United States District Court, S.D. California
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For Dean Beaver, Husband and Wife, Veronica Kenna, husband and wife, on behalf of themselves and all others similarly situated, Kevin Kenna, husband and wife, on behalf of themselves and all others similarly situated, Dinesh Gauba, an individual, Abram Aghachi, an individual, Steven Adelman, an individual, Laurie Beaver, Husband and Wife, Plaintiffs: Donald Eugene Chomiak, LEAD ATTORNEY, Talisman Law, P.C., Glendale, CA; Michael Lawrence Schrag, LEAD ATTORNEY, Meade & Schrag, LLP, Berkeley, CA; Tyler R. Meade, LEAD ATTORNEY, Meade & Schrag LLP, Berkeley, CA; Wendy C. Fostvedt, PRO HAC VICE, Fostvedt Legal Group, LLC, Basalt, CO.
For Tarsadia Hotels, a California corporation, Gaslamp Holdings, LLC, a California limited liability company, MKP One, LLC, a California limited liability company, 5th Rock LLC, a Delaware limited liability company, Gregory Casserly, an individual, B.U. Patel, an individual, Tushar Patel, an individual, Defendants: Alicia Natalie Vaz, LEAD ATTORNEY, Cox Castle and Nicholson, Los Angeles, CA; Perry Hughes, LEAD ATTORNEY, Cox Castle & Nicholson, Los Angeles, CA; Frederick H Kranz, Jr, Cox Castle & Nicholson LLP, Irvine, CA.
For Playground Destination Properties, Inc., a Washington corporation, Defendant: Daniel M. Benjamin, LEAD ATTORNEY, Ballard Spahr, LLP, San Diego, CA; Chrysta L. Elliott, John J. Rice, Thomas W McNamara, Ballard Spahr LLP, San Diego, CA.
For Gregory Casserly, an individual, B.U. Patel, an individual, Tarsadia Hotels, a California corporation, Gaslamp Holdings, LLC, a California limited liability company, 5th Rock LLC, a Delaware limited liability company, Tushar Patel, an individual, MKP One, LLC, a California limited liability company, ThirdParty Plaintiffs: Alicia Natalie Vaz, LEAD ATTORNEY, Cox Castle and Nicholson, Los Angeles, CA; Perry Hughes, LEAD ATTORNEY, Cox Castle & Nicholson, Los Angeles, CA; Frederick H Kranz, Jr, Cox Castle & Nicholson LLP, Irvine, CA.
For Greenberg Traurig, LLP, a limited liability partnership, ThirdParty Defendant: Michael P McNamara, LEAD ATTORNEY, Dylan Ruga, Steptoe & Johnson LLP, Los Angeles, CA.
HON. GONZALO P. CURIEL, United States District Judge.
ORDER DENYING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT AND GRANTING IN PART AND DENYING IN PART TARSADIA DEFENDANTS AND DEFENDANT PLAYGROUND DESTINATION'S MOTIONS FOR SUMMARY JUDGMENT [Dkt. Nos. 81, 94, 98.]
Plaintiffs Dean Beaver, Laurie Beaver, Steven Adelman, Abram Aghachi, Dinesh Gauba, Kevin Kenna and Veronica Kenna (collectively " Plaintiffs" ) brought a class action on behalf of themselves and all others similarly situated against developers and agents of the Hard Rock Hotel & Condominium Project (" Hard Rock" ). (Dkt. No. 69, TAC.) Plaintiffs commenced this action on behalf of persons who purchased units at the Hard Rock between May 2006 and December 2007 for Defendants' failure to disclose and intentionally concealing Plaintiffs' right to rescind their purchase contracts within two years of the date of signing the contracts.
