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Interstate Land Sales Full Interstate Land Sales Full Disclosure Act: Latest Developments

Ensuring Compliance with ILSA's Registration Requirements in the Absence of Clear Guidelines

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNES DAY, JANUARY 25, 2012

Today s faculty features:

Brian C. Cheney, Partner, Snell & Wilmer, S alt Lake City

• M. Theresa ("Tess") Tolentino Meehan, Partner, Stoel Rives, S

acramento, Calif. Frank J. Carmel, Managing S hareholder, Carmel & Carmel, Washington, D.C.

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Interstate Land Sales Full Disclosure Act: Latest Developments p

Ensuring Compliance with ILSA's Registration Requirements in the Absence of Clear Guidelines Requirements in the Absence of Clear Guidelines

January 25, 2012 Brian C. Cheney, Partner Snell & Wilmer, Salt Lake City, UT M Theresa ("Tess") Tolentino Meehan Partner

• M. Theresa ( Tess ) Tolentino Meehan, Partner

Stoel Rives, Sacramento, CA Frank J. Carmel, Managing Shareholder Carmel & Carmel Washington D C Carmel & Carmel, Washington, D.C.

5

Overview of Discussion

History of the Act Recent Developments p Best Practices Best Practices Outlook Outlook Q ti Questions

6

History of the Act

(15 U S C 1701 t )

• Passed in 1968 resulting from sales to out‐of

(15 U.S.C. 1701 et seq.)

Passed in 1968 resulting from sales to out of state‐buyers of uninhabitable lands (FL/AZ)

– Emphasis on full disclosure – Emphasis on full disclosure – Liberalized fraud remedies

7

History of the Act

(15 U S C 1701 t ) (15 U.S.C. 1701 et seq.)

8

History of the Act

(15 U S C 1701 t )

• Passed in 1968 resulting from sales to out‐of

(15 U.S.C. 1701 et seq.)

Passed in 1968 resulting from sales to out of state‐buyers of uninhabitable lands (FL/AZ)

– Emphasis on full disclosure – Emphasis on full disclosure – Liberalized fraud remedies

M d l d ft th S iti A t f 1933

• Modeled after the Securities Act of 1933

– Statement of record = registration statement – Property Report = prospectus

• 1979 Exemption Amendments

– exempt small business and occasional land sellers

9

Values Ri Rise CRASH

Market Stabilizes

ILSA

Stabilizes /Develop

ILSA ACTIVITY

Limitations

Litigation

Period Expires/Fewer Lawsuits

No

Modification to

Develop

to Regulations

10

History of the Act

• Early litigation (pre‐1979 Amendments)

(15 U.S.C. 1701 et seq.)

y g (p ) – Viewed as Buyer’s Remorse Litigation – Materiality of disputed disclosures y p – Defining type of development covered

• E.g. condos are “Lots”

g

• Recent Litigation

– Recognition of contracting to avoid the Act Recognition of contracting to avoid the Act – Strict Application of the Act – Almost ½ of reported cases have been issued in Almost ½ of reported cases have been issued in last 5 years

11

Recent ILSA Developments

Shift from HUD to the CFPB Shift from HUD to the CFPB The Act; Applicability and T i l Terminology Current Litigation Trends

• Major Themes

N l

• Newer unusual cases
• California and State Law Interplay

12

Transfer from HUD to the CFPB Transfer from HUD to the CFPB

• Frank Carmel

Frank Carmel

• Mandated by Dodd‐Frank

– Created for purposes of Wall Street Reform and Consumer Created for purposes of Wall Street Reform and Consumer Protection; – Dodd‐ Frank became law on July 21, 2010; – Established the Bureau of Consumer Financial Protection (Referred to as CFPB); Title X Transferred Responsibility for a number of – Title X Transferred Responsibility for a number of consumer‐oriented financial laws including ILSA to the CFPB (formerly administered by HUD).

13

The Consumer Financial Protection Bureau The Consumer Financial Protection Bureau

• Assumed Responsibility for ILSA on July 21, 2011

Assumed Responsibility for ILSA on July 21, 2011

• Initial result was somewhat chaotic

Initial result was somewhat chaotic

– Loss of institutional history associated with ILSA – Even smaller staff – New interpretation of provisions; Review tightened – Inconsistency complaints by many lawyers – Requesting of Information not in Regulations – Often pages of punch‐list items by reviewers

14

CFPB Activities CFPB Activities

• Common conversation in area is that ILSA statute can be

improved upon improved upon.

• December 5, 2011 Notice on Streamlining Inherited

Regulations - including ILSA.

– Primary directive is mortgage reform but Primary directive is mortgage reform, but – Congressional mandate to address outdated, unnecessary or unduly burdensome regulations. – Comments solicited and due by March 5, 2012.

• December 21, 2011 Revised Regulations

– Primary changes were changes in name of agency and use of forms. C t d b F b 21 2012 – Comments due by February 21, 2012.

• Recent Consideration of Condominium Exemption

15

Transfer to CFPB and Certified State Programs

• California Department of Real Estate (DRE)

California Department of Real Estate (DRE) –CFPB will continue to administer to the same policies policies –No other communication between the DRE d CFPB and CFPB –CFPB continues to accept CA’s public reports

16

Transfer to CFPB and Certified State Programs

• California Department of Real Estate (DRE)

California Department of Real Estate (DRE) –CFPB will continue to administer to the same policies policies –No other communication between the DRE d CFPB and CFPB –CFPB continues to accept CA’s public reports –DRE plans to “wait and see”

17

ILSA – What it Covers ILSA What it Covers

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 commerce, or of the mails– (1) with respect to the sale or lease of any lot not exempt under section 1702 of this title‐‐ (Paraphrased)

p

(A) to sell or lease a lot unless a statement of record with respect to such lot is in effect; (B) to sell or lease a lot unless a printed property report has been furnished to the purchaser or lessee; (C) t ll l l t h t f th t t t f d th t t (C) to sell or lease a lot where any part of the statement of record or the property report contained an untrue statement of a material fact or omitted to state a material fact or (D) to display or deliver to prospective purchasers or lessees advertising and promotional material which is inconsistent with information required to be disclosed in the property report . . .

