Searching for a legal argument port in a storm, the plaintiffs are left stranded as a condo sale is deemed not to be a security.
We have seen the issue come up with investments as citrus groves, payphones (remember those?), country club memberships, timeshares, viatical settlements and fractional ownership in airplanes.
When is something other than a share of stock or a bond a security?
Well, the 9th Circuit just told us in Salameh v. Tarsadia Hotel when a condo/hotel room is not a security.
The Hard Rock Hotel San Diego is a twelve-story, mixed use development with commercial space and 420 condo units. The public was offered the opportunity to buy condos through what would be considered general solicitation in the securities world. They could use the condos for 28 days per year. The purchasers later signed a management agreement for the units months later, which was apparently required by the purchase agreement.
Something must have gone wrong, although it is not stated in the opinion. The plaintiff-purchasers sued the hotel operator, developer, landowner, manager and real estate broker for various securities fraud related complaints. They claimed that the sale of the condos and the later management agreements combined to form a security, the sale of which violated various parts of federal and California securities law.
The court decided that there was no security involved. The court will find a security if there is money invested in a common enterprise with profits anticipated by virtue of others’ work, but there was no such arrangement here. This is what we in the biz refer to as the Howey test*.
Contrasting a prior case** where condos were considered securities, the court stated that the plaintiffs allege no facts showing that:
- purchase agreements and management agreements were offered as a package;
- the management agreement was promoted at the time of sale; or
- that the management agreement would result in investment profits.
In addition, it was stated in court documents that the agreements were executed eight to fifteen months apart. The court had a difficult time accepting that signing two agreements months apart with separate entities had the economic reality of a single transaction or that the only viable use of the condos was as investment property, as opposed to short-term vacation homes.
As a result, there was no sale of security and, thus, no claims for relief under federal or state securities law.