On May 3, 2013, Plaintiffs filed a motion for summary judgment. (Dkt. No. 81.) Defendants filed oppositions and Plaintiffs replied. (Dkt. Nos. 104, 111.) On May 22, 2013, Defendants 5th Rock, Gregory Casserly, Gaslamp Holdings, LLC, MKP One,
LLC, B.U. Patel, Tushar Patel, and Tarsadia Hotels (collectively " Developer Defendants" or " Tarsadia Defendants" ) filed a motion for summary judgment. (Dkt. No. 94.) Plaintiffs filed an opposition and Defendants replied. (Dkt. Nos. 103, 112.) On May 31, 2013, Defendant Playground Destination Properties, Inc. (" Playground" ) filed a motion for summary judgment. (Dkt. No. 98.) Plaintiffs filed an opposition and Defendants replied. (Dkt. Nos. 107, 115.) On August 28, 2013, the Court held a hearing. (Dkt. No. 120.) Tyler Meade, Esq., Michael Shrag, Esq., Michael Reiser, Esq, and Donald Chomiak, Esq. appeared on behalf of Plaintiffs. Alicia Vaz, Esq., Frederick Kranz, Esq. appeared on behalf of Tarsadia Defendants, and Daniel Benjamin, Esq., and Thomas McNamara, Esq. appeared on behalf of Defendant Playground.
Based on the parties' briefs, supporting documentation, applicable law, and hearing oral argument, the Court DENIES Plaintiffs' motion for summary judgment and GRANTS in part and DENIES in part all Defendants' motions for summary judgment.
On August 17, 2011, the proposed class action was removed from state court to this Court. (Dkt. No. 1.) On August 24, 2011, Defendants filed motions to dismiss the First Amended Complaint. (Dkt. Nos. 6, 11, 12.) On December 6, 2011, District Judge Dana Sabraw granted in part and denied in part Defendants' motion to dismiss and granted Plaintiffs leave to amend. (Dkt. No. 20.) On December 22, 2011, Plaintiffs filed a Second Amended Complaint (" SAC" ) alleging violations of the Interstate Land Sales Full Disclosure Act (" ILSA" ), violation of California's Subdivided Lands Act, (" SLA" ), fraud, negligence and violation of California Business and Professions Code sections 17200 et seq. (Dkt. No. 21.) Defendants again moved to dismiss the SAC on January 5, 2012. (Dkt. Nos. 22, 23.) On May 2, 2012, District Judge Dana Sabraw granted in part and denied in part Defendants' motions to dismiss the SAC. (Dkt. No. 34.) In that order, the Court dismissed the second cause of action for violation of California's Subdivided Lands Act with prejudice. (Id.) The first and third causes of action for violation of ILSA and common law fraud were dismissed with prejudice solely as to Defendant Playground. (Id. at 18.)
On August 8, 2012, Defendant Playground filed a motion for judgment on the pleadings as to Plaintiffs' section 17200 claim. (Dkt. No. 40.) On September 27, 2012, Plaintiffs filed a motion for leave to amend to file a Third Amended Complaint (" TAC" ). (Dkt. No. 43.) On October 12, 2012, the case was transferred to the undersigned judge. (Dkt. No. 52.) On April 17, 2013, the Court granted Plaintiffs' motion for leave to file a Third Amended Complaint and denied as moot Defendant Playground Destination's motion for judgment on the pleadings. (Dkt. No. 68.) On April 18, 2013, Plaintiffs filed a Third Amended Complaint (" TAC" ). (Dkt. No. 69.)
On March 1, 2013, Plaintiffs filed a motion to certify class and motion for appointment of co-lead class counsel. (Dkt. Nos. 62, 63.) On June 24, 2013, the Court denied Plaintiffs' motion for class certification as premature as the legal issue of whether the Hard Rock Project was subject to ILSA needed to be addressed first. (Dkt. No. 108.)
In the TAC, Plaintiffs allege the same five causes of action as the second amended complaint but adds additional factual allegations. The five causes of action are: 1) violation of the Interstate Land Sales Full Disclosure Act, 15 U.S.C. § 1701 et seq.
(" ILSA" ); 2) California's Subdivided Lands Act, California Business and Professions Code sections 11000 et seq. (" SLA" ); 3) fraud; 4) negligence; and 5) violation of California Business and Professions Code sections 17200 et seq. It should be noted that in the Court's order granting in part and denying in part Defendants' motion to dismiss the Second Amended Complaint, the Court dismissed the second cause of action for violation of the Subdivided Lands Act with prejudice. Moreover, Defendant Playground was dismissed with prejudice from the first and third causes of action for violation of ILSA and common law fraud. (Dkt. No. 34.)
