The Law and Equity Report

Ride of the Dark Horse: An update on Terra-Adi and Swire Pacific Holdings

 

A dark horse, which had never been thought of . . . rushed past the grand stand to sweeping triumph.

Benjamin Disraeli (British Prime Minister and Novelist. 1804-1881)

 

My money’s riding on this dark horse, baby My heart is sayin’ it’s the lucky one And its true color’s gonna shine through someday If we let this Let this dark horse run.

Amanda Marshall

I would like to give a good reason as to my lack of entries for the last few months. Perhaps it was a major case that required all of my attention; or a mental infirmity brought on by excessive holiday debauchery.  However, the truth of the matter is that I don’t have a reason.  The only mental infirmity I am aware of is being a lawyer (and perhaps a nasty habit of using passive voice) and the fine state of mind that accompanies the same. I believe Christmas vacation wove a spell of sheer laziness on me that has been hard to overcome.  With the imminent arrival of spring, I thought it was a good time to dust out the mental cobwebs.  There has been a recent ILSA decision out of the State of New York. You can see Beck’s overview of it here.  Like a groggy bear just out of hibernation: I could not bring myself to delve into how the timing of a certificate of occupancy would make a project exempt under the 100 lot exemption of ILSA. Especially when the developer seemingly planned to build more than 100 units from inception.  In my opinion, it really is more of the same “right result” reasoning that has been prevalent in “certain” courts on this topic, but I digress.

I thought it important to discuss the two dark horses that are currently in full stride.  The first is a familiar one in the form of  Terra-Adi Intern. Bayshore, LLC v. Georgarious, 20 So. 3d 987 (Fla. 3d DCA 2009) and the follow-up case TRG-Brickell Point NE, Ltd v. Wajsblat, 2010 WL 785854, (Fla. 3d DCA Mar 10, 2010) which you can read here. As you may recall from my last entry, (here) I discussed in some detail about the return of the monies in excess fifteen percent in an ILSA contract.  The Terra-Adi court found on summary judgment that the return of these funds was necessary as the purchaser was “unconditionally entitled even if they did not prevail in the litigation.”  The brevity of this opinion left a lot of room for lawyering  as to the immediate return of the deposit just by filing a simple unverified motion.  In South Florida parlance that means a trip to Uniform Motion Calendar “UMC,” a series of ten minute cattle-call hearings at 8:45 A.M. Monday through Thursday of every week.  As you might imagine lawyers were chomping at the bit to get a hearing for the return of these monies as soon as possible.  Some clients had been waiting for a return of these funds for years after making a demand.  The end result was a flood of orders from Florida trial courts ordering the return of the funds.  One such order was appealed to the Third District Court of Appeals for a second look at the entire issue, which brings us to the Wajsblat opinion.  The court had the opportunity to reconsider the substance of the Terra-Adi opinion, which they did not do. Rather, they took time to clarify the procedural aspect of seeking a return. The Wajsblat court opined:

This is a non-final appeal taken under Florida Rules of Appellate Procedure 9.130(a)(3)(B) and 9.130(a)(3)(C)(ii) from an order entered at a non-evidentiary hearing on the court’s uniform motion calendar, in the nature of a mandatory injunction, see Konover Realty Assocs. Ltd. v. Mladen, 511 So.2d 705, 706 n. 2 (Fla. 3d DCA 1987), or an order of entitlement to immediate possession of property, see Malek v. Bright, 7 So.3d 598 (Fla. 3d DCA 2009). The plaintiffs, two hundred twenty-six in number, are the contract purchasers of one hundred eighty-seven condominium units in three condominium towers in Miami-Dade County. * * * While not conceding lack of entitlement to the fifteen percent, the plaintiffs alleged in their unsworn Motion to Authorize Escrow Agent to Return Deposit Payments in Excess of 15% of the Purchase Price, that “Plaintiffs do not intend to close on their respective units and have either been called to close and have breached or will not close and will be in breach.” * * * There exists no sworn evidence in the record to support the motion. In fact, no defendant had answered the complaint before the order was entered. * * * The court may have been ever so slightly misguided by the fact that the developers admit, except for achieving certainty as to whom to write checks in some instances, [FN1] they have no defense to the action for return of deposit monies in excess of fifteen percent to these plaintiffs. See Terra-Adi Int’l Bayshore, LLC v. Georgarious, 20 So.3d 987, 987 (Fla. 3d DCA 2009) (affirming on summary judgment [FN2] an interlocutory order requiring return of deposits in excess of fifteen percent under identical contract language to that in the contracts before us). However inscrutable the full-court resistance exhibited by these developers to returning the deposit monies in excess of fifteen percent in this case, they are entitled to the due process of the law, meaning a properly supported motion for summary judgment. SeeFla. R. Civ. P. 1.510(c).

