Donald D. Kessler v. Natl. Enterprises

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 99-4249
___________
Donald D. Kessler, et al., on their *
own behalf and on behalf of all others *
similarly situated, *
*
Plaintiffs - Appellants, * Appeal from the United States
* District Court for the
v. * Western District of Arkansas
*
National Enterprises, Inc.; Arkansas *
No. 1 LCC, *
*
Defendants - Appellees. *
___________
Submitted: May 8, 2000
Filed: January 30, 2001
___________
Before LOKEN, HEANEY, and BYE, Circuit Judges.
___________
BYE, Circuit Judge.
In the mid-1980s, plaintiffs purchased time-share interests in the Lakeshore
Resort & Yacht Club (Lakeshore) in Hot Springs, Arkansas. Lakeshore is surrounded
by the Lake Hamilton Resort Hotel (the Hotel). In December 1993, the Hotel revoked
a license agreement that allowed time-share owners access to the Hotel's parking and
recreational facilities, and also terminated Lakeshore's utilities.
As successor to Lakeshore's developer, defendant National Enterprises, Inc.
(NEI) unsuccessfully sued the Hotel in the Arkansas courts to enforce the license
agreement. Plaintiffs then filed the instant class action, claiming that Lakeshore's
developer was obligated to provide utilities and continued access to the Hotel's parking
and recreational facilities, and seeking to hold NEI liable for the initial developer's
obligations. After remands following two threshold appeals, see 165 F.3d 596 (8th Cir.
1996), 203 F.3d 1058 (8th Cir. 2000), the district court entered judgment in favor of
NEI. We now reverse and remand for calculation of damages.
BACKGROUND1
In 1983, Painter's Point Development Company Limited Partnership (Painter's
Point) began construction of a hotel and twenty-unit condominium resort on a tract of
land located on the shores of Lake Hamilton in Hot Springs, Arkansas. Painter's Point
commonly owned the hotel property and resort property until mid-1985, when it
conveyed the resort property to the Lakeshore Resort & Yacht Club Limited
Partnership (Lakeshore LP). Painter's Point continued to construct a hotel on the tract
of land surrounding the resort property.
In June 1985, Lakeshore LP started Lakeshore, a time-share project organized
pursuant to the provisions of the Arkansas Time-Share Act, Ark. Code Ann. §§ 18-14-
101 to 18-14-602 (the Time-Share Act). Contemporaneous with its organization of the
time-share project, Lakeshore LP reached a license agreement with Painter's Point that
allowed individual purchasers of Lakeshore's time-share units to use hotel parking, as
well as the recreational amenities contemplated in the operation of the hotel.
The Lakeshore time-share project had to be registered with, and accepted by, the
Arkansas Real Estate Commission (the Commission) before time-share interests could
1
The parties stipulated to all material facts in the district court.
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be sold to prospective buyers. See Ark. Code Ann. §§ 18-14-202(a)(1), 18-14-204, 18-
14-206(b), 18-14-207. Lakeshore LP filed an application for registration containing
the public offering statement required by the Time-Share Act, see id. at § 18-14-204(a),
and a document entitled "Horizontal Property Regime, Master Deed and Bylaws for
Lakeshore Resort and Yacht Club."
The Master Deed referred to the time-share purchasers' rights to use hotel
amenities by stating that
[t]he Developer is presently contemplating construction of certain
recreational facilities on property owned by the Developer adjacent to the
property described in Exhibit "A". The Co-Owners of this Regime shall
have the right to use said recreational facilities jointly with other
property regimes established or to be established by the Developer or
such other persons who are licenses or guests of the Developer.
(Emphasis added).
The public offering statement referred to the Hotel license agreement,2 but the
agreement itself was not included with Lakeshore LP's application to the Commission.
By letter dated July 3, 1985, the Commission accepted the Lakeshore application
2
The public offering statement indicated that
[a] license agreement by and between [Lakeshore] and [the Hotel] allows
purchasers of time-share intervals to utilize at hotel guest rates all indoor
and outdoor hotel amenities which include:
Tennis Courts Boat Docks
Indoor Pool Outdoor Pool
Exercise Room Game Rooms
Cocktail Lounge Restaurants
Additional amenities which may be added in the future.
At present time there are no use fees.
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conditioned upon the submission of "the Licensing Agreement referred to in the Public
Offering Statement that is intended to insure use of hotel amenities by the Time-Share
Purchaser."
