Rock Solid builds residential homes. Between 2015 and 2017, Rock Solid solicited individuals with good credit scores through radio, Internet, print, and other public advertisements to invest in real estate. The advertisements marketed the plan as a “creative way to profit in real estate” and required “no cash out of pocket.” The strategy was represented to potential investors as having little or no risk.
The way it worked was individual investors’ good credit scores were used to obtain financing to construct, market, and sell an investment home. Rock Solid promised once the investment home was sold Rock Solid would split the profits with Plaintiffs.
Plaintiffs are all individuals who invested. Each Plaintiff signed a Client Contract with Rock Solid. In the Client Contract, under a paragraph entitled “Equity and Guaranteed Client Profit,” Rock Solid promises to build each home for eighty-percent of the final appraised value and promised Plaintiffs at least twenty-percent profit. Financing for these Client Contracts was eventually provided through Legacy Credit Union (“Legacy”).
The loan documents stated that this was an owner occupied home but Plaintiffs remembered marking that this was an “investment” home, only to discover on the final loan documents that this designation had been changed to “owner occupied.”
In the first half of 2018, Plaintiffs were informed that their construction loans were nearly exhausted although homes were only fifty to seventy-five percent completed. Rock Solid told Plaintiffs that its realtor “has found buyers to purchase virtually all our homes.” Plaintiffs thereafter entered into additional loans with Legacy.
Even after receiving these additional funds, Rock Solid failed to complete the homes in the time frame set forth in the parties’ agreements. As the time frame expired, Rock Solid and Legacy negotiated a series of loan extensions which were offered to Plaintiffs.
Rock Solid promised to build Plaintiffs homes of the finest quality but the quality of the construction was poor and substandard. Examples include mismatched or incomplete plumbing and gas lines, cracks in exterior stucco, irregular or misplaced roof shingles, un-level shelving and cabinetry, missing appliances and air-conditioning units, and cracked and shoddy tile work.
Plaintiffs filed a lawsuit in March of 2019 against Rock Solid on six grounds:
Rock Solid’s Client Contracts are unregistered securities, sold in violation of section 12(1) of the 1933 Securities Act
The Client Contracts were sold in violation of section 12(2) of the 1933 Securities Act
The fraudulent marketing and sale of these securities violated Section 10(b) of the 1934 Exchange Act and Rule 10b-5
Rock Solid committed negligent misrepresentations
Rock Solid committed fraud
Rock Solid breached its contracts with Plaintiffs
Discuss how the court will rule on the six grounds mentioned.