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Brooks v. Tarsadia Hotels

United States District Court, S.D. California

December 5, 2019

JASON BROOKS, Inmate Booking No. 150014, Plaintiff,


          Hon. Gonzalo P. Curiel United States District Judge.

         Before the Court is Defendants Tarsadia Hotels, 5th Rock LLC, MKP One, LLC, Gaslamp Holdings, LLC, Tushar Patel, B.U. Patel, and Gregory Casserly's motion to dismiss the second amended complaint. (Dkt. No. 48.) Also before the Court is Defendant Playground Destination Properties, Inc.'s motion to dismiss the second amended complaint. (Dkt. No. 49.) Plaintiff filed oppositions to both motions. (Dkt. Nos. 51, 52.) Replies were filed by the Defendants. (Dkt. Nos. 53, 54.) The Court finds that the matter is appropriate for decision without oral argument pursuant to Local Civ. R. 7.1(d)(1). Based on the reasoning below, the Court GRANTS in part and DENIES in part Tarsadia Defendants' motion to dismiss and GRANTS in part and DENIES in part Playground's motion to dismiss.

         Procedural Background

         On September 25, 2018[1], Plaintiff Jason Brooks (“Plaintiff” or “Brooks”), a prisoner proceeding pro se and in forma pauperis, filed the original complaint against Defendants Tarsadia Hotels, 5th Rock, LLC, MKP One, LLC, Gaslamp Holdings, LLC, Gregory Casserly, B.U. Patel, and Tushar Patel (“Tarsadia Defendants”) as well as Defendant Playground Destination Properties, Inc. (“Playground”) (collectively “Defendants”). (Dkt. No. 1.) On March 18, 2019, Plaintiff filed a first amended complaint (“FAC”) against Tarsadia Defendants and Playground alleging violations of the anti-fraud provision of the Interstate Land Sales Disclosure Act (“ILSA”), 15 U.S.C. §§ 1703(a)(2)(A), (B) and (C); violations of California Corporations Code sections 25401, 25501, 25504.1 and Rule 10b of the 1934 Securities Exchange Act; fraud; negligence; and violations pursuant to California Business & Professions Codes sections 17200 et seq. (Dkt. No. 24.)

         On June 11, 2019, the Court granted in part and denied in part Tarsadia Defendants' motion to dismiss the FAC and granted Playground's motion to dismiss the FAC with leave to amend. (Dkt. No. 37.) On August 7, 2019, the Court denied Plaintiff's motion for reconsideration. (Dkt. No. 46.) On September 3, 2019, Plaintiff filed the operative second amended complaint, (“SAC”). (Dkt. No. 47.) Four causes of action are alleged for violations of the anti-fraud provisions of the ILSA pursuant to 15 U.S.C. §§ 1703(a)(2)(B) and (C); fraud; negligence; and violations pursuant to California Business & Professions Codes sections 17200 et seq. (Id.) Tarsadia Defendants and Playground filed their respective motions to dismiss the SAC, which are fully briefed. (Dkt. Nos. 48, 49, 51, 52, 53, 54.)

         Factual Background

         On May 18, 2006[2], Plaintiff and Brian Thielen, as co-purchasers, entered into a Purchase Contract and Escrow Instruction (“Purchase Contract”) with Defendants for the purchase of Unit 1042 at the newly constructed residential condominium unit called the Hard Rock Hotel & Condominium (“Hard Rock”) located in San Diego. (Dkt. No. 47, SAC ¶ 5.) Specifically, Plaintiff claims that under ILSA, Defendants failed to disclose and intentionally concealed that buyers had an absolute right to rescind their Purchase Contracts within two years of the date of signing. (Id. ¶ 1.) He also contends that Defendants presented marketing materials containing known misstatements and omissions that inflated the desirability of the property and induced purchasers into buying their units, and “fail[ed] to obtain an exemption advisory opinion from ILSA Secretary (sic) to fraudulently conceal their knowledge that the Hard Rock Project was subject to the mandates of the ILSA.” (Id.) He claims he was falsely informed and induced to purchase the Unit because Tarsadia Defendants misrepresented they would manage the property through the Rental Management Agreement (“RMA”) which he thought was voluntary, but it was not, and that Hard Rock guests would be positioned in a consistent “rotational” system that would “rent all suites equitably.” (Id. ¶ 5.)

