From my vantage point as a practitioner in the trenches, the ongoing litigation battle between residential real estate developers and buyers (which, in my opinion, is but a subset of the broader category of litigation related to the subprime crisis) has entered a new dimension. The new dimension is marked by more frequent reports such as the following: (1) the developer of the ambitious Miami Beach Artecity project running into trouble with its lender, Corus Bank; and (2) a rash of foreclosures against the developers of major new West Palm Beach condos, including The Whitney, The Metropolitan, and The Place Via Clematis.
For those with claims, either pending or future, against developers in this climate, the concern is clear: will there be any money left at the end of the lawsuit in the event the developer becomes insolvent? (And tellingly, one of the attorneys mentioned in the article on Artecity is cited as being afraid to represent buyers in the building “in case the developer enters bankruptcy court to avoid a foreclosure.”)Leaving aside issues which might be better addressed in a discussion on bankruptcy law, the short answer is that it may very well depend on the extent to which entities other than the developer of a given troubled project can be targeted by a viable legal theory.
One of the more fertile sources for expanding the scope of potential liability is the Interstate Land Sales Full Disclosure Act (ILSA), which has been maligned by developers’ attorneys as a prevalent tool used by buyers to sue for the return of their deposits. ILSA may also be useful for expanding liability because it defines the term “developer” broadly as,
any person who, directly or indirectly, sells or leases, or offers to sell or lease, or advertises for sale or lease any lots in a subdivision[,]
15 U.S.C. s. 1701(5).
Note the rather wide net cast by this definition: it seems that anyone with a possible connection to the offering of real estate for sale could be considered a “developer” for purposes of ILSA. Two cases illustrate how this broad definition could be employed in practice to expand liability in a real estate lawsuit.
Husted v. Amrep Corp., 429 F. Supp. 298 (S.D.N.Y. 1977) involved an action brought by the purchaser of vacant land in New Mexico, who alleged that she was the victim of various fraudulent sales practices. In addition to the developer corporation, the buyer sued two of the developer’s subsidiary companies, as well as individuals who were officers or directors of the corporate defendants. The court held that the ILSA claims were properly stated against the individuals because as “officer[s] and/or director[s] of one or more of the corporate defendants, . . . such individuals may be liable as ‘developers'” under the statute.
Hammar v. Cost Control Marketing & Sales Management of Virginia, Inc., 757 F. Supp. 698 (W.D. Va. 1990) concerned a real estate development in Virginia. The plaintiff purchasers also alleged various violations of ILSA against a number of defendants behind the development, including a commercial bank which was proclaimed to be the “lead lender” for the main developer entity, and whose name was featured prominently in the project’s sales and marketing efforts. The court found that given sufficient evidence, the bank could be held accountable as a “developer” under ILSA. In the court’s words,
When a financial institution allows its name to be used in advertisements or announcements for a development, it is in effect lending its prestige and good name to the sales effort. It is participating to an unacceptable degree in the marketing of the project. It has gone beyond its function as a commercial bank to lot purchasers.
Common law principles such as the “corporate veil” and judicial dictates weighing against broadly defined “lender liability” traditionally pose obstacles to placing individual defendants and lending institutions (along with their respective assets) on the hook for schemes perpetrated by companies, including developers. But liability under ILSA is a creature of a powerful (and still often overlooked) statute. The broad definition of “developer” under ILSA, and the case law applying this definition, suggests that ILSA could be a formidable nemesis for the individual principals and executives of developers, as well as their banks, as aggrieved purchasers search for deep pockets to pay their claims in the worsening economic climate.
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 email@example.com