Tamer Salameh v. Tarsadia Hotel
726 F.3d 1124, 2013 WL 4055825, 2013 U.S. App. LEXIS 16712 (2013)
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Rule of Law:
For a real estate purchase combined with a rental management agreement to be considered an 'investment contract' and thus a security, the buyer must allege facts showing that the two components were offered as a single package and that the buyer was induced to purchase the property by the rental agreement.
Facts:
- Through television and print advertising, the public was offered the opportunity to buy condominium units in the Hard Rock Hotel San Diego.
- Plaintiffs purchased individual condominium units from the hotel's developer, 5th Rock, LLC.
- Eight to fifteen months after purchasing the units, each Plaintiff signed a separate rental-management agreement with Tarsadia Hotels, the hotel's operator.
- After the purchase, Plaintiffs were not issued keys to their units and had to obtain them from the hotel operator.
- The units were required to be operated as part of the hotel, with management, operation, and marketing handled by certain Defendants.
- A local zoning ordinance prohibited the owners from occupying their units for more than 28 days per year.
Procedural Posture:
- Plaintiffs, who purchased condominiums, filed a putative class action against the hotel's developer, operator, and related entities in the United States District Court.
- Plaintiffs filed a second amended complaint alleging violations of federal and state securities laws and common-law fraud.
- Defendants filed a motion to dismiss the second amended complaint for failure to state a claim under Rule 12(b)(6).
- The district court granted the Defendants' motion to dismiss, holding that the Plaintiffs had failed to plausibly allege the sale of a security, and denied leave to amend.
- Plaintiffs (Plaintiffs-Appellants) appealed the district court's dismissal to the United States Court of Appeals for the Ninth Circuit.
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Issue:
Does the sale of a hotel condominium unit, followed eight to fifteen months later by the execution of a separate rental-management agreement with a different entity, constitute the sale of a security under federal law when the buyers do not allege they were induced to purchase the condominium by the prospect of the rental agreement?
Opinions:
Majority - Gould, Circuit Judge
No. The sale of a condominium and a subsequent rental management agreement do not constitute the sale of a security where the plaintiffs fail to allege facts showing the two were offered as a single package or that the rental agreement induced the real estate purchase. To qualify as an 'investment contract' under the Howey test, a transaction must involve an investment of money in a common enterprise with an expectation of profits from the efforts of others. This court's precedent in Hocking v. Dubois requires a threshold inquiry into whether a real estate sale and a rental agreement were presented as a single package. Here, unlike in Hocking, the Plaintiffs did not allege that the rental management agreement was promoted at the time of the condominium sale, that they were told it would be forthcoming, or that it was the inducement for their purchase. The significant time gap of eight to fifteen months between the signing of the purchase contract and the rental agreement, coupled with the fact that the agreements were with different entities, underscores that they were separate transactions. The 'economic reality' argument that zoning restrictions forced them into the rental agreement fails because the complaint lacks any allegation that they were induced to buy the condominiums by the rental agreement at the outset.
Analysis:
This decision clarifies and arguably narrows the application of the Howey test to real estate transactions as established in Hocking v. Dubois. It establishes that merely linking a real estate purchase with a later rental agreement is insufficient to create a security; plaintiffs must plead specific facts demonstrating the two were presented as an integrated investment package from the beginning. The ruling heightens the pleading standard for such claims, requiring plaintiffs to explicitly allege that the investment component (the rental agreement) was a key inducement for the initial purchase. This makes it more difficult for disappointed real estate buyers to later recharacterize their purchase as a security to gain the protections of federal securities laws, thereby providing greater certainty for developers of condo-hotel projects.
