The opinion of the court was delivered by: Hon. Dana M. Sabraw United States District Judge
ORDER GRANTING DEFENDANTS' MOTIONS TO DISMISS PLAINTIFFS' SECOND AMENDED COMPLAINT
Pending before the Court are nine motions to dismiss Plaintiffs' Second Amended Complaint ("SAC") filed by: (1) Bank of America, N.A. ("Bank of America"), (2) East West Bank ("East West"), (3) JPMorgan Chase Bank, N.A. ("JPMorgan"), (4) XBR Financial Services, LLC ("XBR"), (5) Independent Bank Corporation ("Independent"), (6) Erskine Corp. ("Erskine"), (7) Wintrust Financial Corporation ("Wintrust") (1 through 7, collectively, the "Bank Defendants"), (8) Playground Destination Properties, Inc. ("Playground"), and (9) Tarsadia Hotels, Tushar Patel, B.U. Patel, Gregory Casserly, 5th Rock, LLC, MPK One, LLC, and Gaslamp Holdings, LLC (collectively, "Tarsadia"). The matter came on for hearing on February 11, 2011. For the reasons set forth below, (1) the Bank Defendants' motions to dismiss are granted, (2) Tarsadia's motion to dismiss is granted, and (3) Playground's motion to dismiss is granted.
This matter is a proposed class action brought by investors in the Hard Rock Hotel San Diego ("HRHSD"). (SAC ¶¶ 2, 11, 75.) The HRHSD is a 12-story building containing 420 hotel condominium units and commercial space. (Id. at ¶¶ 110-11.) 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 ¶ 99.) Plaintiffs bring suit on behalf of all persons who were sold and who purchased such ownership interests. (Id. at ¶ 75.)
Plaintiffs purchased ownership units in HRHSD through what Plaintiffs have titled "HRHSD Investment Contracts." (Id. at ¶ 2.) Plaintiffs claim to have invested in what constituted the "HRHSD Common Enterprise." (Id. at ¶ 82.) According to Plaintiffs, the HRHSD Common Enterprise was framed by a series of documents, including: (1) Purchase Contract and Escrow Instructions ("Purchase Contract"), (2) Unit Maintenance Agreement, (3) HRHSD Rental Management Agreement, (4) Declaration of Restrictions, (5) Association Articles of Incorporation and Bylaws, (6) Deed Restrictions, (7) City of San Diego Restrictions, and (8) California Department of Real Estate Report ("DRE Report"). (Id. at ¶ 91.)
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 ¶ 119.) Although they were told the HRHSD Rental Management Agreement was voluntary, for all practical purposes, it was in fact mandatory. (Id. at ¶¶ 101, 116, 129.) Plaintiffs were not issued keys to their units, but instead had to obtain keys from the hotel when staying in their units. (Id. at ¶¶ 4, 104.) The units were required to be operated as part of the hotel and, accordingly, Defendants were responsible for the daily management, operation, and marketing of the units. Furthermore, pursuant to a city zoning ordinance, Plaintiffs were permitted to stay in their units for a maximum of 28 days per calendar year. (Id. at ¶¶ 4, 89, 110-11.) Plaintiffs contend the units were marketed as real estate transactions, but were actually "securities" and should have been sold pursuant to the laws regulating the sale of securities. (Id. at ¶¶ 1-2.)
The SAC asserts eight claims for relief: 1) violation of § 12(a)(2) of the Securities Act of 1933 for misrepresentation and omission, 2) violation of § 10(b) of the Securities Act of 1934 for misrepresentation and omission, 3) violation of California Corporations Code §§ 25110, 25503, and 25504.1 for sale of an unqualified security, 4) violation of California Corporations Code §§ 25401, 25501, and 25504.1 for misrepresentation and omission, 5) violation of California Corporations Code § 25501.5 for sale by an unlicensed broker-seller, 6) violation of California Corporations Code § 25504 by individual Defendants who controlled the entities, 7) fraud-misrepresentation, and 8) fraud-concealment.
