Courts’ Disagreement On ILSA Reflects Uncertain Times

Since my last post over one month ago posing questions about what was a then-proposed Wall Street bailout, key events have unfolded at an almost shockingly rapid pace.  For better or worse, we now have an economic bailout package.  On the political front, a historic U.S. Election Day is just one day away.  Meanwhile, real estate markets across the United States, including South Florida, have continued their precipitous decline, although analysts and forecasters have begun the inevitable speculative talk over whether such markets have yet hit that magical place called “the bottom.”

In contrast to the worlds of politics and markets, the wheels of justice turn slowly.  Legal developments are no less critical, however, for those watching and wondering what the future holds for homebuying and real estate investing.  For example —

As faithful readers of this blog know, the Interstate Land Sales Full Disclosure Act — “ILSA” for short — has become one of the prominent emblems of the great lawsuit explosion which followed in the wake of crashing speculative real estate markets in places such as South Florida.  The statute, passed by Congress in the 1960s to protect out-of-state buyers of land, imposes a set of disclosure obligations upon developers, which in turn can give rise to rescission rights in buyers after the contract is signed.

One of the first opinions to foretell the troubles that ILSA might pose for developers was Pugliese v. Pukka, 524 F. Supp. 2d 1370 (S.D. Fla. 2007), decided on October 3, 2007, by the Southern District of Florida.  As I reported last year, the effect of Pugliese was to surprise developers of smaller condominiums of fewer than 100 units — many of whom had been laboring under the assumption that they were completely exempt from ILSA — with the unpleasant news that they were, in fact, bound by certain of the statute’s provisions.  In the absence of compliance, buyers in such developments could possess cancellation rights, according to Pugliese.

While the holding of Pugliese has been reaffirmed by the Southern District of Florida on two separate occassions, not surprisingly, the case is on appeal, and oral arguments are scheduled to be heard in the Eleventh Circuit in less than two weeks.  Recently, however, another federal district court — the Eastern District of VIrginia — issued an opinion going in exactly the opposite direction.  In Bartley v. Merrifield Town Center Ltd., 2008 WL 4449894 (E.D. Va. Sept. 30, 2008), the court called the reasoning of Pugliese unpersuasive, and read ILSA to provide a complete exemption for those real estate developments with fewer than 100 lots or units.

It remains to be seen how the Eleventh Circuit will rule, and which interpretation of ILSA will prevail.  In some respects, the issues in Pugliese are confined and likely affect only a small number of the total developments embroiled in or potentially facing litigation from buyers.  But the disagreement between the courts in Pugliese and Bartley also reveals a greater truth.  That is, the 100-lot exemption is just one example of an issue under ILSA — and an issue impacting real estate buyers and developers — about which there is currently substantial difference of opinion and conflicting judicial interpretation.  As such, those who have been confounded by the vicissitudes of the real estate market may not find much more certainty 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, 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, 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. He can be reached at 305-789-0072 or jared@beckandlee.com

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