18

The Act ‐ Continued The Act Continued

It shall also be unlawful – (2) with respect to the sale or lease, or offer to sell or lease, any lot not exempt under section 1702(a) of this title—

(A) to employ any device scheme or artifice to defraud; (A) to employ any device, scheme, or artifice to defraud; (B) to obtain money or property by means of any untrue statement of a material fact,

• r any omission to state a material fact necessary in order to make the statements

made (in light of the circumstances in which they were made and within the context

• f the overall offer and sale or lease) not misleading, with respect to any information

pertinent to the lot orsubdivision; (C) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon a purchaser; or (D) to represent that roads, sewers, water, gas, or electric service, or recreational amenities will be provided or completed by the developer without stipulating in the contract of sale or lease that such services or amenities will be provided or l t d completed.

Either You Must Be Exempt Or Your Must Register

19

Exemptions Exemptions

• Threshold Exemptions; The Act does not

l t apply to-

– Less than 25 Lots/Units – Lot improved with a house – Lot improved with a house – Others

• Also does not regulate (but subject to anti-

fraud)

Fewer than 100 Lots; – Fewer than 100 Lots; – Single Family Residential with strict requirements; – Others

20

Important Definitions

(Necessary to Understand Exemptions and Trends)

• “subdivision”
• “common promotional plan”
• “developer”
• “lot” (only from regulations)
• “sale” (only from regulations)

21

Primary Exemptions Primary Exemptions

• Advise Clients to analyze based upon –

Advise Clients to analyze based upon

– Types of Units

• Lots Homes Condominiums

Lots, Homes, Condominiums

• For Example, Completed Homes are Fully Exempt.

– Number of Lots/Units

• Less than 25 Exempt
• 25‐99 – One Hundred Lot Exemption
• 100 or More – Other Exemption or Register

22

The Improved Lot Exemption The Improved Lot Exemption

The sale or lease of any improved land on which there i id i l i l d i i is a residential, commercial, condominium, or industrial building, or the sale or lease of land under a contract obligating the seller or lessor to erect such a building thereon within a period of two years; building thereon within a period of two years;

• Hotbed of Litigation Since the Act was Enacted

g

– Brian to Cover Litigation – Obligation to Complete – Limitations and Conditions – What Constitutes Complete – Counting the two years – Exemption Stacking (referred to as “piggy-backing”) Exemption Stacking (referred to as piggy backing )

23

Two Year Obligation to Complete under th I d L t E ti the Improved Lot Exemption

• The Contractual Obligation from Exemption Guidelines –

– If the contractual obligation is not present, the sale is not exempt. – The two-year period normally begins on the date the purchaser signs the sales contract. A t t th t diti t ti t f b ill – A contract that conditions construction upon acts of a buyer will not exempt the sale. The essence of this exemption is that it applies to the sale of a house (if not built at the time of sale, then to be built within two years after the sale). – The contract must not allow nonperformance by the seller at the seller's discretion. – Basically – No Conditions and No limitations on Remedies – i.e., Specific Performance Specific Performance.

24

Fewer than 100 Lot Exemption Fewer than 100 Lot Exemption

Exempt if: the subdivision contained fewer than 100 lots

• n April 28, 1969; has, since that date, contained fewer

than 100 lots and ill contin e to contain fe er than 100 than 100 lots; and will continue to contain fewer than 100 lots.

Th 100 l t t f f th ti l d l t The 100 lot count for purposes of the exemption excludes lots that are exempt from jurisdiction under 24 CFR 1710.5 (b) through (h).

G id li

• Guidelines

– Developers of subdivisions containing more than 99 lots who wish to operate under this exemption must assure themselves that all lots in excess of 99 have been and will be sold in transactions exempt. f S ( ) – The sale of more than 99 lots in transactions not exempt under Sec. 1710.5 (b) through (h) would nullify this exemption for prior and future sales and might result in prior sales being voidable at the purchaser's option. – If fewer than 100 lots are acquired in a larger subdivision, the offer of these lots will not be exempt if the acquiring party is in any way acting in concert with the will not be exempt if the acquiring party is, in any way, acting in concert with the previous or current developer.

25

Counting Lots/Aggregating Counting Lots/Aggregating

• Back to Definitions

– What Are The Lots/Units? – Common Promotional Plan

• Thread of Ownership or Acting in Concert
• Builder Sales and Lot Sales in Mixed PUD
• Number of lots by each is irrelevant

y

• Common ownership; same or similar name or identity;

common sales agents; common sales facilities; common advertising; and common inventory.

– Who is Selling – Definition of Developer

• 100 Lot Exemption is Subject to Anti‐Fraud Provisions

26

Other Exemptions ‐ Cursory Other Exemptions Cursory

• SFRE – Available but Seldom Used.
• There are Other Complete Exemptions
• There are Other Exemptions Subject to Anti-Fraud

There are Other Exemptions Subject to Anti Fraud Provisions

• Other Minor Exemptions

p

• Regulatory Exemption Application (ill advised)
• More noteworthy for what is covered

More noteworthy for what is covered. If Not Exempt You Must Register If Not Exempt, You Must Register

27

Registration Registration

Registration Consists Of

• The Filing of a Statement of Record
• Statement of Record Consists of Two Parts
• Statement of Record Consists of Two Parts –

– Property Report – Additional Information and Documentation Section ( l f d t th A I D ) (commonly referred to as the A.I.D.)