Lakeshore LP submitted the license agreement to the Commission, but it was not
accepted. In a letter dated August 11, 1985, the Commission stated
the Licensing Agreement was not accepted as written. . . . [T]he
Licensing Agreement must be drafted so that the Agreement cannot be
voided or cancelled by either the [Lakeshore] developer or the [Hotel
owner]. The Agreement should be drafted so that it will be in existence
as long as the Time-Share program exists, to insure the promised use of
the amenities by Time-Share Interval purchasers.
The Commission accepted the application only after a revised "irrevocable"
license agreement3 was submitted.
3
The amended license agreement provided, in pertinent part, that
1. Lakeshore has purchased real property from Painter's Point
with the understanding and agreement that the use of all
recreational amenities and parking facilities owned by
Painter's Point and employed by it in the operation of the
[Hotel] shall extend to and be available under this License
to each time-share condominium purchaser purchasing units
of interval ownership (i.e., time-share condominiums) from
Lakeshore.
2. Use, enjoyment, and benefit of all recreational amenities and
twenty (20) unidentified parking spaces is hereby granted,
transferred, and conveyed to Lakeshore.
...
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Following registration, Lakeshore LP began marketing time-share interests to the
named plaintiffs and other members of the class. Each purchase was memorialized by
a Warranty Deed that incorporated by reference the Lakeshore Resort Master Deed and
By Laws, and gave the purchasers a time-share interest in the resort until noon on the
first Friday of the year 2020.
A sales brochure given to the plaintiffs represented that "[a]s a Lakeshore owner
all of the facilities at the [Hotel] are yours to use and enjoy." In addition, during the
application process with the Commission, Lakeshore LP represented that the license
agreement with the Hotel "provid[es] for the continued use of all amenities and parking
facilities of the resort by the timeshare owners of Lakeshore Resort and Yacht Club."
NEI stipulated that representations made during the application process were
corroborated by oral representations made by sales agents to individual purchasers.
NEI also stipulated that representations were made that time-share purchasers
would receive standard utilities in exchange for paying annual maintenance fees.
Finally, NEI stipulated that the plaintiffs' decisions to purchase time-share interests
were based upon the express representations regarding the continued use of the Hotel
amenities, and that plaintiffs would not have purchased their time-share interests absent
the continued use of the Hotel amenities.
The Hotel honored the terms of the license agreement for the first seven or eight
years of each plaintiff's contemplated thirty-five year interest in the time-share project.
Lakeshore also provided utilities, such as sewer and water, via the Hotel property in
5. This License Agreement is irrevocable.
6. This License Agreement is expressly understood to be a
nonexclusive grant of the license hereby irrevocably
conveyed.
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exchange for annual maintenance fees. Problems arose, however, after a series of
changes in the financing and ownership of both the Lakeshore and Hotel properties.
Lakeshore LP transferred its interests in the Lakeshore property to Hansen,
Hooper & Hayes, Inc. (HHH) in August 1986. HHH then executed a note and
mortgage in favor of Independence Federal Savings & Loan (Independence) with the
Lakeshore property pledged as collateral. In 1991, Independence went into
receivership, and the Resolution Trust Corporation (RTC) was appointed as receiver.
HHH subsequently defaulted on the note and the RTC started foreclosure proceedings
against the Lakeshore property. In October 1993, NEI purchased the note and
mortgage from the RTC, and then purchased the Lakeshore property itself following
a foreclosure sale in May 1994. For present purposes, then, NEI stood in the shoes of
Lakeshore LP as owner of the Lakeshore property.4
The Hotel property also experienced a series of changes. The original developer
(Painter's Point) defaulted on its financing. The lender, Union Planter's, initiated
foreclosure proceedings against the Hotel in November 1988. Union Planter's
purchased the Hotel following a foreclosure sale in September 1990. In December
1990, Union Planter's sold the Hotel property to Robert and Shannon Fewell. In April
1991, the Fewells conveyed the Hotel to their own corporation, Lake Hamilton Resort,
Inc. For present purposes, then, we have referred to Lake Hamilton Resort, Inc., as the
Hotel.
Before NEI purchased Lakeshore's note and mortgage, the Hotel managed the
time-share interests in the Lakeshore property pursuant to an agreement with the RTC.
