Who’s To Blame For The Great Florida Condo Crash? Florida Appellate Court Suggests It May Be . . . Escrow Agents

While the global economy remains in the doldrums, recent reports have the South Florida condo market showing signs of recovery, even robustness.  Still, the fallout from the Great Real Estate Crash of several years ago remains undecided in critical ways.  This is especially true of the legal realm, which typically marches to a slow but steady drumbeat.

Yesterday, the Third District Court of Appeal — the Florida State intermediate appellate court with jurisdiction over Miami-Dade County — dropped a bombshell of sorts.  In a case called CRC 603, LLC v. North Carillon, LLC, the court endorsed the holding of a prior federal trial court decision called Double AA International Investment Group, Inc. v. Swire Pacific Holdings, Inc.   As I wrote in 2010, the Double AA court concluded (to the surprise of many in the field) that Florida developers must establish two separate escrow accounts to hold most preconstruction condominium deposits in order comply with Section 718.202 of the Florida Statutes.

The law in question provides buyers with a right to cancel the contract when the developer does not comply.  Because many developers established only one escrow account to hold deposits, many buyers have a right to cancel under the holding of Double AA.  Now that the Third District Court of Appeal has said it agrees with Double AA, this holding will have the force of binding precedent in Florida (unless, of course, it is overturned by the Florida Supreme Court).

What is especially intriguing about this opinion (or perhaps troubling, depending on where you are sitting) is where the 3rd DCA, at least implicitly, paves the road to liability for the condo market crash debacle.  In condominium projects, it is typically the escrow agent, not the developer, who bears responsibility for complying with the rules and regulations governing escrow accounts.  If developers did not set up two separate accounts like they were supposed to, it is because, in my experience, the escrow agents they hired chose not to do it that way because they didn’t think it was necessary under their (incorrect) reading of the statute.

As a result, we may see a yet another wave of litigation stemming from the condo crash: developers suing escrow agents for failing to comply with the escrow statute on the theory that this failure exposed developers to losses from buyer cancellation claims.  Because many of the escrow agents were attorneys or law firms, there may be claims for legal malpractice as well.  So while many buyer lawsuits are now working their way through the legal system and finally reaching resolution, there may well be a next chapter in the litigation story.

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.

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

2 Comments

Filed under Condo Litigation, Real Estate Litigation

Donald Trump Is No Leader

Lately, Donald Trump has been dominating headlines as a potential presidential candidate.  Much of the discussion so far has concerned the seriousness of Mr. Trump’s plans. Commentators have noted past announcements of a Trump candidacy that never materialized, and his history of seeking the limelight at all costs, not to mention his lack of well-formulated political goals or viewpoints.

Photo by Gage Skidmore

But whether or not Donald Trump has any real intention of throwing his hat into the ring this time around, one thing should be clear to anyone who has observed his track record as a real estate developer.  In the very line of work upon which he built a career, Mr. Trump has repeatedly shown himself to lack essential leadership skills.  Mr. Trump cannot govern the United States, because he does not know what it means to be a leader.

I know this because I represent a group of individuals who have been defrauded by this presidential candidate pretender.  In 2005 and 2006, before the real estate market and economy turned sour, my clients advanced substantial sums of money toward the purchase of units in a planned condominium hotel development to be called the Trump International Hotel & Tower in Fort Lauderdale, Florida.  Before putting down their deposits, they received a large array of advertising materials touting the wonders of the project and highlighting Donald Trump’s involvement.  Artists’ renderings showed an exquisite structure on the Atlantic Ocean, the epitome of luxury and sophistication.  Included was a letter signed by The Donald on Trump stationery, promising that “This magnificent oceanfront resort offers the finest and most luxurious experience I have created.”

Flash forward to 2009.  In the midst of a historic collapse of the global credit markets, the project’s main construction lender fails and is taken over by the federal government.  Stripped of financing, construction stalls, raising questions of whether the condominium will ever see completion.  At this point in the story, one would expect Donald Trump with his supposed billions of dollars in assets and decades of development prowess to step in and save the day by ensuring that the condominium bearing his name is built on schedule.  Right?

Wrong.  Instead of rising to the occasion, Mr. Trump bails.  He publicly declares he has nothing to do with the building, and, in fact, was never the developer in the first place.   The dream peddled by Mr. Trump goes up in smoke; the project goes into foreclosure, and my clients never get the condominiums they paid for.  Today, we are fighting an arduous legal battle to recover their down payments.  And remarkably, my clients are not alone in their experience: in recent years, practically the identical scenario has played out with failed Trump condominium developments in Tampa and Baja California.

This is hardly the track record of a leader.  Dwight Eisenhower once said that “leadership consists of nothing but taking responsibility for everything that goes wrong and giving your subordinates credit for everything that goes well.”  Mr. Trump appears to have just the opposite approach: shamelessly promoting himself at every opportunity, but turning tail when the going gets rough.

As part of his latest media blitz, Mr. Trump brags that he once fleeced Gaddafi in a New York real estate deal.  This may or may not be a praiseworthy achievement or a qualification for the presidency, but there is nothing noble about leaving  ordinary citizens with shattered hopes and dreams.   If Donald Trump cannot be counted on to see his own real estate projects through to completion, imagine what President Trump would do in the context of difficult policymaking, a sudden war, or an unexpected disaster at home.  The thought is terrifying.

