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Dean Beaver, et al v. Tarsadia Hotels

December 6, 2011


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


Pending before the Court are motions to dismiss Plaintiffs' Corrected First Amended Complaint ("Complaint") filed by: (1) Tarsadia Hotels, Tushar Patel, B.U. Patel, Gregory Casserly, 5th Rock, LLC, MPK One, LLC, and Gaslamp Holdings, LLC (collectively, "Developer Defendants"); (2) Playground Destination Properties, Inc. ("Playground"); and (3) brothers Josh and Shane Erskine (the Erskines). Plaintiffs opposed the motions and Defendants replied.*fn1 For the reasons which follow, the Developer Defendants' motion to dismiss is DENIED IN PART AND GRANTED IN PART WITH LEAVE TO AMEND; Playground's motion to dismiss is DENIED IN PART AND GRANTED IN PART WITH LEAVE TO AMEND; and the Erskines' motion to dismiss is GRANTED WITH LEAVE TO AMEND.

Factual and Procedural Background

This case is a proposed class action brought by purchasers of condominium-hotel units at the Hard Rock Hotel & Condominium project in San Diego, California ("Hard Rock"). Hard Rock is a 12-story building containing 420 condominium-hotel units and commercial space. The public was offered an opportunity to purchase ownership interests in individual Hard Rock studios or suites. Plaintiffs filed this action on behalf of all persons who purchased units at Hard Rock between May 2006 and December 2007.

Plaintiffs claim that in connection with the sale of the units, Defendants violated, among other laws, the Interstate Land Sales Full Disclosure Act, 15 U.S.C. §§ 1701 et seq. ("ILSA") and the Subdivided Lands Act, Cal. Bus. & Prof. Code §§ 11000 et seq. ("SLA") by failing to disclosing a two-year statutory right to rescind to them and by making affirmative misrepresentations regarding their right to rescind. The land on which Hard Rock was built was owned by Defendant Gaslamp Holdings, LLC, an affiliate of Defendant 5th Rock, LLC ("5th Rock"), which offered the units for sale to the public. Each Plaintiff executed a pre-printed standardized Purchase Contract and Escrow Instructions ("Contract"). The Contracts were signed on 5th Rock's behalf by Defendant MKP One, LLC ("MKP"), the managing member of 5th Rock. Defendant Tarsadia Hotels ("Tarsadia") is the parent corporation of 5th Rock and MKP, and Defendants Tushtar Patel, B.U. Patel and Gregory Casserly are Tarsadia's principals. The real estate broker for Hard Rock was Playground. Playground and the Erskines allegedly acted as agents within the meaning of ILSA for purposes of the sale.

According to Plaintiffs, the ILSA and SLA were enacted to protect consumers from fraud and abuse in the sale of subdivided lots, including condominium units. Both statutes impose certain disclosure requirements on developers. If developers fail to comply, the statutes provide the purchaser with a right of rescission and other equitable relief and damages.

The developer may include in the default provision of the purchase contract a written notice of a 20-day opportunity for the purchaser to remedy default or breach of contract. If this provision is not included, the purchaser has an absolute two-year right to rescind. (Compl. at 4, citing 15 U.S.C. § 1703(d)(2).) Because Developer Defendants allegedly did not include the default remedy provision in the Contract, Plaintiffs contend they have an absolute two-year right to rescind. (Compl. at 4.) Such right to rescind must be set forth in the public report, another document required by the ILSA and SLA. (15 U.S.C. § 1703(d)(2); Cal. Bus. & Prof. Code §§ 11010(b)(5) & 11018.) The notice of the right to rescind must state, "Under Federal law you may cancel your contract or agreement of sale at any time within two years of the date of signing." 24 C.F.R. § 1710.105(d)(2)(iv); see also 15 U.S.C. § 1703(d). Plaintiffs alleged this notice was not included in the Public Report they received. (Compl. at 4-5.) The theory of Plaintiffs' case is that Defendants violated the ILSA and SLA by failing to disclose the statutory two-year right to rescind as required by law. In addition, Plaintiffs claim Defendants made overt misrepresentations to mislead Plaintiffs regarding their right to rescind. (Id. at 5.)

Plaintiffs filed this action in state court alleging ILSA and SLA violations, fraud, negligence and violations of the Unfair Competition Law, Cal. Bus. & Prof. Code §§ 17200 et seq. ("UCL"). After they amended and corrected the complaint, Defendants removed it to this Court pursuant to 28 U.S.C. Section 1332(d), Class Action Fairness Act of 2005. Plaintiffs' operative Complaint alleges seven causes of action: (1) violation of ILSA's anti-fraud provisions, 15 U.S.C. § 1703(a)(2)(A)-(C); (2) violations of ILSA's property report provision, 15 U.S.C. § 1703(a)(1)(C); violation of ILSA's notice of opportunity to cure default provision, 15 U.S.C. § 1703(d)(2); (4) SLA violation; (5) fraud; (6) negligence; and (7) UCL violation. Plaintiffs also request damages, including punitive damages, rescission of the Contracts and restitution of all funds paid, among other things.


