Stein And Starwood: Two Important New Chapters In The Great American Real Estate Crash Story

September and October of 2009 saw two momentous new chapters in the ongoing saga of the great American real estate crash: a new titan in South Florida real estate development, and a major new opinion on the Interstate Land Sales Full Disclosure Act from the Eleventh Circuit Court of Appeals.

In September, the FDIC seized Corus Bank of Chicago.  Corus was the poster child for reckless construction lending during the boom days, having extended loans to dozens of new developments across the country, including many in South Florida.  Soon after the FDIC took over, mega real estate investment firm Starwood Capital Group successfully bid on the bank’s assets, winding up with a 40% equity stake along with a $1 billion line of credit to complete any unfinished construction on the Corus-financed developments.  The Starwood deal finally removes the dark “Corus cloud” that had been hanging over numerous developments, some of which were in construction limbo owing to Corus’s inability to supply the final round of financing.  And as the Miami Herald reports, Starwood now joins The Related Group as one of the top two players  in the South Florida condominium market.

Meanwhile, the Eleventh Circuit Court of Appeals issued its own view of the nationwide real estate bust in an important decision construing the federal Interstate Land Sales Full Disclosure Act (ILSA).  As I have been charting on this blog ever since the early days of the crash, ILSA is one of the most widely invoked laws in the onslaught of litigation arising out of the market downturn.  A key and hotly contested issue under ILSA is the scope of the statute’s “two-year exemption“.  In a nutshell, if a developer makes an unconditional promise to build a project within two years, then it gets an exemption from ILSA’s disclosure and registration requirements.  But claiming an exemption is treacherous: where the developer claims an exemption that it doesn’t deserve, then all the buyers of its real estate receive an automatic right to rescind the purchase contract and get their money back.  Many, many buyers who put down hefty deposits on properties during the heyday of the boom challenged developers which claimed the two-year exemption, seeking the return of their deposits through lawsuits.  Courts have come to radically different conclusions on how this exemption should be interpreted and applied.

In Stein v. Paradigm Mirasol, LLC, __ F.3d __, 2009 WL 3110819 (11th Cir. Sept. 30, 2009), the Eleventh Circuit has effectively put the kibosh on this type of ILSA lawsuit, at least in federal court.  Authored by Judge Edward Carnes, the opinion, which reversed a Middle District of Florida decision granting rescission to two buyers of a $895,000 Fort Myers condo, starts off with a general musing on market swings, noting that “All bubbles eventually burst” and “The bigger the bubble, the bigger the pop.  The bigger pop, the bigger the losses.  And the bigger the losses, the more likely litigation will ensue.”

From that somewhat tautological preface, the 18-page opinion dives into an extended analysis of ILSA and, specifically, the nature and scope of the two-year exemption.  Ultimately, Stein concludes that developers should be afforded a generous amount of wiggle room to deliver a project beyond the two-year deadline — even if the developer has deliberately chosen to rely on the two-year exemption in avoiding the statute’s disclosure and registration requirements.  As long as the purchase contract excuses “reasonable delays caused by events beyond the seller’s control,” the developer is free to ignore the only federal statute in existence that specifically regulates the offering and sale of real estate to the general public.  And the buyer need not be afforded the full panoply of legal and equitable remedies to force the developer to comply with the construction obligation.  To sum it up, in applying a markedly developer-friendly standard, Stein makes it very hard to find an example of a real estate contract that invokes the two-year exemption improperly.

While the holding of Stein may be stated simply, the actual ramifications are not so straightforward.  The court makes no bones about the fact that its interpretation of ILSA is in direct conflict with the interpretation of the Florida Supreme Court, as well as the Department of Housing and Urban Development (HUD), the federal agency charged with administering the statute.  Notably, in Samara Development Corp. v. Marlow, 556 So. 2d 1097 (Fla. 1990), the Florida Supreme Court set forth a diametrically opposed view of ILSA, adopting a strict construction of the exemption consistent with its consumer protection purpose. In fact, Stein may be seen to raise more questions than it answers.

For one, while ILSA is a federal law, the statute explicitly provides for jurisdiction in both state and federal courts.  And, as Stein itself acknowledges, the two-year exemption incorporates state law as the ultimate standard governing the two-year exemption and its application.  The unique nesting of state law within a federal statute can be difficult to grasp, and Stein only exacerbates this confusion.  In reaching a holding that it admits to be irreconcilable with the Florida Supreme Court’s view, the Eleventh Circuit has created an unbridgeable gap.  While Stein will no doubt be binding precedent upon federal district courts within Florida, Florida state courts will still look (as they have always done) to the Florida Supreme Court’s  Samara opinion in deciding cases.  The end result will be a shift in ILSA litigation under the two-year exemption from federal court to state court, as Florida real estate buyers will be best advised to file cases in state court, where the more favorable Samara standard will be applied.  Not only that, but those transactional attorneys charged with drafting Florida real estate purchase contracts, going forward, will be required to worry about two conflicting legal standards governing the two-year exemption.

If the Eleventh Circuit intended Stein to fix a cloudy area of the law, this is hardly as clear an outcome as one could wish for, although these kinds of things do happen from time to time in the American legal system, with its distinct state and federal courts.

More fundamentally, Stein is based on the questionable notion that allowing a developer lots of wiggle room to miss a self-imposed two-year completion deadline will do nothing to threaten the statute’s purpose of protecting consumers and preventing fraud.  The proposition is set forth without any consideration of why Congress thought to include a strictly worded two-year exemption in the first place.  In fact, those lawyers who have done a lot of real estate litigation, especially in Florida, know that indefinitely stalled projects — where substantial buyers’ deposits have been taken but construction progress is slow or non-existent — can be a big problem, and holding developers accountable in such situations can be difficult or even impossible without the powerful remedies afforded under ILSA.  Allowing such a generous loophole severely undercuts the ability of the statute to do its job as Congress intended.

Shoring up ILSA may not be on Congress’s list of priorities at the moment. However, to the extent that ILSA deals with the “rubber hitting the road” in connection with consumer real estate transactions — and to the extent that such transactions were at the root of one of the worst economic crises of all time — the statute may be due for an overhaul. Where courts have declined to apply the statute to maximize consumer protection, as well as where the statute’s meaning is hard to understand, new legislation can fill in the gaps. Until then, we can likely expect the next round of ILSA litigation to follow the established pattern of confused and conflicting decisions.

