The Shame Of HUD And Its Abandonment Of The Real Estate Buying Public

As loyal readers of this blog know, the Interstate Land Sales Full Disclosure Act (ILSA) is an often overlooked federal law that has ascended in importance over the past year, owing to the fact that it is one of the major sources of potential rights for buyers under real estate purchase agreements, including contracts for condominiums.  Given the recent U.S. housing market collapse and the resultant litigation boom, numerous buyers have turned to ILSA to fully understand the nature of their rights, and especially with respect to the hefty preconstruction deposits often paid to developers as a condition of signing contracts.

Now, in a striking turn of events in the ongoing litigation “war” between buyers and developers, the U.S. Department of Housing and Urban Development (HUD) – the very agency charged by law with administering and enforcing ILSA – has picked sides, and opted to throw in its lot with developers.  In particular, HUD has voluntarily filed an amicus brief supporting the developer’s position with the U.S. Court of Appeals for the Eleventh Circuit in the matter of Pugliese v. Pukka Development.  As I’ve written previously, the trial court’s opinion in Pugliese was an important ruling favorable to real estate buyers, setting forth an interpretation of ILSA with an expansive view of buyers’ rights and remedies under the statute.  HUD’s amicus brief takes the position that the trial judge misinterpreted the statute and reached the wrong result, creating “an adverse impact on the settled expectations of the housing industry” and exposing developers, in HUD’s own words, “to greater financial liability and increasing the potential for their default on construction loans.  Such risks for the developer could, in turn, lead to decreased property values for existing owners within a development.”

The issues on appeal in Pugliese revolve around technical matters of statutory construction concerning a law, ILSA, that is notoriously poorly drafted and difficult to comprehend, even for lawyers.  Those with an interest in this rather esoteric debate can access HUD’s brief here, and the original Pugliese decision here.

But the disturbing big picture point is HUD’s decision to spend its resources intervening on the side of developers against buyers, in support of a narrow interpretation of ILSA that lessens rather than expands the statute’s remedial power.   Here is the context for why this should be troubling.  ILSA, when passed by Congress in the late 1960s, was deliberately patterned after another federal statute, The Securities Act of 1933.  The Securities Act of 1933, in turn, was born out of the Great Depression — one of the causes of which was rampant fraud in the sale of securities to the public — and to this day, is one of the enforcement tools of the Securities and Exchange Commission (SEC) in its mission of regulating the securities market.

Unlike the Securities Act, however, ILSA is administered not by a strong agency with a track record of combatting fraud, but by HUD, a comparatively weak agency without a history and culture comparable to the SEC.  In fact, unlike the SEC, HUD’s origins lay in policy development, not enforcement.  It is no surprise, therefore, that the enforcement history of ILSA by HUD has been paltry, if not non-existent.  What is surprising and disappointing, however, is that HUD would take an affirmative stance against buyers in federal court, given the state of the U.S. economy, the U.S. housing market, and the now regular reports of stalled projects and increasingly elaborate mortgage fraud schemes.  Contrast HUD’s stated position to Judge Lynch’s words in the original Pugliese decision, which referred to ILSA as a law “designed to discourage fraud by keeping buyers informed through rigorous disclosure requirements,” with the “remedial purpose of protecting the buying public” which, as such, “should be liberally construed in favor of the public.”  Judge Lynch got it right.

So where does HUD’s posture of non-enforcement of ILSA and alignment with developers leave the real estate buying public? At the agency level, we can expect to see some of the enforcement burden abdicated by HUD actually shouldered by the SEC.  As I have written here, certain types of real estate projects are increasingly objects of scrutiny from the standpoint of securities law, especially those with a condo-hotel component.  The scope of any SEC action is limited, however, to those projects which may be classified as “securities offerings” pursuant to the regulatory guidelines and case law.

But aside from state and federal criminal prosecution and possible SEC involvement, the bulk of responsibility for enforcing the law against crooked developers will rest with private enforcement, that is, civil lawsuits brought by affected buyers through private attorneys.  In recent months, we have witnessed a palpable backlash against such lawsuits brought under ILSA in federal court .  Some of the backlash is justified, and some of it is unjustified.  I will be writing in depth on this recent backlash in the near future, but the general effect is to push more of the lawsuits into state court, packing state judicial systems that, across the board, are already filled to the brim with mortgage foreclosures.

The bottom line is that HUD should seriously reconsider its priorities as the housing market crisis continues to unfold.  Putting teeth into laws, such as ILSA, which exist to protect consumers in the context of real estate transactions is one of the keys to restoring buyer confidence and forging the path to recovery.

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, 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 jared@beckandlee.com

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