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Beaver v. Tarsadia Hotels

United States District Court, Ninth Circuit

December 17, 2013

DEAN BEAVER, et al., Plaintiffs,
v.
TARSADIA HOTELS, et al., Defendants, TARSADIA HOTELS, et al., Third Party Plaintiffs
v.
GREENBERG TRAURIG, LLP, et al., Third Party Defendants

ORDER DENYING THIRD PARTY DEFENDANT'S MOTION TO DISMISS, AND ALTERNATIVELY, MOTION TO STAY [Dkt. No. 124.]

GONZALO P. CURIEL, District Judge.

On June 14, 2013, Third Party Plaintiffs Tarsadia Hotels; Tushar Patel; B.U. Patel; Gregory Casserly; 5th Rock, LLC; MKP One, LLC; and Gaslamp Holdings, LLC (collectively "Tarsadia Defendants") filed a third party complaint for professional negligence; breach of contract and breach of fiduciary duty against their attorney law firm, Third Party Defendant Greenberg Traurig, LLP ("Greenberg"); and Richard Davis.[1] Before the Court is Third Party Defendant Greenberg's motion to dismiss, or in the alternative, stay the third party complaint. (Dkt. No. 124.) Third Party Plaintiffs filed an opposition on October 18, 2013. (Dkt. No. 129.) Third Party Defendant filed a reply on October 31, 2013. (Dkt. No. 132.) After a review of the briefs, supporting documentation and the applicable law, the Court DENIES Third Party Defendant's motion to dismiss, and DENIES Third Party Defendant's motion to stay the action.

Background

On March 26, 2004, Tarsadia Hotels and 5th Rock's predecessor PBP Hotel Corporation entered into a professional services agreement or engagement agreement with Greenberg Traurig, LLP relating to the development, structuring, marketing and sale of condominium units at the Hard Rock Hotel and Condominium Project, a mixed-use development to include 420 guestroom commercial condominium units ("Units") located at 205 Fifth Avenue in San Diego, California. (Dkt. No. 106-2, Third Party Compl. ("TAC") ¶¶ 17, 18, 19; Ex. A.) All legal services were provided to 5th Rock and all other Third Party Plaintiffs. ( Id. ¶ 18.) Due to their inexperience with condo-hotels, Tarsadia Defendants wanted to ensure that the sales and development, structuring, marketing and sales of the units complied with all applicable laws and regulations and sought expertise and retained Greenberg. ( Id. ¶ 21.) Greenberg was retained to advise in the development, structuring, marketing and sale of the condo-hotel units and to prepare all documents related to the legal transfer of units to the owners. (Id.) Greenberg represented that it was an expert in real estate development and specifically with condominiums and condo-hotels. ( Id. ¶¶ 22-22.)

The March 26, 2004 engagement letter stated that the scope of the work would include the "design, implementation and regulatory compliance of a mixed use hotel project known as the Hard Rock Gaslamp." ( Id. ¶ 28.) A separate description of Greenberg's scope of work was provided on March 11, 2006. ( Id. ¶ 29; Ex. B.) These included review of existing plans and objectives; design and creation of subdivision and condominium program and documents; regulatory compliance review; and sales registrations. ( Id. ¶ 29.) Greenberg drafted all legal documents related to the development, structuring, marketing and sales process. These included the Purchase and Sale Contract and Addendum ("Purchase Contract"), the Unit Management Agreement ("UMA"), the Rental Management Agreement ("RMA"), and the governing documents of the management of the Hotel and owners' associations and it prepared and filed the necessary documents with the California Department of Real Estate. ( Id. ¶ 30.)

Greenberg specifically advised Tarsadia Defendants that the Interstate Land Sales Full Disclosure Act ("ILSA") did not apply because the project would be completed within two year and qualified for the Improved Lot Exemption under ILSA, 15 U.S.C. § 1702(a)(2). ( Id. ¶ 31.) Greenberg assured Tarsadia Defendants that the documents drafted by Greenberg would comply in all respects with all state and federal requirements. ( Id. ¶ 33.) Greenberg never disclosed sufficient information to allow them to have any input into the decision not to include a 20-day opportunity for a buyer to remedy a default or breach of contract, not to include a two-year rescission right or that should ILSA be found to apply, a buyer may be afforded an absolute two-year right to rescind his purchase agreement from the date he signed it. ( Id. ¶ 34.) Greenberg also advised Tarsadia Defendants that they did not need to register with or submit a property report to HUD because ILSA did not apply to the Project since it complied with the Improved Lot Exemption under ILSA. (Id.)