By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School. His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation, as well as pursuing the rights and remedies of consumers and investors. A significant portion of Mr. Beck’s practice is devoted to issues arising under purchase contracts for real estate, including condominiums, condo-hotels, single-family homes, and commercial property. Mr. Beck is a member of the Florida and California Bars, and litigates in other U.S. jurisdictions in conjunction with qualified local counsel. He can be reached at 305-789-0072 or jared@beckandlee.com

Navigating The ILSA Minefield: How Have Courts Applied The Interstate Land Sales Full Disclosure Act In An Era Of Economic Crisis?

Back in October 2007 — when the Florida real estate market had just started its precipitous decline, but before the onset of the global credit crunch — I asked whether the Interstate Land Sales Full Disclosure Act (ILSA) was a “land mine ready to explode” for developers. Now that thousands of ILSA claims filed by real estate purchasers who bought before the crash have had a chance to filter through the judicial system, we can start to assess how the statute has been applied, as well as the import for future regulation of real estate transactions in the United States.

One key observation, at least in Florida, is that the law’s enforcement can vary substantially depending on where the lawsuit is filed.  To illustrate, consider the numerous lawsuits filed in the past several years challenging the developer’s entitlement to what is known as the “two year” or “improved lot exemption.”  As I wrote back in 2007, this exemption was a popular way during the boom for developers to avoid ILSA’s disclosure and registration requirements.  No matter how large the building or subdivision, the law affords developers an exemption if they contractually commit to finishing the project within two years from the date the buyer signs up.

The recently published opinions from Florida federal courts show a marked division among judges concerning how to interpret and apply this particular exemption.  Interestingly, the bulk of opinions from the Middle District of Florida (which covers most of central and west Florida, including Orlando and Tampa) prefers a strict construction of the exemption favoring buyers, whereas the Southern District of Florida (with geographical coverage of Miami, Fort Lauderdale, and West Palm Beach) tends to read the exemption in a manner more forgiving to developers.

While ILSA is a federal statute, it specifically allows the plaintiff a choice of forum between federal and state court.  This means that state courts are also in the business of interpreting and applying the statute, and Florida state courts have certainly seen their fair share of ILSA cases along with their federal brethren.   The two most important recent Florida state appellate decisions, both from 2009, are Mailloux v. Briella Townhomes, LLC, 3 So. 3d 394 (Fla. 4th DCA 2009) and Plaza Court, L.P. v. Baker-Chaput, __ So. 3d __, 2009 WL 1809921 (Fla. 5th DCA 2009).  Taken together, these two decisions apply a strict “impossibility of performance” standard to the improved lot exemption, one that is unfavorable to developers and protective of buyers.  The Plaza Court opinion even went out of its way to distinguish part of its ILSA analysis from the conclusions reached several weeks earlier by an Alabama federal court, chiding the Alabama court for “hold[ing] the developer harmless” for violations of the statute.  My friend Tim O’Neill has a detailed look at the Plaza Court case on his blog.

What explains the difference in interpretation of ILSA from court to court and judge to judge?  There are surely multiple factors at play. Generally speaking, federal courts tend to be less protective of consumer and investor rights than state courts — a trend which has been ongoing since the 1980’s.  This could explain some of the developer-friendly ILSA decisions which have issued in recent months from the federal bench.  But Florida state courts also have their own unique jurisprudence to rely upon, including an important 1990 opinion called Samara Development Corp. v. Marlow, 556 So. 2d 1097 (Fla. 1990).  In Samara, the Florida Supreme Court famously announced that a court deciding whether a developer should be afforded the improved lot exemption must “ensure that the ‘obligation’ to complete construction is not illusory.”

The impossibility of performance standard applied in the most recent Florida state appellate opinions, Mailloux and Plaza Court, fits within the Florida Supreme Court’s mandate to rigorously enforce ILSA’s protections.  The fact that there are also a large number of federal opinions demonstrating visible disagreement concerning how to apply the same statute shows not only that ILSA is a difficult law to understand and apply, but that many developers tried to take advantage of the improved lot exemption in attempting to avoiding the registration and disclosure requirements.  Perhaps Congress will take note and close the loophole in time for the next real estate boom.  After all, the latest economic crisis has taught us that minimizing regulation can have disastrous consequences down the road.

By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School. His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation, as well as pursuing the rights and remedies of consumers and investors. A significant portion of Mr. Beck’s practice is devoted to issues arising under purchase contracts for real estate, including condominiums, condo-hotels, single-family homes, and commercial property. Mr. Beck is a member of the Florida and California Bars, and litigates in other U.S. jurisdictions in conjunction with qualified local counsel. He can be reached at 305-789-0072 or jared@beckandlee.com

The Trump Facade Is Cracking (Again); With It, The Licensed Condo-Hotel Model

Donald Trump and his businesses have had their share of financial problems over the years, typically the result of being over-leveraged at the wrong time. Now, the vaunted Trump name faces a new type of tarnishment: the kind that comes from branding a new condo-hotel as a “Trump” property, and then pulling off the “Trump” once the the going gets tough.  Left in the lurch are those who bought units in the preconstruction phase.

This may be the sad fate of the “Trump” International Hotel & Tower in Fort Lauderdale.  As reported in today’s South Florida Sun-Sentinel, buyers there just learned that the yet-to-open hotel — towards which they paid substantial deposits several years ago — may no longer carry the Trump name, owing to a possible cancellation of the licensing agreement by one of Trump’s entities.  Not only that, but the hotel may not even open if less than half of the units actually close (certainly a tough goal to achieve in this economy).  All of this worsens an already difficult situation at the project, whose principal lender — the notoriously over-extended Chicago-based Corus Bank — faces potential FDIC receivership if it doesn’t raise $390 million by mid-June.

The Trump bait-and-switch follows closely on the heels of the Trump Baja fiasco. There, a planned “Trump” resort in Mexico was cancelled without ever breaking ground, and some $32 million in deposits paid by buyers of units vanished into a black hole.  Trump’s response was neither remorse nor any attempt to make the buyers whole.  Instead, he vehemently distanced himself from the project and sued another company associated with developing the resort!

The recent spate of Trump troubles illustrates a fundamental problem with the condo-hotel model, which I addressed over a year ago on this blog.  While developing a new hotel as a condo-hotel grants developers ready access to investment capital in the form of preconstruction deposits from buyers, developers are incentivized to structure the marketing and sale of condo-hotel units in a manner which aims to avoid the disclosure and registration requirements of federal securities law.  The end result is that the disclosures made to condo-hotel buyers are relatively minimal when contrasted, for example, to the voluminous disclosures which investors get when they buy shares in a publicly traded company.  Accordingly, buyers don’t get vital information going to the project’s future viability — information that might include, to take just one example, Donald Trump’s precise role in a new development, and the terms of any agreement to license his name on the property.