Plaintiffs allege that because Defendants failed to comply with ILSA, they violated ILSA by failing to disclose and intentionally concealed that buyers had an absolute right to rescind their purchase contracts within two years of the date of signing and making affirmative misrepresentations regarding the right to rescind to prevent Plaintiffs from exercising it. Defendants are 5th Rock, LLC (" Seller" ), the seller and developer of the Hard Rock; MKP One, LLC (" MKP" ), the managing member of 5th Rock and the party that signed these contracts on behalf of 5th Rock; Tarsadia Hotels (" Tarsadia" ), an entity 5th Rock retained to assist in the development, and subsequently the operation, and management of the Hotel after opening; Gregory Casserly, the President and member of the Board of Directors of Tarsadia; Tushar Patel, and B.U. Patel, shareholders and members of the Board of Directors of Tarsadia; and Gaslamp Holdings, LLC (" Gaslamp" ), an affiliate of 5th Rock that owned the land underlying the Hard Rock. Playground was the real estate broker for the Hard Rock.
Around 2005, Defendants, through 5th Rock, began to develop a mixed-use development to include 420 guestroom commercial condominium units (" Units" ) called the " Hard Rock Hotel & Condominium" located at 205 Fifth Avenue in San Diego, California. Starting around May 18, 2006, Plaintiffs and 5th Rock executed a pre-printed, standardized Purchase Contract and Escrow Instructions (" Purchase Contract" ) prepared by Defendants for the purchase of one or more Units at the Hard Rock Project. Most closed escrow on their Units in 2007.
Plaintiffs assert that Defendants violated the Interstate Land Sales Full Disclosure Act, 15 U.S.C. § § 1701 et seq. (" ILSA" ) by failing to disclose and intentionally concealing Plaintiffs' right to rescind their purchase contracts within two years of the date of signing the Contracts. Under 15 U.S.C. § 1703(d)(2) of the ILSA, a developer is required to include in the buyer default provision of the purchase contract written notice of a 20-day opportunity for the buyer to remedy default or breach of contract. 15 U.S.C. § 1703(d)(2). If a developer does not include the default remedy provision in the contracts, buyers then have an absolute two-year right to rescind. 15 U.S.C. § 1703(d).
Furthermore, ILSA requires a developer to register a project with the U.S. Department of Housing and Urban Development (" HUD" ) and to provide buyers with an ILSA property report that discloses facts regarding the sales transaction. 15 U.S.C. § 1703(a)(1)(B). If a developer does not obtain an ILSA property report to be distributed to buyers before they sign the purchase contract (or in the alternative, in California, where a developer fails to provide buyers with an ILSA compliant public report issued by the Department of Real Estate), ILSA imposes a two-year right to rescind from the date of contract for the benefit of the buyers where the right to rescind must be disclosed
in the purchase contract. 15 U.S.C. § 1703(c).
Plaintiffs argue that Defendants violated the ILSA by intentionally omitting the statutory notice of right of rescission from the sale documents and making affirmative misrepresentations regarding the right to rescind to prevent Plaintiffs from exercising it. As a result, Plaintiffs were denied their legal right to rescind as the real estate market deteriorated and the economy fell into recession.
Defendants do not dispute that they did not provide an ILSA required property report at the time of the Purchase Contract, did not provide a ILSA compliant public report issued by the DRE, did not include the 20 day opportunity for the buyer to remedy default or breach, and did not include a two year right to rescind in the Purchase Contract. They contend that the Hard Rock Units were not subject to ILSA since the Units were not " lots" under ILSA and were subject to the Improved Lot Exemption.
Plaintiffs move for partial summary judgment on the fifth cause of action on the unfair competition law claim solely as to the " unlawful" prong against Tarsadia Defendants. Developer Defendants move for summary judgment on all claims against them including the first cause of action for violations of ILSA, third cause of action for fraud, fourth cause of action for negligence and fifth cause of action for unfair competition. Defendant Playground Destination moves for summary judgment on all claims against it which include the fourth cause of action for negligence and fifth cause of action for unfair competition.
A. Legal Standard for Federal Rule of Civil Procedure 56
Federal Rule of Civil Procedure 56 empowers the Court to enter summary judgment on factually unsupported claims or defenses, and thereby " secure the just, speedy and inexpensive determination of every action." Celotex Corp. v. Catrett, 477 U.S. 317, 325, 327, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Summary judgment is appropriate if the " pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). A fact is material when it affects the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
The moving party bears the initial burden of demonstrating the absence of any genuine issues of material fact. Celotex Corp., 477 U.S. at 323. The moving party can satisfy this burden by demonstrating that the nonmoving party failed to make a showing sufficient to establish an element of his or her claim on which that party will bear the burden of proof at trial. Id. at 322-23. If the moving party fails to bear the initial burden, summary judgment must be denied and the court need not consider the nonmoving party's evidence. Adickes v. S.H. Kress & Co., 398 U.S. 144, 159-60, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970).
