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Dean Beaver, et al v. Tarsadia Hotels

May 2, 2012

DEAN BEAVER, ET AL.,
PLAINTIFFS,
v.
TARSADIA HOTELS, ET AL., DEFENDANTS.



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

ORDER GRANTING IN PART AND DENYING IN PART MOTIONS TO DISMISS

Pending before the Court are motions to dismiss Plaintiffs' Second Amended Class Action 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"); and (2) Playground Destination Properties, Inc. ("Playground"). Plaintiffs opposed the motions and Defendants replied. For the reasons which follow, both motions to dismiss are GRANTED IN PART AND DENIED IN PART.

Factual and Procedural Background

This proposed class action was 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 disclose a two-year statutory right to rescind and by making affirmative misrepresentations regarding the 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. Playground was the real estate broker for Hard Rock.

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, 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 Contracts, Plaintiffs contend they had an absolute two-year right to rescind, which they claim must be set forth in the public report, another document required by the ILSA and SLA. (Compl. at 4 & 12, citing 15 U.S.C. § 1703(d)(2); 24 C.F.R. § 1710.105(d)(2) & Cal. Bus. & Prof. Code §§ 11010(b)(5) & 11018.) Plaintiffs allege this provision was not included in the public report they received. (Compl. at 4-5 & Ex. C (Final Subdivision Public Report ("Public Report"))). The theory of Plaintiffs' case is that Defendants violated the ILSA and SLA by intentionally omitting the statutory notice of right to rescind from sale documents and engaging in affirmative misrepresentations regarding the right to rescind to prevent Plaintiffs from exercising it. (See, e.g., id. at 4-5, 17.)

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"). Defendants removed the case to this Court pursuant to the Class Action Fairness Act of 2005, 28 U.S.C. Section 1332(d), and subsequently moved to dismiss based primarily on the statute of limitations bar. Their motions were denied in part and granted in part with leave to amend. In the operative second amended complaint, Plaintiffs allege five causes of action: (1) violation of ILSA's anti-fraud provisions, 15 U.S.C. § 1703(a)(2)(A)-(C); (2) SLA violation; (3) fraud; (4) negligence; and (5) UCL violation. Plaintiffs request damages, including punitive damages, rescission of the Contracts and restitution of all funds paid, among other things.

Discussion

Defendants filed motions to dismiss the Complaint arguing it fails to adequately plead claims and is barred by the statute of limitations. 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 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. Huynh v. Chase Manhattan Bank, 465 F.3d 992, 997 (9th Cir. 2006). However, legal conclusions need not be taken as true merely because they are couched as factual allegations. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). 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

In their first cause of action Plaintiffs allege violation of ILSA's anti-fraud provisions, which prohibit any developer or agent:

(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; . . ..

15 U.S.C. § 1703(a)(2)(A)-(C). Plaintiffs maintain Defendants violated the anti-fraud provisions because they failed to disclose the requisite rescission provisions in the sale documents and misled Plaintiffs about their right of rescission.

Plaintiffs signed their Contracts on or about May 18, 2006. (Compl. at 3.) The Contracts did not include notice of the purchaser's 20-day opportunity to remedy default or breach of contract as allegedly required by the ILSA. (Compl. at 4, citing 15 U.S.C. § 1703(d)(2).) Instead, the Contracts included the following:

BUYER MAY CANCEL BUYER'S OFFER TO PURCHASE THE UNIT AND THE CONTRACT RESULTING FROM SELLER'S ACCEPTANCE OF BUYER'S OFFER, AND RECEIVE A FULL REFUND OF BUYER'S INITIAL DEPOSIT UNTIL MIDNIGHT OF THE THIRD (3rd) CALENDAR DAY AFTER THE DAY ON WHICH BUYER SIGNS THIS CONTRACT . . .. (Compl. at 14 & Contracts at 12 (emphasis in original).)

Because Developer Defendants did not include the 20-day default remedy provision in the Contracts, Plaintiffs contend they had an absolute two-year right to rescind, which was required to be disclosed in the Public Report. Plaintiffs received the Public Report on or about May 18, 2006, prior to signing their Contracts. (Compl. at 4 & 16.) They contend the Public Report had to include the following statement: "Under Federal law you may cancel your contract or agreement of sale at any time within two years of the date of signing." (Compl. at 12, quoting 24 C.F.R. § 1710.105(d)(2)(iv).) Instead, the Public Report included a different 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." (Public Report at 13.)

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 17.) Plaintiffs closed escrow in October 2007. (Id.)

The two-year period to exercise the absolute right to rescind under the ILSA started to run when Plaintiffs signed their Contracts on May 18, 2006 and expired on May 18, 2008. The provision included in the Public Report, however, was not triggered until two years after signing the Contract. Unlike the ILSA provision, which is independent of escrow closing, the purchasers' right to rescind as stated in the Public Report did not come into effect at all if escrow closed before May 18, 2008. Prompted by the Closing Notice, Plaintiffs closed escrow in October 2007. (See Compl. at 17.) Upon review of the Contracts and Public Report, it appeared to Plaintiffs that their right to rescind never arose. Plaintiffs contend that Defendants did not include the requisite rescission provision, which would have told them they had until May 18, 2008 to rescind, but included misleading provisions in their documents because they intended to prevent Plaintiffs from exercising their statutory right to rescind. Relying on Defendants' misleading representations, Plaintiffs did not discover they had a right to rescind until after it had expired and they lost the opportunity to exercise it. (See id. at 5 & 18.)

Playground's Liability

Playground argues Plaintiffs cannot state an ILSA claim against it because real estate agents are generally not liable under the ILSA. ILSA's anti-fraud provisions, 15 U.S.C. § 1703(a)(2)(A)-(C), explicitly impose liability on developers and their agents. See also id. § 1709(a). ILSA defines "agent" in pertinent part as "any person who represents, or acts for or on behalf of, a developer in selling . . . or offering to sell . . . any lot or lots in a subdivision . . .." Id. § 1701(6). Playground relies on Santidrian v. Landmark Custom Ranches, Inc., 655 F. Supp. 2nd 1260 (S.D. Fla. 2009), but the court in Santidrian expressly rejected the proposition that real estate agents can never be liable under the ILSA. Id. at 1267-68. Rather, the Court granted the agent's summary judgment motion based on "traditional agency principles" because, among other things, the agent's involvement in the transaction was very limited and there was no evidence of any section 1703(a)(2) violation by ...


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