         This case relates to a prior case that was before the Court and is now concluded. In the case, Beaver v. Tarsadia Hotels, Case No. 11cv1842-GPC(KSC), the purported class action plaintiffs filed an action on behalf of persons who purchased units at the Hard Rock Hotel between May 2006 and December 2007 alleging Defendants failed to disclose and intentionally concealed the plaintiffs' right to rescind their purchase contracts within two years of the date of signing the Purchase Contracts and made affirmative misrepresentations to prevent Plaintiffs from exercising the right. (Case No. 11cv1842, Dkt. No. 69, TAC.) In Beaver, the Third Amended Complaint (“TAC”) alleged, inter alia, violations of the anti-fraud provisions of ILSA, 15 U.S.C. §§ 1703(a)(2)(A)-(C), fraud, negligence, and violation of California Business and Professions Code sections 17200 et seq. The Beaver case involved extensive motion practice which raised numerous novel issues. The Ninth Circuit affirmed the Court's order on reconsideration of the parties' cross-motions for summary judgment, Beaver v. Tarsadia Hotels, 29 F.Supp.3d 1294 (S.D. Cal. 2014). Beaver v. Tarsadia Hotels, 816 F.3d 1170 (9th Cir. 2016). On remand, the case settled as a class action and the Court granted Plaintiffs' motion for final approval of class action settlement and judgment on September 28, 2017, Beaver v. Tarsadia Hotels, Case No. 11cv1842-GPC(KSC), 2017 WL 4310707 (S.D. Cal. Sept. 28, 2017). In its order, the Court noted that one class member, Jason Brooks, who was a co-purchaser of Unit 1042, excluded himself from the Class. Id. at *15. Brooks' SAC alleges the same causes of action and facts alleged in the Beaver case as well as newly added facts.

         In the SAC, Brooks alleges that around 2005, Tarsadia Defendants, through 5th Rock, began to develop the Hard Rock, a residential condominium consisting of 420 units located at 205 Fifth Avenue in San Diego, CA. (Dkt. No. 47, SAC ¶ 35.) Defendants marketed the units through the Internet, marketing materials, brochures and verbal statements. (Id.) Playground was the real estate broker for the Hard Rock and acted as an “agent” of Tarsadia Defendants as that term is defined under the ILSA. (Id. ¶ 4.) Playground has been developing and marketing condominium-hotel units in the United States for decades and registered multiple projects with HUD and on information and belief, is well-versed in the ILSA disclosure obligations. (Id. ¶ 53.)

         ILSA was enacted to protect consumers from fraud and abuse in the sale of subdivided lots, including condominium units, and requires developers and their agents to comply with certain registration and disclosure requirements. (Id. ¶ 7.) Developers and their agents must comply with ILSA unless they fall within an exemption. (Id. ¶ 8.) In this case, while Defendants understood that the Hard Rock was subject to ILSA's provisions and was not exempt, they fraudulently concealed this fact and used a false exemption declaration to cover up their scheme to shift all risk to the buyers. (Id. ¶ 8.) A buyer, despite any diligence, would never uncover whether or not the project was actually exempt from the ILSA because only the developer could obtain an advisory opinion from the ILSA Secretary under 24 C.F.R. § 1710.17. (Id. ¶ 9.)

         Specifically, 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 material facts regarding the sales transaction. (Id. ¶ 13.) 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 (“DRE”)), 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). (Id.)

         Plaintiff claims that Defendants failed to obtain an ILSA property report from HUD and obtained a Public Report from the DRE that was not ILSA compliant. (Id. ¶ 14.) The Purchase Contract failed to provide buyers notice of the two-year rescission right and instead asserted a three-day right to rescind. (Id.) They purposely ignored their disclosure obligations in order to avoid compliance with ILSA. (Id.) Moreover, Plaintiff claims that under 15 U.S.C. § 1703(d)(2) of 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. (Id. ¶ 15.) If such a notice is omitted, the buyer is entitled to an absolute two-year right to rescind his purchase agreement from the date he signed it. (Id.) Plaintiff did not receive this notice; therefore, he was entitled to an automatic two year right to rescind. (Id.) Plaintiff claims he received the “Final Subdivision Public Report, File No. 120249LA-F00” concerning the Hard Rock which was issued by the DRE on April 4, 2006 but it did not include the buyer's rescission rights under ILSA. (Id. ¶ 16.)