Odds are that Donald Trump will not actually run for president.  But if he does, I predict his candidacy will not last long.  At the first sign of adversity, Mr. Trump will fold up the tents, close up shop, and retreat back into his studio set world. After all, it takes leadership to weather storms.

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.

Jared H. 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 small businesses, consumers and investors through class actions. Mr. Beck’s expertise also includes issues arising under purchase contracts for real estate, including condominiums, condo-hotels, single-family homes, and commercial property. He is a member of the Florida and California Bars, and litigates in other U.S. jurisdictions in conjunction with qualified local counsel. Mr. Beck can be reached at 305-789-0072 or jared@beckandlee.com

1 Comment

Filed under Condo Litigation, Real Estate Litigation

An Apology To My Readers

Has it really been five months since my last article on this blog?

I can only apologize to those readers who have been awaiting further analysis of the growing body of case law emerging out of the country’s latest real estate crash. Unfortunately, the day-to-day demands of legal practice, including the growth of my firm’s nationwide class action practice, have kept me from blogging regularly.  (Incidentally, those seeking more information on my firm’s recently-filed Yelp class action in California should visit this page.)

Since the 11th Circuit’s blockbuster opinion in Stein v. Paradigm Mirsol, LLC, there have been a number of new decisions worthy of attention.  I hope to take a closer look at some of them in the near future.  In the meantime, I want to highlight two recent opinions — both readily available on Westlaw — which are especially noteworthy.

The first, Double AA International Investment Group, Inc. v. Swire Pacific Holdings, Inc., __ F. Supp. 2d __, 2009 WL 4825097 (S.D. Fla. Dec. 15, 2009), comes from the Southern District of Florida.  It is the first case to deal extensively with the issue of whether Florida’s statute regulating condominium escrow deposits, Section 718.202, requires establishment of separate escrow accounts when the deposit amount is greater than 10% of the condo’s purchase price.  Judge Altonaga concluded that the answer is “yes,” and that the developer’s failure to create two separate accounts for the purchaser’s escrow funds makes the purchase contract revocable.

The other case, Bodansky v. Fifth on the Park Condo, LLC, 2010 WL 334985 (S.D.N.Y. Jan. 29, 2010), comes from the Southern District of New York.  It is the first New York case in a long while to address issues arising under the federal Interstate Land Sales Full Disclosure Act (“ILSA”).  Bodansky contends with the narrow question of when a developer is entitled to the 100-lot exemption from ILSA’s disclosure requirements.  Consistent with the recent approach taken by other federal courts, including those in Florida, Bodansky adopts a stringent, pro-developer construction of this particular exemption and the statute more generally.

I hope to have more thoughts and analysis up soon.  Again, apologies for the long delay.

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 small businesses, consumers and investors through class actions. Mr. Beck’s expertise includes issues arising under purchase contracts for real estate, including condominiums, condo-hotels, single-family homes, and commercial property. He is a member of the Florida and California Bars, and litigates in other U.S. jurisdictions in conjunction with qualified local counsel. Mr. Beck can be reached at 305-789-0072 or jared@beckandlee.com

Leave a comment

Filed under Beck & Lee Business Trial Lawyers, Condo Cancellation Lawsuit, Florida Condo Contract, Florida Condo Lawyer, Florida Condominium Contract Attorney, ILSA, Interstate Land Sales Full Disclosure Act, Miami Condo Contract Lawyer, Miami Deposit Recovery Lawyer

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

1 Comment

Filed under Cancel Real Estate Purchase Agreement, Condo Cancellation Lawsuit, Condo Litigation, Florida Condo Contract, Florida Condo Law, Florida Condo Lawyer, Florida Condo Market, Fort Lauderdale Condo Lawyer, ILSA, Interstate Land Sales Full Disclosure Act, Miami Condo Contract Lawyer

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

1 Comment

Filed under Beck & Lee Business Trial Lawyers, Cancel Real Estate Purchase Agreement, Condo Cancellation Lawsuit, Condo Hotel Attorney, Condo Hotel Lawyer, Condo Litigation, Florida Condo Contract, Florida Condo Law, Florida Condo Lawyer, Florida Condominium Contract Attorney, Fort Lauderdale Condo Lawyer, ILSA, Interstate Land Sales Full Disclosure Act, Miami Condo Contract Lawyer, Real Estate Litigation

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

2 Comments

Filed under Beck & Lee Business Trial Lawyers, Condo Cancellation Lawsuit, Condo Hotel Attorney, Condo Hotel Lawyer, Condo Securities Law, Florida Condo Contract, Florida Condo Lawyer, Miami Condo Contract Lawyer

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

1 Comment

Filed under Beck & Lee Business Trial Lawyers, Cancel Real Estate Purchase Agreement, Condo Cancellation Lawsuit, Condo Litigation, Florida Condo Contract, Florida Condo Lawyer, Florida Condo Market, Fort Lauderdale Condo Lawyer, ILSA, Interstate Land Sales Full Disclosure Act, Miami Condo Contract Lawyer, Miami Deposit Recovery Lawyer, Real Estate Litigation, Subprime Crisis Litigation, U.S. Housing Market, World Financial Crisis