The Hotel collected revenues, paid expenses, then split the profits with the RTC, all the
4
Subsequently (on September 18, 1995), NEI transferred its interest in
Lakeshore to defendant Arkansas No. 1 LLC. For convenience, we refer to NEI and
Arkansas No. 1 LLC collectively as NEI.
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time honoring the license agreement that provided time-share owners with access to
Hotel amenities and parking.
After NEI became involved, the Hotel began negotiating with NEI to buy
Lakeshore's note and mortgage. The Hotel offered $275,000, based in part upon its
belief that it was not legally required to honor the license agreement. The Hotel stated
that
[Lakeshore] is a very unusual piece of property and is of little value to
anyone other than the owner of the hotel. As you know, the condos have
many problems that affect their market value. The condos have no
parking nor any property for parking to be added. The utilities are
furnished by the hotel and could be disconnected. There is no legal
requirement for the hotel to provide either parking or utility services.
Also, without access to the hotel's recreation amenities (i.e. swimming
pools, marina, etc.) there would be little reason to stay in the condos.
NEI responded by demanding $1,000,000 for the sale of Lakeshore's note and
mortgage, based in part upon NEI's belief that the Hotel was legally obligated to honor
the license agreement. NEI stated that
[w]hile we recognize that there may be some perceived concerns
surrounding parking and utility access, and recreational amenities, we
believe your best interests would not be served by disconnecting, or
refusing access to these services for the time being. At minimum, such
action could be construed as a violation of the timeshare holders'
entitlements, as set forth in a Memorandum of Agreement which was
recorded along with the original sale and follows along the chain of title
for this property.
On November 2, 1993, the Hotel rejected the $1,000,000 counter-proposal,
calling it "totally off-base." The Hotel considered itself "under no legal obligation to
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provide any services, parking or Hotel facilities to any resident or timeshare holder."
On December 3, 1993, the Hotel advised the individual time-share owners that all
utilities provided to Lakeshore via the Hotel property would be disconnected, and that
time-share owners would no longer have access to Hotel amenities and parking. The
Lakeshore time-share units have been unusable ever since.
NEI purchased the Lakeshore note and mortgage itself in May 1994, then
promptly filed suit against the Hotel in Garland County Chancery Court to enforce the
"irrevocable" license agreement. In August 1994, following trial, the state court
directed entry of judgment for the Hotel. The court concluded that the license
agreement was a mere license and created no other interest in the Hotel property; that
the license agreement's purported "irrevocable" nature did not survive the Hotel’s
foreclosure; and that Lakeshore time-share owners had only an easement of necessity
for ingress and egress over the Hotel property.
PROCEDURAL HISTORY
In November 1996, after NEI's unsuccessful attempt to enforce the license
agreement against the Hotel, the plaintiffs initiated the instant class against NEI in state
court. Count I of the complaint alleged that the denial of access to Hotel amenities and
parking constituted a breach of their contracts with the initial developer, and that NEI
assumed the obligations of the initial developer pursuant to § 18-14-601 of the Time-
Share Act.5 Count II alleged that the initial developer misrepresented that the time-
5
Section 18-14-601 is entitled "Financing of time-share programs" and provides
as follows:
In the financing of a time-share program, the developer shall retain
financial records of the schedule of payments required to be made and the
payments made to any person or entity which is the lienholder of any
underlying blanket mortgage, deed of trust, contract of sale, or other lien
or encumbrance. Any transfer of the developer's interest in the time-
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share estates would include access to Hotel amenities and parking, and again alleged
that NEI was responsible for the initial developer's obligations pursuant to the Time-
Share Act. As to both counts, the plaintiffs' alleged that they had no adequate remedy
at law, and in the alternative asked for equitable rescission of the remaining portion of
their time-share estates, and a corresponding partial refund of their respective purchase
prices.
NEI removed the action to federal court, and then filed a third-party complaint
against the Hotel regarding the license agreement. NEI also moved for summary
judgment claiming that the plaintiffs' claims were barred by the doctrine expressed in
D'Oench, Duhme & Co. v. FDIC, 315 U.S. 447 (1942), and its statutory counterpart,
12 U.S.C. § 1823(e), due to NEI's status as the foreclosure sale purchaser of an asset
acquired by the RTC. The district court dismissed NEI's third-party complaint against
the Hotel, but granted NEI's summary judgment motion. We reversed and remanded
after concluding that the claims were not barred by the D'Oench doctrine. See Kessler
v. Nat'l Enters., Inc., 165 F.3d 596 (8th Cir. 1999).
