Brooks v. Tarsadia Hotels et al, No. 3:2018cv02290 - Document 37 (S.D. Cal. 2019)

Court Description: ORDER Granting in Part and Denying in Part Tarsadia Defendants' 27 Motion to Dismiss; and Granting Playground's 26 Motion to Dismiss. Plaintiff is granted leave to file a second amended complaint and shall file it on or before July 8, 2019. Signed by Judge Gonzalo P. Curiel on 6/11/19. (All non-registered users served via U.S. Mail Service)(dlg)

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1 2 3 4 5 6 7 8 9 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA 10 11 12 JASON BROOKS, Inmate Booking No. 150014, 15 16 17 18 19 ORDER GRANTING IN PART AND DENYING IN PART TARSADIA DEFENDANTS’ MOTION TO DISMISS AND GRANTING PLAYGROUND’S MOTION TO DISMISS Plaintiff, 13 14 Case No.: 3:18-cv-2290-GPC-KSC vs. 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, [Dkt. Nos. 26, 27.] Defendants. 20 21 22 23 Before the Court is Defendants Tarsadia Hotels, 5th Rock LLC, MKP One, LLC, 24 Gaslamp Holdings, LLC, Tushar Patel, B.U. Patel, and Gregory Casserly’s motion to 25 dismiss the first amended complaint. (Dkt. No. 26.) Also before the Court is Defendant 26 Playground Destination Properties, Inc.’s motion to dismiss the first amended complaint. 27 1 3:18-cv-2290-GPC-KSC 28 1 (Dkt. No. 27.) Plaintiff filed oppositions to both motions. (Dkt. Nos. 31, 32.) Replies 2 were filed by all Defendants. (Dkt. Nos. 33, 34.) Based on the reasoning below, the 3 Court GRANTS in part and DENIES in part Tarsadia Defendants’ motion to dismiss with 4 leave to amend and GRANTS Playground’s motion to dismiss with leave to amend. 5 Procedural Background On September 25, 20181, Jason Brooks, a prisoner proceeding pro se and in forma 6 7 pauperis, filed the original complaint against Defendants Tarsadia Hotels, 5th Rock, 8 LLC, MKP One, LLC, Gaslamp Holdings, LLC, Gregory Casserly, B.U. Patel, and 9 Tushar Patel (“Tarsadia Defendants”) as well as Defendant Playground Destination 10 Properties, Inc. (“Playground”) (collectively “Defendants”). (Dkt. No. 1.) On March 18, 11 2019, Plaintiff filed the operative first amended complaint (“FAC”) against Tarsadia 12 Defendants and Playground alleging violations of the anti-fraud provision of the 13 Interstate Land Sales Disclosure Act (“ILSA”), 15 U.S.C. §§ 1703(a)(2)(A), (B) and (C); 14 violations of California Corporations Code sections 25401, 25501, 25504.1 and Rule 10b 15 of the 1934 Securities Exchange Act; fraud; negligence; and violations pursuant to 16 California Business & Professions Codes sections 17200 et seq. (Dkt. No. 24.) 17 In May 2006, Plaintiff and Brian Thielen, as co-purchasers, entered into a Purchase 18 Contract and Escrow Instruction (“Purchase Contract”) with Defendants for the purchase 19 of a newly constructed residential condominium unit called the Hard Rock Hotel & 20 Condominium (“Hard Rock”) located in San Diego. (Id. ¶¶ 17, 21.) Specifically, 21 22 23 24 25 26 27 1 Under the prison mailbox rule, the Court deems the Complaint filed on the date Plaintiff signed the Complaint on September 25, 2018. See Houston v. Lack, 487 U.S. 266 (1988) (establishing prison mailbox rule in habeas petition context); see also Douglas v. Noelle, 567 F.3d 1103, 1107–1109 (9th Cir. 2009) (applying mailbox rule to § 1983 complaint); James v. Madison St. Jail, 122 F.3d 27, 28 (9th Cir. 1997) (per curiam) (applying mailbox rule to trust-account statements filed pursuant to 28 U.S.C. § 1915(a)(2)); Caldwell v. Amend, 30 F.3d 1199, 1201 (9th Cir. 1994) (mailbox rule applied to Rule 50(b) motion); Faile v. Upjohn Co., 988 F.2d 985, 989 (9th Cir. 1993) (mailbox rule applied to discovery responses). 2 3:18-cv-2290-GPC-KSC 28 1 Plaintiff claims that under ILSA, Defendants failed to disclose and intentionally 2 concealed that buyers had an absolute right to rescind their Purchase Contracts within 3 two years of the date of signing and making affirmative misrepresentations to prevent 4 Plaintiff from exercising his rescission rights. (Id.) He also asserts that Defendants’ 5 failure to disclose or affirmatively concealing his right to rescind within two year of the 6 date of the Purchase Contract constitute violations of state and federal securities fraud 7 statutes. 8 This case relates to two prior cases that were before the Court and are now 9 concluded. In one case, Salameh v. Tarsadia Hotels, Case No. 09cv2739, the purported 10 class plaintiffs representing purchasers of Hard Rock Hotel San Diego Investment 11 Securities alleged inter alia, violations of federal and California securities statutes. (Case 12 No. 09cv2739, Dkt. No. 86, SAC.) On March 22, 2011, the Court granted Defendants’ 13 motions to dismiss with prejudice. Salameh v. Tarsadia Hotels, No. 09cv2739 14 DMS(CAB), 2011 WL 1044129 (S.D. Cal. Mar. 22, 2011). The Court’s ruling was 15 affirmed on appeal. Salameh v. Tarsadia Hotel, 726 F.3d 1124 (9th Cir. 2013). Relevant 16 to this case, the Ninth Circuit concluded that based on the plaintiffs’ pleadings, the 17 Purchase Contract and the subsequent Rental Management Agreement (“RMA”) did not 18 constitute a “security” under federal and state securities laws. Id. at 1132. 19 In the second case, Beaver v. Tarsadia Hotels, Case No. 11cv1842, the purported 20 class action plaintiffs filed an action on behalf of persons who purchased units at the 21 Hard Rock Hotel between May 2006 and December 2007 alleging Defendants failed to 22 disclose and intentionally concealed the plaintiffs’ right to rescind their purchase 23 contracts within two years of the date of signing the Purchase Contracts and made 24 affirmative misrepresentations to prevent Plaintiffs from exercising the right. (Case No. 25 11cv1842, Dkt. No. 69, TAC.) In Beaver, the Third Amended Complaint (“TAC”) 26 alleged, inter alia, violations of the anti-fraud provisions of ILSA, 15 U.S.C. §§ 27 3 3:18-cv-2290-GPC-KSC 28 1 1703(a)(2)(A)-(C), fraud, negligence, and violation of California Business and 2 Professions Code sections 17200 et seq. The Beaver case involved extensive motion 3 practice which raised numerous novel issues. The Ninth Circuit affirmed the Court’s 4 order on reconsideration of the parties’ cross-motions for summary judgment, Beaver v. 5 Tarsadia Hotels, 29 F.Supp.3d 1294 (S.D. Cal. 2014). Beaver v. Tarsadia Hotels, 816 6 F.3d 1170 (9th Cir. 2016). On remand, the case settled as a class action and the Court 7 granted Plaintiffs’ motion for final approval of class action settlement and judgment on 8 September 28, 2017, Beaver v. Tarsadia Hotels, Case No. 11cv1842-GPC(KSC), 2017 9 WL 4310707 (S.D. Cal. Sept. 28, 2017). In its order, the Court noted that one member, 10 Jason Brooks, who was a co-purchaser of Unit 1042, excluded himself from the Class. 11 Id. at *15. 12 Extracting allegations from the operative complaints in the Salameh and Beaver 13 cases, in this case, Jason Brooks alleges that around 2005 Tarsadia Defendants, through 14 5th Rock, began to develop a residential condominium consisting of 420 Units called the 15 “Hard Rock Hotel & Condominium” (“Hard Rock”) located at 205 Fifth Avenue in San 16 Diego, CA. (Dkt. No. 24, FAC ¶ 16.) Defendants marketed the Units through the 17 Internet, marketing materials, brochures and verbal statements. (Id.) Playground was the 18 real estate broker for the Hard Rock. (Id. ¶ 20.) 19 Around May 18, 2006, Plaintiff and Brian Thielen, as co-purchasers, executed a 20 pre-printed standardized Purchase Contract and Escrow Instructions that was prepared by 21 Defendants for the purchase of Unit 1042 at the Hard Rock. (Id. ¶¶ 21, 100.) He claims 22 he was induced to purchase the Unit because he understood that Tarsadia Defendants 23 would manage the property through the Rental Management Agreement (“RMA”). (Id. ¶ 24 21.) Plaintiff was required to sign three agreements: (1) the Contract, (2) the Unit 25 Management and Operating Agreement (“OA”) and (3) the RMA. (Id. ¶ 23.) Tarsadia 26 Defendants had Playground prepare a document entitled “Tarsadia’s Optional Rental 27 4 3:18-cv-2290-GPC-KSC 28 1 Management Program FAQ” where Defendants represented that investors were not 2 required to participate in the RMA but that representation was false as the purchasers 3 were mandated to participate in the RMA. (Id. ¶¶ 22-24.) 4 Plaintiff claims that the Contract, the OA and the RMA were in essence a single 5 contract as they could not be separated due to what was required in the agreements but 6 Defendants intentionally separated the offer of the OA/RMA and the Contract in order to 7 avoid the securities law. (Id. ¶ 25.) Defendants furthered the fraudulent scheme by 8 having Playground create closing materials that included misstatements by threatening 9 Plaintiff with the loss of his deposit if he did not timely close. (Id. ¶ 26.) Plaintiff 10 11 reluctantly closed escrow in the late summer or fall of 2007. (Id. ¶ 27.) According to the FAC, ILSA was enacted to protect consumers from fraud and 12 abuse in the sale of subdivided lots, including condominium units, and requires 13 developers and their agents to comply with certain registration and disclosure 14 requirements. (Id. ¶ 44.) Developers and their agents must comply with ILSA unless 15 they fall within an exemption but no exemptions applied to the Hard Rock. (Id. ¶ 45.) 