More Important than Ever to Retain Experienced ILSA Counsel - Two More ILSA Decisions Strike Fear in Condominium Developers
On the heels of the 111 Fulton decision passed down in August against a 163-unit New York City condominium developer, two additional cases brought under HUD’s Interstate Land Sales Full Disclosure Act (“ILSA” or “ILSFDA”) ruled upon during the past two weeks within the Southern District of New York indicate just how widespread the impact of ILSA non-compliance is affecting New York condominium developers as well as condominium developers nationwide. These two cases send out a stern message to non-compliant developers: either fully comply with ILSA or suffer the consequences. Additionally, these cases establish that whether or not a developer seeks to comply with ILSA is irrelevant, considering one of the developers registered with HUD and distributed the required HUD property report to purchasers, while the other was either ignorant or willfully dismissive of ILSA. In the end, both developers suffered the same fate – summary judgments in favor of the litigating purchasers. Both cases appear to be the result of poor compliance programs on the part of the developers that would typically be picked up by counsel more experienced in the nuances of ILSA.
Bacolitsas v. 86th & 3rd Owner, LLC
In the case of Bacolitsas v. 86th & 3rd Owner, LLC, decided on September 21, 2010, the United States District Court of the Southern District of New York held in favor of purchasers (“Plaintiffs”) at the Brompton Condominium (“Brompton”), a luxury building located on the Upper East Side of Manhattan. Developers registered the Brompton with the Office of Interstate Land Sales Registration (“OILSR”) and provided HUD Property Reports to purchasers prior to their signing a purchase agreement for a unit at the condominium. The developer also provided the required disclaimers and notices in purchase agreements signed by the Plaintiffs. At issue, however, was the form of sales contract given to purchasers in New York City for pre-construction condominium 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.
While we believe that the Court may have gone too far in its analysis considering HUD’s long term position with respect to the applicability of the requisite legal description to the condominium, the Brompton contract did not appear to even recognize the existence of the required contract provisions specified in 15 USC 1703(d). At Carmel & Carmel, our attorneys are keenly aware of the implications of the Bacolitsas decision; the analysis also coincides with advice we have provided clients since condominium registrations with HUD became common place. Specifically, a description of a lot in a preconstruction condominium contract where a deed will not be delivered within 180 days of contract signing must be in a form sufficient to identify the unit and for the description to be used in a conveyance instrument. That the contract is itself recordable has never been a requirement of HUD, but clearly and legally identifying the unit has been required since the issue was discovered by our office. Due to the fact that this requirement was always problematic with condominium developers seeking registration with the OILSR, HUD established internal, informal policy opinions that deal with this issue for condominiums. Thus, if the unit being purchased were described within the purchase agreement as “Unit X in that certain condominium established by the Declaration of Condominium for XYZ Condominium to be recorded in the Clerk’s Office for County Y,” this would have previously satisfied HUD’s internal policies. We cannot speculate whether or not this would have been sufficient to get a different ruling from the Brompton Court, however, this typical language was apparently not included in the Brompton Contract. In addition, we do not know if trial counsel had assistance of those versed in the subtleties of the internal policies of HUD’s OILSR; and if not, we would now think in hindsight, they should have.
The Bacolitsas decision should put all developers on notice that any and all ILSA violations can be litigated and will likely result in an award to the purchaser. In this case, the Plaintiffs were able to extricate themselves from the purchase contract due to the failure of the developer to comply with the legal description requirements of the ILSA.
Nu-Chan, LLC v. 20 Pine Street, LLC
In Nu-Chan, LLC v. 20 Pine Street, LLC, decided September 30, 2010, the United States District Court of the Southern District of New York handed down another thorough defeat for all New York condominium developers who believed that ILSA did not apply to condominiums, especially condominiums converted from office buildings. Two separate unit purchasers (“Plaintiffs”) at 20 Pine Street Condominium (“20 Pine”), a massive condominium project, sued to revoke their purchase agreements due to the developer’s failure to register 20 Pine with the OILSR and give a HUD Property Report. The 20 Pine developer not only failed to register 20 Pine with the OILSR, it failed in every other manner to abide by the requirements of ILSA. Despite the complete failure to comply with the Act, the developer’s counsel attempted to argue that ILSA did not apply to condominiums in the face of a voluminous amount of cases and federal regulations that says it does apply. Citing the recent bevy of decisions to come out of the Southern District of New York, Judge Crotty quickly dispelled the developer’s argument by citing several decisions conclusively holding that condominiums with over 99 units were in fact subject to the registration requirements of ILSA.
As a default position, the developer argued that, due to the fact that the 20 Pine building was previously an office building, the developer was statutorily exempt from ILSA pursuant to the Improved Lot Exemption found in 15 USC 1702(b)(1). Judge Crotty quickly dismissed this argument as well, explaining that the units which the Plaintiffs purchased are the subject interests of land that must be complete in order to comply with the relevant section of the Improved Lot Exemption.
One additional wrinkle in this decision is in regard to the Plaintiffs’ initiation of their complaints more than two years after initially signing their purchase contracts. The Court held that, despite missing the two-year date, which would have afforded the Plaintiffs an automatic right of rescission under 15 USC 1703(c), the Plaintiffs are still afforded up to three years from the date of initially signing their purchase agreement to pursue a claim based on damages. It remains to be seen whether or not the Plaintiffs will be able to successfully win an award of substantial damages against 20 Pine; however, the decision should be viewed as solidifying the notion that ILSA rescission and damages claims are enforceable in New York City, despite New York condominium developers’ best efforts to deny ILSA applicability to their properties.
It is clear from both the Bacolitsas and 20 Pine decisions that experienced ILSA counsel is a must for high stakes condominium development. Simply pushing paper through HUD without an understanding of the various subtleties of ILSA or not having HUD and state registration compliance evaluated by competent counsel is not going to cut it anymore. Developers, their lenders and investors should pay heed to these new cases and endeavor to ensure that an oversight does not put their project at risk. The line of cases is now firmly established. Plaintiffs and smart class action attorneys will continue to see ILSA and the state registration laws as avenues to win substantial rewards from careless developers and inexperienced registration counsel.
If you have any questions on these cases or if you would like to discuss ILSA compliance issues with someone in our office, please contact Frank Carmel at email@example.com or 202.237.1775.