Wajsblat, 2010 WL 785854 at *1.

The net result is that the appellate court has affirmed its reasoning in Terra-Adi, while setting forth the procedure needed to achieve the return of deposit monies in excess of 15%. The really interesting point is found at footnote three, where the Court states: “Nor was a motion for judgment on the pleadings available to the plaintiffs at this stage of the proceeding. See Fla. R. Civ. P. 1.140(c) (stating such motions may be brought only after the pleadings are closed).”  This may present another avenue for recovery.  A verified complaint with a motion for judgment on the pleadings could provide a shortcut to reaching the return of the deposit sought. Another recurring problem is that developers are not returning the funds even after the court orders them to do so. Some lawyers have sought contempt of court to remedy the problem. That procedure can be messy and result in even more delay waiting for yet another special set evidentiary hearing.  My thoughts on this situation are: get your order, and seek a prejudgment writ of replevin. I have seen courts grant these writs without a secondary hearing. Let the developer or escrow agent explain to the sheriff why the money has not been released.  I think that might get the result you are looking for.  

I certainly hope you are sitting down for the update on Double AA International Investment Group, Inc. v. Swire Pacific Holdings, Inc., __ F. Supp. 2d __, 2009 WL 4825097 (S.D. Fla. Dec. 15, 2009), our second dark horse.  This case to deals with the issue of whether Fla. Stat. Section 718.202, requires establishment of separate escrow accounts when the deposit amount is greater than 10% of the condominium’s purchase price.  The Swire Pacific Court concluded that the developer’s failure to create two separate accounts for the purchaser’s escrow funds renders the contract revocable.  The developer and the escrow agent, Lawyer’s Title, sought review arguing that the statute of limitations and time for revocation had run out and/or they had fulfilled their statutory duties.  Now when you get any dispositive order from a federal court it is nothing less than nerve racking.  Now imagine the court issues a forty-four page order along with a final judgment.  You can read the order issued March 30, 2010, here.  Footnote eighteen provides a good summary of the overarching problem,      

The evidence presented at trial shows that Lawyers Title’s accounting practices pertaining to the Plaintiffs’ deposits did not even meet this standard. While Lawyers Title maintained separate accounting records according to client, it did not maintain its records according to purpose. The spreadsheet ledgers and Buyers Transaction Log do not show the purchase price of the unit (an essential factor in determining the appropriate amount of funds assigned to each purpose) nor do they distinguish funds to the reservation deposit, protected deposit or construction deposit.

The Swire Court tracks the entire legislative history of Section 718.202 in exhaustive detail an concludes that the ten percent in escrow should be returned, while the developer must pay back the ten percent already disbursed. The developer is also liable for the Plaintiff’s attorney’s fees as well as those of the escrow agent who sought interpleader.  I sincerely believe that a great deal, if not a majority of escrow agents fail to follow 718.202.  Make no mistake, this opinion is a firestorm in the making.  Not only will purchasers be voiding their contracts as to developers, you can see a war looming between developers and escrow agents.  Whose responsibility was it to make certain 718.202 was properly complied with? I can see developers claiming the escrow agent’s negligence resulted in the loss of the deposit monies.

The question to ponder here is, “How long will the dark horse run?”   It seems as if the first dark horse might rush past the grand stand to sweeping triumph, although the Florida Supreme Court has yet to speak.  As to the second dark horse: I would not be surprised to see the Florida Legislature or an administrative agency turning cartwheels to undo this opinion, as development has historically been a center of Florida’s economy.  That is if the Eleventh Circuit does not give it the “Stein” treatment first.  Either way, my hat is off to Judge Altonga. Agree or disagree with the opinion: it demonstrates a marked dedication in finding the truth of the law, and most important a great deal of respect for the laws of the State of Florida.     

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.

April 1, 2010 Posted by Timothy Powers O'Neill | Uncategorized | , , , , , , , , , , , , , , | Leave a Comment

Irreconcilable Differences: The Stein v. Paradigm Court Divorces Itself From Precedent on the Interstate Land Sales Full Disclosure Act

 

 Quædam iura non scripta, sed omnibus scriptis certiora sunt.

“Some laws are not written, but are more decisive than any written law.”

  • Seneca the Elder, Controversiae , Bk. 1, ch. 1, sect. 14; translation from Norman T. Pratt Seneca’s Drama (Chapel Hill: University of North Carolina Press, 1983) p. 140.

