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

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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

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

  1. The problem is that each city, county, state interprets the las very differently from each other. I wonder what the actual effects are in the different courtrooms themselves.

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