16 Specifically, ILSA requires a developer to register a project with the U.S. 17 Department of Housing and Urban Development (“HUD”) and to provide buyers with an 18 ILSA property report that discloses material facts regarding the sales transaction. (Id. ¶ 19 46.) If a developer does not obtain an ILSA property report to be distributed to buyers 20 before they sign the purchase contract (or in the alternative, in California, where a 21 developer fails to provide buyers with an ILSA compliant Public Report issued by the 22 Department of Real Estate), ILSA imposes a two-year right to rescind from the date of 23 contract for the benefit of the buyers where the right to rescind must be disclosed in the 24 purchase contract, 15 U.S.C. § 1703(c). (Id.) 25 26 27 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. ¶ 5 3:18-cv-2290-GPC-KSC 28 1 47, 70.) The Public Report failed to provide buyers notice of any rescission rights and 2 instead disclosed a three-day right to rescind. (Id. ¶¶ 70, 71.) Moreover, Plaintiff claims 3 that under 15 U.S.C. § 1703(d)(2) of ILSA, a developer is required to include in the buyer 4 default provision of the purchase contract written notice of a 20-day opportunity for the 5 buyer to remedy default or breach of contract. (Id. ¶¶ 48, 73-76.) If such a notice is 6 omitted, the buyer is entitled to an absolute two year right to rescind his purchase 7 agreement from the date he signed it. (Id.) Plaintiff claims he received the “Final 8 Subdivision Public Report, File No. 120249LA-F00” concerning the Hard Rock which 9 was issued by the DRE on April 4, 2006 but it does not include the buyer’s rescission 10 11 rights under ILSA. (Id. ¶ 49.) Because Defendants failed to comply with their disclosure requirements under 12 ILSA and concealed the two-year rescission rights, they engaged in a scheme to defraud 13 in violation of § 1703(a)(2)(A) of ILSA. (Id. ¶ 50.) Defendants also obtained money 14 from Plaintiff by means of omitting the two-year rescission right in the contract and the 15 Public Report in violation of § 1703(a)(2)(B) and otherwise engaged in a practice or 16 course of business that operated as a fraud upon Plaintiff in violation of § 1703(a)(2)(C). 17 Plaintiff further claims that ILSA imposed an ongoing obligation to amend the Public 18 Report to disclose the two year right to rescind and Defendants failed to do so. (Id. ¶ 84.) 19 Because he was denied the right to rescind, Plaintiff was forced to quit-claim the 20 deed of the property to his co-purchaser, Brian Theilan, in January 2008. (Id. ¶ 53.) If he 21 had known of his right to rescind he would never have closed on the Unit and was 22 deprived the use of his $50,000 to seek legal counsel to uncover Defendants’ wrongful 23 conduct. (Id. ¶ 114.) He also would have used the $50,000 to continue paying his 24 attorney to prevent a default judgment of $18 million against him in June 2008. (Id. 25 ¶116.) He claims he did not respond to that lawsuit because he ran out of money to pay 26 his attorneys at the time. (Id.) He further claims he would never have been sent to prison 27 6 3:18-cv-2290-GPC-KSC 28 1 and he would not be currently paying $40,800 monthly interest penalty on an “illegally 2 induced plea”. (Id.) In sum, he seeks $35 million in damages. (Id. ¶ 118.) 3 Plaintiff has been incarcerated in a Colorado prison since May 24, 2009 and 4 received notice of the class action lawsuit (“Class Notice”) in June 2017. (Id. ¶ 54.) 5 Pursuant to the Class Notice, he timely opted out of the class action settlement on August 6 25, 2017. (Id.; Dkt. No. 17-3, Ds’ RJN, Ex. D at p. 67-68.) He inadvertently filed a 7 complaint in the District Court for the District of Colorado on December 29, 2017, and 8 the complaint was dismissed for improper venue on September 14, 2018. (Dkt. No. 24, 9 FAC ¶ 13; see also Dkt. No. 27-3, Tarsadia Ds’ RJN2, Ex. A.) After conducting a review 10 of the complaint, the Colorado district court also denied the Plaintiff’s motion to transfer 11 the case to this district. (Brooks v. Tarsadia Hotels, Civ. No. 17cv3172-PAB-KMT, Dkt. 12 Nos. 64, 68 (D. Colo.).) The Complaint in this case was filed on September 25, 2018. 13 (Dkt. No. 1.) 14 15 Discussion 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 16 17 state a claim upon which relief can be granted.” Fed. R. Civ. P. 12(b)(6). Dismissal 18 under Rule 12(b)(6) is appropriate where the complaint lacks a cognizable legal theory or 19 sufficient facts to support a cognizable legal theory. See Balistreri v. Pacifica Police 20 Dep’t., 901 F.2d 696, 699 (9th Cir. 1990). Under Federal Rule of Civil Procedure 21 8(a)(2), the plaintiff is required only to set forth a “short and plain statement of the claim 22 showing that the pleader is entitled to relief,” and “give the defendant fair notice of what 23 24 The Court grants Tarsadia Defendants’ request for judicial notice of the complaint filed in the District of Colorado as unopposed and subject to judicial notice. See Fed. R. Evid. 201; Reyn’s Pasta Bella, LLC v. Visa USA, Inc., 442 F.3d 741, 746 n.6 (9th Cir. 2006) (court may take judicial notice of court filings and other matters of public record); 7 2 25 26 27 3:18-cv-2290-GPC-KSC 28 1 the . . . claim is and the grounds upon which it rests.” Bell Atlantic Corp. v. Twombly, 2 550 U.S. 544, 555 (2007). 3 A complaint may survive a motion to dismiss only if, taking all well-pleaded 4 factual allegations as true, it contains enough facts to “state a claim to relief that is 5 plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 6 550 U.S. at 570). “A claim has facial plausibility when the plaintiff pleads factual 7 content that allows the court to draw the reasonable inference that the defendant is liable 8 for the misconduct alleged.” Id. “Threadbare recitals of the elements of a cause of 9 action, supported by mere conclusory statements, do not suffice.” Id. “In sum, for a 10 complaint to survive a motion to dismiss, the non-conclusory factual content, and 11 reasonable inferences from that content, must be plausibly suggestive of a claim entitling 12 the plaintiff to relief.” Moss v. U.S. Secret Serv., 572 F.3d 962, 969 (9th Cir. 2009) 13 (quotations omitted). In reviewing a Rule 12(b)(6) motion, the Court accepts as true all 14 facts alleged in the complaint, and draws all reasonable inferences in favor of the 15 plaintiff. al-Kidd v. Ashcroft, 580 F.3d 949, 956 (9th Cir. 2009). Where a motion to dismiss is granted, “leave to amend should be granted ‘unless 16 17 the court determines that the allegation of other facts consistent with the challenged 18 pleading could not possibly cure the deficiency.’” DeSoto v. Yellow Freight Sys., Inc., 19 957 F.2d 655, 658 (9th Cir. 1992) (quoting Schreiber Distrib. Co. v. Serv-Well Furniture 20 Co., 806 F.2d 1393, 1401 (9th Cir. 1986)). In other words, where leave to amend would 21 be futile, the Court may deny leave to amend. See DeSoto, 957 F.2d at 658; Schreiber, 22 806 F.2d at 1401. 23 B. 24 Legal Standard as to Federal Rule of Civil Procedure 9(b) Where a plaintiff alleges fraud in the complaint, Rule 9(b) requires a plaintiff to 25 “state with particularity the circumstances constituting fraud or mistake. Malice, intent, 26 knowledge, and other conditions of a person’s mind may be alleged generally.” Fed. R. 27 8 3:18-cv-2290-GPC-KSC 28 1 Civ. P. 9(b). Rule 9(b) requires that the circumstances constituting the alleged fraud “be 2 specific enough to give defendants notice of the particular misconduct . . . so that they 3 can defend against the charge and not just deny that they have done anything wrong.’” 4 Kearns v. Ford Motor Co., 567 F.3d 1120, 1124 (9th Cir. 2009) (internal quotation 5 omitted). A party must set forth “the time, place, and specific content of the false 6 representations as well as the identities of the parties to the misrepresentation.” Odom v. 7 Microsoft Corp., 486 F.3d 541, 553 (9th Cir. 2007) (internal quotation marks omitted). 8 As such “[a[verments of fraud must be accompanied by ‘the who, what, when, where, 9 and how’ of the misconduct charged.” Kearns, 567 F.3d at 1124 (citing Vess v. Ciba- 10 Geigy Corp. U.S.A., 317 F.3d 1097, 1106 (9th Cir. 2003)). Thus, to satisfy the 11 specificity requirement of Rule 9(b), a plaintiff is required “to plead evidentiary facts” 12 and the court must “consider what inferences these facts will support—despite the pitfalls 13 and inefficiencies of such an analysis at the pleading stage . . . .” Fecht v. Price Co., 70 14 F.3d 1078, 1082 (9th Cir. 1995) (emphasis added). 15 C. Tarsadia Defendants’ Motion to Dismiss 16 1. 17 On a motion to dismiss based on the statute of limitations, the Court must assess 18 whether “the running of the statute is apparent on the face of the complaint.” Huynh v. 19 Chase Manhattan Bank, 465 F.3d 992, 997 (9th Cir. 2006) (quoting Jablon v. Dean 20 Witter & Co., 614 F.2d 677, 682 (9th Cir. 1980) (“When a motion to dismiss is based on 21 the running of the statute of limitations, it can be granted only if the assertions of the 22 complaint, read with the required liberality, would not permit the plaintiff to prove that 23 the statute was tolled.”)). Because the statute of limitations is an affirmative defense, the 24 “defendant has the burden of proving the action is time-barred.” Grisham v. Philip 25 Morris, Inc., 670 F. Supp. 2d 1014, 1020 (C.D. Cal. 2009) (citation omitted). Statute of Limitations 26 27 9 3:18-cv-2290-GPC-KSC 28 1 Tarsadia Defendants argue that the ILSA and fraud claims are barred by the three- 2 year statute of limitations from the date of the Purchase Contract, May 18, 2006, and 3 therefore, these causes of actions expired on May 18, 2009. They also argue that the 4 negligence claim is barred by the Court’s prior ruling in the Beaver case. Further, they 5 claim that the securities fraud is barred by either the two year or five year limitations 6 period under California Corporations Code section 25506. Finally, they assert the UCL 7 claims are barred by the four-year statute of limitations. In response, Plaintiff argues that 8 he did not discover the alleged failure to disclose rescission rights under ILSA until June 9 2017 when he received the Beaver Class Notice. He also contends that several tolling 10 theories apply to his case. 11 a. 12 ILSA Anti-Fraud Statute of Limitations Plaintiff alleges violations of the anti-fraud provisions of the ILSA, 15 U.S.C. §§ 13 1703(a)(2)(A), (B), (C).3 The statute of limitations for these provision accrues from 14 “three years after discovery of the violation or after discovery should have been made by 15 the exercise of reasonable diligence.” 