We must not make a scarecrow of the law,
Setting it up to fear the birds of prey,
And let it keep one shape, till custom make it
Their perch and not their terror.

In Stein v. Paradigm Mirasol, LLC, __ F.3d __, 2009 WL 3110819 (11th Cir. Sept. 30, 2009), the Eleventh Circuit rendered a decision that managed to ignore their own precedent set in Kamel v. Kenco/The Oaks At Boca Raton LP, 2008 U.S. App. LEXIS 21762 (11th Cir. Oct. 16, 2008) as well as the resulting state law decisions of Florida: Home Devco/Tivoli Isles LLC v. Silver — So.3d —-, 2009 WL 3018146 (Fla. 4 DCA Sept. 23, 2009); Plaza Court, L.P. v. Baker-Chaput, — So.3d —-, 34 Fla. L. Weekly D1305, 2009 WL 1809921 (Fla. 5th DCA June 26, 2009).  For a well reasoned exploration of the policy and implications that arise from the Stein decision, you should read Jared Beck’s blog on the issue here.  I am just a “nuts and bolts” type of guy, and true to my nature the Stein decision made me think of my college days. No, I am not referring to the first thing that popped into your mind. (Whatever that might have been.)  I was thinking of Dr. Anthony Beavers and my semester of logic class as required by my minor in pre-law. Dr. Beavers would tell you that I was much better in his Greek philosophy than in his logic course. I could always see the correct beginning and result for a proof, but often times I found myself sorely wanting in expressing the steps to arrive at the conclusion.  However, he did manage to teach me one thing that I remember quite well after all these years.  It is an elegant and simple proof known as a hypothetical syllogism which is just a fancy name for the proposition that states: if one implies another, and that other implies a third, then the first implies the third.  Represented in proof form it looks like this: P → Q. Q → R. Therefore, P → R. If you placed facts in such a proof it would look like this:

If I do not wake up, then I cannot go to work.
If I cannot go to work, then I will not get paid.
Therefore, if I do not wake up, then I will not get paid.

Now that your eyes have glazed over, and I have burned my reader attention credits: let me get to the point. There have been four cases, as mentioned above that defined the two-year completion exemption (15 U.S.C. Sec. 1702(a)(2)) for the State of Florida.  For starters, let’s examine the case of Kamel v. Kenco/The Oaks At Boca Raton LP, 2008 U.S. App. LEXIS 21762 (11th Cir. Oct. 16, 2008).  The purchaser lost in the Kamel case, but the opinion yielded a very important guideline for the interpretation of the two-year completion exemption.

Because the ILSA is a federal statute, federal law governs its interpretation. Sola Electric Co. v. Jefferson Electric Co., 317 U.S. 173, 176, 63 S.Ct. 172, 174, 87 L.Ed. 165 (1942). State contract law, however, is the ultimate arbiter of whether a contract actually “obligates” a seller to erect a building within two years. See Markowitz v. Northeast Land Co., 906 F.2d 100, 105 (3d Cir.1990); see also Guidelines for Exemptions Available Under the Interstate Land Sales Full Disclosure Act, 61 Fed.Reg. 13596, 13603 (Mar. 27, 1996) [hereinafter, Guidelines].  

Kamel, at *4.

As you can see, the Eleventh Circuit Court of Appeals made it plain that the “obligation” to complete in two years was a matter of state contract law, with the state acting as the ultimate arbiter of the same. Further, the Eleventh Circuit has been consistent on its position in following state law:  “[a] federal court applying state law is bound to adhere to decisions of the state’s intermediate appellate courts absent some persuasive indication that the state’s highest court would decide the issue otherwise.” See Galindo v. ARI Mut. Ins. Co., 203 F.3d 771, 775 (11th Cir.2000) (stating that “[a]bsent a decision by the highest state court or persuasive indication that it would decide the issue differently, federal courts follow decisions of intermediate appellate courts in applying state law”);Silverberg v. Paine, Webber, Jackson & Curtis, Inc., 710 F.2d 678, 690 (11th Cir.1983) (noting that a “federal court applying state law is bound to adhere to decisions of the state’s intermediate appellate courts absent some persuasive indication that the state’s highest court would decide the issue otherwise”); McMahan v. Toto, 311 F.3d 1077, 1080 (11th Cir.2002) (noting that the fact that a federal court may decide the issue differently is not a “persuasive indication that the Florida Supreme Court would agree with us and not with one of its own intermediate appellate courts, which presumably knows more about Florida law” and rescinding portions of a prior decision that applied the Florida offer of judgment statute in a manner contrary to a subsequent decision by a Florida intermediate appellate court); Meier ex rel. Meier v. Sun Int’l Hotels, Ltd., 288 F.3d 1264, 1271 (11th Cir.2002) (reversing district court interpretation of the Florida long arm statute that rejected the decision of a Florida intermediate appellate court where the district court indicated that “[b]ecause it is not a decision of the Florida Supreme Court, [the appellate court decision] does not constitute binding authority” on the issue of Florida law); King v. Guardian Life Ins. Co., 686 F.2d 894, 898 (11th Cir.1982) (following Georgia intermediate appellate court interpretation of state statute as it pertains to policy lapse and noting rule that “[in] the absence of a decision from the state’s highest court, we must adhere to the decisions of the state’s intermediate appellate courts unless there is some persuasive indication that the state’s highest court would decide the issue otherwise” (internal quotation marks and citation omitted)).  Therefore, if the state intermediate appellate courts ruled  on the two year “obligation” it would be binding precedent on the Eleventh Circuit. Correct? Here is my less than credible attempt at the hypothetical syllogism:

If the Stein court reviews the “obligation” under Sec. 1702(a)(2) then as a federal court they must follow state contract law.

If a federal court must follow state contract law, then the Plaza Court and Home Devco opinions are controlling.

Therefore, if the Stein court reviews the “obligation” under Sec. 1702(a)(2), then the Plaza Court and Home Devco opinions are controlling.

What is perhaps most incredible in this situation is that not one, but two intermediate state appellate courts specifically agreed with the lower court’s reasoning on the 1702(a)(2) “obligation” in Stein v. Paradigm Mirasol. Both of these decisions of the intermediate appellate courts were issued prior to the Eleventh Circuit’s opinion in Stein. This is really just a long-winded way of saying that the Stein opinion defies logic. However, just as with any logical proof, the conclusion is not as important as the methodology employed to reach that conclusion.

In the Plaza case the Court opined:

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, 619 F.Supp.2d at 1339-41. We agree with Judges Steele and Hurley that the question is whether Plaza’s contractual provisions are recognized within Florida’s doctrine of impossibility.

FN3. Disimone v. LDG South II, LLC, 2009 WL 210711 (M.D.Fla. Jan.28, 2009); Van Hook v. The Residences at Coconut Point, LLC, 2008 WL 2740331 (M.D.Fla. July 10, 2008); Stein v. Paradigm Mirsol, LLC, 551 F.Supp.2d 1323 (M.D.Fla.2008).

Plaza Court, 2009 WL 1809921 at *7-8. (emphasis added.)

In Home Devco/Tivoli Isles LLC v. Silver — So.3d —-, 2009 WL 3018146 (Fla. 4 DCA Sept. 23, 2009) the court discussed the lower court’s ruling in Stein in some detail:

In Stein, the closest case to ours factually, the court framed the issue as whether the clause "so undermines the two-year requirement that it renders the provision illusory." Stein, 551 F.Supp.2d at 1330. In finding the provision illusory, the court addressed issues at the heart of the current appeal:
The provision in the Agreement provides that the two year period is extended "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 the Seller…." * * * The other exclusions, however, are broad enough to seriously undermine the obligation to complete the condominium within two years. This provision does not limit the permissible delays to those justifiable under an impossibility of performance, but allows exclusions for far less compelling reasons, culminating in the catchall "other delays beyond the control of the Seller." In the Agreement in this case, none of the exclusions are required to satisfy impossibility standards, and the catchall "other delays beyond the control of the Seller" is certainly broad enough to allow the Seller to excuse completion on a wide variety of events. The Court concludes that the provision in the Agreement extending the completion period for delays not qualifying under Florida’s impossibility of performance principles renders the obligation to complete the condominium within two years illusory. Therefore the Agreement is not exempt from the ILSFDA because it does not "obligate" completion of the condominium within two years.

Home Devco, 2009 WL 3018146 at *6-7. (emphasis added.)