         Because Defendants failed to comply with their disclosure requirements under ILSA and concealed the two-year rescission rights, Defendants obtained money from Plaintiff by means of omitting the two-year rescission right in the contract and the Public Report in violation of 15 U.S.C. § 1703(a)(2)(B) and otherwise engaged in a practice or course of business that operated as a fraud upon Plaintiff in violation of 15 U.S.C. § 1703(a)(2)(C). (Id. ¶ 17.)

         Plaintiff additionally alleges that on June 20, 2007, David McCain, a purchaser, sought to rescind his purchase contract based on ILSA violations. (Id. ¶¶ 9, 50.) Playground's outside attorney and its representatives were all consulted before a memorandum dated July 6, 2007 was prepared to respond to McCain's letter. (Id. ¶ 50.) By submitting the response memorandum, according to Plaintiff, Defendants “affirmatively invoked ILSA exemption.” (Id. ¶¶ 9, 19.) Once Defendants “invoked” the exemption under ILSA, Plaintiff claims they were required to obtain an exemption determination with the ILSA Secretary as mandated by 24 C.F.R. § 1710.15 or at a minimum, an exemption advisory opinion under 24 C.F.R. § 1710.17. (Id. ¶¶ 50, 72.) Because Defendants failed to do so, they continued to fraudulently conceal the fact that the Hard Rock was subject to the ILSA. (Id. ¶ 73.) Invoking the exemption refutes any assertion that Defendants did not know whether or not ILSA applied to the Hard Rock. (Id. ¶ 50.) Because Tarsadia Defendants understood the Hard Rock was not exempt under the ILSA, Tarsadia Defendants and Playground took deliberate action to avoid learning the truth, by even failing to obtain an advisory opinion from the ILSA Secretary under 24 C.F.R. § 1710.17. (Id. ¶ 51.) After the July 6, 2007 memorandum to Mr, McCain was drafted, Playground “carried a subjective belief that there was a high probability that the ILSA applied to the Hard Rock project and understood only the Developer Defendants could obtain confirmation of this invoked exemption; however, in order to close out their marketing of the project, prevent buyers from backing out of their purchases, thus ensuring Playgrounds success, Defendant Playground continued to make misrepresentations and omissions to buyers.” (Id. ¶ 54.) The McCain letter alerted Defendants of their obligations under the ILSA but they continued to fraudulently conceal this fact by negligence, willful blindness and/or deliberate ignorance by refusing to obtain an exemption advisory opinion from the ILSA secretary under 24 C.F.R. § 1710.17. (Id. ¶ 91.) Moreover, because only a developer can obtain an exemption or advisory opinion, Plaintiff had no reason to suspect or ability to uncover that Defendants' claim of exemption was fraudulent. (Id. ¶ 19.)

         Plaintiff was required to sign three agreements: (1) the Contract, (2) the Unit Management and Operating Agreement (“OA”) and (3) the RMA. (Id. ¶ 85.) Tarsadia Defendants had Playground prepare a document entitled “Tarsadia's Optional Rental Management Program FAQ” where Defendants represented that investors were not required to participate in the RMA but that representation was false as the purchasers were mandated to participate in the RMA and this illusory option inflated the property's desirability and induced Plaintiff, in part, to buy the property. (Id. ¶ 86.)

         The Purchase Contract and Public Report were provided to Playground by Tarsadia Defendants. (Id. ¶ 82.) Around August 2007, Playground distributed the Closing Notice that informed the purchasers that they would lose their deposits if they did not close by the end of August. (Id. ¶ 94.) Playground threatened the loss of the buyers' deposit to ensure occupancy rates of units would not diminish during the construction of the hotel and benefited from commissions on each sale by promoting the misrepresentation. (Id. ¶ 95.) Playground made a conscious decision to disseminate the Closing Notice a month after Tarsadia Defendants invoked the ILSA exemption. (Id. ¶ 96.)

         In response to the Closing Notice, Plaintiff sought guidance from the Contract and the Public Report, which omitted his right to rescind. (Id. ¶ 98.) Believing he would lose his deposit, he reluctantly closed escrow in October 2007. (Id. ¶ 99.) He suffered from chronic ulcerative colitis and was placed in a medically induced coma beginning December 7, 2007. (Id. ¶ 100.) In January 2008, in the midst of his health crisis and his life collapsing around him, he quit claimed the deed of his 50% interest in the Unit to his co-purchaser in the event of his death. (Id.) Because he was denied the right to rescind, Plaintiff was forced to quit-claim the deed of the property. (Id. ¶ 17.)