Defendants are: 1) Tarsadia Hotels, HRHSD's operator, 2) 5th Rock, LLC, the developer and one of the sellers of the HRHSD Investment Contracts, 3) Gaslamp Holdings, LLC, which owns the land on which HRHSD sits and has a lease agreement with 5th Rock, 4) MPK One, LLC, the controlling entity that manages 5th Rock and executed the sales documents by which the investment contracts and properties were sold to Plaintiffs, 5) Tushar Patel, Chairman of Tarsadia Hotels, 6) B.U. Patel, Vice Chairman and founder of Tarsadia Hotels, 7) Greg Casserly, President of Tarsadia Hotels, 8) Playground, 9) East West, which provided approximately $42,726,435 in financing for purchases at HRHSD, 10) XBR, which purchased several of Plaintiffs' notes from East West after the filing of this legal action, 11) JPMorgan, which provided approximately $7,349,895 in financing for purchases at HRHSD, 12) Professional Mortgage Partners, Inc. ("PMP"), which provided approximately $38,536,730 in financing for purchases at HRHSD, 13) Bank of America, which provided approximately $14,450,870 in financing for purchases at HRHSD, 14) Wintrust, which acquired certain assets and liabilities of PMP and is named on the basis of successor liability, 15) Erskine, as agent of PMP, and 16) Independent, which purchased approximately 100 HRHSD investment contract loans from PMP. (SAC at ¶¶ 53-69.)
Plaintiffs filed the original complaint on December 8, 2009. (Doc. 1.) On March 15, 2010, Plaintiffs filed the First Amended Complaint ("FAC"). (Doc. 8.) On July 20, 2010, the Court issued an Order granting the motions to dismiss the FAC made by Defendants East West, XBR, Bank of America, and JPMorgan. (Doc. 72.) The Court issued an Order granting Defendant Playground's motion to dismiss the FAC on August 24, 2010. (Doc. 82.) Plaintiffs were granted leave to amend and filed the SAC on September 10, 2010. (Doc. 86.) Motions to dismiss the SAC have been filed by: (1) the seven Bank Defendants, (2) Playground, and (3) Tarsadia. (Docs. 91, 93, 96, 98, 99, 111, 113, 122, 132.) Plaintiffs filed an opposition to each motion to dismiss and replies were filed by each of the moving Defendants.*fn1
A party may move to dismiss a claim under Rule 12(b)(6) if the claimant fails to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). The Federal Rules require a pleading to include a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). The Supreme Court, however, recently established a more stringent standard of review for pleadings in the context of 12(b)(6) motions to dismiss. See Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009); Bell Atl. 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 to relief that is plausible on its face.'" Iqbal, 129 S. Ct. at 1949 (quoting 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.
A. Application of Securities Laws
As a threshold matter, the Court must address whether Plaintiffs have sufficiently alleged the existence of a security. Playground and Tarsadia move to dismiss the SAC on the basis that Plaintiffs have not sufficiently alleged the HRHSD condominium units constituted a security.*fn2 Plaintiffs argue a security need not be in the form of a single, neat contract and that a general scheme of profit-seeking activities may constitute a security. See Hocking v. Dubois, 885 F.2d 1449, 1457 (9th Cir. 1989); see also S.E.C. v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946). They allege the security at issue here was comprised of a series of documents, including the Purchase Contract, the Unit Maintenance and Operations Agreement, and the Rental Management Agreement. (SAC ¶ 91.) Plaintiffs contend the sale of HRHSD condominium units was an investment contract subject to state and federal securities laws and the economic reality of the project was that the units were required to be managed as part of a common enterprise under the Rental Management Agreement. The federal securities laws define a security to include an investment contract. 15 U.S.C. § 77b(a)(1); 15 U.S.C. § 78c(a)(10). A three-part test exists to determine whether or not a transaction constitutes an investment contract: "(1) an investment of money (2) in a common enterprise (3) with an expectation of profits produced by the efforts of ...