Once the moving party has satisfied this burden, the nonmoving party cannot rest on the mere allegations or denials of his pleading, but must " go beyond the pleadings and by her own affidavits, or by the 'depositions, answers to interrogatories, and admissions on file' designate 'specific facts showing that there is a genuine issue for trial.'"
Celotex, 477 U.S. at 324. If the non-moving party fails to make a sufficient showing of an element
of its case, the moving party is entitled to judgment as a matter of law. Id. at 325. " Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no 'genuine issue for trial.'" Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). In making this determination, the court must " view the evidence in the light most favorable to the nonmoving party." Fontana v. Haskin, 262 F.3d 871, 876 (9th Cir. 2001). The Court does not engage in credibility determinations, weighing of evidence, or drawing of legitimate inferences from the facts; these functions are for the trier of fact. Anderson,
477 U.S. at 255.
Plaintiffs, Developer Defendants, and Playground filed motions for summary judgment on the ILSA and/or related state law causes of action. Prior to determining whether ISLA was violated, the threshold issue determinative as to any cause of action is whether the Hard Rock Units are subject to the requirements under ILSA. Specifically, the Court must address whether the Hard Rock Units are " lots" under ILSA and whether the Improved Lot Exemption applies to this case. These issues have not been addressed by the Ninth Circuit or by many of the district courts in the Ninth Circuit and are issues of first impression in this district and this Circuit.
B. Whether the Hard Rock Units are " Lots" Under ILSA
All Defendants argue that the ILSA does not apply because the Hard Rock Units are not " lots" as contemplated under ILSA. Plaintiffs contend that the units are " lots" and subject to the provisions of ILSA.
ILSA was originally enacted in 1968 to prevent false and deceptive practices in the sale of unimproved tracts of land by requiring developers to disclose information needed by potential buyers. See 15 U.S.C. § 1703. " The disclosure requirements are designed to prevent fraud in interstate land transaction." De Luz Ranchos Invest., Ltd. v. Coldwell Banker & Co., 608 F.2d 1297, 1302 (9th Cir. 1979). To obtain this goal, ILSA imposes disclosure requirements on developers to protect purchasers from unscrupulous sales of undeveloped home sites. Winter v. Hollingsworth Props., Inc., 777 F.2d 1444, 1446-47 (11th Cir. 1985). Although Congress was primarily concerned with the sale of raw land, ILSA also applies to the sale of lots in subdivisions. Rogers v. Wesco Props., LLC, No. CV 09-8149-PCT-MHM, 2010 WL 3081352, at *4 (D. Az Aug. 4, 2010) (citing Winter, 777 F.2d at 1447).
Under ILSA, a purchaser of a residential lot may pursue a cause of action against the developer or agent of the developer for violations of ILSA's registration and disclosure provisions. See 15 U.S.C. § 1709. To fall under the protections of ILSA, " a plaintiff must first show that he or she purchased a lot from a defendant who qualifies as a developer or developer's agent under the ILSA." Id. (emphasis added).
The term " lot" is not defined in the statute. The Regulations, promulgated by the Consumer Financial Protection Bureau (" CFPB" ), and formerly the Department of Housing and Urban Development (" HUD" ), the agencies responsible for administering and enforcing ILSA, have defined a " lot" as " any portion, piece, division, unit, or undivided interest in land located in any state or foreign country, if the interest includes the right to the exclusive use of a portion of the land." 12 C.F.R. § 1010.1.
In providing further guidance on the term, " lot" and other provisions under ILSA, HUD published Guidelines in 1996. As to the term " lot," the Guidelines provide:
If the purchaser of an undivided interest or a membership has exclusive repeated use or possession of a specific designated lot even for a portion of the year, a lot as defined by the regulations, exists. For purposes of definition, if the purchaser has been assigned a specific lot on a recurring basis for a defined period of time and could eject another person during the time he has the right to use that lot, then the purchaser has an exclusive use.
