Plaza Court, L.P., v. Baker-Chaput and O’Brien: Florida Adopts the Jankus Rationale on the Interstate Land Sales Act


In Plaza Court, L.P., v. Shane Baker-Chaput and Christine O’Brien, — So.3d —-, 2009 WL 1809921 (Fla. 5th DCA June 26, 2009), the Florida Fifth District Court of Appeals appears to have put to rest many of the issues dividing the federal courts on Florida law, as it applies to Interstate Land Sales Full Disclosure Act (“ILSA”).  First, let me say that in order to analyze ILSA you must examine the law of the state that applies to the sales contract.  In other words, the interpretation of ILSA is always a marriage between federal statutory law and the contract law of the forum state. Therefore, the applicability of ILSA may be different from state to state.  That is what makes the Plaza Court opinion so important, as the Federal courts are bound to follow this Florida opinion as to Florida state law.  Kamel v. Kenco/The Oaks At Boca Raton LP, 2008 U.S. App. LEXIS 21762 (11th Cir. Oct. 16, 2008)(Whether the contract “actually obligates” the seller to complete the building within two years, or whether the obligation is “illusory,” is determined under the law of the state where the development is located.)  See: Supplemental Information to Part 1710: Guidelines for Exemptions Available Under the Interstate Land Sales Full Disclosure Act, 61 Fed. Reg. 13595, 13599 (1996) (the “HUD Guidelines”). A federal court applying state law is bound by the rulings of the state’s highest court. If the state’s highest court has not ruled on the issue, a federal court must look to the intermediate state appellate courts. Tobin v. Mich. Mut. Ins. Co., 398 F.3d 1267, 1272 (11thCir. 2005); Arawak Aviation, inc. v. Zebra Investments, LC, 285 F.3d 954, 959 (11th Cir. 2002);Veale v Citibank, FSB, 85 F.3d 577, 580 (11th Cir. 1996); Nussbaum v. Mortg. Svc. Am. Co., 913 F.Supp. 1548 (S.D. Fla. 1995) (Where court was confronted with interpreting a question of state law in the context of a federal consumer protection statute, the federal court was bound to follow the law as stated by Florida Supreme Court and intermediate state appellate courts, notwithstanding Eleventh Circuit precedent with a differing analysis of the state law issue).

1. Plaza Court Establishes Impossibility of Performance as the Standard For the Two-Year Completion Exemption

One of the main points of contention in ILSA litigation is the applicability of the “two-year completion” exemption.  If a developer obligates itself to complete a building in two years in the sales contract, that transaction is exempt from ILSA. See: 15 U.S.C. §1702(a)(2).  The problem is developers don’t like to get sued for breach of contract, and ostensibly have to return the buyer’s deposit, if they are a little late on that two-year deadline. That is where the creative lawyering on drafting  force majeure clauses, and other contractual provisions comes in.  The attorney drafting the sales contract does their best to provide the developer with the maximum flexibility while ensuring that the buyer is still obligated under the sales contract.  However, this practice does not mesh well with attempting to exempt a developer from ILSA application, as it is a strict liability statute. For instance, in Stein v. Paradigm Mirsol, LLC, 2008 U.S. Dist. Lexis 9073 (M.D. Fla. 2008) the court found the following language did not exempt the developer under the “two-year completion” exemption from ILSA because it rendered the developer’s obligation to complete in two years illusory, or “I will if I want to.”   The contract in Stein stated:

Construction of the condominium unit will be complete and ready for possession within two (2) years from the execution of this Purchase Agreement in compliance with the Interstate Land Sales Full Disclosure Act; provided, however, that Seller shall not be responsible for any delay caused by acts of God, weather conditions, restrictions imposed by any governmental agency, labor strikes, material shortages, or other delays beyond the control of seller and the completion and occupancy date shall be extended accordingly.

After the Stein case, the federal courts were anything but uniform in their results on the two–year completion exemption.  Most federal courts adopted the Stein’s illusory standard: but many courts found that just about any force majeure clause would not render the builder’s obligation illusory. Two competing schools of thought arose: (1) one where “all contract defenses” recognized by Florida law was sufficient for the two year exemption; or (2) one where only impossibility of performance was allowed as a defense in a force majeure clause.  No Florida Appellate court had spoken squarely to this issue until Plaza Court, and their opinion should finally lay the issue to rest in the state of Florida. The Plaza Court case states:

There appears to be some disagreement among the many recent federal decisions about the standard to apply to ascertain the validity of a “two-year completion” clause in one of these ILSFDA contracts. In Jankus v. Edge Investors, L.P., 2009 WL 961154 *8 (S.D.Fla. Apr. 8, 2009), Judge Hurley discussed the competing points of view and concluded, in line with a series of opinions FN3 by Judge Steele, in the Middle District of Florida, that the test is impossibility of performance under Florida law. Jankus, 2009 WL 961154 at *8. We agree with Judges Steele and Hurley that the question is whether Plaza’s contractual provisions are recognized within Florida’s doctrine of impossibility. See Hilton Oil Transport v. Oil Transport Co., 659 So.2d 1141, 1147 (Fla. 3d DCA 1995); Cook v. Deltona Corp., 753 F.2d 1552, 1558 (11th Cir.1985) (citing Shore Inv. Co. v. Hotel Trinidad, Inc., 29 So.2d 696 (1947)). * * * Similar to the Kamel purchase agreement, the purchase agreement here contains the modifying clause “or any other grounds cognizable in Florida contract law as impossibility or frustration of performance.” However, unlike the Kamel purchase agreement, the modifying clause here contains the subsequent language “including, without limitation, delays occasioned by wind, rain, lighting [sic] and storms.” We conclude, consistent with Jankus and Harvey, that Plaza is not exempt from ILSFDA. We agree that the two-year construction commitment is more broad than Florida’s defense of “impossibility.” Plaza Court, L.P., 2009 WL 1809921, *6-7 (Fla. 5th DCA June 26, 2009).

2.  Plaza Court Adopts a Three-Year Right of Rescission Where the Contract Does Not Include a Notice of the Right to Rescind Within Two Years

In my first blog post I discussed the different approaches taken by the Taylor v Holiday Isle Court versus the Jankus Court. That Post can be found here.  The Plaza Court opinion finds the reasoning in Jankus is “superior” to that of Taylor. The rule set forth in the Taylor decision actually encourages a developer not to comply with the statute.  Instead of facing rescission, the developer only faces a damage claim. The amount of damages resulting from a violation of ILSA is still the subject of some debate. I have seen first hand how a developer will argue that you did not suffer any real damage by their failure to include the two year notice, or deliver a Property Report for that matter. The end result is a diminished right to the purchaser, and extra leverage for a developer in litigation.  Insofar as the effect of the developer’s failure to include the required notice is governed by contract law: the Plaza Court ruling serves as additional authority to protect purchasers in the State of Florida.  The Plaza court does not mince words when it opined:

Although there is much in Taylor with which to agree, we are bound to separate from its analysis on the last issue – the effect of the failure of the developer to include § 1703(c)’s required notice of the two-year limit on the right of rescission for the failure to provide a property report. The Taylor court reasoned that the failure of the developer to provide the statutorily required “clear” notice of the two-year right of rescission could not affect the developer’s right to enforce the limitation because the statute did not include any remedy for violation other than, perhaps, the damages remedy in § 1709. The Taylor court also treated the two-year rescission right as a statute of limitations and concluded that the “extraordinarily limited” circumstances the law recognizes to avoid a statute of limitations could not apply, in part, because the two-year limitation is contained within the statute and everyone is expected to know the law. 561 F.Supp.2d at 1274-75.

As to the statute of limitations analysis, we do not accept the premise that the provision at issue is a statute of limitations. A statute of limitations sets the outer limits for the commencement of litigation and this provision does not do that. This is a two-year right of rescission and upon timely exercise, the statute of limitations for bringing suit to enforce the right is three years from the date of purchase. We see nothing in the statutory rescission right to which the “equitable tolling” analysis of Taylor should pertain. We also note that Judge Hurley in the Southern District of Florida has quite recently reached a similar conclusion in Jankus. 2009 WL 961154 at *5. The conclusion reached by the Jankus court was that the two-year right of rescission would not begin to run until proper notice of the right to rescind was given, up to expiration of the three-year statute of limitations. For the reasons well described in the Jankus opinion, this analysis is superior to the view taken by the Taylor court, which effectively holds the developer harmless for the failure to give the required notice. The result in Jankus is consistent with Florida law. FN4 See Engle Homes v. Krasna, 766 So.2d 311 (Fla. 4th DCA 2000). Because there is no suggestion that Plaza gave the statutorily required notice to Baker and O’Brien prior to their filing suit within the three-year statute of limitations, we affirm.

This article, and the comments posted in response, do not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

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About Timothy Powers O'Neill

Timothy O’Neill, an attorney with the firm of Schwed, McGinley and Kahle, practices in the areas of business litigation, real estate litigation, and intellectual property litigation. Timothy received his Bachelor of Science Degree from the University of Evansville and graduated from the University of Missouri-Columbia School of Law in 1997. Following law school, Timothy clerked for two years in the State of Florida's Fifteenth Judicial Circuit in Palm Beach County, and served as a law clerk in the United States District Court for the Southern District of Florida. Timothy serves as an executive board member of the Busch Wildlife Sanctuary, a non-profit entity dedicated to preserving Florida’s wildlife through rehabilitation and education. Timothy is admitted to practice before all of the state courts of Florida as well as: The Supreme Court of the United States; United States Court of Appeals, Eleventh Circuit; United States Court of Appeals, Ninth Circuit; United States District Court, Southern District of Florida; United States District Court for the Middle District of Florida, United States District Court of Colorado, and is a member of the Palm Beach County, Florida, and Federal Bar Associations.