         Plaintiff had no reason to suspect that Defendants' representations in the Sales Agreements, Public Report, Closing Notice, FAQ and other communications concerning his rescission rights were false or misleading. (Id. ¶ 18.) Therefore, he did not know he had been harmed until he received notice of the Class Action Settlement in the Beaver case in July 2017. (Id.) He could not have known that he had a complete cause of action based on just comparing the ILSA statute with the Contract and Public Report. (Id.) “No matter how diligent the Plaintiff was in trying to uncover the Defendants abuses - even if Plaintiff knew of the ILSA and asserted his right to recession (sic) prior to closing-because Defendants invoked exemption, as they had when purchaser David McCain sought to rescind his purchase contract in June 2007, Plaintiff would have no reason to suspect (or ability to uncover) that the representation made by Defendants claim of exemption under the ILSA was fraudulent.” (Id. ¶ 19.)

         Plaintiff was eventually imprisoned and has been incarcerated since May 24, 2009. (Id. ¶ 21.) In June 2017, Plaintiff was notified that he was a member of a class action lawsuit involving these exact claims and was unaware of being harmed by Defendants' conduct until that time. (Id.) He timely opted-out of the class action settlement on August 24, 2017. (Id. ¶ 1.)

         If he had known of his right to rescind he would never have closed on the Unit and would not have lost his 50% interest in the property by quit-claiming the deed to his co-purchaser. (Id. ¶¶ 110, 111.) He was deprived use of the $50, 000 deposit to continue paying his attorney to prevent a default judgment of $18 million against him in June 2008. (Id. ¶ 112.) He claims he did not respond to that lawsuit because he ran out of money to pay his attorneys at the time. (Id.) Therefore, he would have only incurred a $3.2 million judgment in the case instead of the $18 million judgment. (Id. ¶ 113.) He further claims that had Plaintiff been alerted to the ILSA after Defendants invoked the exemption in June 2007, he would have dissected the statute and learned that “scienter” has been “unconstitutionally omitted” from the Colorado Securities Act and he would never have accepted a plea in his criminal case and would have been exonerated. (Id. ¶ 115.) If he had been alerted to his rights under the ILSA in 2007, he would never have been sent to prison and he would not be currently paying $50, 000 monthly interest penalty on an “illegally induced plea”. (Id. ¶ 117.) In sum, he seeks $35 million in damages. (Id. ¶ 118.)

         Plaintiff inadvertently filed a complaint in the District Court for the District of Colorado on December 29, 2017, and the complaint was dismissed for improper venue on September 14, 2018. (Id. ¶ 34.) After conducting a review of the complaint, the Colorado district court also denied the Plaintiff's motion to transfer the case to this district. (Brooks v. Tarsadia Hotels, Civ. No. 17cv3172-PAB-KMT, Dkt. Nos. 64, 68 (D. Colo.).) The complaint in this case was filed on September 25, 2018. (Dkt. No. 1.)


         A. Legal Standard as to Federal Rule of Civil Procedure 12(b)(6)

         Federal Rule of Civil Procedure (“Rule”) 12(b)(6) permits dismissal for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). Dismissal under Rule 12(b)(6) is appropriate where the complaint lacks a cognizable legal theory or sufficient facts to support a cognizable legal theory. See Balistreri v. Pacifica Police Dep't., 901 F.2d 696, 699 (9th Cir. 1990). Under Federal Rule of Civil Procedure 8(a)(2), the plaintiff is required only to set forth a “short and plain statement of the claim showing that the pleader is entitled to relief, ” and “give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007).

         A complaint may survive a motion to dismiss only if, taking all well-pleaded factual allegations as true, it contains enough facts to “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (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. “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. “In sum, for a complaint to survive a motion to dismiss, the non-conclusory factual content, and reasonable inferences from that content, must be plausibly suggestive of a claim entitling the plaintiff to relief.” Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009) (quotations omitted). In reviewing a Rule 12(b)(6) motion, the Court accepts as true all facts alleged in the complaint, and draws all reasonable inferences in favor of the plaintiff. al-Kidd v. Ashcroft, 580 F.3d 949, 956 (9th Cir. 2009).