15 U.S.C. § 1711(a)(2). 16 17 18 19 20 21 22 23 24 25 26 27 ILSA’s anti-fraud provision provides: (a) It shall be unlawful for any developer or agent, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce, or of the mails– . . . 3 (2) with respect to the sale or lease, or offer to sell or lease, any lot not exempt under section 1702(a) of this title-(A) to employ any device, scheme, or artifice to defraud; (B) to obtain money or property by means of any untrue statement of a material fact, or any omission to state a material fact necessary in order to make the statements made (in light of the circumstances in which they were made and within the context of the overall offer and sale or lease) not misleading, with respect to any information pertinent to the lot or subdivision; (C) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon a purchaser 15 U.S.C. § 1703(a)(2)(A)-(C). 10 3:18-cv-2290-GPC-KSC 28 Under the discovery rule, incorporated into ILSA, “a cause of action accrues (1) 1 2 when the plaintiff did in fact discover, or (2) when a reasonably diligent plaintiff would 3 have discovered, ‘the facts constituting the violation’ -- whichever comes first.” Merck 4 & Co., Inc. v. Reynolds, 559 U.S. 633, 637 (2010). The Court in Merck held that the 5 statute of limitations does not begin to run when the plaintiff discovers facts that put the 6 plaintiff on “inquiry notice” when the facts “would have prompted a reasonably diligent 7 plaintiff to begin investigating.” Id. at 653. Instead, the claim accrues when the plaintiff 8 discovers or a reasonably diligent plaintiff would have discovered “the facts constituting 9 the violation . . . irrespective of whether the actual plaintiff undertook a reasonably 10 diligent investigation.” Id. “A fact is considered ‘discovered’ when ‘a reasonably 11 diligent plaintiff would have sufficient information about that fact to adequately plead it 12 in a complaint . . . with sufficient detail and particularity to survive a 12(b)(6) motion to 13 dismiss.’” Rieckborn v. Jefferies LLC, 81 F. Supp. 3d 902, 915 (N.D. Cal. 2015) 14 (quoting City of Pontiac Gen. Employees’ Ret. Sys. v. MBIA, Inc., 637 F.3d 169, 175 (2d 15 Cir. 2011)). 16 Tarsadia Defendants argue that the statute of limitations on the ILSA anti-fraud 17 claims expired on May 18, 2009 which is three years from when Plaintiff signed the 18 purchase contract on May 18, 2006.4 They summarily contend that May 18, 2006 is 19 when Plaintiff knew of or should have been able to discover by reasonable diligence all 20 the facts that constituted the alleged ILSA violations. In response, Plaintiff argues that he 21 did not discover the alleged violations until he received the Class Notice in June 2017. 22 23 4 24 25 26 27 In his opposition, Plaintiff claims that he does not know the specific date when he signed the contract, either May 18, 2006 or December 12, 2006; therefore, his FAC cannot be dismissed as untimely, (Dkt. No. 31 at 10); however, the FAC alleges he signed the contract on May 18, 2006, (Dkt. No. 24, FAC ¶ 100), and incorporates by reference the Purchase Contract he signed which is dated May 18, 2006. (See Dkt. No. 17-3, Tarsadia Ds’ RJN, Ex. A at 35-49.) Therefore, the Court concludes the Plaintiff has alleged he signed the Purchase Contract on May 18, 2006. 11 3:18-cv-2290-GPC-KSC 28 1 Because he was forced to quit-claim his deed to the Unit to his co-purchaser in January 2 2008, he did not receive any reports on the property. Moreover, he explains that the 3 ILSA is complex that even if he compared the Purchase Contract and Public Report with 4 ILSA’s requirement he would not have known that Tarsadia Defendants violated any 5 laws. 6 The FAC alleges that Plaintiff had no reason to suspect any of Defendants’ 7 representations in the Contract, Public Report, Closing Notice or FAQ concerning his 8 rescission rights to be false or misleading. (Dkt. No. 24, FAC ¶ 52.) He claims that 9 because of his incarceration and indigence, he could never have discovered his two-year 10 rescission rights under ILSA. (Id. ¶ 110.) He also claims due to the complexity of the 11 ILSA and securities laws, he was unable to discover his rescission rights. (Id. ¶ 111.) He 12 only discovered the violations when he was provided with the Class Notice in June 2017. 13 (Id. ¶ 110.) Pursuant to that Class Notice, he opted out. (Id. ¶ 112.) He asserts that any 14 exercise of reasonable diligence would not have lead to the discovery of Plaintiff’s 15 rescission rights due to his incarceration and involuntary act of quit-claiming the deed to 16 his co-purchaser. (Id. ¶ 113.) 17 Here, Plaintiff alleges that he did not discover the alleged violations until he 18 received the Class Notice in June 2017 and reasons why discovery would not have been 19 possible. Tarsadia Defendants merely assert that Plaintiff knew about or should have 20 discovered by reasonable diligence all facts that constituted the alleged ILSA violations 21 as of May 18, 2006 but do not provide any supporting facts to support their conclusion. 22 First, Tarsadia Defendants have not carried their burden in demonstrating that Plaintiff 23 discovered the facts or should have discovered with reasonable diligence facts to support 24 a cause of action under ILSA on May 18, 2006. Second, the question of when Plaintiff 25 was on notice about Tarsadia Defendants’ alleged failure to disclose and intentionally 26 concealing the buyers’ two year right to rescind for purposes of applying the discovery 27 12 3:18-cv-2290-GPC-KSC 28 1 rule is a question of fact not amenable on a motion to dismiss. See Kramas v. Security 2 Gas & Oil Co., Inc., 672 F.2d 766, 770 (9th Cir. 1982) (fact questions are usually 3 involved determining when a plaintiff discovered the violation); Toombs v. Leone, 777 4 F.2d 465, 468 n. 4 (9th Cir. 1985) (finding that unresolved fact questions precluded 5 disposition of the section 12(2) claim on statute of limitations grounds); see also Rafton 6 v. Rydex Series Funds, No. 10cv1171-LHK, 2011 WL 31114, at *9 (N.D. Cal. Jan. 5, 7 2011) (“the determination of inquiry notice is ‘fact intensive’ and is usually not 8 appropriate at the pleading stage”). Therefore, the Court concludes it is not apparent 9 from the allegations in the FAC that the ILSA anti-fraud claims are time barred. 10 Accordingly, at this early stage, the Court DENIES Tarsadia Defendants’ motion to 11 dismiss the anti-fraud provisions of ILSA based on the statute of limitations. 12 b. 13 Fraud and California Securities Statute of Limitations The FAC alleges claims of fraud and violations of California Corporations Code 14 sections 25401, 25501, 25504.1. 5 (Dkt. No. 24 FAC ¶¶ 134-137.) In California, an 15 action for fraud has a three-year statute of limitations and is “not deemed to have accrued 16 until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake.” 17 Cal. Civ. Proc. § 338(d). On the state securities claims, the statute of limitations expires 18 “five years after the act or transaction constituting the violation or the expiration of two 19 years after the discovery by the plaintiff of the facts constituting the violation, whichever 20 shall first expire.” Cal. Corp. Code § 25506. Section 25506’s discovery refers to inquiry 21 notice rather than actual notice. Deveny v. Entropin, Inc., 139 Cal. App. 4th 408, 422-23 22 (2006). 23 24 25 26 27 5 The Court notes Tarsadia Defendants do not move to dismiss the federal securities claim based on statute of limitations. 13 3:18-cv-2290-GPC-KSC 28 1 Tarsadia Defendants argue that the fraud cause of action is barred by the three year 2 statute of limitations because Plaintiff knew or should have been able to discovery by 3 reasonable diligence all the facts that constituted the ILSA violations on May 18, 2006 4 when he signed the Purchase Contract, and the securities fraud claims are barred by the 5 two and five year statute of limitations because the limitations period began to run on 6 May 18, 2006, and expired on May 18, 2009 or May 18, 2011. Because Plaintiff filed his 7 complaint in 2018, his claims are not timely. 8 Contrary to the federal discovery rule, under the California discovery rule, as it 9 relates to the fraud causes of action, the statute of limitations begins to run when a 10 plaintiff “suspects or should suspect that her injury was caused by wrongdoing, that 11 someone has done something wrong to her.” Jolly v. Eli Lilly & Co., 44 Cal. 3d 1103, 12 1110 (1988); Norgart v. The Upjohn Co., 21 Cal. 4th 383, 397 (1999) (“the plaintiff 13 discovers the cause of action when he at least suspects a factual basis . . . for its 14 elements”); see also O’Connor v. Boeing N. American, Inc., 311 F.3d 1139, 1148 (9th 15 Cir. 2002) (noting difference between California and federal discovery rule and 16 “reject[ing] an interpretation of the federal discovery rule that would commence 17 limitations periods upon mere suspicion of the elements of a claim.”). In California, the 18 statute of limitations begins once “the plaintiff has notice or information of circumstances 19 to put a reasonable person on inquiry . . . .” Jolly, 44 Cal. 3d at 1110-11 (internal citation 20 and quotation marks omitted). Once on inquiry, the plaintiff has an obligation to discover 21 facts and cannot sit on his rights but must go find them himself. Id. at 1111. 