First Global decision holds piggybacking of ILSA exemptions must be done properly


Contact - Aaron Eidelman

 

First Global Corp. v. Mansiana Ocean Residences, LLC, 2010 U.S. Dist. LEXIS 52474 (S.D. Fla. May 27, 2010) 

 

One May 27, 2010, a federal district court out of the Southern District of Florida ruled on behalf of condominium purchasers who sought rescission and damages from a developer that failed to abide by the Interstate Land Sales Full Disclosure Act (“ILSA”).  The defendant developer from whom the plaintiffs had purchased a condominium unit had not registered the condominium with ILSA, and therefore the purchases had received no HUD property report before signing their purchase contact, and their contract contained no notification of their two year right of rescission. This decision should serve as a warning to developers seeking to piggyback ILSA exemptions: either register with HUD, or make sure you have thoroughly analyzed and documented the basis of your exemption in the event that a consumer rescission suit should arise down the road.

 

At issue in the case was whether the developer was exempt from ILSA and therefore from the registration and disclosure requirements. Although the condominium was planned to contain 135 units, the developer argued that it should be allowed to “piggyback” two ILSA exemptions in order to avoid ILSA’s strict registration requirements; namely, the “two year obligation” and the “100 lot exemption.”  In rejecting the developer’s argument, the court looked to other pro-consumer ILSA decisions out of Florida and Virginia, explaining that “if a project consists of 123 units, a developer can sell 24 of the units under an obligation to construct a building on property within two years, i.e. qualifying for the two-year exemption, and the remaining 99 units would then qualify under the 100-lot exemption.”  Id. (emphasis added by court).  But according to the court, since the developer “…had not sold any of the units with a two-year commitment to build at the time that [plaintiff] purchased its unit, there were more than 100 units which were not exempt at the time.  Under these circumstances, the unit purchased by [plaintiff] was not exempt from the requirements of the ILSA.”  Id. The developer also unsuccessfully argued that there was uncertainty as to how many units the condominium would contain; it maintained that since the condominium might ultimately consist of fewer than 100 units at the time of the sale to the plaintiff, it was therefore exempt from registration. However, the court rejected this argument on the grounds that at the time of the sale, the only information that had been communicated to the plaintiff and to the public was that the condominium would contain 135 units.

 

The court also looked at the developer’s press releases issued on behalf of the project to support the proposed unit count above 99. The court’s use of press releases bolsters the concept that developers, if they seek to utilize ILSA exemption, must take every possible precaution in documenting their basis for an exemption and the facts supporting it. In the instant case, it was not enough for the developer to simply claim that its own internal discussions about the proposed unit count provided an exemption from ILSA; ultimately, the court looked at what information had been conveyed to the public and to the purchaser in determining that the developer had not complied with the 100 lot exemption. 

 

This article does not constitute legal advice or the formation of an attorney-client relationship.  Republication of this article without express permission of Carmel & Carmel P.C is prohibited.

 

Please contact Aaron Eidelman at aeidelman@carmel.us if you have any comments or questions in regards to this article. 

 

The citation for First Global decision is -

First Global Corp. v. Mansiana Ocean Residences, LLC, 2010 U.S. Dist. LEXIS 52474 (S.D. Fla. May 27, 2010)

2010-06-02 16:38:00