• Property Report - Disclosure and Warnings on Risks

– Information provided is often irrelevant in modern projects p p j

• A.I.D. Supporting Documentation

– not provided to consumers

28

Contract Provisions Contract Provisions

• Seven Day and Two Year Right of Rescission on all Sales

Documents:

You have the option to cancel your contract or agreement of sale by notice to the seller until midnight of the seventh day following the signing of the contract or agreement. If you did not receive a Property Report prepared pursuant to the rules and regulations of th C Fi i l P t ti B i d f i i th t t the Consumer Financial Protection Bureau in advance of your signing the contract or agreement, this contract or agreement may be revoked at your option for two years from the date of signing.

• Two Year Rescission for other omissions –
• Two Year Rescission for other omissions –

If a deed is not delivered within 180 days of contract signing, the purchaser is entitled to a two year right of rescission if the contract does not contain: (A) a legal sufficient and recordable lot description; (B) 20 days notice and right to cure on any default; (C) a damages limitation of 15% of the purchase price or actual damages, whichever is greater.

29

Various Other Requirements Various Other Requirements

• Disclaimers on Advertising

Disclaimers on Advertising

• Advertising Guidelines
• Deceptive Trade Practices

Deceptive Trade Practices

• Consolidations
• Amendments
• Amendments
• Annual Reports of Activity (AROA)

Recently a problem area at CFPB – Recently a problem area at CFPB.

30

Penalties Penalties

• Criminal Liability

Criminal Liability

• Civil Liability
• Three Year Statute of Limitations

Three Year Statute of Limitations

– Not to be confused with two year rescission rights, – Brian to discuss issues from cases.

• The Act provides at 15 U.S.C. 1703(e) that:

If a contract or agreement is revoked pursuant to subsection (b), (c), or (d) of this section, if the purchaser

• r lessee tenders to the seller or lessor (or successor thereof) an instrument conveying his or her rights and
• r lessee tenders to the seller or lessor (or successor thereof) an instrument conveying his or her rights and

interests in the lot, and if the rights and interests and the lot are in a condition which is substantially similar to the condition in which they were conveyed or purported to be conveyed to the purchaser or lessee, such purchaser or lessee shall be entitled to all money paid by him or her under such contract or agreement.

31

Current Litigation Trends Current Litigation Trends

Major Themes in Case Major Themes in Case Law A newer line of cases Interplay of ILSA and Interplay of ILSA and California State Law

32

Major Themes in Case Law Major Themes in Case Law

• Improved Lot Exemption (2 year completion)

Improved Lot Exemption (2 year completion)

• 99 Lot Exemption and “Piggy‐Backing”

S f i i i d S

• Statute of Limitations under ILSA

33

The “Improved Lot” Exemption

• 15 U.S.C. 1702(a)(2); Guidelines Part IV(b): Unless the method of

disposition is used for the purpose of evasion of the statute the disposition is used for the purpose of evasion of the statute, the Act does not apply to the sale or lease of any improved land on which there is a residential, commercial, condominium or industrial building, or the sale or lease of land under a contract g

• bligating the seller or lessor to erect such a building within a

period of two years.

• When is a building deemed complete? The building is generally

deemed complete when physically habitable and usable for the purpose in which it was purchased or leased.

• When does the two year period commence? The two‐year

i d b i h h i i d b h b period begins when the contract is signed by the buyer.

• What is a contract “obligating” completion within two years? This

issue has been the subject of much litigation over the years.

34

“Improved Lot” Exemption (Continued)

Marco Bay Assoc. v. Vandewalle, 472 So.2d 472 (Fla. App. 1985). In

• rder to be exempt under improved lot exemption, contract must contain

an unqualified and unconditional guarantee to complete the building within an unqualified and unconditional guarantee to complete the building within two years. Harvey v. Lake Buena Vista Resort, LLC, 568 F. Supp. 2d 1354 (M.D. Fla. 2008). Force majeure clause in purchase contract was too broad to impose nconditional obligation on seller to complete nit ithin t o impose unconditional obligation on seller to complete unit within two years. Atteberry v. Maubelle Company, 60 F.3d 415 (8th Cir. 1995). Seller’s duty to complete the building within two years was contingent upon the buyer p g y g p y submitting plans and paying all of seller’s costs and expenses. The Court held that the conditions were “reasonable steps in the construction process” and did not “negate the rights of purchasers” and, therefore, the improved lot exemption applied In support of its holding the Court noted improved lot exemption applied. In support of its holding, the Court noted that, “while the[] guidelines say that the seller’s obligation to build must be specific, they do not say, or even hint, that the obligation must be

• unconditional. Neither, of course, does the statute.”