When you read Stein v. Paradigm Mirasol, LLC, __ F.3d __, 2009 WL 3110819 (11th Cir. Sept. 30, 2009), you will notice that the Court does not address whether or not the Supreme Court of Florida would agree with two of the Florida intermediate appellate courts.  In fact, you won’t see a mention of either the Plaza Court case or the Home Devco case anywhere in the Eleventh Circuit’s opinion in Stein v. Paradigm Mirasol, LLC. It seems rather odd that the Kamel court tells us that we must look to state law, and yet the Stein court fails to mention two cases that are directly on point. Perhaps there is some unwritten law at work here.  A law where “what goes up, must come down” and buyer’s remorse, constitute a complete defense to federal statutes. This “unwritten” law seems to be prevalent in the recent Federal decisions on ILSA.  Seneca would be proud. To the state courts of Florida: The only thing you are the arbiter of is a dry husk erected in a barren field. A place where the passager hawks take their rest on the migration south, to where the prey is now both plentiful and easy.

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.

October 22, 2009 Posted by Timothy Powers O'Neill | Uncategorized | , , , , , | 2 Comments

Tunnel Vision: The View From Here

Expecting the world to treat you fairly
because you are a good person
is a little like expecting the bull not to attack you
because you are a vegetarian. -Dennis Wholey

I was perusing the web for real estate news when I came across this article written by Mario A. Iglesias which can be found here.  The name of the article is “Hindsight over Condo Sales,” and he tracks the history of the condo boom that peaked in 2003 and the following bust that was fully evident by 2007.  Mr. Iglesias wrote:

It was not uncommon to find buyers camped out overnight outside of a sales center upon the announcement of a new project. A buyer could easily have signed a contract to purchase a unit for $500,000, then “flip” that contract for a price well over $800,000 just one year later. As such, real estate developers rushed ahead with as many new projects as they could physically—and financially—handle at a time.  In the mad dash to develop condominium units to feed this growing market, which led to as many as 60,000 new units in Miami-Dade County alone, real estate developers had to make business decisions that carried material legal consequences. * * * It was believed that the developer could complete a project of this size within two years following the date the units were pre-sold. The truth was that by 2003, there were no condo projects in excess of 100 units that could be substantially completed in two years. (emphasis mine.)

The article explains why developers chose to seek exemptions rather than comply with the Interstate Land Sales Act. (See two-year completion exemption 15 U.S.C. 1702(a)(2).) Factors such as: (1) cost and delay associated with compliance; (2) the limitation of damages to the developer to 15% of the purchase price in case of default; and (3) a developer would be required to provide a defaulting buyer with 20 days written notice and an opportunity to cure any default. (See 15 U.S.C. Sec. 1703(d).)   All of these things represent a major inconvenience in a market where buyers are camped out at your sales trailer, and the majority of units are under reservation agreements on the first day of sale.  If a buyer elects not to purchase in an hot market, you simply keep their deposit and resell the unit at a higher price.  The developers undertook these condominium developments, and drafted the accompanying contracts, with eyes wide open.  Many detractors like to use the stock market analogy making statements such as, “Real estate like the stock market can go down. Why is that so hard to understand? I don’t see people in the casino asking back for their bets when they lose?”  If your stock broker violated FINRA and SEC rules, or your card dealer violated the laws of the gaming commission by cheating, you could seek your money back.  Why is that so hard to understand? Should violation of the law be meaningless?

I mention this because of the unending attempts to cast the developer as a victim. A victim is defined as: “a person who is deceived or cheated, as by his or her own emotions or ignorance, by the dishonesty of others, or by some impersonal agency: a victim of misplaced confidence; the victim of a swindler; a victim of an optical illusion.” victim.” Dictionary.com Unabridged (v 1.1). Random House, Inc. 06 Aug. 2009. <Dictionary.com http://dictionary.reference.com/browse/victim>.  This is usually accompanied by the ever popular refrain of “buyer’s remorse,” a tagline that is apparently irresistible. Examples of this can be found here, here, and here.  This phrase inevitably appears in motions to dismiss, statements of umbrage in a motion for summary judgment, and almost every single article the media generates that concerns condominium buyer lawsuits.  It represents one of the most egregious examples of intellectual dishonesty in recent memory.  Developers are not blameless, and they certainly are not victims.  They made the informed decision to seek a “self-determined” exemption rather than register with HUD. They approved the draft of the form contract to be employed in every sale. They raced to complete thousands of units that they actively encouraged to be bought as an investment. In some cases they violated a federal strict liability statute known as ILSA, and are paying the price. That being said, in the vast majority of contracts I have reviewed, I found no violation.  Most developers understood these laws and followed them properly. Unfortunately, the minority of developers who chose to push the envelope, built thousands of units.

