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Salameh v. Tarsadia Hotels

August 24, 2010


The opinion of the court was delivered by: Hon. Dana M. Sabraw United States District Judge


Pending before the Court is Defendant Playground Destination Properties' ("Playground") motion to dismiss. The matter came on for hearing on August 13, 2010. Michael Aguirre and Maria Severson appeared on behalf of Plaintiffs. Daniel Benjamin and Logan Smith appeared on behalf of Playground. Frederick Kranz appeared on behalf of the Tarsadia Hotel Defendants. Edward Rosenfeld appeared on behalf of Defendant Bank of America. For the reasons set forth below, Defendant's motion is 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 ("RMA"). (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.) Defendant Playground was the third-party real estate brokerage company hired by the developer to list and market the condominium units to be developed. Plaintiffs assert four claims against Playground: 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, and 4) violation of Cal. Corp. Code 25501.5 for sale by unlicensed broker-seller.

Plaintiffs filed the original complaint on December 8, 2009, and the FAC on March 15, 2010. (Docs. 1 & 8.) Playground filed its motion to dismiss on June 9, 2010. Plaintiffs filed an opposition and Defendant filed a reply. (Docs. 77 & 79.) On July 20, 2010, this Court granted without prejudice four motions to dismiss filed by the Bank Defendants. (Doc. 72.)


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.


Playground moves to dismiss the FAC on the grounds that the condominium units were not "securities" under the securities laws and Plaintiffs' claims are barred by the relevant statutes of limitations.

A. Sale of Security

Plaintiffs contend the sale of HRHSD condominium units was an "Investment Contract" subject to state and federal securities laws. "[A]n investment contract for purposes of the Securities Act means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party." SEC v. W. J. Howey Co., 328 U.S. 293, 298-299 (1946). There is a three-part test to determine whether or not a transaction is an investment contract: "(1) an investment of money (2) in a common enterprise ...

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