35

“Improved Lot” Exemption (Continued)

Stein v. Paradigm Mirasol, LLC, 586 F.3d 849 (11th Cir. 2009). Force majeure clause in purchase contract did not improperly limit obligation to complete within two years. Clause was limited to circumstances “beyond the control of the seller.” “Allowing for reasonable delays caused by events beyond the seller’s control does not promote or permit fraud. It does not transform the seller’s obligation into an option.” Mailloux v Briella Townhomes LLC 3 So 3d 394 (Fla App 2009) Force Mailloux v. Briella Townhomes, LLC, 3 So.3d 394 (Fla. App. 2009). Force majeure clause permitting delays associated with acts of God, impossibility of performance and frustration of purpose did not render seller’s obligation to complete within two years illusory. Such defenses f d b ll i d d f l f found to be well-recognized defenses to contractual non-performance under Florida law. Princeton Homes, Inc. v. Virone, 612 F.3d 1324 (11th Cir. 2010). Court held obligation to build within 210 working days after obtaining a building held obligation to build within 210 working days after obtaining a building permit was illusory. Obtaining the building permit was largely within the control of the seller and was not a recognized force majeure defense under Florida law to the enforcement of a contract. Additionally, the court

36

“Improved Lot” Exemption (Continued)

found that what may constitute a “working day” was too dependent on the seller’s unilateral judgment.

• Can the seller limit the buyer’s remedies in the event of the

seller’s failure to complete within two years? Specific performance remedy must be available to buyer.

Stein v. Paradigm Mirasol, LLC, 586 F.3d 849 (11th Cir. 2009). Waiver

• f buyer’s right to speculative, punitive, and special damages still

allowed buyer to seek specific performance to enforce two year allowed buyer to seek specific performance to enforce two year

• bligation to complete the unit within two years or actual damages for

seller’s failure to do so. “[E]ven with the limitation of remedies clause, the Steins had an effective remedy to enforce Paradigm’s contractual i t l t th t ti f th d i i it ithi promise to complete the construction of the condominium unit within two years.”

37

“Improved Lot” Exemption (Continued)

Dalzell v. Trailhead Lodge at Wildhorse Meadows, LLC, 2010 U.S. Dist. LEXIS 125838 (D. Colo. 2010). Casualty provision in purchase contract providing that in the event of casualty damages to the unit or the project prior to closing, seller may terminate the contract found to “negate the buyer’s remedy of specific performance when the casualty provision is triggered.” Because the buyer would not have a right of specific performance under those circumstances the purchase contract was not performance under those circumstances, the purchase contract was not exempt. Salazar v. Santa Barbara Townhomes of Homestead, Inc., 2009 U.S. App. LEXIS 2181 (11th Cir. 2009). Purchase contract at issue generally limited h b ’ di li id d d b i h h the buyer’s remedies to liquidated damages, but with respect to the

• bligation to build within two years, the contract allowed all remedies

available at law. The contract also provided that the parties expressly intended the contract to be exempt under the Act, and that both buyer and intended the contract to be exempt under the Act, and that both buyer and seller were waiving any right or provision that would prevent the application of the exemption of the agreement. The Court held that the contract sufficiently obligated the seller to complete within two years.

38

“Improved Lot” Exemption (Continued)

• Will a Savings Clause Cure Contractual Defects Which Would

Preclude Application of the Exemption? Maybe, but don’t bet it

• n it.

Caswell v. Antilles Vero Beach, LLC, 2008 WL 4279555, *4 (July 8, 2008 S.D. Fla.). Enforcing a severability clause in finding that contract was exempt under 1702(a)(2) because “the portion of the contract at issue exempt under 1702(a)(2) because the portion of the contract at issue does not, contrary to Plaintiffs' argument, go to the essence of the contract and, therefore, it is enforceable. Further, the language contained in the “severability clause” portion of the Contract does not constitute an impermissible waiver, nor does it reveal an intent solely to evade ILSA's disclosure requirements.” Dubois v. Home Dynamics Murano, LLC, Case No. 07-61082-CIV- LENARD/GARBER (S D Fla 2008) Severing a limitation on damages LENARD/GARBER (S.D. Fla. 2008). Severing a limitation on damages provision and other offending language from the contract in holding the contract was exempt under 1702(a)(2) of ILSA and dismissing plaintiff’s claims on summary judgment.

39

“Improved Lot” Exemption (Continued)

Stefan v. Singer Island Condominiums Ltd., 2009 WL 426291 (Feb. 20, 2009 S.D. Fla. 2009). Applying savings clause and reading contract as a whole and giving all language effect in finding contract exempt under ILSA. Rosenstein v. The Edge Investors, L.P., 2009 WL 903806 (March 30, 2009 S.D. Fla.). Holding severability clause did not constitute impermissible waiver nor reveal intent to evade ILSA's disclosure requirements in finding waiver nor reveal intent to evade ILSA s disclosure requirements in finding contract exempt under ILSA. Harvey v. Lake Buena Vista Resort, LLC, 568 F. Supp. 2d 1354, 1365 (M.D. Fla. 2008), aff’d, 306 Fed. Apx. 471 (11th Cir. 2009). Refusing to l l “ i l ” ik l li i i apply contractual “savings clause” to strike language limiting two year

• bligation to complete. “Giving effect to the Resort's purported savings

clause in this case would encourage other developers to include the broadest list of potential all-encompassing excuses to extend completion broadest list of potential all encompassing excuses to extend completion dates beyond two years, and simply tack on a savings clause to avoid losing the exemption in the event it is challenged.”

40

The 99 Lot Exemption

 15 U.S.C. § 1702(b)(1); 24 C.F.R. §1710.6; Guidelines, Part V(a). Unless the method of disposition is adopted for the purpose

• f evasion of the Act, the provisions requiring registration and

, p q g g disclosure do not apply to the sale or lease of lots in a subdivision containing fewer than one hundred lots which are not fully exempt under subsection 1702(a). According to the y p ( ) g regulation, the subdivision must have contained fewer than 100 lots since April 28, 1969.  What is a “lot?”  What is a lot?

