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California Business Defends Investor Lawsuit
Dismissal of a class investor lawsuit in San Diego last month was a blow for investors who were seeking to regain losses after investing in a downtown high-rise hotel.
According to the complaint filed in December 2009, Tarsadia Hotels did not file all of the necessary paperwork with the proper regulatory agencies when it offered investors a chance to invest in the Hard Rock Hotel.
Tarsadia Hotels is a management company for a number of well-known hotels throughout California. In 2007, it opened the Hard Rock Hotel on 5th Avenue in San Diego. The lawsuit alleges that the investment offering was a security, but it was not properly filed with the U.S. Securities and Exchange Commission (SEC) or California Department of Corporations because Tarsadia did not want the deal to be analyzed.
Investors purchased condominium-style units, from studios starting at $350,000 all the way up to $2 million suites, with the promise that revenue from the rooms would cover their monthly mortgage payments. Buyers quickly found that their rooms were not being rented enough, and as a result, were not making enough to cover their monthly payments; several have since fallen into foreclosure.
The investors are now suing under securities law, claiming that what they were sold was a security (one of the remedies provided under the Securities Act is the ability to sue for damages). The buyers' suit claims that Tarsadia's failure to file was a scheme to avoid the investment from falling under the Securities Act.
A federal judge, in dismissing the claim, said that investors failed to prove that the investment was a securities purchase, nor did they prove that there was an expectation of profits. The investors plan to appeal. Tarsadia will continue to be wrapped up in litigation, which may have been avoidable depending on how well the original agreement was written.
Protecting California Businesses From Litigating Investors
By making sure that commercial property or investment agreements leave no room for interpretation-especially in regards to whether an investment is a security, businesses can protect themselves from potential litigation.
Business owners that do have not retained in-house corporate counsel can benefit from keeping close contact with an outside attorney. Many law firms are willing to serve as "corporate counsel" for small businesses; by keeping an attorney or law firm on retainer, businesses can run day-to-day operations and leave investment contracts and compliance concerns for federal and state regulations to their lawyers.
If you are a business owner and would like advice on contractual, investment or any other regulatory matters, talk to an experienced attorney.