On remand, the parties submitted the case to the district court on stipulated facts
and an agreed documentary record. The court entered judgment in favor of NEI,
concluding that NEI was not liable as a successor and that, in any event, the initial
developer was not liable for breach of contract or misrepresentation (constructive
fraud). Plaintiffs appeal; NEI cross-appealed challenging the prior dismissal of NEI's
third-party complaint against the Hotel. We dismissed NEI's cross-appeal because it
should have been pursued when plaintiffs brought their first appeal. See Kessler v.
share program to any third person shall be subject to the obligations of
the developer.
Ark. Code Ann. § 18-14-601 (emphasis added).
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Nat'l Enters., Inc., 203 F.3d 1058 (8th Cir. 2000). We now address the remaining
issues raised by the plaintiffs.
DISCUSSION
I. Standard of Review
The district court granted summary judgment after the case was submitted to it
on a stipulated record without trial. Therefore, de novo is the proper standard of
review. See Am. Civil Liberties Union v. City of Florissant, 186 F.3d 1095, 1097 (8th
Cir. 1999) (discussing standard of review for a case submitted on a stipulated record);
Turner v. Iowa Fire Equipment Co., 229 F.3d 1202, 1209 (8th Cir. 2000) (discussing
standard of review for a district court's grant of summary judgment).
II. NEI's Liability for the Developer's Obligations
Because the plaintiffs seek a partial equitable rescission of their original purchase
contracts, a critical threshold question is whether NEI can be held liable for the initial
developer's alleged breaches of contract and/or misrepresentations. The plaintiffs
assert that § 18-14-601 of the Time-Share Act provides that NEI is liable for all
obligations of the initial developer. Alternatively, the plaintiffs contend that NEI either
expressly or impliedly assumed the developer's obligations under common law
principles of corporate successor liability.
The district court determined that NEI succeeded only to the property interests
conveyed in the May 1994 foreclosure sale, and that those property interests did not
include the initial developer's obligations to provide utilities, and access to Hotel
amenities and parking. The district court further determined that § 18-14-601 of the
Time-Share Act refers only to the transfer of the developer's obligation to perform
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certain record-keeping functions, not to a transfer of all obligations of the initial
developer.
We disagree. We conclude that § 18-14-601 means what it says. "Any transfer
of the developer’s interest in the time-share program to any third person shall be
subject to the obligations of the developer." The statute does not limit the obligations
transferred to certain record-keeping functions. Instead, the statute refers to all of the
developer's obligations vis a vis the individual time-share owners.
Our interpretation of § 18-14-601 is hardly novel. In a separate state court
proceeding brought against NEI by Lakeshore time-share owners Charles and Mickie
Rea (presided over by the same Garland County Chancery Court that decided the
license agreement dispute), the court held that NEI was liable for the
misrepresentations of the original developer pursuant to the provisions of the Time-
Share Act. That decision was affirmed by the Arkansas Supreme Court on procedural
grounds, without addressing the merits. See Nat'l Enters., Inc. v. Rea, 947 S.W.2d 378,
380 (Ark. 1997).
Though the Arkansas Supreme Court has not had occasion to address the
meaning of § 18-14-601, that provision is derived from a model act adopted verbatim
by several other states. See Iowa Code Ann. § 557A.18; Neb. Rev. Stat. § 76-1739;
Tenn. Code Ann. § 66-32-127; see also Guam Code Ann. § 47501.
One state, Tennessee, has addressed precisely the question at stake here: Do the
initial developer's obligations transfer to a third party (by operation of the Time-Share
Act) as the result of a foreclosure sale. State v. Heath, 806 S.W.2d 535 (Tenn. Ct.
App. 1990). In Heath, the Tennessee Attorney General sued to prevent the foreclosure
of certain unsold units in a time-share program, unless at the time of the foreclosure
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sale the rights of all non-defaulting time-share purchasers were specifically recognized
and preserved. See Heath, 806 S.W.2d at 536-37. The court held that
[t]hese provisions of the Act [referring to a transfer of the developer's
interest] are to protect a consumer from what actually transpired in this
case, i.e., foreclosure by lender that extinguishes the rights of the non-
defaulting purchaser. While the statute does not forbid foreclosure, it
requires any foreclosure to take into account the purchasers of the time-
shares' interest.