Giralt v. Vail Village Inn Assoc., 759 P.2d 801 (Colo. App. 1988). 107 parking units in the subdivision held to be “lots” under the Act. Therefore sale of the 34 residential units not subject to the 99 lot Therefore, sale of the 34 residential units not subject to the 99 lot

• exemption. The Court found that the parking units fell within the

regulations’ definition of “lot” – i.e., “any portion, piece, division, unit, or undivided interest in land located in any state or foreign county if the y g y

41

The 99 Lot Exemption (Continued)

interest includes the right to the exclusive use of a specific portion of the land.” Trotta v. Lighthouse Point Land Co., LLC, 551 F. Supp. 2d 1359 (S.D. Fla. 2008) ’d th d 319 F d A 803 805 2 (11th Ci 2008), rev’d on other grounds 319 Fed.Appx. 803, 805 n.2 (11th Cir. 2008). The exemptions under ILSA are most naturally interpreted to relate to the number of homes for sale in a subdivision. A “development does not become meaningfully larger, in the sense that consumers are g y g more likely to need regulatory protection from sophisticated sellers, merely because interests in storage spaces (or parking spaces) are sold along with the residential units.” Storage units and parking spaces are not “lots” under ILSA not lots under ILSA. Romero v. Borden East River Realty LLC, 2010 U.S. Dist. LEXIS 141319 (E.D. N.Y. 2010), rev’d on other grounds 635 F.3d 75 (2nd Cir. 2011). Because the sale of parking units and roof terrace units was restricted to residential unit owners, they were not “lots” under

• ILSA. “The mere fact that the roof terrace units and parking units have

separate legal descriptions, and owners are able to convey them to other residential unit owners or purchasers does not alter this conclusion ” residential unit owners or purchasers does not alter this conclusion.

42

The 99 Lot Exemption (Continued)

 What about separate offerings of less than 100 lots? The “common promotional plan” – defined as “a plan, undertaken by a single developer or a group of developers acting in by a single developer or a group of developers acting in concert, to offer lots for sale or lease; where such land is

• ffered for sale by such a developer or group of developers

acting in concert, and such land is contiguous or is known, designated, or advertised as a common unit or by a common name, such land shall be presumed, without regard to the number of lots covered by each individual offering, as being

• ffered for sale or lease as part of a common promotional
• ffered for sale or lease as part of a common promotional

plan” 15 U.S.C. §1701(4).

Piggott v. Sanibel Development, LLC, 576 F. Supp. 2d 1258 (S.D. Ala. 2008) S ll d th t l t th l i tiff t b 14 2008). Seller argued that sales to the plaintiffs were exempt because 14

• f the 108 units were not part of the common promotional plan for the

subdivision because they were offered first to principals or investors of the

• seller. The Court however, found that while the sales were made in two

,

43

The 99 Lot Exemption (Continued)

separate phases, they were not part of two separate promotional plans. The subdivision as a whole contained 108 units and, therefore, sales to the plaintiffs were not exempt under the 99 lot exemption.

44

“Piggy‐Backing” with the 99 Lot Exemption

• Guidelines, Part V(a). “[A] developer of a subdivision

containing a total of 129 lots since April 28, 1969, qualifies for this exemption if at least 30 lots are sold in transactions that p are exempt because the lots had completed homes erected

• n them. The 30 exempt transactions may fall within any one

exemption or a combination of exemptions noted in Sec. 1710 5 (b) th h (h) d b ith t f t 1710.5 (b) through (h) and may be either past or future

• sales. In the above example, the developer also could qualify

if twelve lots had been sold with residential structures already erected on them nine lots had been sold to building erected on them, nine lots had been sold to building contractors and at least nine lots were reserved for either the construction of homes by the developer or for sales to building contractors. The reserved lots need not be g specifically identified. Developers of subdivisions containing more than 99 lots who wish to operate under this exemption must assure

45

“Piggy‐Backing” with the 99 Lot Exemption (Cont.)

themselves that all lots in excess of 99 have been and will be sold in transactions exempt under 24 CFR 1710.5 (b) through (h). The sale of more than 99 lots in transactions not exempt ( ) p under Sec. 1710.5 (b) through (h) would nullify this exemption for prior and future sales and might result in prior sales being voidable at the purchaser's option.

• The Act, regulations and guidelines make it clear that lots

which are wholly exempt from the Act under 15 U.S.C. §1702 do not count toward the 99‐lot limit. Therefore, many developers sought to take advantage of the 99 Lot Exemption developers sought to take advantage of the 99 Lot Exemption by combining it with other full exemptions. Recently, several courts have held that this “piggy‐backing” approach will not be effective unless the developer can show that, at the time be effective unless the developer can show that, at the time the purchase contract at issue was signed, all units covered by the §1702 exemption are actually exempt, and not that

46

“Piggy‐Backing” with the 99 Lot Exemption (Cont.)

the developer simply intended to sell the lots under the exemption at some point in the future.