It does raise a fair question: Why did these buyers back out in such large numbers?  When purchasing a home most buyers had to finance the portion of the purchase in excess of twenty percent. The bank performs an initial appraisal at the time of purchase, and a second appraisal after the building is constructed.  It was not unusual for contracts that were signed 2005 and called to close in 2008, to have a twenty-five to thirty percent shortfall on the appraisal.  The bank will only fund up to the second appraisal price regardless of your contact price.  If your second appraisal results in a $100,000 shortfall, it is up to the buyer to supply that money in cash in order to close. Most of these buyers could not close, even if they had wanted to.  Then there were those buyers who found out years after the one-hundred and eighty day presale contingency had expired that their lender had “blackballed” the project. The developer had failed to sell the requisite number of units and forged ahead with the completion of the building, instead of refunding the purchaser’s deposit monies and walking away.  The buyers’ banks, fearing a loss of their loan monies, refused to lend in these “blackballed” developments. These buyer’s either faced a “Hobson’s choice” or were skewered with “Morton’s Fork.”  The “shortfall” buyer had to make up twenty to thirty percent of the purchase price and the “blackballed” buyer had to come up with the remaining eighty percent of the purchase price in order to close.  If the buyer was incapable of supplying this cash, they had to forfeit their twenty percent deposit, or fifteen percent in the case of a project subject to ILSA.  See Santidrian v. Landmark Custom Ranches, Inc., 2009 WL 195575, at *5 (S.D. Fla. July 6, 2009)(developer not entitled to equitable exemption from ILSA because buyer’s initial reason for not closing was failure of financing.)  If you purchase a stock that drops in value, you can at least try to hold it so the loss does not become permanent. Here, the buyer’s money was gone.

Even those buyers entitled to five percent of the purchase price back under an ILSA contract in most cases received nothing. See 15 U.S.C. Sec. 1703(d)(2).  I can recall making a demand on a developer for return of the five percent of the buyer’s money and informing them we were not going to close.  The developer’s reply was that they were choosing not to hold us in default, and therefore we were entitled to nothing. In essence, the protection afforded under 15 U.S.C. Sec. 1703(d)(2) was optional, based upon the choice of this developer.  This event speaks volumes about the overarching problem.  Developers, their lawyers drafting the contract, and even some courts, have developed acute tunnel vision.  The protections afforded by Congress in drafting the Interstate Land Sales Act are optional, and the buyer’s rights under the law are a nuisance to be dealt with accordingly. When these buyers learned of the violations of the law committed by their particular developer (laws meant to protect them as a buyer) it was not remorse that motivated them, it was anger. 

As to these minority of the developers who saw the law as optional: You waved a red flag at a bull with dollars impaled upon its horns. Why should it come as a surprise to you to be under attack?     

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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August 10, 2009 Posted by Timothy Powers O'Neill | Uncategorized | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a Comment

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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June 30, 2009 Posted by Timothy Powers O'Neill | Uncategorized | , , , , , , , , , , , , , , , , , , , , | 7 Comments

ILSA: A Primer for Real Estate Agents

Many of you making your initial journey to this blog may be wondering: “What is the Interstate Land Sales Act?” and “Why should I care?” Most blogs cover the act solely from the purchaser’s perspective. However there are those individuals, usually real estate agents, who unwittingly get caught in the middle of the ILSA. Whether the Act or these regulations apply to a particular development is beyond the scope of this post. Suffice it to say that if you are selling in a preconstruction development with more than twenty-five homes you should be aware of the regulations discussed herein. The Act itself and the regulations adopted by the Secretary of HUD make it clear: that selling preconstruction units in a large development can be hazardous. The pertinent ILSA regulations can be found at 24 C.F.R. s. 1710, 24 C.F.R. s. 1715, and 24 C.F.R. s. 1720. In addition there are many practical explanations, and examples provided by HUD concerning these regulations. See: 61 FR 13596 (1996). There are two major areas in the ILSA regulations that can trap an agent trying to make a sale: (1) future monetary or investment value; and (2) promises that a unit can be resold prior to closing. While some promises of future value may be written off as mere “puffery,” (i.e panaramic views, a tropical paradise, best clubhouse around, etcetera) representations related to the future monetery value may violate ILSA. Also, telling a potential purchaser that you can assign the contract to a new buyer and have the unit resold at a profit before the required closing can violate the Act. The regulations promulgated by HUD define the following practices as “unlawful sales practices” violating ILSA as set forth in 24 C.F.R. s. 1715.20:
. . .
(h) Use, as a sales inducement, any representation that any lot has good investment potential or will increase in value unless it can be established, in writing, that:
(1) Comparable lots or parcels in the subdivision have, in fact, been resold by their owners on the open market at a profit, or;
(2) There is a factual basis for the represented future increase in value and the factual basis is certain, and;
(3) The sales price of the offered lot does not already reflect the anticipated increase in value due to any promised facilities or amenities. The burden of establishing the relevancy of any comparable sales and the certainty of the factual basis of the increase in value shall rest upon the developer.

