Kranz: u201cFrom a securities standpoint, it's a fairly important decision.u201d

IRVINE, CA—The US Supreme Court has denied a certiorari request by plaintiffs Salameh, et al. regarding the Ninth Circuit court’s landmark decision that the sale of condominium/hotel units at the Hard Rock Hotel in San Diego is not the sale of a security. Effectively, the High Court has upheld the Ninth Circuit court’s ruling, which also lays out a fairly tight set of rules for safe harbor when selling fractionalized interests in a real estate asset.

As reported in August 2013, the issue of whether a fractured-ownership purchase constitutes a security or a real estate transaction was further settled by the recent Ninth Circuit landmark decision, according to Frederick “Rick” Kranz, the prevailing litigator in the case at hand. Kranz, an attorney with locally based Cox Castle & Nicholson, told that the Ninth Circuit “has finally laid down a very clear safe harbor for developing and selling condominium hotels.”

The ruling involved the Circuit upholding a lower-court’s dismissal of plaintiffs’ common-law fraud claims in Salameh, et al. v. Tarsadia Hotels, et al. The Circuit found that the plaintiffs did not allege sufficient facts that would demonstrate that the condominium-hotel units at the Hard Rock Hotel in San Diego constituted a security.

“The plaintiffs asked the Supreme Court to review the case, but they basically said they were not going to hear it and let the Ninth Circuit decision in the underlying case stand,” Kranz now tells “Anybody who sells fractional interests needs to be familiar with the decision. If you do not have a pooling arrangement and there is a distinct time difference between when the product is offered and when a management contract is signed, it’s likely not a security. Developers need to be careful not to use a pooling arrangement and to be careful when using management agreements.”

According to, a pooling agreement—also termed as a voting agreement, shareholder voting agreement or shareholder-control agreement—is a contractual arrangement by which corporate shareholders agree that their shares will be voted as a unit. Therefore, a voting trust is created between a group of stockholders and the trustee to whom they transfer their voting rights. In a pooling agreement, individuals who own corporate stock that carries voting rights transfer the shares to another party for voting needs. This is done to control the corporate affairs. Such pooling agreements may also provide the method by which stockholders can direct how the stock is to be voted.

Kranz says the ruling is not only applicable to hotel/condo scenarios like Hard Rock Hotel, but applies to all manner of fractionalized interests including time-share developers, joint and co-tenancy arrangements. “It’s a pretty broad decision and applies to anyone who does securities litigation. At its core, the case tells us that there are specific pleading requirements to survive motions to dismiss. From a securities standpoint, it’s a fairly important decision as well.”

The decision is the end of the road for the Salameh, et al. case, and Kranz says it is a warning bell for the commercial real estate industry to analyze fractionalized interests careful and “watch your step. It can be a security if you don’t watch it carefully.”