the investments,” the “extremely large commissions” Davis and 28 Berthel would recover from plaintiffs’ investments, the “extremely unsuitable [nature of the 1 investments] . . . based on the Langilles’ ages, the [sic] employment status, directives as well as 2 their investment objectives and risk tolerance level” and the “extreme risk” they faced investing “a 3 very significant portion of [their] [] entire liquid net worth” in these funds). Nonetheless, the court 4 agrees more robust allegations, particularly as to the “when, where, and how” of Davis’s alleged 5 fraud are necessary to satisfy Rule 9(b). See Vess, 317 F.3d at 1106. Plaintiffs’ complaint is silent 6 on these points. 7 Accordingly, the motion is GRANTED with leave to amend. 8 2. Statute of Limitations & Discovery Rule 9 A four-year statute of limitations period governs plaintiffs’ breach of fiduciary duty 10 claim. Cal. Civ. Proc. Code § 343; Judicial Council of California Civil Jury Instruction 4120 & 11 Directions for Use (applying section 343’s four-year period but noting some courts have held 12 section 338(d)’s three-year period applies “if the breach can be characterized as constructive 13 fraud”). Plaintiffs’ fraud in the inducement claim is subject to a three-year statute of limitations. 14 Cal. Civ. Proc. Code § 338(d). A two-year statute of limitations period controls for both plaintiff’s 15 negligence and negligent supervision claims. Cal. Civ. Proc. Code § 335.1. 16 “The uniform California rule is that a limitations period dependent on discovery of 17 the cause of action begins to run no later than the time the plaintiff learns, or should have learned, 18 the facts essential to his claim.” Fox v. Ethicon Endo–Surgery, Inc., 35 Cal. 4th 797, 807 (2005) 19 (quoting Gutierrez v. Mofid, 39 Cal. 3d 892, 897 (1985)) (emphasis in original). “In order to rely 20 on the discovery rule for delayed accrual of a cause of action, “[a] plaintiff whose complaint 21 shows on its face that his claim would be barred without the benefit of the discovery rule must 22 specifically plead facts to show (1) the time and manner of discovery and (2) the inability to have 23 made earlier discovery despite reasonable diligence.” Id. at 808 (original alteration; citation 24 omitted). The limitations period begins once the plaintiff “has notice or information of 25 circumstances to put a reasonable person on inquiry . . . .” Jolly v. Eli Lilly & Co., 44 Cal. 3d 26 1103, 1110–11 (1988) (internal quotations, citations, emphasis omitted). When plaintiffs become 27 aware of an injury, they “are required to conduct a reasonable investigation . . . and are charged 28 ///// 1 with knowledge of the information that would have been revealed by such an investigation.” Fox, 2 35 Cal. 4th at 808 (emphasis, citations omitted). 3 It is clear from the operative complaint that plaintiffs’ claims arise from investments 4 they made on Davis’s advice in November 2006. See FAC ¶ 10. Plaintiffs filed this suit on 5 February 15, 2019, ECF No. 1-1, more than twelve years after plaintiffs made their investment. 6 Accordingly, it is apparent from the face of the operative complaint that plaintiffs’ claims are time- 7 barred unless saved by tolling. 8 Plaintiffs rely on the delayed discovery rule, arguing their claims are timely because, 9 regardless of whether the prospectuses and other documents alerted plaintiffs to the high-risk and 10 illiquid nature of the investments, plaintiffs only “had [] reason to believe” the investments were 11 ill-suited for their needs and inconsistent with Davis’s representations and indeed could only have 12 discovered their claim in late 2016 when they learned their UDF investment was “worthless,” rather 13 than the safe and profitable investment Davis had held it out to be. Id. at 8−12. For support, 14 plaintiffs rely on cases holding that a party’s duty to investigate is relaxed or absent when she relies 15 on the representations of a fiduciary acting on her behalf. Id. at 9−11; Hobbs v. Bateman Eichler, 16 Hill Richards, 164 Cal. App. 3d 174, 201−03 (1985) (plaintiff had no duty to investigate where 17 financial advisor changed her investment goals form without her permission, made trades and 18 purchases without her consent or authorization and sent plaintiff confirmation slips that did not 19 identify her account balance or indicate her distribution checks were paid from principal); see also 20 Vucinich v. Paine, Webber, Jackson & Curtis, Inc., 739 F.2d 1434, 1436–37 (9th Cir. 1984) (“[T]he 21 statute of limitations may be tolled by a broker reassuring his client on concerns relevant to the 22 possible misrepresentation.”) (citing Twomey, 262 Cal. App. 2d at 723–29 (1968)); but see WA Sw. 23 2, LLC, 240 Cal. App. 4th at 156–58; Calvi v. Prudential Sec., Inc., 861 F. Supp. 69, 72 (C.D. Cal. 24 1994) (distinguishing Hobbs where “there were no written offering memoranda—or any other 25 documentation—which specifically contradicted the broker’s oral assurances. . . . Hobbs concerned 26 a broker’s unauthorized trading without the plaintiff's knowledge. No such claim of blatant 27 wrongdoing has been made in this action.”) (footnote omitted). 28 ///// 1 Plaintiffs have alleged their discovery, upon finding their investments were 2 worthless, and their inability to earlier discover their claims given their reliance on their fiduciary’s 3 representations. As discussed above, whether plaintiffs’ argument ultimately will prevail cannot 4 be determined on this record. Because plaintiffs now also allege their discovery was impeded 5 because they never received certain disclosures and dispute the accuracy of certain investor 6 information required by Berthel, allegations not included in plaintiffs’ complaint, the motion is 7 GRANTED with leave to amend to allow plaintiffs to provide such allegations. 8 IV. CONCLUSION 9 The motion to dismiss is GRANTED. Plaintiffs may file an amended complaint 10 within twenty-one (21) days. 11 IT IS SO ORDERED. 12 DATED: September 18, 2019. 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28