The opinion of the court was delivered by: Hon. Dana M. Sabraw United States District Judge
ORDER GRANTING BANK DEFENDANTS' MOTIONS TO DISMISS PLAINTIFFS' FIRST AMENDED COMPLAINT [Docs. 15, 18, 29, & 45.]
Pending before the Court are four motions to dismiss Plaintiffs' First Amended Complaint ("FAC") brought by Defendants East West Bank, XBR Financial Services, Bank of America, and JP Morgan Chase (collectively "Bank Defendants"). The matter came on for hearing on June 25, 2010. Michael Aguirre, Maria Severson and Chris Morris appeared on behalf of Plaintiffs. Edward Rosenfeld appeared on behalf of Defendant Bank of America. Christopher Murphy appeared on behalf of Defendant East West Bank. Katherine Agbayani appeared on behalf of Defendant JP Morgan Chase. Frederick Kranz appeared on behalf of Defendant Tarsadia Hotels. Jennifer Needs appeared on behalf of Defendant XBR Financial Services. Gregory Borman appeared on behalf of Defendant Erskine Corporation. For the reasons set forth below, Defendants' motions are granted.
The Hard Rock Hotel San Diego ("HRHSD") is located in downtown San Diego's Gaslamp Quarter, near the baseball stadium. (FAC ¶ 67.) It is a 12-story building containing 420 guest rooms, 244 studios, 176 suites, and meeting and event space. (Id. at ¶ 68.) The public was offered the opportunity to purchase ownership interests in individual HRHSD studios or suites through press releases and public marketing programs, including television commercials. (Id. at ¶ 82.) Plaintiffs bring suit on behalf of all persons who purchased such ownership interests. (Id. at ¶ 60.)
Plaintiffs purchased ownership interests in individual HRHSD studios or suites at prices ranging from $350,000 to more than $2 million. (Id. at ¶¶ 82, 85.) They purchased their ownership units through what Plaintiffs have titled "HRHSD Investment Contracts." (Id. at ¶ 82.) The HRHSD Investment Contract consisted of three documents: 1) Purchase Contract and Escrow Instructions, 2) Unit Maintenance and Operating Agreement, and 3) HRHSD Rental Management Agreement. (Id. at ¶ 86.)
Plaintiffs allege that once they purchased their units at HRHSD, they had no control over the rental management of the studios and suites. (Id. at ¶ 79.) Although they were told the HRHSD Rental Management Agreement was voluntary, it was in fact mandatory. (Id. at ¶¶ 76-78.) Plaintiffs were not issued keys to their units, but instead had to obtain keys from the hotel when staying in their units. (Id. at ¶ 89.) Plaintiffs were permitted to stay in their units for up to 28 days per year, and if they sold the unit, the unit was subject to the 28-day limitation. (Id. at ¶ 88.) HRHSD was managed by Defendant 5th Rock, LLC, and Plaintiffs had to pay 5th Rock a service and management fee when they stayed in their units. (Id. at ¶¶ 87, 90.) 5th Rock had a right of first refusal if Plaintiffs chose to sell their interests. (Id. at ¶ 94.)
Plaintiffs contend the units were marketed as real estate transactions, and indeed, as part of those real estate transactions Plaintiffs were obligated to pay tens of thousands of dollars in nonrefundable deposits. (Id. at ¶ 74.) Plaintiffs allege, however, that the units were actually "securities" and should have been sold pursuant to the laws regulating the sale of securities. (Id. at ¶ 74, 95-101.) Plaintiffs bring five claims for relief: 1) violation of § 12(a)(2) of the Securities Act of 1933 for misrepresentation or omission, 2) violation of Cal. Corp. Code §§ 25110, 25503 and 25504.1 for sale of unqualified security, 3) violation of Cal. Corp. Code §§ 25401, 25501 and 25504.1 for misrepresentation or omission, 4) violation of Cal. Corp. Code 25501.5 for sale by unlicensed broker-seller, and 5) violation of Cal. Corp. Code § 25504 by individual Defendants who controlled the entities.
