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

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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

One response to “The New Wave Of ILSA Case Law: A Death Knell For Clever Lawyering?

  1. James Monroe

    The Gentry case really crystallizes how condo developers have sought evade the Act through piggybacking and how courts are beginning to catch onto this.

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