Salameh v. Tarsadia Hotels documents yet another instance of buyers' remorse.  Like most “condo-hotel units are securities" litigation, the plaintiffs in this case were looking to discredit the developer's sales practices and operational model as a means of rescinding their unit purchases.  And like many other similar claims, the plaintiffs’ claims didn’t survive a motion to dismiss. 

Strike One

In Tarsadia Hotels, the U.S. District Court for the Southern District of California in August 2010 dismissed (without prejudice) plaintiffs’ federal securities law claims as articulated in their first amended complaint.  Focusing on the second and third elements of the Howey Test, the court stated that:

Plaintiffs have failed to allege a common enterprise, and their allegations as to their expectation of profits produced by the efforts of others are conclusory.

Strike Two

After reviewing plaintiffs’ second amended complaint, the court made special note of the 8 to 10 month gap between the plaintiffs’ execution of the purchase agreements and the rental management agreements, as well as the plaintiffs’ representations in the purchase agreement that there was no investment intent.   In light of these facts, the court determined that plaintiffs could not credibly allege the existence of a single “investment contract” or the necessary expectation of profit from their “investment” in the condo-hotel units.  As a consequence, the court dismissed the second amended complaint with prejudice and denied leave to amend

Is A Third Strike Really Necessary? 

With the bat taken out of their hands, plaintiffs are appealing the court’s order to dismissReportedly, plaintiffs are also attempting to enlist the support of the SEC in their appeal.

You would have to wonder why plaintiffs are bothering.  As mentioned above, plaintiffs were on notice that the second amended complaint would have to substitute conclusory allegations with facts that credibly supported a securities claim.  However, this single paragraph is about the best plaintiffs could do:

[The declaration] provided that plaintiffs could only rent their unit under a program operated by the Hotel Owner or “any third party approved by the Hotel Owner.” The plaintiff unit owner is required to provide written notice to the Master Association of the unit owner’s intention to permit occupancy of the owner’s unit room.  [The maintenance agreement] provide that the unit owner was required to pay the Hotel Owner a service fee at initial rates of $90 per day for a studio, $125 per day for a one-bed-room suite and $150 per day for a Rock Star Suite. . . . The imposition of service charges by defendants, together with the other provisions in the applicable agreement, rendered the option of owners renting out their own units financially infeasible. 

For reasons not immediately evident, plaintiffs do not discuss what qualifications were required of rental managers, or even mention whether there were any other approved third-party rental managers.  Likewise, there is no explanation as to why a $90-$150 housekeeping charge would make independent rental untenable. 

Compare this to the securities claims in Trump SoHo, another condo-hotel project with owner occupancy limited by zoning provisions.  There plaintiffs spend nine paragraphs building the argument that the relevant economics render illusory the choice between Trump Hotels and the one other rental manager approved at Trump SoHo.   While we are still waiting for the Trump SoHo court to rule on the developers’ motion to dismiss, that judge at least may have something to chew on.