22 In order for the discovery rule to delay the accrual of a cause of action, a complaint 23 must plead facts to “show (1) the time and manner of discovery and (2) the inability to 24 have made earlier discovery despite reasonable diligence.” Fox v. Ethicon Endo-Surgery, 25 Inc., 35 Cal. 4th 797, 808 (2005) (quoting McKelvey v. Boeing N. American, Inc., 74 26 Cal. App. 4th 151, 160 (1999)). The plaintiff “must conduct a reasonable investigation of 27 14 3:18-cv-2290-GPC-KSC 28 1 all potential causes of that injury. If such an investigation would have disclosed a factual 2 basis for a cause of action, the statute of limitations begins to run on that cause of action 3 when the investigation would have brought such information to light.” Id. at 808-09. 4 As to the first factor, the FAC alleges that Plaintiff discovered the alleged 5 violations in June 2017 when he received the Class Notice but the FAC is devoid of any 6 allegation that he conducted any investigation of potential causes of his injury prior to 7 that time. He claims that his incarceration is an extraordinary circumstance6 beyond his 8 control but provides no caselaw in support. Despite his incarceration, he has not alleged 9 he made any diligent efforts to investigate.7 On this basis, the Court GRANTS Tarsadia 10 Defendants’ motion to dismiss for failing to allege that California’s discovery rule applies 11 to his state law causes of action for fraud and securities fraud. 12 As to the five-year statute of limitations under section 25506, Plaintiff relies on 13 California Civil Procedure Code section 352.1 that the statute of limitations is tolled for 14 up to two years during imprisonment, Cal. Civ. Proc. Code § 352.1(a) (If a person 15 entitled to bring an action . . . at the time the cause of action accrued, imprisoned on a 16 criminal charge, or in execution under the sentence of a criminal court for a term less 17 than for life, the time of that disability is not a part of the time limited for the 18 commencement of the action, not to exceed two years.”) (emphasis added), but the tolling 19 20 21 22 23 24 25 26 27 6 Extraordinary circumstance is used to demonstrate the application of equitable tolling. For equitable tolling to apply, Plaintiff must demonstrate “some extraordinary circumstance stood in his way” and prevented timely filing. Holland v. Florida, 560 U.S. 631 (2010). In the habeas context, ignorance of the law or limited legal knowledge do not constitute extraordinary circumstances. Rasberry v. Garcia, 448 F.3d 1150, 1154 (9th Cir. 2006) (an inmates “ignorance of the law” and “lack of legal sophistication” is not an extraordinary circumstance warranting equitable tolling). However, here, the Court is considering application of the discovery rule under California law, not equitable tolling. 7 The Court notes that the FAC alleges that “Plaintiff reluctantly closed escrow in the late summer or fall of 2007.” (Dkt. No. 24, FAC ¶ 27.) It is not clear why Plaintiff was reluctant to close escrow and whether his reluctance constitutes suspicion of some wrongdoing. 15 3:18-cv-2290-GPC-KSC 28 1 applies only when Plaintiff was in prison at the time the cause of action accrued. Here, 2 Plaintiff was imprisoned on May 24, 2009. If the cause of action accrued either on May 3 18, 2006, when the Purchase Contract was signed, as Tarsadia Defendants assert, or 4 August 2007, when the closing documents were completed, which Plaintiff appears to 5 assert may be the accrual date for some of his causes of action, Plaintiff was not yet 6 incarcerated. Therefore, section 352.1 does not support Plaintiff’s argument that the 7 fraud causes of action are timely. 8 Furthermore, if “five years after the act or transaction constituting the violation” 9 occurred on May 18, 2006, as Tarsadia Defendants assert, or August 2007, as Plaintiff 10 claims, his state securities claims are barred because the five year period is a strict limit 11 that may not be tolled. In re Verisign, Inc. v. Derivative Litig., 531 F. Supp. 2d 1173, 12 1221 (N.D. Cal. 2007) (citing SEC v. Seaboard Corp., 677 F.2d 1301, 1308 (9th Cir. 13 1982)); KKMB, LLC v. Khader, Case No. CV 18-5170-GW(JPRx), 2018 WL 6012225, 14 at *6 (C.D. Cal. Oct. 4, 2018) (referencing section 25506(b) as an absolute limitation 15 period). Because section 25506 applies to whichever date expires first, based on 16 Plaintiff’s argument that he did not discover the cause of action until June 20178, the 17 earliest expiration date for the statute of limitations would have been the five year 18 absolute statute of limitations accruing in August 2007 and expiring in August 2012. 19 American Pipe would not save the state securities claims. In American Pipe, the 20 United States Supreme Court held that commencement of a purported class action “tolls 21 the running of the statute for all purported members of the class who make timely 22 motions to intervene after the court has found the suit inappropriate for class action 23 24 25 26 27 The Court questions Plaintiff’s claim that he did not discover the securities claims until June 2017 when he received Class Notice of the Beaver action. The Beaver action did not involve securities fraud claims. 16 8 3:18-cv-2290-GPC-KSC 28 1 status.” 414 U.S. 538, 553 (1974) (class action on federal statutes of Sherman Act, 2 Clayton Act and False Claims Act). This rule was extended in Crown, Cork to allow 3 tolling where plaintiffs sought to file an entirely new action and the statute of limitations 4 is tolled for all members of the class “until class certification is denied.” Crown, Cork & 5 Seal Co. v. Parker, 462 U.S. 345, 354 (1983). Similarly, when certification has been 6 granted, the statute begins running anew from the date when the class member exercises 7 the right to opt out because before this time, the class member is deemed to be actively 8 prosecuting her rights. See Appleton Electric Co. v. Graves Truck Line, Inc., 635 F.2d 9 603, 608-10 (7th Cir. 1980), cert. denied, 451 U.S. 976 (1981); Wood v. Combustion 10 Engineering, Inc., 643 F.2d 339 (5th Cir. 1981). However, American Pipe does not apply 11 to toll the securities causes of action when the Beaver action was filed on May 18, 2011, 12 as these securities claims were not causes of action in that case. See Johnson v. Railway 13 Express Agency, Inc., 421 U.S. 454, 467 (1975) (tolling in American Pipe “depended 14 heavily on the fact that (the prior) filings involved exactly the same cause of action 15 subsequently asserted.”). 16 Accordingly, based on the allegations in the FAC, the Court GRANTS Tarsadia 17 Defendants’ motion to dismiss the fraud with leave to amend and GRANTS Tarsadia 18 Defendants’ motion to dismiss the state securities causes of action as time barred. 19 c. 20 Negligence The FAC alleges a negligence per se claim based on violations of the disclosure 21 provision of ILSA and arises from § 1703(d)(2) and § 1703(a)(1)(C). (Dkt. No. 24, FAC 22 ¶¶ 46, 48, 56 69, 72, 73, 74, 147-153). Violations of the disclosure provisions must be 23 brought “within three years after the signing of the contract. . . .” 15 U.S.C. §1711(a)(1) 24 & (b). 25 The elements of a negligence cause of action are: (a) a legal duty to use due care; 26 (b) a breach of such legal duty; and (c) the breach as the proximate or legal cause of the 27 17 3:18-cv-2290-GPC-KSC 28 1 resulting injury. Ladd v. County of San Mateo, 12 Cal. 4th 913, 917 (1996). Because the 2 negligence cause of action is based on a violation of a federal statute, the statute or 3 regulation may be adopted as a standard of care in a negligence action. Di Rosa v. Showa 4 Denko K.K., 44 Cal. App. 4th 799, 808 (1996). In this case, Plaintiffs have asserted a per 5 se negligence theory based on Tarsadia Defendants’ violation of ILSA. Plaintiffs identify 6 three duties that were violated: (1) a duty to disclose Plaintiffs’ two-year right to rescind 7 in the Public Report; (2) a duty to replace the language in the Contract concerning the 8 three-day right to rescind with language disclosing this two-year right, and (3) a duty to 9 otherwise disclose to Plaintiffs their two-year right to rescind. (Dkt. No. 24, FAC ¶ 148.) 10 In the Court’s prior order in Beaver, based on the exact same negligence allegation, 11 it determined that the negligence per se theory of liability was dependent on an 12 underlying statutory violation, (11cv1842, Dkt. No. 153 at 35 (the “presumption arising 13 from the doctrine of negligence per se is dependent and requires an analysis of the 14 underlying causes of action pursuant to 15 U.S.C. § 1703(a)(1)(c) and 15 U.S.C. § 15 1703(d)(2).”).) Because the plaintiffs, in the Beaver action conceded that the causes of 16 action under §§ 1703(a)(1)(C) and (d)(2) were time barred, the negligence per se cause of 17 action necessarily failed. (See Case No. 11cv1842, Dkt. No. 20 at 5.) 18 In opposition, Plaintiff does not dispute Tarsadia Defendants’ argument and it is 19 not clear whether Plaintiff acknowledges that the claims under §§ 1703(a)(1)(C) and 20 (d)(2) are time barred. In any event, to the extent Plaintiff did not oppose the argument 21 that the negligence cause of action is time barred, the Court GRANTS Tarsadia 22 Defendants’ motion to dismiss. 23 24 25 d. UCL Statute of Limitations In this case, the UCL “unlawful prong” claim is based on violations of ILSA, the state securities laws and Rule 10b of the 1934 Securities Exchange Act. (Dkt. No. 24, 26 27 18 3:18-cv-2290-GPC-KSC 28 1 FAC ¶ 156.) The FAC also alleges claims under the “unfair” and “fraudulent” prongs of 2 the UCL. (Id. ¶¶ 155, 158.) 