Defendants are: 1) Tarsadia Hotels ("Tarsadia"), HRHSD's operator, 2) 5th Rock, LLC ("5th Rock"), the developer and one of the sellers of the HRHSD Investment Contracts, 3) Gaslamp Holdings, LLC ("Gaslamp"), which owns the land on which HRHSD sits and has a lease agreement with 5th Rock, 4) MPK One, LLC ("MPK"), the controlling entity that manages 5th Rock, 5) Tushar Patel, Chairman of Tarsadia, 6) B.U. Patel, Vice Chairman and founder of Tarsadia, 7) Greg Casserly, President of Tarsadia, 8) Playground Destination Properties ("Playground"), 9) East West Bank ("East West"), 10) XBR Financial Services, LLC ("XBR"), 11) JP Morgan Chase ("Chase"), 12) Professional Mortgage Partners, Inc. ("Professional Mortgage"), 13) Bank of America ("BofA"), and 14) Erskine Corp ("Erskine"). (Id. at ¶¶ 40-55.)
The present motions to dismiss were filed by four of the banks involved in the action: East West, XBR, Chase, and BofA. The banks provided financing to Plaintiffs to allow them to purchase ownership units. (Id. at ¶ 85) Plaintiffs allege East West underwrote $42,726,435 in Investment Contracts. (Id. at ¶ 131.) East West also advanced an $88 million construction loan and $30 million in letters of credit to HRHSD. (Id. at ¶ 129.) XBR purchased several of Plaintiffs' notes from East West. (Id. at ¶ 49.) Chase underwrote $7,349,895 in Investment Contracts. (Id. at ¶ 134.) BofA underwrote $14,450,870 in Investment Contracts. (Id. at ¶ 137.)
Plaintiffs filed the original complaint on December 8, 2009. (Doc. 1.) On March 15, 2010, Plaintiffs filed the FAC. (Doc. 8.) East West filed its motion to dismiss on April 14, 2010. (Doc. 15.) Chase filed its motion on April 29, 2010. (Doc. 18.) On May 5, 2010, the matter was reassigned to this Court. (Doc. 27.) XBR filed its motion to dismiss on May 7, 2010, and BofA filed its motion on May 27, 2010. Plaintiffs filed oppositions to each of the motions, and each Defendant filed replies. (Docs. 53-57, 61-65.)
In two recent opinions, the Supreme Court established a more stringent standard of review for 12(b)(6) motions. See Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct. 1937 (2009); Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). To survive a motion to dismiss under this new standard, "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim for relief that is plausible on its face.'" Iqbal, 129 S.Ct. at 1949 (citing Twombly, 550 U.S. at 570). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (citing Twombly, 550 U.S. at 556). "Determining whether a complaint states a plausible claim for relief will ... be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. at 1950 (citing Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d Cir. 2007)). The reviewing court must therefore "identify the allegations in the complaint that are not entitled to the assumption of truth" and evaluate "the factual allegations in [the] complaint to determine if they plausibly suggest an entitlement to relief." Id. at 1951.
Three claims for relief are asserted against each of the Bank Defendants: 1) violation of § 12(a)(2) of the Securities Act of 1933 for misrepresentation or omission ("Section 12(a)(2)"), 2) violation of Cal. Corp. Code §§ 25110, 25503 and 25504.1 for sale of unqualified security, and 3) violation of Cal. Corp. Code §§ 25401, 25501 and 25504.1 for misrepresentation or omission. Defendants contend they are not liable under any of the securities laws because they were not "sellers" of securities and they did not act as underwriters. Defendants further contend that Plaintiffs' claims are barred by the relevant statutes of limitations.*fn1
Initially, Bank Defendants have requested the Court take judicial notice of several documents. East West requests judicial notice of the Purchase Contracts and Escrow Instructions, Unit Maintenance and Operations Agreements, Rental Management Agreements, and promissory notes of each of the Plaintiffs to whom East West provided financing. XBR also seeks judicial notice of documents from Plaintiffs who received financing from East West, namely, the Purchase Contracts and Escrow Instructions, promissory notes, and Grant Deeds and Deeds of Trust. BofA similarly requests judicial notice of Purchase Contract and Escrow Instructions, Unit Maintenance and Operations Agreements, Rental Management Agreements, Deeds of Trust and Promissory Notes of Plaintiffs who received financing from BofA. BofA also filed a Second Request for Judicial Notice of a "Notice of ...