7 Responses to “Plaza Court, L.P., v. Baker-Chaput and O’Brien: Florida Adopts the Jankus Rationale on the Interstate Land Sales Act”

  1. Tim, your analysis of Plaza Court hits the nail on the head. From a historical perspective, it interests me that Florida appellate courts have generally been the ones favoring a strict construction of ILSA.

    Jared Beck, Esq.

    http://beckandlee.wordpress.com

    • Thanks Jared:

      One interesting point that remains to be resolved is how much impact the Plaza Court case will have on the right to rescind for three years. How much of that principle is based in contract law? At least we might finally be able to escape the “all contract defenses” language that was taken out of context from the HUD guidelines.

  2. Timothy,
    Great post on a great case. I’m in Seattle and ILSA is only recently coming into play around here. My partner and I are, to my knowledge, the first attorney’s to raise an ILSA claim in Washington and, better still, the first to win it. I’m looking forward to citing to Plaza and Jankus in my next case which involves a force majeure clause straight out of the Paradigm Mirasol playbook plus a second contract evasion scenario a la Gentry v. Harborage. I’ll be borrowing some of your citations for the proposition that Florida federal courts are bound by the Plaza opinion for persuasive counter-authority to the “all contracts defense” approach that my opponent will undoubtedly raise.

    Great stuff. Keep up the good work.

    • Thanks for the kind words Marc. Quite the converstions you have in the comments of your blog! You mentioned a “two contract” or replacement contract problem, so I thought I would offer the following.

      If you are dealing with a two contract case where one exempt contract is replaced by an ILSA contract, pay attention to the timing of the HUD registration and the date an “offer” was sent to your client. It is a violation of Section 1703(a) to make such a sale (usually the second contract) within thirty days of filing with HUD. You may be able to use this in addition to “purpose of evasion” argument.

      15 U.S.C. 1703 provides:

      (a) Prohibited activities. It shall be unlawful for any developer or agent, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce, or of the mails–
      (1) with respect to the sale or lease of any lot not exempt under section 1403 [15 USCS § 1702]–
      (A) to sell or lease any lot unless a statement of record with respect to such lot is in effect in accordance with section 1407 [15 USCS § 1706];

      Section 1706 provides:

      § 1706. Effective date of statements of record and amendments thereto

      (a) Thirtieth day after filing or such earlier date as determined by Secretary; consolidation of subsequent statement with earlier recording. Except as hereinafter provided, the effective date of a statement of record, or any amendment thereto, shall be the thirtieth day after the filing thereof or such earlier date as the Secretary may determine, having due regard to the public interest and the protection of purchasers.

  3. Timothy,

    Actually, my scenario is the opposite. The developer has never registered with HUD or given a property report and its original contract was nowhere near compliant with ILSA, in my humble opinion. They replaced some (but not all) of their buyers’ contracts with another one that they believe qualifies for the two year exemption. It’s not perfectly clear how they think they’re exempt under the original contracts that were not replaced especially now that the two year window has been pretty strongly opened for an additional year. Perhaps they think they can stack exemptions and exempt the original contracts under the 99 lot exemption. Or perhaps they think they’re a sovereign state and compliance with the Act is discretionary!

    For anyone reading this posting or my posting above, it is not intended as and you should not rely on it as legal advice. If you have any questions about your rights and obligations under a contract to purchase a condominium (or any other type of property) you should consult your own independent legal counsel.

  4. I appreciate that you are making this information available through a blog!

Trackbacks/Pingbacks

  1. Navigating The ILSA Minefield: How Have Courts Applied The Interstate Land Sales Full Disclosure Act In An Era Of Economic Crisis? « Jared Beck’s Real Estate Market Crisis Law Report - July 6, 2009

    [...] While ILSA is a federal statute, it specifically allows the plaintiff a choice of forum between federal and state court.  This means that state courts are also in the business of interpreting and applying the statute, and Florida state courts have certainly seen their fair share of ILSA cases along with their federal brethren.   The two most important recent Florida state appellate decisions, both from 2009, are Mailloux v. Briella Townhomes, LLC, 3 So. 3d 394 (Fla. 4th DCA 2009) and Plaza Court, L.P. v. Baker-Chaput, __ So. 3d __, 2009 WL 1809921 (Fla. 5th DCA 2009).  Taken together, these two decisions apply a strict “impossibility of performance” standard to the improved lot exemption, one that is unfavorable to developers and protective of buyers.  The Plaza Court opinion even went out of its way to distinguish part of its ILSA analysis from the conclusions reached several weeks earlier by an Alabama federal court, chiding the Alabama court for “hold[ing] the developer harmless” for violations of the statute.  My friend Tim O’Neill has a detailed look at the Plaza Court case on his blog. [...]

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