Taking the long view, Trump’s latest failures should spur legislators, regulators, and courts to take a hard look at the condo-hotel model.  Condo-hotels are primarily investment vehicles and should be treated as such.  Investments offered to the public without full disclosure are nothing short of recipes for disaster.

By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School. His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation, as well as pursuing the rights and remedies of consumers and investors. A significant portion of Mr. Beck’s practice is devoted to issues arising under purchase contracts for real estate, including condominiums, condo-hotels, single-family homes, and commercial property. Mr. Beck is a member of the Florida and California Bars, and litigates in other U.S. jurisdictions in conjunction with qualified local counsel. He can be reached at 305-789-0072 or jared@beckandlee.com

The New Wave Of ILSA Case Law: A Death Knell For Clever Lawyering?

When I began writing about the explosion of lawsuits filed in Florida in 2007 under the federal Interstate Land Sales Full Disclosure Act (ILSA), these cases were often characterized simply as “buyer’s remorse” suits. At the time, with the Florida real estate market starting its dramatic freefall, the generally accepted wisdom was that such cases were all about real estate buyers using this federal law as mere pretext for seeking to exit deals that no longer appeared profitable.

From the standpoint of April 2009, we now know that the events of 2007 were just the tip of the iceberg. Since then, a softening Florida condo and real estate market has snowballed into a nationwide real estate collapse and foreclosure crisis. And the real estate crash is not just the down-end of a typical boom-bust cycle, but truly historic in scope — the symptom of systemic economic frailties which have crippled some of the largest financial institutions in the U.S. and abroad.

The shift in perspective is now impacting the judicial application of ILSA, as recent case law shows. In Gentry v. Harborage Cottages-Stuart, LLLP, __ F. Supp. 2d __, 2009 WL 689714 (S.D. Fla. Feb. 13, 2009), the plaintiffs were buyers who bought preconstruction units in a Martin County, Florida development. They alleged various claims, including under ILSA, based on various misrepresentations about the project, among them that they would able to obtain ownership rights in a planned marina if they bought the units. While the developer responded that it was exempt from ILSA’s requirements, the Southern District of Florida carefully analyzed the function and limitations of the statute’s allowed exemptions. Noting that ILSA “is a remedial statute intended to protect consumers from unscrupulous sales practices and requires ambiguities concerning exemptions to be construed narrowly,” Judge Michael K. Moore found that the developer in this case deliberately drafted and used two different purchase agreement forms to maximize the number of exemptions that would apply to its public offering of units. Because the different purchase agreements “were used primarily to avoid compliance” with ILSA — and because the developer was unable to demonstrate a “legitimate business reason” for using two different contracts in its public offering — the court found that the developer had purposely evaded the statute, was ineligible for any exemption, and the anti-fraud provisions of ILSA applied in full.

The Gentry opinion powerfully rejects what was a common practice of developers and their attorneys during the heyday of the real estate boom in Florida and other regions. In order to minimize the time and expense needed to document and make disclosures for a given project — and to lessen the exposure to claims from buyers down the road — lawyers frequently and unabashedly drafted purchase contracts and structured public offerings with the specific intent of fitting within the greatest possible number of ILSA exemptions, thereby circumventing the statute’s requirements. Gentry itself recognizes that this practice was blessed, to some degree, by language in official guidelines issued by the Department of Housing and Urban Development (HUD) (the agency responsible for administering ILSA), but nonetheless concludes that exemptions cannot be used “in a manner that is abusive and unnecessarily diminishes consumer protection from unscrupulous sale practices.” In other words, clever lawyering must take a backseat to consumer protection.

The chief concern in Gentry is expressed in recent opinions from other courts. For example, in Murray v. Holiday Isle, LLC, 2009 WL 857406 (S.D. Ala. Mar. 25, 2009), the developer defendant asserted that its failure to advise the plaintiffs buyers of their rescission right under ILSA was immaterial, because there was no evidence that the buyers were actually damaged by the lack of disclosure. But the Southern District of Alabama vehemently dispensed with this argument, holding that being “kept in the dark” about one’s statutory right to rescind a contract is certainly sufficient grounds to claim damages: the failure to disclose deprived the buyers of their ability to investigate and ultimately exercise a rescission right which would have enabled them to recover their deposits. The emphasis on giving effect to ILSA’s disclosure function is also expressed in a recent Middle District of Florida decision called Meitis v. Park Square Enterprises, Inc., Case No. 6:08-cv-01080-ACC-GJK (M.D. Fla. Jan. 21, 2009), where the court held that the developer’s failure to give a federal Property Report to a buyer stated a claim for damages because the Property Report “would have contained important warnings about the risks associated with purchasing property.” Had the buyer been advised of these risks, he would not have signed a purchase contract and paid deposits in the first place.

Implicit in these opinions is, perhaps, a common understanding that ILSA stands as the thin reed dividing the prospective real estate buyer from the rampant speculation which both fueled the recent real estate crash and, in no small way, contributed to the present financial crisis. It bears noting that in Florida (along with numerous other jurisdictions), the Property Report mandated by ILSA is the only warning given to the buyer — before the time of sale — specifically advising of the hazards of real estate speculation. As the Code of Federal Regulations state, the Property Report must include a page on the “Risks of Buying Land” which, among other statements, notifies the prospective buyer that “The future value of any land is uncertain and dependent upon many factors. DO NOT expect all land to increase in value”; and “Resale of your lot may be difficult or impossible . . . .” See C.F.R. s. 1710.107.

With the benefit of hindsight, it is easy to say that the pre-sale warnings mandated by ILSA are hardly the stuff of meaningless boilerplate, but precisely the sort of cautionary language that was intended to protect individual consumers — and, indeed, the real estate buying public as a whole — from unwittingly assuming the risks of real estate speculation. Heeding such warnings would have gone a long way toward mitigating or even preventing market overheating. While, in fairness, not every consumer could be expected to read or carefully consider such warnings before making a real estate purchase, in order to give ILSA its intended effect, courts must strongly penalize those developers who willfully sought to end-around the disclosure requirements.

The new wave of ILSA case law being decided in the context of an acknowledged global financial crisis is driven less by notions of “buyer’s remorse” and more concerned with charting the course of consumer protection for real estate transactions going forward. That future involves strict adherence to ILSA’s requirements, with little room for clever lawyering by developers’ attorneys to escape the statute. While we can surely expect that current events will spur new laws from Congress aimed at preventing history from repeating itself, much of the key decision-making affecting the future is already happening in the courts.