         B. Tarsadia Defendants' Motion to Dismiss

         On a motion to dismiss based on the statute of limitations, the Court must assess whether “the running of the statute is apparent on the face of the complaint.” Huynh v. Chase Manhattan Bank, 465 F.3d 992, 997 (9th Cir. 2006) (quoting Jablon v. Dean Witter & Co., 614 F.2d 677, 682 (9th Cir. 1980) (“When a motion to dismiss is based on the running of the statute of limitations, it can be granted only if the assertions of the complaint, read with the required liberality, would not permit the plaintiff to prove that the statute was tolled.”)). Because the statute of limitations is an affirmative defense, the “defendant has the burden of proving the action is time-barred.” Grisham v. Philip Morris, Inc., 670 F.Supp.2d 1014, 1020 (C.D. Cal. 2009) (citation omitted).

         Tarsadia Defendants argue that the ILSA and fraud claims are barred by the three-year statute of limitations from the date of the Purchase Contract, May 18, 2006, and therefore, these causes of actions expired on May 18, 2009. They also argue that the negligence claim is barred by the three- year statute of limitations and expired on May 18, 2009. Finally, they assert the UCL claims are barred by the four-year statute of limitations which expired in October 2011. In response, Plaintiff argues that he did not and could not discover the alleged failure to disclose rescission rights under ILSA until June 2017 when he received the Beaver Class Action Settlement Notice. Therefore, certain tolling theories apply to make his claims timely.

         The parties do not dispute that the statute of limitations expired on Plaintiff's causes of action either on May 18, 2009, three-year statute of limitations, or October 2011, four-year statute of limitations; however, it is Plaintiff's contention that tolling applies to save all four causes of action.

         1. ILSA and Fraud Statute of Limitations

         The SAC alleges violations of the ILSA anti-fraud provisions pursuant to 15 U.S.C. §§ 1703(a)(2)(B) and (C).[3] The statute of limitations for these provisions accrue from “three years after discovery of the violation or after discovery should have been made by the exercise of reasonable diligence.” 15 U.S.C. § 1711(a)(2).

         The SAC also alleges a fraud claim. (Dkt. No. 47, SAC ¶¶ 140-50.) In California, an action for fraud has a three-year statute of limitations and is “not deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake.” Cal. Civ. Proc. § 338(d).

         Tarsadia Defendants argue that the statute of limitations on the ILSA anti-fraud and state law fraud claims expired on May 18, 2009 which is three years from when Plaintiff signed the purchase contract on May 18, 2006. They argue that Plaintiff acknowledges he received the Public Report and the Purchase Contract; therefore, as of May 18, 2006, he had all the documents he needed to discover whether he received the required disclosures. The reasons Plaintiff offers to explain his failure to discover the bases for his claim does not warrant the application of the delayed discovery rule.[4]

         In response, Plaintiff argues that he sufficiently alleged why, even with the exercise of due diligence, he never could have known he was harmed by Tarsadia Defendants' conduct, could not have discovered his rescission rights under the ILSA, could not have known Defendants affirmatively invoked an exemption under the ILSA and why circumstances outside of his control prevented discovery of their wrongdoing.

         Under the discovery rule, incorporated into ILSA, “a cause of action accrues (1) when the plaintiff did in fact discover, or (2) when a reasonably diligent plaintiff would have discovered, ‘the facts constituting the violation' -- whichever comes first.” Merck & Co., Inc. v. Reynolds, 559 U.S. 633, 637 (2010). The discovery rule is an exception that arose recognizing that “something different was needed in the case of fraud, where a defendant's deceptive conduct may prevent a plaintiff from even knowing that he or she had been defrauded.” Id. at 644 (emphasis in original). Thus “where a plaintiff has been injured by fraud and ‘remains in ignorance of it without any fault or want of diligence or care on his part, the bar of the statute does not begin to run until the fraud is discovered.'” Holmberg v. Armbrecht, 327 U.S. 392, 397 (1946).

         The Supreme Court noted that “inquiry notice” or “storm warnings” do not trigger the running of the statute of limitations but “may be useful to the extent that they identify a time when the facts would have prompted a reasonably diligent plaintiff to begin investigating.” Merck, 559 U.S. at 653. A claim accrues when the plaintiff discovers or a reasonably diligent plaintiff would have discovered “the facts constituting the violation . . . irrespective of whether the actual plaintiff undertook a reasonably diligent investigation.” Id.; see also DeFazio v. Hollister, Inc., 854 F.Supp.2d 770, 783 (E.D. Cal. 2012) (‚ÄúTherefore, assuming plaintiffs in this case were not ...

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