3 The Tarsadia Defendants argue that claims under the “unlawful” prong of the UCL 4 for violations of ILSA, and federal and state securities laws by failing to provide the 5 disclosures or registering the agreements as securities are barred by the four-year statute 6 of limitations. In Beaver, the Ninth Circuit held that the UCL cause of action has a four- 7 year statute of limitations and is governed by common law accrual rules looking at when 8 the harm was completed. The plaintiffs in Beaver claimed the harm was completed in the 9 fall of 2007 when they were required to close escrow and when they suffered cognizable 10 11 financial harm. Beaver, 816 F.3d at 1178. The UCL statute of limitations provides, “[a]ny action to enforce any cause of 12 action pursuant to this chapter shall be commenced within four years after the cause of 13 action accrued. No cause of action barred under existing law on the effective date of this 14 section shall be revived by its enactment.” Cal. Bus. & Prof. Code § 17208. The 15 discovery rule applies to the UCL. See Aryeh v. Canon Bus. Solutions, Inc., 55 Cal. 4th 16 1185, 1198 (2013) (“the UCL is governed by common law accrual rules to the same 17 extent as any other statute.”); Cover v. Windsor Surry Co., No. 14-cv-5262-WHO, 2015 18 WL 4396215, at *3 (N.D. Cal. July 15, 2015) (“Accordingly, I am bound by Aryeh . . . 19 and I conclude that the discovery rule is available to toll the statute of limitations on 20 [Plaintiff's] UCL claim.”); Plumlee v. Pfizer, Inc., Case No. 13cv414 LHK, 2014 WL 21 695024, at *8 (N.D. Cal. Feb. 21, 2014) (“delayed discovery rule is available to toll the 22 statute of limitations under the . . . UCL.”). 23 As discussed above, to allege the application of the California discovery rule, 24 Plaintiff must allege “(1) the time and manner of discovery and (2) the inability to have 25 made earlier discovery despite reasonable diligence.” Fox, 35 Cal. 4th at 808. Because 26 the Court concluded Plaintiff did not allege the second factor, that he made a reasonably 27 19 3:18-cv-2290-GPC-KSC 28 1 diligent effort to investigate yet was unable to make a discovery, on this basis, the Court 2 GRANTS Tarsadia Defendants’ motion to dismiss the UCL claim. 3 2. 4 Alternatively, Plaintiff submits several tolling theories but does not differentiate Tolling Arguments 5 which tolling argument applies to which cause of action as some tolling theories only 6 apply to federal claims and others apply only to state law claims. Plaintiff alleges the 7 following theories: 1) Rule 15 relation back doctrine such that his FAC relates back to the 8 original complaint in the Beaver case on May 18, 2011; 2) imprisonment tolling under 9 California Civil Procedure Code section 352.1; 3) the class action tolling rule under 10 American Pipe and Crown, Cork & Seal and during the time he attempted to file the same 11 suit against Defendants in Colorado district court; 4) the continuous violation doctrine; 5) 12 equitable tolling; and 6) equitable estoppel. 13 First, the Court concludes that the relation back rule under Rule 15 does not apply 14 in this case. Rule 15(c)(1) provides that “an amendment to a pleading relates back to the 15 date of the original pleading” when certain conditions are met. Fed. R. Civ. P. 15(c)(1). 16 The rule allows a party to relate an amended pleading to an original pleading in the same 17 action. Here, Plaintiff seeks relation-back of his FAC to a complaint in a different case. 18 The Colorado District Court that considered Plaintiff’s complaint held that Rule 15 does 19 not apply to a separately filed claim. See Brooks v. Tarsadia Hotels, District of 20 Colorado, Case No. 17cv3172-PAB, KMT, Dkt. No. 68 at p. 9-10, Mar. 11, 2019) (citing 21 Benge v. United States, 17 F.3d 1286, 1288 (10th Cir. 1994) (stating that a “separately 22 filed claim, as opposed to an amendment or supplementary pleading, does not relate back 23 to a previously filed claim”)). Plaintiff does not provide any authority to the contrary. 24 Second, the imprisonment tolling provision under California Civil Procedure Code 25 section 352.1 also does not appear to apply because Plaintiff must allege that he was 26 imprisoned at the time his state law causes of action accrued. Section 352.1 allows a 27 20 3:18-cv-2290-GPC-KSC 28 1 plaintiff to file an action if “at the time the cause of action accrued” is “imprisoned on a 2 criminal charge, or in execution under the sentence of a criminal court for a term less 3 than for life, the time of that disability is not a part of the time limited for the 4 commencement of the action, not to exceed two years.” Cal. Civ. Proc. Code § 352.1. 5 Thus, Plaintiff must be incarcerated when his claims accrued. See Groce v. Claudat, 603 6 F. App’x 581, 582 (9th Cir. 2015) (“The district court correctly determined that all of 7 [the plaintiff’s] claims . . . were time-barred because [the plaintiff] was not incarcerated 8 when his claims accrued.”). To the extent Plaintiff’s claims that the discovery rule tolls 9 the statute of limitations until June 2017, section 352.1 is not applicable as his state law 10 claims would be timely. To the extent the state law causes of action accrued prior to his 11 imprisonment on May 24, 2009, section 352.1 is also not applicable. It appears that the 12 relevant accrual dates would be either May 18, 2006, the date the Purchase Contract was 13 signed, or August 2007, when Plaintiff closed escrow on the Unit. Based on these 14 potential accrual dates, section 352.1 would be inapplicable. 15 The Court declines to dismiss based on equitable tolling and equitable estoppel as 16 these theories often depend on matters outside the pleadings and they “[are] not generally 17 amenable to resolution on a Rule 12(b)(6) motion.” Cervantes v. City of San Diego, 5 18 F.3d 1273, 1276 (9th Cir. 1993); see Shropshire v. Fred Rappoport Co., 294 F. Supp. 2d 19 1085, 1097-98 (N.D. Cal. 2003) (“Because all of these [equitable estoppel] factors turn 20 on disputed facts, it is improper for the Court, on a Rule 12(b)(6) motion—the purpose of 21 which is test the sufficiency of the pleadings—to resolve this issue.”). 22 As to the remaining tolling issues under American Pipe/Crown Cork & Seal, and 23 the continuous violation doctrine, the Court declines to address them as not fully briefed. 24 The Court notes that Tarsadia Defendants do not address the continuous violation 25 doctrine in their reply. If the Court determines that the last act constituting the violation 26 occurred in August 2007, then with the application of American Pipe/Crown Cork & Seal 27 21 3:18-cv-2290-GPC-KSC 28 1 tolling, Plaintiff’s UCL claims may be timely. Tarsadia Defendants summarily argue that 2 American Pipe tolling does not apply to the state law causes of action; however, 3 California court have applied American Pipe to state law causes of action under certain 4 circumstances. See Falk v. Children’s Hospital Los Angeles, 237 Cal. App. 4th 1454 5 (2015) (applying American Pipe tolling to some cause of actions and not others). 6 Because these complex and fact specific tolling issues were not fully briefed, the Court 7 declines to consider them at this time. 8 Because it is not clear that Plaintiff’s allegations could not be amended to show 9 that he is entitled to certain theories of tolling, a statute of limitations dismissal would be 10 improper. In sum, the Court GRANTS in part and DENIES in part Tarsadia Defendants’ 11 motion to dismiss based on the statute of limitations with leave to amend. 12 3. 13 Tarsadia Defendants contend that the ILSA and fraud claims should be dismissed Rule 12(b)(6) - ILSA and Fraud Claims 14 based on the Court’s prior decision in Beaver v. Tarsadia Hotels, 978 F. Supp. 2d 1124 15 (S.D. Cal. 2013) where the Court determined, on summary judgment, that the evidence 16 did not demonstrate that Tarsadia Defendants knew the representations or affirmative 17 representations were false when made or that Tarsadia Defendants had an intent to 18 deceive Plaintiffs. However, the Court’s ruling was on summary judgment after 19 discovery had been completed and based on the facts alleged in the TAC of Case No. 20 11cv1842. 21 Here, on a motion to dismiss on a similar but not identical complaint, the Court 22 looks to the allegations in the FAC to determine if Plaintiff has alleged the Tarsadia 23 Defendants knew the representations were false when they were made or had an intent to 24 deceive Plaintiff. Tarsadia Defendants reliance on the Court’s prior summary judgment 25 ruling in another case with different named plaintiffs is without merit and cannot be the 26 basis for dismissal of the FAC in this case. Because Tarsadia Defendants have failed to 27 22 3:18-cv-2290-GPC-KSC 28 1 demonstrate that the allegations in the FAC are deficiently pled, the Court DENIES 2 Tarsadia Defendants’ motion to dismiss on the ILSA and fraud causes of action. While 3 Plaintiff, with discovery, may not ultimately be able to demonstrate an issue of fact 4 whether Tarsadia Defendants knew the representations were false at the time they were 5 made, at this early stage of the proceeding, the Court cannot dismiss the FAC based on a 6 summary judgment ruling in the Beaver case. Rule 9(b) – Fraud, Negligence, ILSA and Securities Fraud Claims 7 4. 8 Finally, Tarsadia Defendants argue that the claims under ILSA, securities fraud, 9 fraud and negligence must be dismissed for failure to comply with Rule 9(b) because 10 Plaintiff has not sufficiently pled causation, which is a necessary element of all his 11 claims, and also justifiable reliance. Plaintiff does not address these arguments in his 12 opposition. Under California law, the elements of common law fraud are “misrepresentation, 13 14 knowledge of its falsity, intent to defraud, justifiable reliance and resulting damage.” Gil 15 v. Bank of Am., N.A., 138 Cal. App. 4th 1371, 1381 (2006). For an ILSA fraud claim, 16 courts apply California’s fraud standard. Irving v. Lennar Corp., No. Civ. S-12-290 KJM 17 EFB, 2013 WL 1308712, at *10 (E.D. Cal. Apr. 1, 2013) (applying California fraud 18 standard on ILSA anti-fraud claim) (citing Lazar v. Superior Ct., 12 Cal. 4th 631, 638 19 (1996)); Dexter v. Lake Creek Corp., No. 7:10-cv-226-D, 2013 WL 1898381, at *6 (May 20 7, 2013) (elements of state fraud cause of action applicable to ILSA’s anti-fraud 21 provision). But under ILSA, a plaintiff need not demonstrate a showing of reliance. 