Stein And Starwood: Two Important New Chapters In The Great American Real Estate Crash Story

September and October of 2009 saw two momentous new chapters in the ongoing saga of the great American real estate crash: a new titan in South Florida real estate development, and a major new opinion on the Interstate Land Sales Full Disclosure Act from the Eleventh Circuit Court of Appeals.

In September, the FDIC seized Corus Bank of Chicago.  Corus was the poster child for reckless construction lending during the boom days, having extended loans to dozens of new developments across the country, including many in South Florida.  Soon after the FDIC took over, mega real estate investment firm Starwood Capital Group successfully bid on the bank’s assets, winding up with a 40% equity stake along with a $1 billion line of credit to complete any unfinished construction on the Corus-financed developments.  The Starwood deal finally removes the dark “Corus cloud” that had been hanging over numerous developments, some of which were in construction limbo owing to Corus’s inability to supply the final round of financing.  And as the Miami Herald reports, Starwood now joins The Related Group as one of the top two players  in the South Florida condominium market.

Meanwhile, the Eleventh Circuit Court of Appeals issued its own view of the nationwide real estate bust in an important decision construing the federal Interstate Land Sales Full Disclosure Act (ILSA).  As I have been charting on this blog ever since the early days of the crash, ILSA is one of the most widely invoked laws in the onslaught of litigation arising out of the market downturn.  A key and hotly contested issue under ILSA is the scope of the statute’s “two-year exemption“.  In a nutshell, if a developer makes an unconditional promise to build a project within two years, then it gets an exemption from ILSA’s disclosure and registration requirements.  But claiming an exemption is treacherous: where the developer claims an exemption that it doesn’t deserve, then all the buyers of its real estate receive an automatic right to rescind the purchase contract and get their money back.  Many, many buyers who put down hefty deposits on properties during the heyday of the boom challenged developers which claimed the two-year exemption, seeking the return of their deposits through lawsuits.  Courts have come to radically different conclusions on how this exemption should be interpreted and applied.

In Stein v. Paradigm Mirasol, LLC, __ F.3d __, 2009 WL 3110819 (11th Cir. Sept. 30, 2009), the Eleventh Circuit has effectively put the kibosh on this type of ILSA lawsuit, at least in federal court.  Authored by Judge Edward Carnes, the opinion, which reversed a Middle District of Florida decision granting rescission to two buyers of a $895,000 Fort Myers condo, starts off with a general musing on market swings, noting that “All bubbles eventually burst” and “The bigger the bubble, the bigger the pop.  The bigger pop, the bigger the losses.  And the bigger the losses, the more likely litigation will ensue.”

From that somewhat tautological preface, the 18-page opinion dives into an extended analysis of ILSA and, specifically, the nature and scope of the two-year exemption.  Ultimately, Stein concludes that developers should be afforded a generous amount of wiggle room to deliver a project beyond the two-year deadline — even if the developer has deliberately chosen to rely on the two-year exemption in avoiding the statute’s disclosure and registration requirements.  As long as the purchase contract excuses “reasonable delays caused by events beyond the seller’s control,” the developer is free to ignore the only federal statute in existence that specifically regulates the offering and sale of real estate to the general public.  And the buyer need not be afforded the full panoply of legal and equitable remedies to force the developer to comply with the construction obligation.  To sum it up, in applying a markedly developer-friendly standard, Stein makes it very hard to find an example of a real estate contract that invokes the two-year exemption improperly.

While the holding of Stein may be stated simply, the actual ramifications are not so straightforward.  The court makes no bones about the fact that its interpretation of ILSA is in direct conflict with the interpretation of the Florida Supreme Court, as well as the Department of Housing and Urban Development (HUD), the federal agency charged with administering the statute.  Notably, in Samara Development Corp. v. Marlow, 556 So. 2d 1097 (Fla. 1990), the Florida Supreme Court set forth a diametrically opposed view of ILSA, adopting a strict construction of the exemption consistent with its consumer protection purpose. In fact, Stein may be seen to raise more questions than it answers.

For one, while ILSA is a federal law, the statute explicitly provides for jurisdiction in both state and federal courts.  And, as Stein itself acknowledges, the two-year exemption incorporates state law as the ultimate standard governing the two-year exemption and its application.  The unique nesting of state law within a federal statute can be difficult to grasp, and Stein only exacerbates this confusion.  In reaching a holding that it admits to be irreconcilable with the Florida Supreme Court’s view, the Eleventh Circuit has created an unbridgeable gap.  While Stein will no doubt be binding precedent upon federal district courts within Florida, Florida state courts will still look (as they have always done) to the Florida Supreme Court’s  Samara opinion in deciding cases.  The end result will be a shift in ILSA litigation under the two-year exemption from federal court to state court, as Florida real estate buyers will be best advised to file cases in state court, where the more favorable Samara standard will be applied.  Not only that, but those transactional attorneys charged with drafting Florida real estate purchase contracts, going forward, will be required to worry about two conflicting legal standards governing the two-year exemption.

If the Eleventh Circuit intended Stein to fix a cloudy area of the law, this is hardly as clear an outcome as one could wish for, although these kinds of things do happen from time to time in the American legal system, with its distinct state and federal courts.

More fundamentally, Stein is based on the questionable notion that allowing a developer lots of wiggle room to miss a self-imposed two-year completion deadline will do nothing to threaten the statute’s purpose of protecting consumers and preventing fraud.  The proposition is set forth without any consideration of why Congress thought to include a strictly worded two-year exemption in the first place.  In fact, those lawyers who have done a lot of real estate litigation, especially in Florida, know that indefinitely stalled projects — where substantial buyers’ deposits have been taken but construction progress is slow or non-existent — can be a big problem, and holding developers accountable in such situations can be difficult or even impossible without the powerful remedies afforded under ILSA.  Allowing such a generous loophole severely undercuts the ability of the statute to do its job as Congress intended.

Shoring up ILSA may not be on Congress’s list of priorities at the moment. However, to the extent that ILSA deals with the “rubber hitting the road” in connection with consumer real estate transactions — and to the extent that such transactions were at the root of one of the worst economic crises of all time — the statute may be due for an overhaul. Where courts have declined to apply the statute to maximize consumer protection, as well as where the statute’s meaning is hard to understand, new legislation can fill in the gaps. Until then, we can likely expect the next round of ILSA litigation to follow the established pattern of confused and conflicting decisions.

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

One comment

  1. Pingback: Irreconcilable Differences: The Stein v. Paradigm Court Divorces Itself From Precedent on the Interstate Land Sales Full Disclosure Act « The Law and Equity Report by Timothy Powers O’Neill

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