By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School. His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation, as well as pursuing the rights and remedies of consumers and investors. A significant portion of Mr. Beck’s practice is devoted to issues arising under purchase contracts for real estate, including condominiums, condo-hotels, single-family homes, and commercial property. Mr. Beck is a member of the Florida and California Bars, and litigates in other U.S. jurisdictions in conjunction with qualified local counsel. He can be reached at 305-789-0072 or jared@beckandlee.com

Some Notes On This Blog, Twitter, And An Upcoming Talk On Condo Law

Readers who regularly follow this blog may have noticed a few recent design updates.  Hopefully, they are improvements.  I have also added a page which describes a bit of the history behind the blog and my law practice at Beck & Lee.

I have also opened a Twitter account, updates from which will appear on the right side of the blog under “JARED BECK’S TWITTER FEED.”  For those unfamiliar with Twitter, it is a “micro-blogging” service which permits the quick and convenient broadcasting of short ideas, comments, and news items.  Because new developments in the areas covered by the blog have been taking pace at such a fast clip these days, the Twitter feature will allow me to post items of potential interest to readers, without having to write and edit a full article.  For those who also have a Twitter account, I encourage you to follow mine, which can be accessed here.

Finally, some may be interested in an upcoming seminar on “Florida Condominium Disputes and Litigation” scheduled for March 19, 2009 in Fort Lauderdale, at which I’ve been invited to talk.  The agenda and fee schedule can be accessed here.  It looks to be a full day on some interesting and timely topics.

By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School. His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation, as well as pursuing the rights and remedies of consumers and investors. A significant portion of Mr. Beck’s practice is devoted to issues arising under purchase contracts for real estate, including condominiums, condo-hotels, single-family homes, and commercial property. Mr. Beck is a member of the Florida and California Bars, and litigates in other U.S. jurisdictions in conjunction with qualified local counsel. He can be reached at 305-789-0072 or jared@beckandlee.com

No Magic Bullet Theory Of Recovery For Jorge Perez Or Other Real Estate Speculators

Sunday’s Miami Herald offers a revealing look at Jorge Perez — Miami’s “condo king” — and the declining fortunes of his company, The Related Group,  in the midst of the economic meltdown.  Matthew Haggman’s piece zeroes in on Related’s massive and ambitious ICON Brickell project, a victim of terrible market timing, which has so far seen miniscule closing rates.  It is striking that Perez, who readily draws comparisons between present times and the Great Depression, finds himself in a position structurally similar to that of the more “average” American real estate investor who may be underwater on a mortgage or two:  that is, hoping for some mercy from his lenders.

Perez’s situation is a sure sign that these are unusually brutal times without easy solutions.  This holds especially true for legal avenues of relief.  Back in December 2007, I wrote that the swelling numbers of condo purchasers looking for legal representation in a falling market were well-advised to research attorneys carefully, and to retain a skilled litigator.  That advice may be even more relevant today.   In recent months, generally speaking, courts have taken a narrow view of one of the primary sources of protection for individual real estate buyers and investors at the time of sale, the federal Interstate Land Sales Full Disclosure Act (ILSA).   And those cases in which buyers are more inclined to get favorable rulings tend to be relatively factually intensive, such as construction delay cases, where litigation discovery tools must be effectively deployed to prove that the causes of a delayed project were legally inexcusable.  To sum it up, developers are hunkering down and battling for their survival.  Challenging them in court requires litigation acumen and a fighting spirit.  There are no “magic bullets.”

In my view, a recently filed lawsuit that has been making headlines in Seattle exemplifies the kind of “magic bullet” theories which are not getting much sympathy in court these days.  As reported in The Seattle Times, the lawsuit was filed by several buyers of condos in a luxury high-rise, including an individual making $20,000-a-year who put down approximately $75,000 in deposit money on a $1.5 million unit.  Part of what the lawsuit alleges, according to the article, is that there was deception insofar as the contract they all signed “was written in English, a language they didn’t understand.”  Unfortunately, this is not an availing legal argument.  It is hard to imagine a court — especially in the context of a high-dollar real estate transaction — excusing a contracting party from performance because the documents were written in an unfamiliar language.

By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School. His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation, as well as pursuing the rights and remedies of consumers and investors. A significant portion of Mr. Beck’s practice is devoted to issues arising under purchase contracts for real estate, including condominiums, condo-hotels, single-family homes, and commercial property. Mr. Beck is a member of the Florida and California Bars, and litigates in other U.S. jurisdictions in conjunction with qualified local counsel. He can be reached at 305-789-0072 or jared@beckandlee.com

Can ILSA Provide Troubled Mexican Trump Resort Buyers With American Justice?

While real estate “doom and gloom” news stories routinely feature cities like Miami, Las Vegas, or Fort Myers, bad and worsening market conditions are global and also afflicting places like Malaga and Dubai.  And here’s an article about a plagued pre-construction condo-hotel in Baja California, Mexico, originally marketed as the “Trump Ocean Baja Resort.”  As the San Diego Union-Tribune reports, the project has failed to break ground; Donald Trump has pulled his name out of the agreement to license his name for the hotel; and a whopping $32 million in buyers’ deposits have, shockingly, already been spent.

The story should serve as a cautionary tale for any contract holder in a development sold under a licensed  ”marquee” name: if the licensor can pull out at will, then the buyers are clearly in a vulnerable position.  But the practical issue for Trump Ocean Baja Resort buyers now left holding the bag (and perhaps of interest to buyers in similarly troubled overseas properties) is whether there are strong avenues of legal relief available, including against Trump himself.

One obvious possibility is the federal Interstate Land Sales Full Disclosure Act (ILSA), with its expansive definition of “developer.”  But can buyers in a Mexican condo-hotel seek the protection of American law in an American court, or will they be forced to litigate in Mexico under Mexican law?  The good news for these buyers is that ILSA, with its strong consumer-oriented remedies, explicitly applies to real estate offerings “in a foreign country.”  See 15 U.S.C. s. 1701(3).   Congress clearly intended the law to apply to sales of foreign real estate, such as a condo-hotel on Mexican soil.  And, as I have discussed elsewhere on this blog, ILSA was explicitly patterned after federal securities laws, which have been held to apply extraterritorially.  See AVC Nederland B.V. v. Atrium Inv. Partnership, 740 F.2d 148 (2d Cir. 1984).

The bad news is that the buyers may be subject to a forum selection clause or arbitration clause in the purchase contract, or at the very least an argument that the most logical forum to resolve any dispute is in Mexico.  Whether those roadblocks to American justice can be overcome will depend on various factors including the precise contractual language, the circumstances of the transaction at issue, and the entities/individuals suing and being sued.  One thing is virtually certain: aggrieved purchasers will (and should) try as hard as they can to have their claims heard in a U.S. court.

