Brooks v. Tarsadia Hotels, Case No.: 3:18-cv-2290-GPC-KSC
| Decision Date | 05 December 2019 |
| Docket Number | Case No.: 3:18-cv-2290-GPC-KSC |
| Parties | JASON BROOKS, Inmate Booking No. 150014, Plaintiff, v. TARSADIA HOTELS; 5TH ROCK, LLC; MKP ONE, LLC; GASLAMP HOLDING, LLC; TUSHAR PATEL; B.U. PATEL; GREGORY CASSERLY; PLAYGROUND DESTINATION PROPERTIES, INC.; DOES 1-50, Defendants. |
| Court | U.S. District Court — Southern District of California |
1) GRANTING IN PART AND DENYING IN PART TARSADIA DEFENDANTS' MOTION TO DISMISS; AND
2) GRANTING IN PART AND DENYING IN PART PLAYGROUND'S MOTION TO DISMISS
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.
On September 25, 20181, 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.)
On May 18, 20062, 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 theClass. 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 adeveloper 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 P...
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