Id. at 538.
The court noted that the legislature intended to give time-share purchasers a
remedy against both the developer's lender and the third party to whom the developer's
interest is sold, because a foreclosure-in-process is a good sign that any remedy against
the developer itself would be meaningless:
Section 127 states that any third party to whom the developer's interest is
transferred shall be subject to the developer's obligation even if, arguendo,
the bank was not required to comply with section 1286 when the
agreement was made, the bank as transferee would assume the obligations
of compliance once the developer defaulted.
6
Section 66-32-128 of the Tennessee Time-Share Act is identical to § 18-14-602
of the Arkansas Time-Share Act, which provides that
[t]he developer whose project is subjected to an underlying blanket lien
or encumbrance subsequent to the transfer of a time-share interval shall
protect nondefaulting purchasers from foreclosure by the lienholder by
obtaining from the lienholder a nondisturbance clause, subordination
agreement, or partial release of the lien as to those time-share intervals
sold or shall provide a surety bond or insurance against the lien from a
company acceptable to the agency.
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The overriding purpose of the Time-Share Act is to protect consumers.
Regulatory, civil and criminal remedies are provided. To hold that a civil
remedy against a lender [or other third-party transferee] is inapplicable
would defeat the legislative intent. Ordinarily, a developer defaults on a
note because it has no money to pay its obligation. To conclude that the
legislature intended to limit the consumer's civil remedies to an action for
damages against the developer under Section 128 would be a meaningless
gesture.
Id.
The instant case is indistinguishable from Heath for all material purposes. In
both cases, the original developer defaulted, the lender foreclosed, and a third party
purchased (or intended to purchase) the developer's interest at the foreclosure sale.
Under the reasoning in Heath, § 18-14-601 mandates that NEI "shall be subject to the
obligations of the developer."7
Florida has also enacted a provision in its Time-Share Act that serves the same
purpose as § 18-14-601 of the Arkansas Time-Share Act, though the statutory language
is not identical. See Fla. Stat. Ann. § 721.17. In Bell v. RDI Resort Servs. Corp., 637
So. 2d 960 (Fla. Dist. Ct. App. 1994), the court held that the Florida legislature
intended that subsequent third-party participants in the operation of a time-share project
could be held liable for alleged misrepresentations made by the original developer. See
Bell, 637 So. 2d at 962; see also Smith v. Dept. of Bus. Regs., 504 So. 2d 1285 (Fla.
Dist. Ct. App. 1987) (financier who accepted assignment of unsold time-share units as
7
Our conclusion is not changed by the fact that the Master Deed contemplated
that, no later than three years after the first sale of an individual time-share interest, the
original developer's obligations would transfer to a "Council of Co-Owners" made up
of individual time-share owners. It is undisputed that a Council of Co-Owners was
never formed in this instance. Thus, the developer, and any party to whom the
developer's interests were transferred, remained subject to the statutory requirements
imposed by the Arkansas Time-Share Act.
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collateral for balance of loan to time-share developer was subject to statute requiring
developer to honor rights of purchasers).
Our interpretation of § 18-14-601 is thus consistent with the nature of time-share
projects, and the unique obligations that arise from the development and creation of
such projects. The developer sells not only an interest in real property, but an interest
in time. The time-share regime is meaningless unless the time-share purchasers'
continued interests in the project are protected. Thus, when a developer's interests in
the project are transferred to a third party, the transferee must acquire not only the
interest in the property, but also all the other obligations of the developer with respect
to the time-share regime.8
III. Statute of Limitations
The second question we must address is whether the plaintiffs' cause of action
is time-barred. The district court addressed both the general five-year statute of
limitations for breach of contract claims found at Ark. Code Ann. § 16-56-111(b), and
the general three-year statute of limitations for constructive fraud claims found at Ark.
Code Ann. § 16-56-105(3), and concluded that the plaintiffs' claims were not barred
under either statute.
We agree with the district court's conclusion, but not with its reasoning. Having
determined that NEI may be subject to liability for the original developer's obligations
8
Having concluded that NEI may be liable for the original developer's obligation
pursuant to § 18-14-601, we decline to address the plaintiff's alternative argument that
NEI assumed the developer's obligations under common law principles of corporate
successor liability. We express our doubts, however, that those common law principles
would apply to this type of real estate transaction, or that NEI would be liable absent
the requirements of the Time-Share Act.