There is a subtle point that many people overlook when dealing with this regulation. It is not the representation; it is an omission that constitutes a violation of ILSA. In other words, failing to provide the prospective purchaser with written documentation of the underlying facts that supports a representation that the unit “will increase in value” is the violation. The representation itself is not unlawful if accompanied by the proper documentary backup. This distinction is important as many sellers attempt to employ a defense with the boilerplate disclaimers that “no oral representations” prior to the contract may be relied upon. A purchaser cannot “rely” on an omission, and ostensibly this would fall outside such a provision. In addition, 15 U.S.C. §1712 specifically states that ILSA compliance may not be waived by contract. This particular area of ILSA is not well-settled under existing case law. However, it seems to be the most frequent mistake sales agents make. Only a small minority of purchasers I have spoken with state that they were not promised that their purchase would prove to be a good investment.

Second there is the matter of the resale program. This promise is often accompanied by a written resale agreement that supplements the purchase contract. In 24 C.F.R. s. 1715.25(o) it states that is a “misleading sales practice” to make, any representation that implies that the developer or agent will resell or repurchase the property being offered at some future time unless the developer or agent has an ongoing program for doing so. This means you may not be allowed to abandon a resale program, even in a dismal economy, without violating ILSA.

Be aware. Be careful. You may face individual liability for these violations of the Act. With so many developers going bankrupt, purchasers are increasingly turning to individual liability to ensure recovery of their deposit.

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.

June 9, 2009 Posted by Timothy Powers O'Neill | Uncategorized | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a Comment

Recent Developments in The Interstate Land Sales Full Disclosure Act: Jankus v. The Edge Investors

PLEASE NOTE:   The opinion cited below was withdrawn by Jankus v. Edge Investors, L.P., — F.Supp.2d —-, 2009 WL 2849064 (S.D.Fla. Aug 31, 2009) (NO. 08-80200-CIV); However, the reasoning of this opinion was adopted by Plaza Court, L.P. v. Baker-Chaput, 2009 WL 1809921, *5+, 34 Fla. L. Weekly D1305, D1305+ (Fla.App. 5 Dist. Jun 26, 2009). The effect of the Plaza Court adoption is discussed at  http://tinyurl.com/lxj2t8.  The Eleventh Circuit states that the forum state is the ultimate arbiter of the two year promise exemption.  The Jankus opinion was withdrawn based upon the two year promise exemption. This occurred after the State of Florida expressly found that the provision involved in Jankus, and others like it, was not exempt from ILSA. 

The Right to Rescind Expands to Three Years under 15 U.S.C. Section 1703(c)

Several years ago the Florida Fourth District Court of Appeal issued the opinion in Engle Homes, Inc. v. Krasna,766 So.2d 311 (Fla. 4th DCA 2000).  The Krasna court dealt with a developer’s violation of 15 USC section 1703(b), by failing to place a seven day right of rescission in the purchase contract. Recently, in Jankus v. Edge Investors, L.P., 2009 U.S. Dist. LEXIS 29110 (S.D. Fla. Apr. 8, 2009), the Federal Court for the Southern District of Florida has applied a Krasna style reasoning to Section 1703(c) of ILSA.  In order to understand the Jankus case, one must look to the history of cases that develop the treatment of rescission under 15 U.S.C. Section 1703(c).

ILSA provides:– 15 U.S.C. section 1703(b): “Any contract or agreement for the sale or lease of a lot not exempt under section 1702 of this title may be revoked at the option of the purchaser or lessee until midnight of the seventh day following the signing of such contract or agreement or until such later time as may be required pursuant to applicable State laws, and such contract or agreement shall clearly provide this right.” (emphasis added).

– 15 U.S.C. section 1703(c): “In the case of any contract or agreement for the sale or lease of a lot for which a property report is required by this chapter and the property report has not been given to the purchaser or lessee in advance of his or her signing such contract or agreement, such contract or agreement may be revoked at the option of the purchaser or lessee within two years from the date of such signing, and such contract or agreement shall clearly provide this right.” (emphasis added).