By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School.  His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation, as well as pursuing the rights and remedies of consumers and investors.  A significant portion of Mr. Beck’s practice is devoted to issues arising under purchase contracts for real estate, including condominiums, condo-hotels, single-family homes, and commercial property.  Mr. Beck is a member of the Florida and California Bars, and litigates in other U.S. jurisdictions in conjunction with qualified local counsel.  He can be reached at 305-789-0072 or jared@beckandlee.com

As Real Estate Market Stays Sour, Courts Punish Builders Who Stray From Construction Schedules, Relieving Buyers From Contracts

Back in September of 2008, as knowledge of the global financial crisis was both broadening and deepening, I predicted that of the myriad lawsuits being filed by real estate buyers in hopes of recovering their initial preconstruction deposits, among those with the highest probability of success were scenarios in which the developer failed to deliver the project on time.

While there is no sure way of testing this forecast, my sense is that for the most part, it is proving itself true.  Take, for example, a recent opinion from the Eleventh Circuit — the highest federal appellate court with jurisdiction over Florida, and one which has been instrumental in setting the tone for the latest wave of real estate litigation.  In Harvey v. Lake Buena Vista Resort, LLC,  2009 WL 19340 (11th Cir. Jan. 5, 2009), the Eleventh Circuit upheld  the lower court’s order refunding deposits paid toward the purchase of an Orlando condominium, finding that the developer had breached the purchase contract by failing to deliver the unit in a timely manner.  Notably, the Eleventh Circuit left the developer zero room for deviation from the promised two-year construction schedule.  While the developer obtained a certificate of occupancy just five days after the two-year deadline, the court held that this was too late as a matter of law, even though the defendant testified that the extra five days were attributable to a matter outside of its control — the unusually slow processing of a necessary road permit.

Tellingly, in reaching its conclusion, the Eleventh Circuit sidestepped another issue on which the purchasers had prevailed in the lower court — that is, whether the developer had violated the disclosure provisions of the federal Interstate Land Sales Full Disclosure Act (ILSA) in failing to both register the condo with the U.S. Department of Housing and Urban Development (HUD) and furnish a federal Property Report to the buyers.  As I have noted previously on this blog, federal courts have been noticeably reluctant to rule for buyers on claims brought under ILSA, violations of which are often viewed as hyper-technical and immaterial in instances where a project is otherwise delivered according to a developer’s stated promises.

In contrast, it is easy to see why courts might have more sympathy for buyers in cases where construction has been unjustifiably delayed.  The calculus is simple: the longer a building goes unfinished, the more time a buyer’s deposits will have been tied up in an unlivable and unsaleable project.   And every day the real estate market remains mired in a historic slump only serves to exacerbate the downside to the buyer.  The recent but unsurprising rash of lender foreclosure actions against developers — such as this one, this one, and this one – tell a general tale of builders without funds to pay off loans, contractors, or subcontractors.   This means that the many yet-to-be-finished projects around the country will miss the completion deadlines set forth under contract — if they get finished at all, that is.

As a practical matter, those buyers with potential construction delay claims who have decided that they are without the patience of Job are well-advised to assert their legal claims as quickly and decisively as possible.  While construction delay may be a pathway to successful rescission of a purchase contract, generally speaking, the longer one waits to take legal action, the greater the chance that the developer will be able to argue that the buyer — by his or her own delay — has waived any legal claims.

By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School, and practices law in the courts of South Florida. His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation, as well as pursuing the rights and remedies of consumers and investors. A significant portion of Mr. Beck’s practice is devoted to issues arising under purchase contracts for real estate, including condominiums, condo-hotels, single-family homes, and commercial property. He can be reached at 305-789-0072 or jared@beckandlee.com

Federal Court Endorses Financial Crisis As Basis For Relief From Pre-Existing Contractual Duties; Could Real Estate Contracts Be Affected?

My recent post on Donald Trump’s legal arguments in defense of his failure to pay off a contruction loan on the Chicago Trump Tower project has spawned a number of inquiries.  Many have asked specifically about the theory that the “world financial crisis” could constitute a valid defense to Trump’s performance of a contractual obligation.  Folks want to know the chances that this theory could ultimately be adopted by a court, and whether it could have a wider application beyond the construction loan context.

Those interested in the issue should read a recent federal opinion called Hoosier Energy Rural Electric Cooperative, Inc. v. John Hancock Life Insurance Co., 2008 WL 5068649 (S.D. Ind. Nov. 25, 2008).  The background is somewhat complex but essentially involves the owner of an electrical generating plant in Indiana, Hoosier Energy, which in 2002 entered into a complex lease-back arrangement over some of its assets with an insurance company, John Hancock, aimed at creating a tax shelter for John Hancock.  As part of the deal, Hoosier Energy was required to obtain what amounted to a line of credit from Ambac,  a financial institution called a “swap provider.”

Until 2008, Hoosier Energy made all of its scheduled payments under the agreement.  Then, global financial crisis ensued, and the credit rating of Hoosier Energy’s swap provider sunk like a stone.  Hooiser Energy was unable to find another swap provider with a suitable credit rating who could be substituted in a timely manner.  John Hancock declared Hoosier Energy to be in default and demanded a large termination payment, shortly after which Hoosier Energy filed suit, requesting a protective injunction.

Here’s where it gets interesting.  Like Donald Trump, Hooiser Energy argued that the extraordinary freeze in global credit markets at least partially excused it from performing under the contract as an instance of “commercial impracticability,” mitigating the default declared by John Hancock.   And the court agreed:

The crisis certainly was not anticipated in 2002, when the deal between Hoosier Energy, Ambac, and John Hancock was being finalized.   Retrospect will not assist John Hancock here, nor will an assertion that it was Hoosier Energy’s responsibility to prepare for and guard against any imaginable commercial calamity . . . .  Hoosier Energy has come forward with evidence indicating that the obstacles it faced were not specific to Ambac but were the product of the credit crisis that effectively but temporarily froze the market for comparable credit products at any price.  Those effects were not anticipated and could not have been guarded against.

That’s strong language and, to my knowledge, the first judicial pronouncement that the economic events of 2008 were so extraordinary as to excuse performance under a pre-existing contract.

How could this newly articulated doctrine be more broadly applied? One possibility rests with the large number of individuals who signed preconstruction real estate contracts several years ago, with the intention of obtaining mortgage financing once the project was finished.  Now that many of those projects have been or will soon be competed, those buyers are unable to close because, owing to the global credit crunch, banks will no longer extend mortgage financing for certain new real estate construction at 2004 or 2005 prices.

