IRVINE, CA-The issue of whether a fractured-ownership purchase constitutes a security or a real estate transaction has been further settled by a 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, tells GlobeSt.com 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.

“This is a significant victory for our client, our team and the other condo-hotel developers that have been wrongly targeted by disgruntled purchases' claims following the financial meltdown of 2008,” says Kranz, who, along with his team including Jonathan Kitchen, Ali Hamidi and Lynn Galuppo, represented the developer and operator of the hotel.

This is the first Ninth Circuit published opinion to address squarely whether the sale of a condominium-hotel unit constitutes the sale of a security, the firm reports. Prior to this decision, condo-hotel developers relied upon SEC guidelines to navigate through this unsettled area of law. The Ninth Circuit found it important that there was a significant time gap between the signing of the purchase and sale agreement and the rental management agreement.

The putative class action was first filed in December 2009 in the US Southern District of San Diego when purchasers of the Hard Rock Hotel condo-hotel units because dissatisfied following the dramatic downturn of the economy. The plaintiffs argued that the sale of the condo-hotel units violated federal and state securities laws, and that they were fraudulently induced to enter into the purchase and sale agreements. The plaintiffs failed after several opportunities given to them by the federal district court to allege adequately that the sale constituted the sale of a security.

Kranz tells GlobeSt.com that beyond the narrow view of the Ninth Circuit making a ruling about the development and sale of condo hotels, “the opinion can be looked at as a breaking mechanism on the many lawsuits filed in recent years trying to invoke security laws to attack otherwise legitimate business ventures. There's an application to fractional sales which would include timeshares and joint ownership kinds of devices that you see all over the US.”

He adds that the ruling sets a very strong precedent in the Western states since the Ninth Circuit is a fairly persuasive circuit to other Western circuits. “It has had a significant effect. In fact, the lower-court opinion has already been cited by other cases nationwide.”

Many types of ownership that go beyond single ownership are being challenged as securities, similar to joint or co-tenancy situations. “But I think the real message behind this ruling is that the courts are looking with some skepticism on the many lawsuits that have been filed claiming securities, which are really real estate,” says Kranz. “If it's a [security] investment, there's a control over the up and down. This is clearly real estate, and 2008 tells us that real estate does go up and down very rapidly, and the developer has no control over that.”

As GlobeSt.com recently reported, David Wensley, a partner with Cox Castle & Nicholson, moderated a panel at RealShare Orange County here last week. Wensley said that the Irvine Co. is incorporating a lot of collaborative space in its newly built offices, “and if they're doing it, it won't be long for us dinosaur lawyers to be doing it, too.”