Defendants filed motions to dismiss the Complaint arguing that all claims are barred by the statute of limitations and that the claims are not alleged with sufficient specificity. Under Federal Rule of Civil Procedure 12(b)(6), a motion to dismiss tests the sufficiency of the complaint. Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001). Dismissal is warranted where the complaint lacks a cognizable legal theory. Shroyer v. New Cingular Wireless Serv., Inc., 622 F.3d 1035, 1041 (9th Cir. 2010) (internal quotation marks and citation omitted); see Neitzke v. Williams, 490 U.S. 319, 326 (1989) ("Rule 12(b)(6) authorizes a court to dismiss a claim on the basis of a dispositive issue of law"). Alternatively, a complaint may be dismissed where it presents a cognizable legal theory yet fails to plead essential facts under that theory. Robertson v. Dean Witter Reynolds, Inc.,749 F.2d 530, 534 (9th Cir. 1984); see also Shroyer, 622 F.3d at 1041.

In this regard, "to survive a motion to dismiss, a complaint must contain sufficient factual matter to state a facially plausible claim to relief." Shroyer, 622 F.3d at 1041, citing Ashcroft v. Iqbal, 556 U.S. 662, __, 129 S. Ct. 1937, 1949 (2009). "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." Iqbal, 129 S. Ct. at 1949, citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007). "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." Iqbal, 129 S. Ct. at 1950.

In reviewing a motion to dismiss under Rule 12(b)(6), the Court must assume the truth of all factual allegations and must construe them in the light most favorable to the nonmoving party. Cahill v. Liberty Mut. Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). Legal conclusions need not be taken as true merely because they are couched as factual allegations. Twombly, 550 U.S. at 555. Similarly, "conclusory allegations of law and unwarranted inferences are not sufficient to defeat a motion to dismiss." Pareto v. Fed. Deposit Ins. Corp., 139 F.3d 696, 699 (9th Cir. 1998).

Interstate Land Sales Full Disclosure Act

Defendants challenge each claim alleged in the Complaint, including the ILSA claims, based on the statute of limitations. When, as here, the motion to dismiss is based on the running of the statute of limitations, it "may be granted only 'if the assertions of the complaint, read with the required liberality, would not permit the plaintiff to prove the statute was tolled.'" Supermail Cargo, Inc. v. United States, 68 F.3d 1204, 1206-07 (9th Cir. 1995), quoting Jablon v. Dean Witter & Co., 614 F.2d 677, 682 (9th Cir. 1980). The untimeliness must appear beyond doubt on the face of the complaint before a claim will be dismissed as time-barred. See Supermail Cargo, 68 F.3d at 1206-07.

In their opposition, Plaintiffs agreed to dismiss the second and third causes of action for ILSA violations under 15 U.S.C. Section 1703(a)(1)(C) and (d)(2), respectively, as untimely. (Opp'n at 1 n.2.) Accordingly, the second and third causes of action are DISMISSED WITH PREJUDICE.

In their first cause of action, Plaintiffs alleged violation of ILSA's anti-fraud provisions, 15 U.S.C. § 1703(a)(2)(A)-(C). In this regard, ILSA prohibits any developer or agent directly or indirectly in connection with a sale:

(A) to employ any device, scheme, or artifice to defraud;

(B) to obtain money or property by means of any untrue statement of a material fact, or any omission to state a material fact necessary in order to make the statements made (in light of the circumstances in which they were made and within the context of the overall offer and sale or lease) not misleading, with respect to any information pertinent to the lot or subdivision; [or]

(C) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon a purchaser;

Plaintiffs' theory in this regard is that not only did Defendants fail to include the requisite provisions in the Contract and the Property Report, but they included and otherwise disseminated information to Plaintiffs indicating they did not have a right of rescission as provided by ILSA.*fn2 For example, rather than to include the broad automatic right to rescission language mandated by the regulations, 24 C.F.R. § 1710.105(d)(2)(iv) ("Under Federal law you may cancel your contract or agreement of sale at any time within two years of the date of signing."), they included a narrower provision, "If the escrow has not closed on your Room Unit within two (2) years less one (1) day from the date of your Purchase Agreement, you may request the return of your purchase money deposit." (Compl. Ex. C, Public Report at 13.) While the federal right to rescind is independent of closing, Defendants' provision was conditioned on the timing of closing. Furthermore, in or about August 2007, Playground distributed a document entitled "Closing -- It's Time to Make Your Move" ("Closing Notice") which included the following statement: "[I]f you don't close on the date to be announced by the developer, you will be in default and lose your deposit." (Compl. at 15.) This statement is contrary to the rescission right granted Plaintiffs by the ILSA.

Defendants maintain that Plaintiffs' claim for violation of ILSA's anti-fraud provisions is time barred under their ...

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