Bodansky v. Fifth on the Park Condo, LLC, 635 F.3d 75 (2nd Cir. 2011). Developers intended to sell more than 99 condominium units and intended that the sales be exempt under ILSA. Within 2 years of signing the contracts the plaintiffs sought to revoke the contracts The the contracts, the plaintiffs sought to revoke the contracts. The developers claimed the sales were exempt under the 100 lot and “improved lot” exemptions. District Court held that because the developers had sold fewer than 100 units before they received a TCO, those sales were exempt under the Act and future sales would be exempt under the improved lot exemption. The 2nd Circuit reversed the District Court and held that the applicability of the 100 lot exemption is determined as of the time the purchaser or lessor signs the contract, determined as of the time the purchaser or lessor signs the contract, not at an uncertain date when the developer may actually sell or lease 100 or more non-exempt lots. The Court relied principally on the present tense of the language of the Act and that a buyer should not have to wait

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“Piggy‐Backing” with the 99 Lot Exemption (Cont.)

until some unspecified point in time to know whether the sale was exempt and, therefore, whether they are entitled to the protections of the Act. Nickell v. Beau View of Biloxi, L.L.C., 636 F.3d 752 (5th Cir. 2011). D l i t d d t t t d k t f t 456 it Developer intended to construct and market a four-tower, 456-unit condominium development. After hurricane Katrina, the market for condominiums declined sharply. Plaintiffs signed purchase contracts in July 2005 in Tower I, which included 112 units. Developer only sold 87 of y p y the units and closed on 62. Plaintiff buyers closed on their units in November and December 2007, and demanded rescission of their sales contracts in June, 2008. The District Court granted the Developer’s motion for summary judgment and dismissed Plaintiffs’ claims finding that motion for summary judgment and dismissed Plaintiffs claims, finding that the sales were exempt from ILSA. On appeal, Developer relied largely on HUD Guidelines in arguing that sales were exempt because it intended to use the “improved lot” exemption for sales above 99 units by adding an addendum to the purchase contracts obligating completion within 2 years. The Court disagreed and relied on the “plain” language of the statute in holding that the applicability of the 100 lot exemption is determined at the time of sale the time of sale.

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“Piggy‐Backing” with the 99 Lot Exemption (Cont.)

 Courts have also recently held that in order to take advantage

• f the “piggy‐backing” of full exemptions with the 99 Lot

exemption the developer must have a legitimate business exemption, the developer must have a legitimate business purpose for doing so.

Gentry v. Harborage Cottages-Stuart, LLLP, 654 F.3d 1247 (11th Cir. 2011). In May, 2005 the plaintiffs signed purchase contracts to purchase condominium units in a 126 unit condominium project. 36 of the units were sold under contracts that obligated the developer to complete construction within two years The other 90 units were sold under construction within two years. The other 90 units were sold under contracts that did not contain the two year completion obligation. The developer argued that the sales were exempt under the 99 lot and improved lot exemptions. The District Court disagreed and held that the d l f il d t t bli h th t th th d f l f th it t developer failed to establish that the method of sale of the units was not adopted “for the purpose of evasion” of the Act and, therefore, the developer failed to qualify for an exemption. On appeal, the 11th Circuit

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“Piggy‐Backing” with the 99 Lot Exemption (Cont.)

requirements, constitutes a method of disposition that was adopted for the purpose of evading the ILSFDA’s requirements.” The Court held that a developer cannot merely show that the sale technically meets the i t f ti b t l t h th t th f requirements for an exemption but also must show that the purpose for seeking the exemption was not solely to evade the requirements of the

• Act. In this case, the Court found that the developer failed to meet this

burden and show a “legitimate business purpose” for seeking the g p p g

• exemptions. The Court conceded the burden was not a heavy one, but

developer’s sole argument was that it relied on the advice of legal counsel. Double AA Int’l Inv Group Inc v Swire Pac Holdings 674 F Supp 2d Double AA Int l Inv. Group, Inc. v. Swire Pac. Holdings, 674 F. Supp. 2d 1344 (S.D. Ala. 2009), . Seller’s desire to structure the purchase agreements and offering documents to save time and money is a legitimate business purpose.

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Statute of Limitations for Rescission Claims U d ILSA Under ILSA

• 15 U.S.C. §1703(c). Automatic two year revocation period for

§ ( ) y p failure to register and deliver a property report and/or failure to disclose such right of revocation in contract. 15 U S C §1711(b) A ti t f i ht t d b

• 15 U.S.C. §1711(b). Action to enforce right created by

§1703(c) must be brought within three years after the signing

• f the contract.
• When is the date of “signing of the contract?” The date the

buyer signs vs. the date both parties have signed. R ili h i i d i §1703( ) d

• Reconciling the two year revocation period in §1703(c) and

the three year limitations period in §1711(b).

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Statute of Limitations (Cont.)

Taylor v. Holiday Isle, LLC, 561 F. Supp. 2d 1269 (S.D. Ala. 2008). A purchaser has two years to exercise a right of revocation under §1703(c). If ti l i d th h th h thi d d §1711(b) If timely exercised, the purchaser then has a third year under §1711(b) within which to bring an action to enforce the 1703(c) revocation right. “[T]he most logical reading of these provisions, and the only one that gives effect to the disparate time limits set forth in each of them, is that a g es e ec

• e d spa a e

e s se

• eac
• e

, s a a plaintiff’s rescission claim requires compliance with both §1703(c)’s two- year limit for exercising the right of rescission and §1711(b)’s three year limit for filing suit based on the seller’s refusal to honor said rescission Jankus v Edge Investors L P 619 F Supp 2d 1328 (S D Fla 2009) Jankus v. Edge Investors, L.P., 619 F. Supp. 2d 1328 (S.D. Fla. 2009), vacated on other grounds, 650 F. Supp. 2d 1248 (S.D. Fla. 2009). Developer’s failure to give notice of revocation right under §1703(c) extends the two year revocation period until two years after the disclosure y p y is made. The Court ultimately vacated this order on other grounds, finding that the developer satisfied the requirements of the improved lot exemption and, therefore, the contract in question was exempt.

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Statute of Limitations (Cont.)