61 Fed. Reg. 13596, 13602 (Mar. 27, 1996).
The CFPB, and formerly HUD, have consistently maintained that " lot" applies to condominium units. Berlin v. Renaissance Rental Partners, LLC, 723 F.3d 119, 2013 WL 1859140, at *1 (2d Cir. May 6, 2013) (citing Land Registration, Formal Procedures, and Advertising Sales Practices, and Posting of Notice of Suspension, 38 Fed. Reg. 23,866, 23,866 (Sept. 4, 1973); (Dkt. No. 81-5, Ps' Req. For Judicial Notice, Ex. C, CFPB's letter brief in Berlin v. Renaissance Rental Partners, LLC,, No. 12-2213, Mar. 12, 2013 at 14); see also 39 Fed. Reg. 7824 (1974); 44 Fed. Reg. 24,012 (1979).
Accordingly, federal courts have held that the term " lot" applies to units in a condominium building. Winter, 777 F.2d at 1447-48; Berlin, 723 F.3d 119, 2013 WL 1859140, at *1 (single floor condominium unit in multi-story building included the right to the exclusive use of a specific portion of the land was a " lot" within the meaning of ILSA). The Court in Smith v. Myrtle Owner, LLC, 09cv1655-KAM(VVP), 2011 WL 2635717 (E.D.N.Y. Feb. 9, 2011) concluded that a high-rise condominium building is a " lot" under ILSA and explained,
Other federal courts have followed suit. See, e.g., Nu-Chan, LLC v. 20 Pine Street, LLC, No. 09-cv-477, 2010 WL 3825734, at *2-*3 (S.D.N.Y. Sept. 30, 2010); An v. Leviev Fulton Club LLC, No. 09-cv-1937, 2010 WL 3291402, at *1 (S.D.N.Y. Aug. 10, 2010); Cruz v. Leviev Fulton Club, LLC, 711 F.Supp.2d 329, 331 (S.D.N.Y. 2010); Beauford v. Helmsley, 740 F.Supp. 201, 209 (S.D.N.Y. 1990); see also Giralt v. Vail Village Inn Assocs., 759 P.2d 801, 805-06 (Colo. Ct. App.1988). Some cases proceed on the assumption that the statute applies and address the applicability of certain exemptions to condominiums. See Long v. Merrifield Town Center Ltd. Partnership, 611 F.3d 240 (4th Cir. 2010); Markowitz v. Northeast Land Co., 906 F.2d 100, 102 (3d Cir. 1990); Romero v. Borden East River Realty LLC, No. 09-cv-665, at *26 (E.D.N.Y. Mar. 11, 2010);
Bacolitsas v. 86th & 3rd Owner, LLC, No. 09-cv-7158, 2010 WL 3734088, at *4 (S.D.N.Y. Sept. 21, 2010); Bodansky v. Fifth on the Park Condo, LLC, 732 F.Supp.2d 281, 285 (S.D.N.Y. 2010) (" The parties agree that [the condominium] is subject to certain of the Act's provisions" ). The court is not aware of any contrary authority holding the statute inapplicable to condominiums.
[WL] at 2. However, in Becherer v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 127 F.3d 478, 481 (6th Cir. 1997), which Defendants'
primarily rely on, the Sixth Circuit held that while recognizing that condominiums are " lots", individual interests in non-residential hotel condominiums subject to use restrictions are not " lots" within the meaning of ILSA. Id. The Sixth Circuit affirmed the district court's holding that the hotel interests were nonresidential condominium units subject to use restrictions. Id.
Relying on the district court's findings, the Sixth Circuit noted that the units were largely non-residential and encumbered with numerous use restrictions so that the investors did not have " exclusive use" of their hotel units. Id. When the units were purchased, they were already restricted for use as a hotel and never available for use at the discretion of the unit owner. Id. at 482. If the owners sold their units, they had to sell them as hotel rooms. Id. at 480. The investors were only allowed fourteen days per year in their units and only if the units were not previously rented. Id. at 482. " Alternate dates could be selected by the unit owner, but there is no guarantee that the unit will ever be available to him or her." Becherer v Merrill Lynch, Pierce, Fenner & Smith, 920 F.Supp. 1345, 1355 (E.D. Mich. 1996). Lastly, the investor's right to ejects tenants was assigned to the hotel manager and " never truly resided with the unit owners." ...