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pursuant to the Arkansas Time-Share Act, we conclude that Time-Share Act's statute
of limitations governs this action. See Shelton v. Fiser, 8 S.W.3d 557, 560 (Ark. 2000)
(holding that, under Arkansas law, a specific statute of limitations involving the
particular subject matter governs over more general statutes).
The Time-Share Act actually contains two separate four-year statutes of
limitations. The first applies to proceedings "where the accuracy of the public offering
statement or validity of any contract or purchase is in issue and a rescission of the
contract or damages is sought." Ark. Code Ann. § 18-14-403 (emphasis added). In
such a situation, suit "must be commenced within four (4) years of the date of the
contract of purchase." Id.
The second limitation period applies to proceedings "with respect to the
enforcement of provisions in the contract of purchase which require the continued
furnishing of services and the reciprocal payments to be made by the purchaser." Suit
must be commenced within "four (4) years for each breach." Id. This second limitation
period can be shortened to two years by agreement of the parties. See id.9
The plaintiffs' initiated this suit on November 27, 1996. The plaintiffs entered
their contracts of purchase more than four years earlier, so this action is barred if the
first limitation period applies. However, the first "breach" of contract requiring "the
continued furnishing of services" did not occur until December 10, 1993, when the
Hotel terminated Lakeshore's utilities and access to Hotel amenities and parking. The
plaintiffs filed this action within four years of that date, so this action is timely if the
second limitation period applies.
9
There is no agreement in this case to shorten the statutory period to two years.
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The plaintiffs do not challenge the accuracy of the public offering statement, or
the validity of any contracts of purchase. Instead, their claims are based on "provisions
in the contract which require the continued furnishing of services" — that is, access
to the Hotel amenities and parking, as well as the continued furnishing of utilities. Due
to NEI's unsuccessful attempt to enforce the license agreement, NEI is legally incapable
of actually furnishing the described services. Thus, the plaintiffs have no adequate
remedy at law and are entitled, in the alternative, to pursue a claim for equitable
rescission. See Strout Realty, Inc. v. Burghoff, 718 S.W.2d 469, 474 (Ark. Ct. App.
1986). We do not believe that this equitable remedy, sought in lieu of actual contract
enforcement, equates to the type of rescission claim contemplated by the first limitation
period set forth in § 18-14-403. The plaintiffs' suit is more appropriately viewed as an
attempt to enforce contract provisions that require the continued furnishing of services,
services for which the plaintiffs made reciprocal payments (consideration for the
original contract payments, or ongoing annual maintenance fees), with equitable relief
sought in lieu of an adequate remedy at law. Thus, we hold that this action is governed
by the second statute of limitation set forth in § 18-14-403, and is therefore timely.
IV. Misrepresentation/Constructive Fraud
Having determined that NEI may be liable for the obligations of the initial
developer, and that the statute of limitations is satisfied, we turn now to the merits of
plaintiffs' claim. Plaintiffs contend that the initial developer made misrepresentations
regarding the time-share owners' continued access to Hotel amenities and parking.
Under Arkansas law, a buyer of property may be entitled to rescind the purchase
contract if the purchase was induced by constructive fraud. Constructive fraud may be
found in the absence of actual fraud:
To rescind a contract based upon fraud, it is not necessary that actual
fraud exist. It is well settled that representations are construed to be
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fraudulent when made by one who either knows the assurances to be false
or else not knowing the verity asserts them to be true. . . . Neither actual
dishonesty of purpose nor intent to deceive is an element of constructive
fraud.
Lane v. Rachel, 389 S.W.2d 621, 624 (Ark. 1965) (emphasis in original); see also
South County, Inc. v. First West.Loan Co., 871 S.W.2d 325, 327 (Ark. 1994)
(describing constructive fraud as the "making of misrepresentations by one who, not
knowing whether they are true or not, asserts them to be true without knowledge of
their falsity and without moral guilt or evil intent"); Cardiac Thoracic & Vascular
Surgery, P.A. Profit Sharing Trust v. Bond, 840 S.W.2d 188, 191 (Ark. 1992) (holding
that a cause of action for constructive fraud will lie even when the misrepresentations
were made innocently, and their false nature is not discovered until well after the
representations are made). To establish constructive fraud under Arkansas law, the
misrepresentation must be material. See Scollard v. Scollard, 947 S.W.2d 345, 348
(Ark. 1997).