Nu-Chan, LLC v. 20 Pine Street LLC, 2010 U.S. Dist. LEXIS 103541 (S.D. N.Y. 2010). Buyer sought to rescind contract due to seller’s failure to l ith th i d l t ti d t i l d ti f th comply with the improved lot exemption and to include notice of the buyer’s right to revoke the contract within two years. Buyer failed to exercise the “automatic” right to revoke the contract within two years of signing but initiated the action within the three year limitations period in s g g bu a ed e ac o e ee yea a o s pe od §1711. The court held that although the automatic revocation right had lapsed, the buyer could maintain an equitable claim for rescission or for damages under §1709(b) within three years of the date of signing.

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Newer Line of Cases – Legal Description Newer Line of Cases Legal Description

• Frank Carmel
• Legal Description Cases (Based upon 1703(d))

Legal Description Cases (Based upon 1703(d))

– Bacolitsas v. 86th & 3rd Owner, LLC, 2010 WL 3734088 (S.D.N.Y. Sept. 21, 2010):

• Developers actually registered the subject condominium with HUD, properly provided HUD Property Reports,

and required disclaimers in purchase agreements.

• At issue was the form of sales contract given to purchasers in New York City for pre‐construction condo

purchases.

• The court found that the contract signed by the Plaintiffs did not meet the requirements of 15 USC 1703(d) of

ILSA, due to the fact that it did not provide an adequate legal description of the unit making such unit clearly identifiable and in a form acceptable for recording by the appropriate public official responsible for maintaining land records.

• Held despite HUD Amicus Brief to the contrary.

– Berkovich v. Vue‐N. Carolina, LLC, 2011 WL 5037124 (W.D.N.C. Oct. 24, 2011)

• Continuation of legal description issues raised in Bacolitsas decision, decision out of NC even more troubling
• NC Federal court says according to 1703(d) if the contract does not contain the declaration's recorded

i f ti th d 1703(d) th h h t t i d it t t information then under 1703(d) the purchaser has two years to rescind its contract.

• Despite fact that in NC preconstruction condominium contracts will necessarily not contain such information,

due to the fact declarations cannot be recorded until the condominium is substantially complete.

• Court held that Plaintiff's purchase not exempt from 1703(d). Plaintiff rewarded revocation and deposits.

– Cases are contrary to Taplett v. TRG Oasis (Tower Two), Ltd., L.P., 755 F. Supp. 2d 1197, 1198 (M.D. y p ( ), , , pp , (

• Fla. 2009)
• Followed by Boynton Waterways Inv. Associates, LLC v. Bezkorovainijs, 4D09‐4233, 2011 WL 2694522 (Fla. Dist.
• Ct. App. July 13, 2011)

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Co‐Developer Liability Co Developer Liability

• Co-Developer Issue - 1701(5) – Original Case

– Hammar v. Cost Control Marketing & Sales Management, Inc., 757 F. Supp. 698 (W.D. Va. 1990) 1990) –

• Financial institution that allowed its name to be used in advertisements was in effect

lending its prestige and good name to the sales effort. Found to be a “developer” under the Act. – More Recently Sewell v. D’Alessandro & Woodyard, Inc., 655 F.Supp.2d 1228, 1254 (M D Fla 2009) (M.D.Fla.2009).

• Host of cases that argue co-developers, with many more continuing.

– Nahigian v. Juno-Loudon, LLC, 1:09CV725 JCC, 2010 WL 3418179 (E.D. Va. Aug. 23, 2010) involving Ritz Carlton. Held that Ritz could not be considered a developer because it was not an “affiliate” developer and had no equity stake in the Development. Ritz had no authority to execute the sale of the property Ritz did not sell Plaintiffs its lot Ritz had no authority to sell execute the sale of the property. Ritz did not sell Plaintiffs its lot. Ritz had no authority to sell lots in the Development and did not sell lots in the Development – Trump Cases on Co-Developer

• Aaron v. Trump Organization, Inc., 2011 WL 2784151 (M.D. Fl. 2011) holding that Trump

undoubtedly qualif[ies] as either a “developer” or an “agent”. The defendants not only acted on behalf of SimDag in promoting the sale of the units, but the defendants acted on behalf of SimDag in promoting the sale of the units, but the defendants distributed marketing material that portrayed the Trump Tower Tampa as an “exclusive,” Trump development, i.e., one of “the finest properties from the biggest name in real estate”

• Trump Baja in litigation along with others

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Strict Liability Strict Liability

• Misrepresentation or Omissions in Property Reports – 1703(a)
• Burns v. Duplin Land Dev., Inc., 621 F. Supp. 2d 292 (E.D.N.C. 2009)

– Encourages Plaintiff attorneys to pore over every possible omission or misrepresentation in a Property Report. – Actual recoverable damages for plaintiff-purchaser in such a case very unclear.

• Zhou Jie Plant v. Merrifield Town Ctr. Ltd. P'ship, 751 F. Supp. 2d 857, 869

(E.D. Va. 2010); Also Plant Case that Followed.

– Clarified that the fact itself must be material not the misrepresentation or omission. But leads to confusion.

• See also, Blanco v. Trump Ruffin Tower I, LLC, 2:11-CV-00153-GMN, 2011

WL 3841207 (D. Nev. Aug. 25, 2011) holding that ILSA is not a strict liability statute.

• But Michael Keefe et al. v. Base Village Owner, LLC , pending in Colorado

g , , p g holding that square footage is a material item of importance.

• Large FOIA requests asked of CFPB by plaintiff attorneys – seeking to

find any possible angle for ILSFDA lawsuit.