22 Keanneally v. Bank of Nova Scotia, 711 F. Supp. 2d 1174, 1186 (S.D. Cal. 2010); see 23 also Irving, 2013 WL 1308712, at *11. Under § 10(b)9, a plaintiff must allege “(1) a 24 25 26 27 9 Tarsadia Defendants do not argue that the state securities fraud claim should be dismissed under Rule 9(b). (Dkt. No. 27-1 at 22-23.) 23 3:18-cv-2290-GPC-KSC 28 1 material misrepresentation or omission by the defendant; (2) scienter; (3) a connection 2 between the misrepresentation or omission and the purchase or sale of a security; (4) 3 reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss 4 causation.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 37-38 (2011) (internal 5 quotation omitted). The elements of a negligence cause of action are: (a) a legal duty to 6 use due care; (b) a breach of such legal duty; and (c) the breach as the proximate or legal 7 cause of the resulting injury. Ladd v. County of San Mateo, 12 Cal. 4th 913, 917 (1996). 8 The FAC alleges that Defendant’s fraudulent concealment prevented him from 9 timely exercising rescission rights and seeking other legal options. (Dkt. No. 24, FAC ¶ 10 114.) He claims that if he had been allowed to rescind, he would not have closed on the 11 property and would not have incurred damages of his loss of $50,000 which he could 12 have used to hire an attorney to uncover Defendants’ wrongful conduct or would have 13 been able to pay his attorney to prevent a default judgment of $18 million entered against 14 him in June 2008, would not have been sent to prison and not be currently paying 15 $40,800 monthly interest penalty on an illegally induced plead. (Id. ¶¶ 114-116.) The 16 Court concludes these are not conclusory allegations of causation and satisfy the 17 particularity requirement of Rule 9(b). 18 As for justifiable reliance, in Beaver, the Court held that the plaintiffs sufficiently 19 alleged reliance by claiming “they relied on Defendants’ misleading representations 20 regarding their right to rescind, which caused them to miss the opportunity to timely 21 exercise their right to rescind under the ILSA.” (Case No. 11cv 1842, Dkt. No. 34 at 7.) 22 Here, similarly, the FAC alleges that he relied on the material misstatements or wrongful 23 omissions and had Plaintiff been informed of his two-year rescission rights, he would not 24 closed on the Unit or would not have quit claimed his deed to his co-purchaser in early 25 2008 and would have rescinded his Contracts and recovered his purchase money. (Dkt. 26 27 24 3:18-cv-2290-GPC-KSC 28 1 No. 24, FAC ¶¶ 109, 115, 144.) Plaintiff sufficiently alleges justifiable reliance. The 2 Court DENIES Defendants’ motion to dismiss pursuant to Rule 9(b). In sum, the Court GRANTS in part and DENIES in part Tarsadia Defendants’ 3 4 motion to dismiss on the statute of limitations grounds and DENIES Tarsadia 5 Defendants’ motion to dismiss pursuant to Rule 12(b)(6) and Rule 9.10 6 D. Playground Destination’s Motion to Dismiss 7 1. 8 Playground argues that the first cause of action for ILSA fraud violations and third ILSA and Fraud 9 cause of action for fraud fail because the FAC does not sufficiently plead Playground’s 10 knowledge of the non-disclosure of the two-year rescission right relying on the Court’s 11 ruling in the Beaver case filed on May 12, 2012. (Case No. 11cv1842, Dkt. No. 34.) 12 Plaintiff argues that the facts supporting his claims differ from those in the Beaver case. 13 Plaintiff alleges violations of the anti-fraud provisions of ILSA, 15 U.S.C. §§ 14 1703(a)(2)(A), (B), and (C). In California, a plaintiff alleging fraud must show “(1) 15 misrepresentation (false representation, concealment, or nondisclosure); (2) knowledge of 16 falsity (scienter); (3) intent to defraud (i.e., to induce reliance); (4) justifiable reliance; 17 and (5) resulting damage.” Ryder v. Lightstorm Entm't, Inc., 246 Cal. App. 4th 1064, 18 1079 (2016) (internal quotations omitted). California’s fraud standard applies to ILSA’s 19 anti-fraud statute except there is no need to demonstrate reliance for violations of the 20 anti-fraud provisions of the ILSA. See Irving, 2013 WL 1308712, at *10, 11 (applying 21 22 23 10 24 25 26 27 Additionally, Tarsadia Defendants argue that the federal and state securities claims are barred by the Ninth Circuit ruling in Salameh that the transactions at issue did not constitute a “security.” 726 F.3d at 1132. While Tarsadia Defendants claim that the securities law claims in the Salameh and Brooks case are “identical” they have not claimed or demonstrated that the factual assertions to support the claims are identical. Accordingly, the Court declines to rely on the Salameh ruling on Tarsadia Defendants’ motion to dismiss. 25 3:18-cv-2290-GPC-KSC 28 1 California fraud standard on ILSA anti-fraud claim); Keanneally, 711 F. Supp. 2d at 2 1186. 3 The FAC alleges that Playground failed to disclose the rescission provisions in the 4 sales documents and misled Plaintiff about his rescission rights. Playground was the real 5 estate broker for Hard Rock acting as an agent for the Defendants. (Dkt. No. 24, FAC ¶ 6 20.) Playground developed marketing materials that threatened to take Plaintiff’s 7 $50,000 deposit if he did not close on his unit to further develop Tarsadia Defendants’ 8 scheme. (Id. ¶ 43.) Playground, as a real estate broker, is well versed in ILSA’s 9 disclosure obligations and the anti-fraud provisions of state and federal laws. (Id. ¶ 68.) 10 Tarsadia Defendants provided the standardized contract and the Public Report from the 11 DRE to Playground, their real estate broker. (Id. ¶ 94.) Around May 5, 2006, 12 Playground distributed to prospective buyers a “Perspectives and Prices” publication 13 which provided drawings of the Units and the prices. (Id. ¶ 95.) Playground, in its 14 capacity as real estate broker, had a statutory duty to disclose all facts known to it that 15 materially affects “the value or desirability of the property that are not known to, or 16 within the diligent attention and observation of, the parties” as provided in California 17 Civil Code section 2079.16. (Id. ¶ 96.) A seller has a duty to disclose to buyers any 18 material facts affecting the value or desirability of the property. (Id. ¶ 97.) According to 19 Plaintiff, Playground has to have known of this right as well, yet failed to disclose it to 20 Plaintiff, or “consciously chose to ignore the fact that Developer Defendants were 21 engaged in a scheme to ensure sales of the condos at the Hard Rock could not be 22 rescinded.” (Id. ¶ 98.) Around August 2007, Playground distributed the Closing Notices 23 that informed the purchasers that they would lose their deposits if they did not close by 24 the end of August. (Id. ¶ 101.) Playground wrongfully mislead buyers to believe they 25 would lose their deposits if they did not close. (Id. ¶ 108.) Playground distributed the 26 Closing Notice with the full knowledge and consent of Tarsadia Defendants. (Id. ¶ 102.) 27 26 3:18-cv-2290-GPC-KSC 28 1 By distributing the Closing Notice, Playground perpetuated Tarsadia Defendants’ scheme 2 and their own interest. (Id. ¶ 102.) The FAC then summarily alleges that “Defendants 3 knowingly and willingly devised and carried out a common plan, scheme or artifice to 4 defraud Plaintiff by purposefully omitting the two year right of rescission from the 5 Contract and the Public Report and instead intentionally misrepresenting in the Contract 6 that only a three-day right of rescission existed.” (Id. ¶ 107.) 7 In its prior order in Beaver, based on almost identical allegations concerning 8 knowledge, (Compare 11cv1842, Dkt. No. 21, SAC ¶¶ 63-65, 67-71, 73-74 with Dkt. No. 9 24, FAC ¶¶ 93-95; 100-105, 107-109), the Court concluded that the plaintiffs’ theory of 10 knowledge as to Playground was imputing Tarsadia Defendants’ knowledge and 11 concealment of the buyers’ right to rescind onto Playground based on California Civil 12 Code section 2332.11 (Case No. 11cv1842, Dkt. No. 34 at 6.) However, the Court 13 concluded that section 2332 only imputes the agent’s knowledge to the principal and not 14 the reverse. (Id.) Similarly, in this case, to the extent Plaintiff alleges Playground’s 15 knowledge is based on Tarsadia Defendants’ knowledge, the Court concludes that 16 Plaintiff has not sufficiently alleged Playground’s knowledge as to his rescission rights. 17 In opposition, Plaintiff contends that he has asserted additional misrepresentations 18 made by Playground that were not alleged in the Beaver case and have nothing to do with 19 rescission rights. He alleges that Defendants had Plaintiff prepare a “Tarsadia’s Optional 20 Rental Management Program FAQ” where they knowingly and materially assisted each 21 other in representing that investors were not required to participate in the RMA and that 22 the decision was voluntary but in fact that representation was false as investors were 23 24 25 26 27 “As against a principal, both principal and agent are deemed to have notice of whatever either has notice of, and ought, in good faith and the exercise of ordinary care and diligence, to communicate to the other.” Cal. Civ. Code § 2332. 