In this case, the material nature of the misrepresentation is satisfied by NEI's
stipulation that the plaintiffs would not have purchased their time-share interests
without access to the Hotel amenities and parking. The question remains, however,
whether the developer represented that the plaintiffs would enjoy permanent access to
the Hotel’s parking, utilities, and recreational amenities throughout the life of the time-
share interests. We conclude that the developer made those representations.
We find persuasive the fact that the Arkansas Real Estate Commission reviewed
the public offering statement and Master Deed, and concluded that those documents
"promised" the "use of the amenities by Time-Share Interval purchasers." We find even
more persuasive the fact that the Commission would not accept the Lakeshore time-
share application until the license agreement referenced in the public offering statement
was amended to purportedly provide time-share owners with permanent access to the
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licensed amenities. The Commission demanded a license agreement that was "drafted
so that it will be in existence as long as the Time-Share program exists, to insure the
promised use of the amenities by Time-Share Interval purchasers." (Emphasis added).
The developer responded with an amended license agreement representing that it
"provid[es] for the continued use of all amenities and parking facilities of the resort by
the timeshare owners of Lakeshore Resort and Yacht Club." NEI's subsequent
stipulation, that this representation was later corroborated by oral representations made
to individual purchasers by the developer's sales agents, is the linchpin in support of our
conclusion that the developer represented to plaintiffs that they would have permanent
access to the Hotel amenities and parking.10
CONCLUSION
NEI assumed the obligations of the original developer pursuant to § 18-14-601
of the Arkansas Time-Share Act. This suit, brought pursuant to that Act, is timely. The
original developer misrepresented the plaintiffs' right to continued access to Hotel
amenities and parking. Therefore, the plaintiffs are entitled to equitable relief in the
form of partial rescission. Accordingly, we reverse the judgment of the district court,
and remand for calculation of damages.
LOKEN, Circuit Judge, dissenting.
My problem with the court’s resolution of this difficult case stems from its
sleight-of-hand treatment of the statute of limitations issues. The court concludes that
the original developer was guilty of constructive fraud when its promise of permanent
access to the Hotel’s amenities induced plaintiffs to purchase their time-share units.
10
Having concluded that the plaintiffs' have an actionable claim for constructive
fraud, we find it unnecessary to address the breach of contract claim, since the plaintiffs
seek identical damages under both claims.
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That alleged fraud clearly occurred when plaintiffs made their time-share purchases in
1985 and 1986. The court concludes these fraud claims are not time-barred under the
second limitations period set forth in § 18-14-403 of the Time-Share Act:
However, with respect to the enforcement of provisions in the contract
of purchase which require the continued furnishing of services . . . the
period of bringing a judicial proceeding will continue for a period of four
(4) years for each breach.
(Emphasis added.) On its face, this is a breach-of-contract statute of limitations.
Plaintiffs’ constructive fraud claims do not seek to enforce the purchase contracts; these
claims seek rescission of those contracts on the ground they were fraudulently induced.
The remedy for plaintiffs’ fraud claims -- as opposed to the remedy for their breach of
contract claims -- is not, to use the court’s phrasing, an “equitable remedy, sought in
lieu of actual contract enforcement.” Id. at p.16.
Therefore, these constructive fraud claims must be timely under the three-year
statute of limitations for misrepresentation claims found in ARK. CODE ANN. § 16-56-
105. See Wilson v. General Elec. Capital Auto Lease, Inc., 841 S.W.2d 619, 620 (Ark.
1992). Absent concealment of the misrepresentation, that statute begins to run when
the injury occurs, not when it is discovered. See Chalmers v. Toyota Motor Sales,
USA, Inc., 935 S.W.2d 258, 261 (Ark. 1996). Here, the alleged misrepresentations
occurred when plaintiffs purchased their time-share interests in 1985 and 1986.
Plaintiffs were injured at that time, for the unknown flaw in the License Agreement
existed, and plaintiffs could have sued the developer for rescission (in the event the
License Agreement could not be reformed to provide permanent access, for example,
by the Hotel granting an easement).
