Court Nixes Hard Rock Condo Buyers’ Fraud Suit

     (CN) – Investors who bought condominiums in the Hard Rock Hotel San Diego lost their bid Tuesday to revive a securities fraud class action against the hotel’s owners and operators.
     The 9th Circuit upheld the dismissal of a lawsuit accusing Tarsadia Hotels, 5th Rock LLC and others of fraudulently offering securities disguised as real-estate transactions.
     Buyers claimed they were forced to sign an overly restrictive rental management agreement with Tarsadia after buying condos in the 12-story hotel in San Diego’s historic Gaslamp Quarter. The hotel controlled the keys to the condos, they claimed, and let buyers use them for only 28 days a year. Whether investors made money on the condos wholly depended on the efforts of hotel developer Tarsadia and operator 5th Rock LLC, buyers claimed.
     They acknowledged having signed the purchase contracts and management agreements eight to 15 months apart, but said the two documents effectively formed an investment contract “as a matter of practical and economic reality.”
     This “unregistered, public offering of a security” violated federal law, they claimed.
     A federal judge dismissed the complaint for failure to allege that the condos constituted a security, and the 9th Circuit agreed.
     “Plaintiffs’ allegations are not sufficient to show that a security was sold when the condominiums were transferred,” Judge Ronald Gould wrote for the three-judge panel in Pasadena, Calif.
     The panel similarly rejected the buyers’ “economic reality” argument, saying “the two transactions were distinct.”
     “Moreover, plaintiffs’ economic-reality argument rests on the implicit assumption that the only viable use for the condominiums was as an investment property, but there is no plausible reason why there cannot be a viable market for owner-occupied hotel-condominiums for use as short-term vacation homes,” Gould noted.
     The plaintiffs’ common-law fraud claims also fail, Gould said, because they too “depend on the sale of a security.”
     The panel added that the lower court did not abuse its discretion by denying the condo buyers leave to amend.
     “Indeed, the district court gave plaintiffs specific instructions on how to amend the complaint, and plaintiffs did not comply,” Gould explained.
     Other defendants in the underlying lawsuit were: MPK One LLC, manager of 5th Rock; real-estate brokerage Playground Destination Properties; Gaslamp Holdings LLC, which owns the hotel land; Professional Mortgage Partners Inc.; and Tarsadia executives Tushar Patel, B.U. Patel and Greg Casserly.

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