Tarsadia Defendants also sought Greenberg's counsel on whether to structure the sale as a sale of real estate, requiring DRE approval, or a security, requiring registration with the Securities and Exchange Commission ("SEC") and the California Department of Corporations ("DOC"). ( Id. ¶ 36.) Greenberg specifically told Tarsadia Defendants that the sale of units would not be deemed a security under applicable state and federal law and provided an opinion letter. (Id.) Tarsadia Defendants contend that Greenberg failed to advise them that there was any risk that buyers would later argue that the sale of units was in fact a security and the Purchase Contract was an investment contract. ( Id. ¶ 39.) As a result, five lawsuits have been filed against Tarsadia Defendants.

On May 18, 2011, Plaintiffs Dean Beaver, Laurie Beaver, Steven Adelman, Abram Aghaehi, Dinesh Gauba, Kevin Kenna and Veronica Kenna initiated a purported class action against Tarsadia Defendants stemming from their acquisition of hotel-condo units at the Property. ( Id. ¶ 40.) Since then, Tarsadia Defendants have had to defend the litigation brought by these plaintiffs at considerable cost and have been subject to negative publicity and a damaged reputation. ( Id. ¶ 49.) The purported class action has also had a detrimental effect on the relationship between Tarsadia Defendants and the owners of the units, with many of the owners filing litigation alleging that the sale of condo-hotel units was done fraudulently and unlawfully. (Id.) Lastly, the claims have negatively impacted the value of the Hotel. (Id.) Further, Tarsadia Defendants and Greenberg have entered into an agreement tolling any applicable statutes of limitation. (Id.)

On December 8, 2009, Tamer Salameh and others filed a complaint against the Third Party Plaintiffs in the United States District Court for the Southern District in a matter entitled Tamer Salameh, et al v Tarsadia Hotel, et al., (Case No. 28 3:09cv-02739-DMS-CAB) ("Salameh Action"). ( Id. ¶ 50.) The plaintiffs alleged that the Purchase Contract, coupled with the UMA and RMA, constitute an investment contract, and the sale of the Units should have been registered as a security. ( Id. ¶ 51.)

On April 26, 2010, Royal Alliance filed a complaint against Tarsadia Defendants asserting a class action on behalf of parties that entered into Purchase Contracts for condo-hotel units but failed to close, in San Diego County Superior Court in a matter entitled Royalty Alliance, Inc. v. Tarsadia Hotels, et al., (Case No. 37-2010-00090678-CU-SL-CTL) ("Royalty Alliance Action"). ( Id. ¶ 54.) The plaintiffs in the Royalty Alliance Action asserted claims similar to those asserted in the Salameh Action, claiming that the sale of the units constituted a fraudulent sale of securities under state law. ( Id. ¶ 55.) After much expense, the Third Party Plaintiffs prevailed on a motion for summary judgment on January 4, 2013. ( Id. ¶ 56.) The ruling in that matter is on appeal before the California Court of Appeal and although the trial court awarded the Tarsadia approximately $1.2 million in attorneys' fees and costs as the prevailing party, they have not been able to attempt to collect on the award due to the pending appeal. (Id.)

On July 26, 2010, a large group of owners, including many of the named Plaintiffs in this action, filed an action in San Diego County Superior Court in a matter entitled James Bell, et al v. Tarsadia Hotels, et al (Case No. 37-2010-00096618-7 CU-BT-CTL) ("Bell Action"). ( Id. ¶ 57.) The plaintiffs in the Bell Action also alleged that the Tarsadia Defendants failed to comply with securities laws when selling the condo-hotel units. ( Id. ¶ 58.) Tarsadia Defendants were again forced to defend their actions at considerable expense. ( Id. ¶ 59.) Only after the Salameh Action was dismissed by the Court did the plaintiffs in the Bell Action voluntarily dismiss their claims. (Id.) Though Tarsadia attempted to recover their attorney's fees as the prevailing party, the Court held that the claims had been brought under an alleged "investment contract" and that specific wording in the Purchase Contract and the RMA did not extend to the specific claims set forth in the Bell Action. (Id.)

On May 19, 2011, Tamer Salameh and others filed a cross-complaint against the Tarsadia Defendants in the matter entitled 5th and K Parcel 2 Owners' Association. Inc. v. Tamer Salameh, et al (Case No. 37-2010-OO094424-CU-21 OR-CTL) ("5th & K Action"). ( Id. ¶ 60.) Like the other claims before the 5th & K Action, third party plaintiffs in that action alleged that Tarsadia had fraudulently devised the sales program for the condo-hotel units, omitting material facts in the Purchase Contract, RMA and UMA. ( Id. ¶ 61.) They further alleged that by omitting material facts, the Third Party Plaintiffs were able to avoid scrutiny by the DRE regulators. (Id.) The scope and nature of the claims asserted against the Third Party Plaintiffs in the 5th and K Action continue to evolve to include other aspects of the manner in which the development was structured by the Third Party Defendants. ( Id. ¶ 62.) Recently, the case was certified as a class action and requires that Tarsadia Defendant defend themselves at great expense. (Id.)

Tarsadia Defendants allege causes of action for professional negligence; breach of contract; and breach of ...


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