27 11 3:18-cv-2290-GPC-KSC 28 1 mandated to participate in the RMA. (Dkt. No. 24, FAC ¶¶ 24, 142.) They also 2 knowingly and materially assisted each other in misrepresenting that the Hard Rock 3 guests would be placed in a consistent rotational system that would “rent all suites 4 equitably” but there was no way to live up to this representation, and this representation 5 induced Plaintiff to buy the condominium. (Id. ¶¶ 34-35, 143.) Instead, Defendants 6 rented the rooms that generated the most income and they had no system to ensure all 7 units would be rented equitably. (Id.) He also argues that Defendants knew that the 8 liquidated damages provision, which allowed them to retain the $50,000 deposit, was 9 unreasonable but they still threatened purchasers with the loss of their deposit if they did 10 11 not close. (Id. ¶¶ 74, 75 101.) First, these additional facts do not appear to be the bases of his claims under the 12 fraud or ILSA causes of action. Therefore, Plaintiff’s arguments in opposition do not bar 13 dismissal of the FAC for the fraud causes of action for lack of knowledge. To the extent 14 Plaintiff seeks to add additional allegations, he may do so in a Second Amended 15 Complaint (“SAC”). Moreover, as noted by Playground, many of these additional 16 allegations refer to “Defendants” generally without indicating which Defendant was 17 involved in which misrepresentation. If Plaintiff files a SAC, he shall indicate which 18 Defendant made each of the alleged misrepresentations and provide sufficient facts to 19 support a reasonable inference that Playground had knowledge about these 20 misrepresentations. 21 As currently plead, the FAC fails to allege facts to permit a reasonable inference 22 that Playground knew of the disclosure requirements of ILSA. See Iqbal, 556 U.S. at 23 678. Accordingly, the Court GRANTS Playground’s motion to dismiss the first and third 24 cause of action. 25 2. Federal and State Securities 26 27 28 3:18-cv-2290-GPC-KSC 28 1 Playground argues that because Plaintiff failed to plead knowledge of the alleged 2 misrepresentations or omissions, he cannot state a claim under Section 10(b) of the 3 Securities Exchange Act and under California Corporations Code sections 25401, 25501, 4 25504.1 as these provisions require scienter as an element. Plaintiff argues that scienter 5 is not required to plead a violation of sections 25401 and 25501. 6 As stated above, under § 10(b), a plaintiff must allege “(1) a material 7 misrepresentation or omission by the defendant; (2) scienter; (3) a connection between 8 the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon 9 the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Matrixx 10 Initiatives, Inc., 563 U.S. at 37-38 (internal quotation omitted). Scienter is “the 11 defendant’s intention ‘to deceive, manipulate, or defraud.’” Tellabs, Inc. v. Makor Issues 12 & Rights, Ltd., 551 U.S. 308, 313 (2007). Corporations Code section 22504.1 also 13 provides “any person who materially assists in any violation of Section . . . 25401, . . . 14 with intent to deceive or defraud, is jointly and severally liable with any other person 15 liable under this chapter for such violation.” Cal. Corp. Code § 25504.1. Section 16 25504.1 requires a showing that the defendant had an “intent to deceive or defraud.” 17 Orloff v. Allman, 819 F.2d 904, 907 (9th Cir. 1987) overruled on other grounds by 18 Hollinger v. Titan Capital Corp., 914 F.2d 1564, 1575 (9th Cir. 1990). 19 Plaintiff does not dispute that scienter must be alleged for a violation of § 10(b) 20 and section 25504.1. Therefore, the Court GRANTS Playground’s motion to dismiss for 21 failing to sufficiently allege scienter on these claims. 22 Corporations Code section 25401 prohibits the sale of securities “by means of any 23 written or oral communication which includes an untrue statement of a material fact or 24 omits to state a material fact necessary to make the statements made, in the light of the 25 circumstances under which the statements were made, not misleading.” Cal. Corp. Code 26 § 25401. Corporations Code section 25501 creates a private cause of action for violation 27 29 3:18-cv-2290-GPC-KSC 28 1 of section 25401, with exceptions for instances where the plaintiff knew about the facts 2 of the untruth or the defendant exercised reasonable care and did not know of the untruth 3 or omission. Cal. Corp. Code § 25501. 4 In opposition, Plaintiff argues that scienter is not required to assert a violation of 5 California securities law under sections 25401 and 25501. Playground does not address 6 this argument in its reply. The Court agrees with Plaintiff that scienter is not an element 7 of sections 25401 and 25501. See I-Enter. Co. LLC v. Draper Fisher Jurvetson Mgmt. 8 Co. V, LLC, No. C-03-1561-MMC, 2005 WL 3590984, at *27 (N.D. Cal. Dec. 30, 2005) 9 (violations of sections 25401 and 25501 does not require proof of intent); BayStar Capital 10 Mgmt. LLC v. Core Pacific Yamaichi Int’l (H.K.) Ltd., CV 05–1091 ABC (CWx), 2007 11 WL 9711373, at *4 (C.D. Cal. Apr. 16, 2007) (reliance and scienter need not be shown 12 for section 25501). Thus, the Court DENIES Playground’s motion to dismiss the state 13 securities claims under sections 25401 and 25501 for failing to allege scienter. 14 Next, Playground contends that the federal and state securities law claims also fail 15 because the transactions do not constitute a security as the Ninth Circuit held in Salameh 16 v. Tarsadia Hotel, 726 F.3d 1124, 1132 (9th Cir. 2013) and any claims would be barred 17 by the relevant statutes of repose as the Court held in its order granting the defendants’ 18 motion to dismiss the state and federal securities claims filed on March 22, 2011. (Case 19 No. 09cv2739, Dkt. No. 158 at 13-15.) However, while the SAC in Salameh may be 20 similar to the FAC in this case, they are not identical and Playground fails to point to the 21 deficiencies in the FAC as required on a motion to dismiss. 22 Section 3(a)(10) of the Securities Exchange Act defines “security” as inter alia, a 23 “note, stock, treasury stock, bond, [or] investment contract.” 15 U.S.C. § 78c(a)(10). 24 Congress defined “security” to be “sufficiently broad to encompass virtually any 25 instrument that might be sold as an investment” but did not “intend to provide a broad 26 federal remedy for all fraud.” Reves v. Ernst & Young, 494 U.S. 45, 61 (1990) (internal 27 30 3:18-cv-2290-GPC-KSC 28 1 quotations omitted). Courts should look not to the form but to the “economic realities of 2 the transaction.” United Hous. Fdn. v. Forman, 421 U.S. 837, 838 (1975). 3 In Howey, the Court defined whether an investment contract is a security under the 4 Securities Act and held that an investment contract is “a contract, transaction or scheme 5 whereby a person invests his money in a common enterprise and is led to expect profits 6 solely from the efforts of the promoter or a third party.” SEC v. W.J. Howey Co., 328 7 U.S. 293, 298-99 (1946). Howey’s three-part test requires “(1) an investment of money 8 (2) in a common enterprise (3) with an expectation of profits produced by the efforts of 9 others.” SEC v. Rubera, 350 F.3d 1084, 1090 (9th Cir. 2003) (internal quotation marks 10 11 omitted). In Salameh, the Ninth Circuit, relying on its en banc ruling in Hocking v. Dubois, 12 885 F.2d 885 F.2d 1447 (9th Cir. 1989), held that the sale of the condos at the Hard Rock 13 and the later RMA together did not constitute the sale of a security because the plaintiffs 14 had not alleged that the Purchase Contracts and the RMAs were offered as a package. Id. 15 at 1131. The Ninth Circuit noted that “Plaintiffs allege no facts showing that the 16 Purchase Contracts and the Rental Management Agreements were offered as a package. 17 They do not allege that the Rental Management Agreement was promoted at the time of 18 the sale. They do not allege that Defendants told them that the Rental Management 19 Agreement would be forthcoming. They do not allege that they were told that the Rental 20 Management Agreement would result in investment-like profits.” Id. They also did not 21 allege when the respective agreements were signed. Id. Instead, the defendants informed 22 the court that the RMAs were executed 8-15 months after the Purchase Contract. Id. 23 Taking the Ninth Circuit ruling into consideration and attempting to cure the 24 deficiencies noted in the opinion, Plaintiff summarily alleges that the Purchase Contract, 25 26 27 31 3:18-cv-2290-GPC-KSC 28 1 OA12 and RMA were offered as a single package even though they were offered as 2 independent documents. (Dkt. No. 24, FAC ¶ 25.) He claims that Defendants 3 intentionally separated the OA and the RMA from the Purchase Contract in order to 4 avoid the securities laws. (Id.) All three documents induced Plaintiff into buying the 5 condominium. (Id.) Even though he read the disclaimer that the purchase of the Unit 6 was not an investment, the economic and practical realities established the transaction 7 was an investment and constituted a sale of a security. (Id. ¶ 22.) The FAC also asserts 8 that whether the investors made money depended on the managerial efforts of 9 Defendants. (Id. ¶ 32.) Despite Plaintiff’s attempt to cure the deficiencies noted by the 10 Ninth Circuit, the alleged facts are mere “threadbare recitals” of the elements of a 11 “security” under Howey and Hocking, but no additional facts are presented to create a 12 reasonable inference that the Purchase Contract, the OA, and the RMA were securities. 13 (See Dkt. No. 24, FAC ¶¶ 21-25.) In addition, Plaintiff does not allege when he signed 14 the RMA or OA. Plaintiff’s facts are insufficient to allege a security. Accordingly, the 15 Court GRANTS Playground’s motion to dismiss the federal and state securities claims. 16 3. 17 The FAC alleges a negligence per se claim based on violations of the ILSA 18 disclosure provisions pursuant to § 1703(d)(2) and § 1703(a)(1)(C). (Dkt. No. 24, FAC 19 ¶¶ 46, 48, 56 69, 72, 73, 74, 147-153). These violations must be brought “within three 20 years after the signing of the contract. . . .” 