An Offering Memorandum Triggers Duty of Inquiry and Statute of Limitations in Investments Gone Bad
In the matter of WA Southwest 2, LLC v. First American Title Ins. Co. (2015) 240 Cal.App.4th 148, investors in a real estate deal alleged that their broker had made material misrepresentations and committed fraud. Specifically, the investors alleged that their broker had represented that the property had been subjected to a thorough due diligence review and that the sales load would be less than 10%. According to the investors, however, this was not true. Rather, the actual sales load was purportedly in excess of 20%.
Putting aside the alleged oral representations, the court noted that a written Offering Memorandum provided to the investors had indicated that the sales load exceeded 10%. Thus, the court held that the inconsistency between the Offering Memorandum and the alleged oral representations of the broker put the investors on notice of a falsity and that the investors had a duty to inquiry thereafter. The investors failure to inquire was not only in breach of their obligations, but also started the running of the statute of
limitations on any claims by the investors. As the investors failed to timely bring suit against their broker based on the time of the receipt of the Offering Memorandum, the court concluded that their claims were barred by the statute of limitations and the case was dismissed.