Under Arkansas law, fraudulent concealment tolls the statute of limitations until
the constructive fraud is discovered. But concealment is not presumed. “There must
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be some positive act of fraud, something so furtively planned and secretly executed as
to keep the plaintiff’s cause of action concealed, or perpetrated in a way that it conceals
itself.” Wilson, 841 S.W.2d at 620 (quotation omitted). In this case, plaintiffs do not
allege fraudulent concealment by the original developer, and there is no factual basis
in the record for such an assertion. Therefore, because plaintiffs did not file this action
until November 1996, their claims of constructive fraud are time-barred under the
Arkansas statute of limitations governing actions for fraud.11
I also have substantial doubt whether, on this record, the Supreme Court of
Arkansas would find a material misrepresentation of fact by the original developer that
can support plaintiffs’ claims of constructive fraud. To establish constructive fraud
under Arkansas law, there must be a material misrepresentation of fact. See Scollard
v. Scollard, 947 S.W.2d 345, 348 (Ark. 1997). All the express representations
contained in the Master Deed and the developer’s public offering statement were true
when plaintiffs purchased their time share intervals in 1985 and 1986. The record does
not reflect whether plaintiffs also reviewed the developer’s License Agreement with the
Hotel before purchasing their time-share intervals. If they did, they would have seen
that the agreement purported to be “irrevocable.” That was a true statement. Plaintiffs
argue it was also an implicit misrepresentation they would enjoy permanent access to
the Hotel’s amenities. But Arkansas fraud law requires proof that the defendant had
an insufficient basis upon which to make a representation that turns out to be false.
11
Alternatively, these claims are governed by, and time-barred under, the first
limitations period in § 18-14-403 of the Time-Sharing Act, which provides that actions
seeking “rescission of the contract or damages” based upon “the accuracy of the public
offering statement” must be commenced “within four (4) years after the date of the
contract of purchase.” This statute reflects the traditional principle that rescission is
not appropriate when a contract has been performed to the point that the parties cannot
be returned to the status quo. See Herrick v. Robinson, 595 S.W.2d 637, 644 (Ark.
1980). Here, for example, plaintiffs enjoyed use of their time-share units with full
access to the Hotel’s facilities for at least seven years.
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Here, the developer renegotiated the License Agreement to be “irrevocable,” and the
Real Estate Commission accepted that change as satisfying its demand that time-share
owners be provided permanent access to the licensed amenities. This sequence of
events provided a strong basis in fact for the developer’s alleged representation that
time-share owners would have permanent access to the Hotel’s parking, utilities, and
recreational facilities. See Titan Oil & Gas, Inc. v. Shipley, 517 S.W.2d 210, 221 (Ark.
1974) (no constructive fraud if the defendant proves he “did not know, or in the
exercise of reasonable care could not have known, of the untruth or omission”).
Finally, I conclude the district court was correct in granting judgment in favor
of NEI on plaintiffs’ breach-of-contract claims. These claims are not time-barred, but
plaintiffs cannot point to any contractual promise that was breached. Plaintiffs’
contracts to purchase their time-share real property interests were initially reflected in
Interval Ownership Purchase Agreements, which then merged at closing with the
Warranty Deeds they received. See THOMPSON ON REAL PROPERTY § 99.06 (David
A. Thomas ed. 1994). The Warranty Deeds conveyed title to the time-share unit
weeks; they contained no promises regarding amenities, utilities, or parking. The
Warranty Deeds incorporated by reference the Lakeshore Resort Master Deed and By-
Laws, but those documents likewise contained no absolute promise of amenities,
utilities, or parking. The Master Deed simply recited that the developer “is presently
contemplating construction of certain recreation facilities on property” adjacent to the
Lakeshore Resort, and it established that time-share owners would be liable for
maintenance fees.12 Thus, plaintiffs received, and continue to be able to receive,
exactly what their purchase contracts promised -- ownership of their time-share
intervals, and the right to use the common areas of the Lakeshore Resort during those
12
The Master Deed also referred to a Management Agreement as “Exhibit C.”
There is no copy of this agreement in the record on appeal, and plaintiffs do not allege
that the Developer breached any management contract.
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intervals. There was no breach of contract by the original developer entitling plaintiffs
to rescind.
For the foregoing reasons, I conclude that plaintiffs have no surviving breach of
contract or constructive fraud claims against the original developer, NEI therefore has
no successor liability, and the judgment of the district court must be affirmed.
A true copy.
Attest:
CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.
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