While many of these purchase contracts were drafted with clauses stating that they were not contingent upon the buyer qualifying for a mortgage, it could be argued, on the basis of the reasoning set forth in Hoosier Energy, that the deals were signed under both parties’ reasonable assumption that financing would actually be available from somewhere once construction was completed.  To quote the Southern District of Indiana in Hoosier Energy, “The crisis was not anticipated by the most senior economists in the country.”  If that is true, why should the defense of commercial impracticability, based on the lack of accessible credit, be any less available to the individual real estate buyer seeking to mitigate the effect of a pre-existing contract then it would be to an electrical generating plant operator dealing at arms length with a multibillion dollar insurer?  (To some degree, the question overlaps the analysis of whether “bailout” principles should apply equally to financial institutions and individual homeowners, both of whom are victims of their own inability to foresee the mortgage crisis).

We may very well get some clarity from the courts on these issues in 2009.  In the meantime, we will no doubt see lawsuits filed and defended on these theories, with lawyers pushing the reasoning on both sides.

By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School, and practices law in the courts of South Florida. His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation, as well as pursuing the rights and remedies of consumers and investors. A significant portion of Mr. Beck’s practice is devoted to issues arising under purchase contracts for real estate, including condominiums, condo-hotels, single-family homes, and commercial property. He can be reached at 305-789-0072 or jared@beckandlee.com

New Rules Under Real Estate Settlement Procedures Act (RESPA) Could Trap Unwary Developers And Lenders

Passed into law by the U.S. Congress in 1974, the Real Estate Settlement Procedures Act (RESPA) was intended to shield homebuyers from the predatory practices of settlement service providers such as lenders, realtors, and title insurers.  Owing to their vulnerable position at the closing table, homebuyers were historically ripe for exploitation by such companies, many of which used bait-and-switch and kickback schemes in order to line their pockets.

At present, with the residential real estate market in shambles nationwide — and with an ongoing crisis in the mortgage and credit industries — the concern of the day is with the skyrocketing number of foreclosures as well as the increasing volume of unsold new home inventory.  The significance of RESPA would seem to take a backseat (and certainly in relation to other statutes such as the Interstate Land Sales Full Disclosure Act and the securities laws) in a climate where so few closings are even happening.

In the coming year, however, rules recently issued by the U.S. Department of Housing and Urban Development (HUD) could re-ignite the importance of RESPA.  The new rules, which are slated to take effect on January 16, 2009, essentially make it a violation of RESPA’s prohibition against unearned fees and kickbacks (found in 12 U.S.C. ss. 2607, 2608 ) for developers and homebuilders to offer incentives to buyers for using affiliated mortgage companies and title companies.  Such incentives have been a longstanding practice of many developers and builders, which will have to adjust to the new regulatory landscape.  Brief summaries of the new rules can be found online at Builder magazine and on the Greenberg Traurig website.

In the long run, the new rules will likely prove to be a good idea, insofar as they will heighten the regulatory impact of RESPA and HUD at the micro level in stamping out predatory and deceitful practices, and hopefully helping to restore credibility to a mortgage industry which has certainly been taking more than its fair share of its hits lately.  If the U.S. housing market is to make a full recovery, restoring public faith in the mortgage industry will be a crucial element.

In the short run, however, the amendments may mean trouble for unwary and/or desperate developers and builders.  Offering incentives have become a key means for developers of new projects to induce buyers to come to the closing table, and this includes offering price discounts where the buyer uses an affiliated lender.   As the Greenberg Traurig bulletin notes, the definition of “affiliate” under RESPA is broad, and might even encompass scenarios in which a developer has a marketing agreement with a lender.  For those that run afoul of RESPA, the consequences can be dire, as the statute provides for criminal penalties in addition to treble damages and payment of attorneys’ fees in the civil context.

One result of the new RESPA rules could be fostering even more litigation related to real estate.  If the economic recession continues or even worsens, buyers who close on new homes in 2009 and beyond may find themselves in unfavorable mortgage arrangements as they see their property values dip.  With foreclosure on the horizon, filing a lawsuit under RESPA may be an attractive means of gaining same leverage over the lender and possibly recovering damages.

By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School, and practices law in the courts of South Florida. His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation, as well as pursuing the rights and remedies of consumers and investors. A significant portion of Mr. Beck’s practice is devoted to issues arising under purchase contracts for real estate, including condominiums, condo-hotels, single-family homes, and commercial property. He can be reached at 305-789-0072 or jared@beckandlee.com

Appellate Courts Weigh In On Both Sides Of The Interstate Land Sales Full Disclosure Act

Yesterday, in a closely watched contract rescission lawsuit brought by buyers under the federal Interstate Land Sales Full Disclosure Act (ILSA), the Eleventh Circuit reversed the lower court’s controversial interpretation of the statute and its award of the deposits back to the buyers.   As I noted previously, Pugliese v. Pukka Development, Inc. made waves when it was handed down in the Southern District of Florida in October 2007, because it effectively forged a pathway under ILSA for buyers to recover deposits in developments with fewer than 100 units or lots, even while the U.S. Department of Housing and Urban Development’s (HUD’s) official position was that such developments are entitled to a full exemption from the statute. 

The Eleventh Circuit’s opinion can be found here.   While much of the opinion is in the realm of arcane statutory construction, what stands out — and, in my view, what ultimately drove the appellate result — is the deference given to HUD’s stated position, which includes the amicus brief filed by HUD in the proceeding that sided with the developer against the buyers.  I have previously registered my disappointment with the notion that HUD would actively expend resources on advocating for the narrow application of a federal statute aimed at protecting members of the real estate buying public.  In the end, however, the impact of Pugliese v. Pukka will not be as far-ranging as the attention afforded to it, as the legal issues and range of affected real estate projects are comparatively narrow.

On the same day the Eleventh Circuit issued Pugliese, a Florida state appellate court, the Fourth District Court of Appeal, delivered an opinion on a separate ILSA exemption issue, in this case siding with the buyer plaintiffs.  The court held that where developers wish to avail themselves of one of the exemptions from the statute, any required contractual language must be operative before – not after – the buyer executes the purchase contract.  The opinion in 200 East Partners, LLC v. Gold can be found here.  In contrast to Pugliese, the Fourth District was unpersuaded by HUD’s stated position on the issue before it.  As the court noted, “ILSA is a strict liability statute enacted for the purpose of protecting the public and should be liberally construed in favor of the public.”