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Interplay with Other Laws Interplay with Other Laws

• Use of ILSA in conjunction with other Federal

Laws;

• Use of ILSA with Other State Laws;

– Consumer Protection Statutes – State Mini-ILSA Statutes R d l t d f – Red are regulated for

• ut of state sales;

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California Perspective p

• California is a HUD/CFPB Certified state

– No separate registration with HUD/CFPB required – Once CA Public Report Issued send notice to HUD/CFPB

• California Homebuyers “Bill of Rights”
• Pro‐Active Subdivision Dept. at DRE [www.dre.ca.gov]

– Review all documents at every stage for compliance both SLA and ILSA; Deficiency Notices – SPRAG DRE Regulations (CCR 2705 et seq ) – SPRAG, DRE Regulations (CCR 2705 et seq.) – Out‐of‐state subdivisions offered for sale in CA must be registered with DRE [Out of country – no ‐ but needs disclaimer]

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California Perspective

• Subdivided Lands Act (Bus. & Prof. Code §§ 11000 et

seq.) q )

– Applies to the division of improved/unimproved land into 5 or more lots for sale or lease

• People v. Pacific Land Research Co., 20 Cal. 3d 10 (1977)

– 13 Narrow Limited Exemptions SOL i 3 b d i l ti f SLA – SOL is 3 years based on violation of SLA

• Beaver et al. v. Tarsadia Hotels et al., 2011 U.S. Dist.

LEXIS 140518

– Rescission remedy by case law

• Barrett v. Hammer Builders, Inc., 195 Cal. App. 2d 305,

, , pp , 308‐09 (1961)

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California Perspective p

• ILSA Interplay with other state claims

p y

– Combined with claims of SLA violations, breach of contract, unfair business practices (17200), fraud, , p ( ), , misrepresentation, etc. – Although may not get ILSA automatic rescission, get anyway under SLA

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California Perspective p

• ILSA Interplay with other state claims

– Combined with claims of SLA violations, breach of contract, unfair business practices (17200), fraud, misrepresentation, etc. – Although may not get ILSA automatic rescission, t d SLA get anyway under SLA – ILSA permits recovery of Attorney’s fees and costs and SLA does not unless provided by K and SLA does not unless provided by K

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California Perspective

• Default Cases

– ILSA/SLA Requirements

• Proper Notice of default; Notice of Rescission Rights

– Statute of Limitations

Mi O i i f M t i l F t

• Misrep or Omission of Material Fact

– Looking for the “Loop Hole” – Public Report, Amended Report (before close of escrow) p p ( ) – Varying definitions of “material fact/change” – Scrutinizing each closing requirement and term

Alt E /C D l

• Alter Ego/Co‐Developer
• Securities – Salameh et al. v. Tarsadia Hotels, et al.,

2011 U S Dist Lexis 30375 (S D Cal Mar 22 2011) 2011 U.S. Dist. Lexis 30375 (S.D. Cal., Mar. 22, 2011)

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Best Practices Best Practices

• Do the analysis, ask the hard questions
• When seeking to qualify for improved lot exemption, don’t get too

g q y p p , g creative with force majeure clauses and remedies

• If questionable that client can/will complete within two years, advise

against use of the exemption g p

• Use of piggy‐backing or combining exemptions is highly risky – don’t do it
• Make sure to include contract language required by 1703(d)
• If client registers/provides property reports maintain good records get
• If client registers/provides property reports, maintain good records, get

receipts for delivery of property reports, etc.

• Comply strictly with requirements for preparation of Statement of

Record/Property Report Record/Property Report

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Best Practices (CA)

• Close the “Loop Holes”
• Close the “Loop Holes”

– Clear contract language (CA Consumer Protection Statutes) – Be careful using form purchase and sales agreements – Be careful using form purchase and sales agreements

• Look at both state regulations and ILSA (not always consistent e.g. 3
• v. 7 day rescission; liquidated damage provisions)
• Litigation Considerations

– Don’t give up on Buyer’s Remorse Theme

• Substantial Compliance ‐ Blanco v. Trump Ruffin Tower I, LLC, 2:11‐

CV‐00153‐GMN, 2011 WL 3841207 (D. Nev. Aug. 25, 2011)

– Use of experts (Bascolitsas e al. v. 86th and 3rd Owner, LLC, 2010 Use of experts ( ascolitsas e al. v. 86 and 3

Owner, C, 0 0 U.S. Dist. LEXIS 99642)

• DRE Expert

– Judicial Referee /Arbitration

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Outlook

What does the future hold? What does the future hold? Will legislation help? What to do in the meantime.

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Thank You. Thank You.

Brian C. Cheney, Partner Snell & Wilmer |15 West South Temple, Suite 1200 | Salt Lake City, UT 84101 Snell & Wilmer |15 West South Temple, Suite 1200 | Salt Lake City, UT 84101 Direct: (801) 257‐1873 | General: (801) 257‐1900 | Fax: (801) 257‐1800 bcheney@swlaw.com |www.swlaw.com

• M. Theresa ("Tess") Tolentino Meehan, Partner

STOEL RIVES LLP | 500 Capitol Mall, Suite 1600 | Sacramento, CA 95814 Direct: (916) 319‐4677 | General: (916) 447‐0700 | Fax: (916) 447‐4781 Direct: (916) 319 4677 | General: (916) 447 0700 | Fax: (916) 447 4781 ttmeehan@Stoel.com | www.stoel.com Frank J. Carmel Managing Shareholder Frank J. Carmel, Managing Shareholder Carmel & Carmel PC | 2141 Wisconsin Avenue NW, Suite M |Washington DC 20015 Direct: 202‐237‐1775 | General: 202‐237‐1700 | Fax: 202‐237‐1701 fcarmel@carmel us| www carmel us fcarmel@carmel.us| www.carmel.us

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