While lately this blog has focused on pressing issues in Florida real estate litigation, including the wave of lawsuits involving Florida condominium contracts, from time to time it can be insightful to frame the issues in a larger context. One such context is a buzzword heard frequently these days in reports on the current state of the U.S. economy: subprime litigation.
As this recent Business Week article as well as this story from Oregon’s Mail Tribune suggest, “subprime litigation” encompasses lawsuits directly arising out of the collapse of the U.S. mortgage market. This category includes lawsuits brought by individual and institutional investors whose portfolios have declined as a result of the decrease in value of mortgage-backed securities, as well as by home buyers claiming that they were defrauded by the originators of subprime mortages. To these types of lawsuits, I would add that subprime litigation also includes the current crop of lawsuits brought by buyers/investors seeking to recover deposits paid under residential real estate contracts. The ready availability of subprime mortgage financing accelerated the demand for housing in already highly speculative housing markets such as Florida, Nevada, California, and Arizona. When the rug was pulled out from under that financing — see, for example, the “blacklists” issued by several large banks with respect to South Florida condo projects for which they will no longer extend mortgages — numerous real estate purchasers were left out in the cold. With many such buyers now unable to get approval for mortgages on the real estate for which they paid hefty deposits several years ago, they are left with no alternative but to file suit to have a chance of recovering that money.
This article by two lawyers at a large Atlanta firm illustrates the nature of the legal battle which is inevitably going to be at the center of the lawsuits involving mortgage-backed investments. As they wisely predict, much of the fight will be over the process by which risky investments were given high “AAA” ratings enabling them to be sold to portfolio managers. The authors assert that the rating agencies, when targeted by lawsuits or subpoenas seeking discovery, will attempt to shield themselves with the so-called “journalist’s privilege” and will argue that any information gathered during the rating process — which would reveal the representations concerning the investments made by their issuers and underwriters, as well as the extent of due diligence by the rating agencies themselves — is protected under the First Amendment.
With respect to lawsuits brought under residential real estate contracts, the “information war” will play out differently. Unlike mortgage-backed securities, residential properties — while also risky investments which teetered on top of the over-extended subprime mortgage sector — were never blessed by authoritative rating agencies. Rather, any information concerning the suitability of a given property as an investment would have come from the developer, or from the sales agents attempting to move the property. Federal securities law provides one source of law under which buyers could bring claims based on such information: for example, recent lawsuits such as this one against the developer of a high-end Florida condo-hotel assert that developers made misrepresentations regarding the rental income which could be expected from owning a unit. Another potential source of law is exemplified by section 718.506 of the Florida Statutes governing sales of condominiums, which reads in relevant part:
“Any person who, in reasonable reliance upon any material statement or information that is false or misleading and published by or under authority from the developer in advertising and promotional materials, including, but not limited to, a prospectus, the items required as exhibits to a prospectus, brochures, and newspaper advertising, pays anything of value toward the purchase of a condominium parcel located in this state shall have a cause of action to rescind the contract or collect damages from the developer for his or her loss prior to the closing of the transaction.”
Note the phrase “published by or under authority from the developer.” Those condo buyers who try to claim that properties were misleadingly marketed, perhaps by deliberately concealing or coloring any risk associated with them, will need to trace the marketing information to the developer itself.
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. A significant portion of Mr. Beck’s practice is devoted to issues arising under condominium and other real estate purchase agreements. He can be reached at 305-789-0072 or firstname.lastname@example.org