By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School, and practices law in the courts of South Florida. His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation, as well as pursuing the rights and remedies of consumers and investors. A significant portion of Mr. Beck’s practice is devoted to issues arising under purchase contracts for real estate, including condominiums, condo-hotels, single-family homes, and commercial property. He can be reached at 305-789-0072 or jared@beckandlee.com

Global Financial Crisis As “Force Majeure”: A Trump Card For Donald Trump?

Legal doctrines are typically pushed to their logical extremes in times of crisis.  The litigation surrounding Donald Trump’s 92-story condo project in Chicago offers a prime example.

As reported last week in Chicago Business Today, Trump and one of the project’s main lenders, Deutsche Bank, have filed countervailing lawsuits over Trump’s failure to timely pay off the remaining $334.2 million on a construction loan.  In support of his claim that the lender has undermined his ability to finish the development, Trump has invoked the loan’s force majeure clause, alleging that “the world financial crisis is an extraordinary event” justifying his failure to pay.

Generally speaking, the legal term “force majeure,” which translates from French to “greater force,” means a superior or overpowering force or unexpected or uncontrollable event which can excuse performance under a pre-existing contract.  Without examining the particular clause at issue in Trump’s loan or the cases from the relevant controlling law, it is safe to say that Trump’s position is a stretch.  Judicial findings of force majeure are ordinarily reserved for unforeseeable and catastrophic events, such as hurricanes, earthquakes, or civil war.  The conventional wisdom is that market downturns, however severe, are foreseeable events that are within the realm of acceptable risk for contracting parties, and therefore cannot constitute force majeure.

Legal precedent is, of course, an issue separate from the policy desirability of the force majeure claim advanced by Trump, and whether the economic crisis can be fit within the legal concept .  Courts interpret the concept narrowly out of a concern for enforcing the settled expectations of parties to a contract, thereby upholding the predictability of markets, but some flexibility must be granted to account for the truly extraordinary and unforeseen.  And surely, the unparalleled government bailout of Wall Street financial institutions functions as some degree of “precedent” establishing that the latest financial crisis is truly extraordinary in scope.

In fact, if Trump were to prevail on his theory, he would have many grateful fellow developers presently experiencing difficulties finishing projects owing to the credit crisis.  Also grateful would be legions of real estate buyers who, either unable to obtain financing or unable to pay off their mortgages, could benefit from an expanded notion of force majeure to recover down payments or stave off foreclosure proceedings.

By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School, and practices law in the courts of South Florida. His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation, as well as pursuing the rights and remedies of consumers and investors. A significant portion of Mr. Beck’s practice is devoted to issues arising under purchase contracts for real estate, including condominiums, condo-hotels, single-family homes, and commercial property. He can be reached at 305-789-0072 or jared@beckandlee.com

Courts’ Disagreement On ILSA Reflects Uncertain Times

Since my last post over one month ago posing questions about what was a then-proposed Wall Street bailout, key events have unfolded at an almost shockingly rapid pace.  For better or worse, we now have an economic bailout package.  On the political front, a historic U.S. Election Day is just one day away.  Meanwhile, real estate markets across the United States, including South Florida, have continued their precipitous decline, although analysts and forecasters have begun the inevitable speculative talk over whether such markets have yet hit that magical place called “the bottom.”

In contrast to the worlds of politics and markets, the wheels of justice turn slowly.  Legal developments are no less critical, however, for those watching and wondering what the future holds for homebuying and real estate investing.  For example –

As faithful readers of this blog know, the Interstate Land Sales Full Disclosure Act — “ILSA” for short — has become one of the prominent emblems of the great lawsuit explosion which followed in the wake of crashing speculative real estate markets in places such as South Florida.  The statute, passed by Congress in the 1960s to protect out-of-state buyers of land, imposes a set of disclosure obligations upon developers, which in turn can give rise to rescission rights in buyers after the contract is signed.

One of the first opinions to foretell the troubles that ILSA might pose for developers was Pugliese v. Pukka, 524 F. Supp. 2d 1370 (S.D. Fla. 2007), decided on October 3, 2007, by the Southern District of Florida.  As I reported last year, the effect of Pugliese was to surprise developers of smaller condominiums of fewer than 100 units – many of whom had been laboring under the assumption that they were completely exempt from ILSA — with the unpleasant news that they were, in fact, bound by certain of the statute’s provisions.  In the absence of compliance, buyers in such developments could possess cancellation rights, according to Pugliese.

While the holding of Pugliese has been reaffirmed by the Southern District of Florida on two separate occassions, not surprisingly, the case is on appeal, and oral arguments are scheduled to be heard in the Eleventh Circuit in less than two weeks.  Recently, however, another federal district court — the Eastern District of VIrginia — issued an opinion going in exactly the opposite direction.  In Bartley v. Merrifield Town Center Ltd., 2008 WL 4449894 (E.D. Va. Sept. 30, 2008), the court called the reasoning of Pugliese unpersuasive, and read ILSA to provide a complete exemption for those real estate developments with fewer than 100 lots or units.

It remains to be seen how the Eleventh Circuit will rule, and which interpretation of ILSA will prevail.  In some respects, the issues in Pugliese are confined and likely affect only a small number of the total developments embroiled in or potentially facing litigation from buyers.  But the disagreement between the courts in Pugliese and Bartley also reveals a greater truth.  That is, the 100-lot exemption is just one example of an issue under ILSA — and an issue impacting real estate buyers and developers — about which there is currently substantial difference of opinion and conflicting judicial interpretation.  As such, those who have been confounded by the vicissitudes of the real estate market may not find much more certainty in the courts.

By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School, and practices law in the courts of South Florida. His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation, as well as pursuing the rights and remedies of consumers and investors. A significant portion of Mr. Beck’s practice is devoted to issues arising under purchase contracts for real estate, including condominiums, condo-hotels, single-family homes, and commercial property. He can be reached at 305-789-0072 or jared@beckandlee.com

What Will A Wall Street Bailout Mean For The South Florida Housing And Condo Market?

September 2008 will be remembered as an extraordinary month in the history of financial markets:

• It started with the federal government’s decision to take over Fannie Mae and Freddie Mac (September 5).
• Then, Bank of America agreed to buy out Merrill Lynch, while Lehman Brothers filed for bankruptcy (September 15).
• The federal government acquired a 79.9 percent stake in AIG to rescue the nation’s largest insurance company (September 16), which was followed by Goldman Sachs and Morgan Stanley electing to become bank holding companies (September 22). 
• Washington Mutual filed for bankruptcy (September 25).
• And September is presently winding down with Congress considering a historic $700 billion plan to bail out the collapsing U.S. financial system, largely through the purchase of troubled mortgage backed securities from financial institutions.