15 U.S.C. §§ 1711(a)(1) & (b). Negligence 21 Playground argues that because the negligence per se claim arises from the 22 disclosure provisions of ILSA, they are time barred as the statute of limitations began to 23 run on May 18, 2006 and expired on May 18, 2009. In response, Plaintiff does not 24 appear to dispute Playground’s argument but instead contends that his negligence per se 25 26 27 12 The Ninth Circuit opinion did not address the OA as part of its ruling. 32 3:18-cv-2290-GPC-KSC 28 1 claims are not only based on ILSA’s disclosure provisions but also Defendants’ negligent 2 misrepresentation that the RMA was not a mandatory condition of ownership, knowledge 3 that rooms would not be placed into an equitable rotational system, and understanding 4 that the liquidated damages provision was unreasonable. However, because Plaintiff 5 does not dispute Playground’s argument and the additional allegations he claims to 6 support his negligence cause of action are not specifically asserted in the FAC on the 7 negligence cause of action, the Court GRANTS Playground’s motion to dismiss with 8 leave to amend. 9 4. UCL 10 The UCL “unlawful prong” claim is based on violations of ILSA, the state 11 securities laws, and Rule 10b of the 1934 Securities Exchange Act. (Dkt. No. 24, FAC ¶ 12 156.) The FAC also alleges claims under the “unfair” and “fraudulent” prongs of the 13 UCL. (Id. ¶¶ 155, 158-59.) 14 The unlawful prong of the UCL incorporates “violations of other laws and treats 15 them as unlawful practices.” Cel-Tech Comms., Inc. v. Los Angeles Cellular Tel. Co., 20 16 Cal. 4th 163, 180 (1999). This prong creates an “independent action when a business 17 practice violates some other law.” Walker v. Countrywide Home Loans, Inc., 98 Cal. 18 App. 4th 1158, 1169 (2002). A UCL claim “stands or falls depending on the fate of 19 antecedent substantive causes of action.” Krantz v. BT Visual Images, 89 Cal. App. 4th 20 164, 178 (2001). 21 Playground argues that the unlawful prong based on violations of ILSA and federal 22 and state securities laws fail to sufficiently allege its knowledge of the alleged omission 23 in the Purchase Contract. Because the Court dismissed the ILSA and securities claims, 24 the UCL cause of action based on these allegations necessarily fails, and the Court 25 GRANTS Playground’s motion to dismiss. See id. 26 27 33 3:18-cv-2290-GPC-KSC 28 1 2 Playground also argues that the unfair prong should also be dismissed because Plaintiff fails to allege facts to support “unfair” conduct. Plaintiff opposes. A business act or practice is “unfair” when the conduct “threatens an incipient 3 4 violation of an antitrust law, or violates the policy or spirit of one of those laws because 5 its effects are comparable to or the same as a violation of the law, or otherwise 6 significantly threatens or harms competition.” Cel-Tech Comms., Inc. v. Los Angeles 7 Cellular Tel. Co., 20 Cal. 4th 163, 187 & n. 12 (1999) (applying “unfair” test to anti- 8 competitive practices and not consumer actions). As the Court explained in the Beaver 9 case, post-Cel-Tech, California appellate courts are divided as to which test of “unfair” 10 applies to consumer cases. 29 F. Supp. 3d at 1314; see also Hodsdon v. Mars, Inc., 891 11 F.3d 857, 866 (9th Cir. 2018) (recent case noting the term “unfair” is still in flux in 12 California courts). In Lozano v. AT&T Wireless Servs., Inc., 504 F.3d 718, 736 (9th Cir. 13 2007), the Ninth Circuit held that two tests, “the Cel–Tech test where the unfairness is 14 tied to a “legislatively declared” policy, or the former balancing test under South Bay,13 15 which involves balancing the harm to the consumer against the utility of the defendant’s 16 practices, would apply to consumer cases. Id. at 1315. In order to be a “legislatively 17 declared” policy, there must be a “close nexus between the challenged act and the 18 legislative policy.” Hodsdon, 891 F.3d at 866 (citing Cel-Tech, 20 Cal. 4th at 187) 19 (holding that for an act to be “unfair,” it must “threaten[ ]” a violation of law or “violate[ 20 ] the policy or spirit of one of those laws because its effects are comparable to or the 21 same as a violation of the law”). 22 In Beaver, the plaintiffs applied the tethering test arguing that its unfair claim is 23 tied to Playground’s violation of its statutory duty as a real estate agent to “disclose all 24 facts known to the [it] materially affecting the value or desirability of the property that 25 26 27 13 South Bay Chevrolet v. Gen. Motors Acceptance Corp., 72 Cal. App. 4th 861 (1999). 34 3:18-cv-2290-GPC-KSC 28 1 are not known to, or within the diligent attention and observation of, the parties pursuant 2 to Cal. Civ. Code § 2079.16.” The Court granted Playground’s motion for summary 3 judgment concluding that the plaintiffs “do not allege or show that the failure to disclose 4 or affirmative misrepresentation is predicated on a public policy and that the conduct 5 threatened to violate the letter, policy, or spirit of the antitrust laws or that it harms 6 competition. . . . Plaintiffs only argue that the unfair practices are tethered to the 7 disclosure policies, not public policy.” Id. at 1315. “Moreover, Plaintiffs have not 8 alleged or demonstrated that such acts are against public policy, immoral, unethical, 9 oppressive, or unscrupulous.” Id. Even though the Court’s order was on summary 10 judgment, it noted that the plaintiffs did not even allege that the alleged conduct was 11 predicated on a public policy. 12 Similarly, in this case, Plaintiff argues that the UCL claim is tethered to California 13 Civil Code sections 2079.16(b) & (c) which requires Playground to act in an honest, fair 14 dealing and good faith manner as well as disclosing all facts known to the agent that 15 materially affects the value or desirability of the property under Civil Code section 16 2079.16. (Dkt. No. 32 at 11.) The FAC claims that Defendants concealed information 17 Plaintiff was entitled to receive prior to closing, including his two year right to rescind 18 and these actions were unfair because they offended established anti-fraud statutes and 19 the harm Plaintiff suffered greatly outweighs any benefits associated with those practices. 20 (Dkt. No. 24, FAC ¶ 158.) California has a legislative policy requiring that real estate 21 brokers disclose all facts materially affecting the desirability or value of the property that 22 are not known to, or within diligent attention and observation of the parties. (Id. ¶ 159.) 23 As in Beaver, Plaintiff, in this case, has not sufficiently alleged that the failure to 24 disclose or misrepresentations are predicated on “legislatively declared” policy 25 mandating a “close nexus between the challenged act and the legislative policy.” See 26 Hodsdon, 891 F.3d at 866. Accordingly, because Plaintiff has failed to allege facts to 27 35 3:18-cv-2290-GPC-KSC 28 1 support a claim under the “unfair” prong, the Court GRANTS Playground’s motion to 2 dismiss. 3 Finally, Playground contends that the FAC fails to plead a fraudulent or deceptive 4 act because Plaintiff has not alleged Playground had a duty to disclose those undisclosed 5 material facts. To state a claim under the fraudulent prong of the UCL, “it is necessary 6 only to show that members of the public are likely to be deceived” by the business 7 practice. Prakashpalan v. Engstrom, Lipscomb and Lack, 223 Cal. App. 4th 1105, 1134 8 (2014). But “a failure to disclose a fact one has no affirmative duty to disclose is [not] 9 ‘likely to deceive’ anyone within the meaning of the UCL.” Daugherty v. American 10 Honda Motor Co., Inc., 144 Cal. App. 4th 824, 838 (2007). The Court agrees. Plaintiff relies on the real estate broker’s duties under Civil 11 12 Code section 2079.16 (“A Seller’s agent . . .has the following affirmative obligations: . . . 13 (c) A duty to disclose all facts known to the agent materially affecting the value or 14 desirability of the property that are not known to, or within the diligent attention and 15 observation of, the parties.”) which requires knowledge of the alleged failure to disclose. 16 Here, Plaintiff must allege that Playground knew about the ILSA disclosure provisions 17 which the Court concluded above he has not sufficiently alleged. Accordingly, the Court 18 GRANTS Playground’s motion to dismiss the fraudulent prong of the UCL. 19 E. 20 Leave to Amend Plaintiff seeks leave to amend to correct any deficiencies in the FAC. Tarsadia 21 Defendants and Playground ask the Court to grant their motions to dismiss with prejudice 22 without leave to amend as Plaintiff has had a couple of attempts to file a complaint 23 without success. The Ninth Circuit has directed that “a district court should grant the 24 plaintiff leave to amend if the complaint can possibly be cured by additional factual 25 allegations.” Zixiang Li v. Kerry, 710 F.3d 995, 999 (9th Cir. 2013). Here, as a pro per 26 Plaintiff, the Court liberally construes the FAC, and concludes that leave to amend would 27 36 3:18-cv-2290-GPC-KSC 28 1 not be futile. See Schreiber Distrib. Co., 806 F.2d at 1401. The Court GRANTS Plaintiff 2 leave to file a second amended complaint. 3 Conclusion 4 Based on the above, the Court GRANTS in part and DENIES in part Tarsadia 5 Defendants’ motion to dismiss and GRANTS Playground’s motion to dismiss. Plaintiff 6 is granted leave to file a second amended complaint and shall file it on or before July 8, 7 2019. 8 9 IT IS SO ORDERED. Dated: June 11, 2019 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 37 3:18-cv-2290-GPC-KSC 28

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