The Krasna court reasoned that the full three years to rescind was available to the purchaser because the contract did not include the notice of the seven day rescission period. As the court explained:

“The Krasnas are asserting a right, i.e., rescission, created under subsection (b) of the Act. The notification of the rescission and return of the deed was done within thirty-one (31) months after the signing of the contract and within sixty (60) days of the Krasnas’ discovery that Engle Homes had violated the Act. Engle Homes also asserts that the Krasnas waived their right to rescind the contract. This assertion is flawed.  Waiver is the relinquishment of a known right and may not occur unless knowledge of that right is express or implied. Independent Fire Ins. Co. v. Arvidson, 604 So. 2d 854 (Fla. 4th DCA 1992). Engle Homes concedes that the right was not expressly stated in the contract. Thus, since the Krasnas did not learn of their right to rescission until 1997, waiver cannot be implied by their acceptance of the deed and living in the house.”

In 2008 the court in Taylor v. Holiday Isle, 561 F. Supp. 2d 1269 (S.D. Ala. 2008) decided that as to 15 USC 1703(c) rescission had to be made in two years, but damages were available for three. The Taylor court criticized the Engle Homes v. Krasna decision in a foot note:

“The only case that plaintiffs cite in support of the proposition that lack of notice of their right of rescission extends or eliminates the § 1703(c) deadline is Engle Homes, Inc. v. Krasna,766 So.2d 311 (Fla. App. 4 Dist. 2000). In Krasna, the court did not examine the statutory language in meaningful detail, but instead held in conclusory terms that the purchasers could not have timely waived their right to rescind the contract because the right of rescission was not expressly stated in the contract, and the purchasers did not learn of that right until 31 months after the fact. Krasna’s reasoning is problematic and ultimately unavailing to plaintiffs for three reasons. First, the doctrine of waiver generally does not apply to a plaintiff’s failure to bring an action within a statutory limitations period; rather, waiver is generally discussed in terms of a defendant’s waiver of a right to invoke the limitations defense. See generally Day v. Crosby, 391 F.3d 1192, 1194 (11th Cir. 2004) (“In an ordinary civil case, a failure to plead the bar of the statute of limitations constitutes a waiver of the defense.”) (citation omitted). Second, Krasna’s determination that the purchasers could not be held accountable for a statutory limitations period of which they were not aware is contrary to well-established law concerning tolling of such periods.  A plaintiff’s lack of knowledge of a limitations deadline is generally not an excuse for his failure to comply with it. See, e.g., Wakefield v. Railroad Retirement Bd., 131 F.3d 967, 970 (11th Cir. 1997) (“Ignorance of the law usually is not a factor that can warrant equitable tolling.”); Whitt v. Stephens County, 529 F.3d 278, 2008 U.S. App. LEXIS 10881, 2008 WL 2122814, *5 n.7 (5th Cir. May 21, 2008) (opining that “neither excusable neglect nor ignorance of the law is sufficient to justify equitable tolling of limitations”)”

The inherent problem with the Taylor decision arises under the plain reading of 15 U.S.C. Section 1711, or the statute of limitations section of ILSA.  Section 1711 provides a three-year statute of limitations — either running from the date the contract was signed, or from the date the discovery of the ILSA violation was made, depending on which right under ILSA is being asserted.  See 15 U.S.C. section 1711.  The two year rescission period does not appear in Section 1711, and as such it is something other than a statute of limitations.  The Jankus court found that the two-year period for the buyer to give notice was a condition precedent to filing, not a statute of limitations.  As such, the developer can waive the two-year notice period, when they fail to give the appropriate notice in the contract as required by Section 1703(c).  Jankus also noted the inadequacy of the damage remedy that the Taylor court espoused.

“Moreover, that the plaintiff may have a theoretical action for damages  under §1709(b) is not a meaningful alternative where he or she is still bound to perform under the contract of purchase. Without the legislatively prescribed rescission remedy under § 1703(c), he or she is left with the difficult task of proving the materiality of the property report disclosure violation and causally related damages under § 1709(b). The corresponding diminished litigation exposure attendant to this revision of the statutory scheme would give developers little incentive to comply with the disclosure requirements mandated under the ILSA. This court is not willing to interfere with the ILSA statutory scheme in this fashion by effectively writing the rescission disclosure requirement out of the statute, essentially what the Holiday Isle court achieved by enforcing §1703(c)’s two year rescission period against a buyer who did not receive the statutorily prescribed notice of it.”  Jankus 2009 U.S. Dist. LEXIS 29110 at *19-20.

Just as Krasna ensured that the seven day notice rights under Section 1703(b) are protected: Jankus ensures that developers must comply with 1703(c) or face rescission within three years.

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.

May 3, 2009 Posted by Timothy Powers O'Neill | Uncategorized | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | 4 Comments