 

Anyone following these remarkable events (and who hasn’t been following them?) knows that the primary cause is often summarized as rampant over-speculation by financial institutions in the market for mortgage backed securities.  But that “cause” is really the product of many complex and intermingled “sub-causes.”  To name a few:

• the U.S. housing market crash;
• questionable lending practices;
• systemic mortgage fraud;
• the failure of credit rating agencies;
• and poor governmental policymaking and oversight.

 

My readers know that for approximately the past year, I have been charting a critical aspect of one of these “sub-causes”: that is, the precipitous decline of the Florida condominium and real estate market as measured through the explosion in litigation between contract holders and developers (of course, the Florida real estate market crash officially pre-dates the start of my blog by at least several months.)

Now that Congress is deliberating upon – and will likely pass into law – a bailout package of monumental proportions, this is a question I expect to hear repeatedly from those holding contracts to purchase properties: what, if any, effect should the bailout have on a buyer’s decision between closing on the property, or pursuing any claims for rescission and refund of the deposits through litigation?

Here, for example, is a recent Miami Herald article trumpeting that a “Wall Street bailout could boost South Florida housing market.”  In my view, the headline is far too optimistic, given the degree to which the South Florida housing market was and remains speculative.  If successful, the short-term effect of any bailout plan which Congress approves would be to stem the failure of more banks and financial institutions and thereby promote a return to normalcy in the financial markets.  A bailout will almost surely not revive the risky lending and financing practices that undisputedly helped bring about the crisis in the first place.

At the end of the day, the South Florida housing market is only going to rebound once the fundamentals re-adjust so that the demand side catches up to an enormous and ongoing over-supply of inventory that was fueled by speculation and unsound lending practices.  This article suggests that the long-awaited entry of “vulture” or “bulk” buyers into the Miami condo market is starting to occur, although I have not seen the evidence that this is yet happening to the extent necessary to really prop up demand for South Florida real estate.  It is more likely, in my opinion, that a steady flow of individual foreign buyers motivated by the weak dollar will levitate demand.  But determining the degree of foreign interest in buying South Florida properties in the present market is a difficult task given the incentives that brokers and developers have to hype or exaggerate how interested foreign buyers are, as a means of enticing them to buy.  And it is important to bear in mind that many foreign buyers were among those already burned in the bubble burst.

The final analysis here is that notwithstanding a Congressional bailout, the South Florida housing market will remain depressed and mired in litigation for the foreseeable future.  That general prediction deserves modification only in the circumstance that the bailout plan includes relief targeted specifically at distressed mortgagors, i.e., homeowners.  For example, legal scholar Howell Jackson has wisely proposed having the government purchase bad home loans — as opposed to the mortgage backed securities which financed such loans — thus enabling the government to offer relief to the homeowners whose mortgages it would now hold, much as the Home Owners Loan Corporation did during the Great Depression.  Such a plan would give the housing market a shot in the arm by curtailing the number of foreclosed homes entering the supply of inventory.

By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School, and practices law in the courts of South Florida. His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation, as well as pursuing the rights and remedies of consumers and investors. A significant portion of Mr. Beck’s practice is devoted to issues arising under purchase contracts for real estate, including condominiums, condo-hotels, single-family homes, and commercial property. He can be reached at 305-789-0072 or jared@beckandlee.com

A Word On The Opera Tower Decision, Boilerplate Disclaimers, And The Teeth Of ILSA

Among recent decisions in lawsuits pitting condo buyers against developers, a federal opinion from the Southern District of Florida concerning the Opera Tower Condominium in Miami has garnered an exceptional amount of media attention.  In Weaver v. Opera Tower LLC, the Court dismissed claims brought by buyers seeking to rescind purchase contracts due to alleged misrepresentations in advertising brochures.  One of the key holdings is that the buyers were not entitled to rely on any representations made in the condo advertising, because the purchase contract contained boilerplate disclaimers (i.e., “legalese”) stating that the buyers were forbidden from relying on them.

Various soruces including The Wall Street Journal, CBS News, and the Daily Business Review, have covered the bases in reporting on Opera Tower, and you can read the full opinion here. (One detail that isn’t mentioned in any of the stories is that the law firm Phillips, Cantor & Berkowitz, which defended Opera Tower, did a very effective job from what I understand).  I don’t have much to add to the coverage, other than the following general observation.

At some point, a court is going to need to decide what effect the provision of the Interstate Land Sales Full Disclosure Act (ILSA) in 15 U.S.C. s. 1712 has on “boilerplate” or “fine print” disclaimers in real estate purchase contracts.  This provision of ILSA states that, “Any condition, stipulation, or provision binding any person . . . to waive compliance with any provision of this chapter . . . .”  Interestingly, the Securities Act of 1933 — the acknowledged historical legislative model for ILSA, which is in many ways the “securities law” for real estate — contains a provision with basically the exact same language as 15 U.S.C. s. 1712.  The “anti-waiver” clause of the Securities Act of 1933 can be found at 15 U.S.C. s. 78cc(a).

What is important about the fact that ILSA and the 1933 Securities Act contain identical anti-waiver provisions? The answer is in a recent securities case from an Ohio federal court which was brought by institutional investors against an investment bank, based on alleged misrepresentations in sales materials regarding the quality of a securitized note program.  (For those keeping score, the case is called In re National Century Financial Enterprises, Inc., 541 F. Supp. 2d 986 (S.D. Ohio 2007)).  While the investors asserted claims for securities fraud under the 1933 Act, the bank argued that they could not have relied upon the advertising, because the participation agreement for the program contained statements disclaiming the accuracy of the advertising.  The court completely rejected the bank’s argument, looking at the anti-waiver provision in the 1933 Securities Act and observing that “[c]ourts have long held that general disclaimers of accuracy do not shield sellers who knowingly make false statements.”

The rationale behind the Ohio federal court’s decision is clear.  The Securities Act would lose much of its power to protect investors from fraud if companies could shield themselves from liability through the liberal use of contractual boilerplate disclaimers.  In my view, if ILSA is to have any teeth, then the same principle must apply.

By Jared H. Beck, Esq.

This article does not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

Mr. Beck has a law degree from Harvard Law School, and practices law in the courts of South Florida. His law firm, Beck & Lee Business Trial Lawyers in Miami, is dedicated to the practice of business and real estate litigation, as well as pursuing the rights and remedies of consumers and investors.  A significant portion of Mr. Beck’s practice is devoted to issues arising under purchase contracts for real estate, including condominiums, condo-hotels, single-family homes, and commercial property.  He can be reached at 305-789-0072 or jared@beckandlee.com