New Cases Offer Conflicting Opinions on Piggybacking Exemptions Under ILSA


The past several months have seen a number of notable court decisions with respect to interstate land sales compliance. Of particular importance are two recent district court opinions that offer conflicting messages regarding what may, or may not, constitute compliance with the Interstate Land Sales Full Disclosure Act (“ILSA”).  More specifically, these cases offer varying interpretations when it comes to whether a developer properly qualified for an exemption under ILSA at the time the sale to the  buyer was made.

 

As a result of new market realities, more and more purchasers are bringing rescission claims against developers in an effort to cancel their purchase contracts, even years after they have closed.  As a new wave of foreclosures appears to be occurring, disenchanted homeowners are looking for ways to avoid losing the money they have put towards a home because of it being “underwater” or because of a simple inability to pay due to loss of employment.  Often, purchasers will claim that at the time they signed their purchase agreements, the developer failed to register the subdivision/condominium with HUD when registration was required under ILSA.  This is a significant problem for builders and developers and has recently extended to reach a hospitality brand that lent its name to a subdivision.  Unfortunately, the correct approach to compliance is often missed by even experienced local counsel.

 

ILSA provides for exemptions from its registration requirements in 15 U.S.C. § 1702(a) and (b).  Often developers attempt to claim an exemption from HUD by “piggybacking” (combining of two or more) of these exemptions.  For example, one exemption from ILSA is based upon a subdivision’s containing fewer than 100 Lots (the “Under 100 Lot Exemption” found in 15 U.S.C. § 1702(b)(1)).  Another ILSA exemption involves the sale of a completed home or the sale of a lot with a home to be built when a developer is contractually obligated, without condition, to complete the home within two (2) years from the date the purchaser signs the purchase contract (the “Improved Lot Exemption” found in 15 U.S.C. § 1702(a)(2)).  HUD’s Guidelines in the evaluation of the exemptions clearly contemplates the ability to combine exemptions in order to remain under the 100 lot threshold of the Under 100 Lot Exemption. 

 

A developer’s combination of the Under 100 Lot Exemption and the  Improved Lot Exemption as the basis of an exemption from ILSA was addressed in Bodansky v. Fifth on the Park Condo, LLC, 2010 U.S. Dist. LEXIS 7577 (S.D.N.Y. 2010).  In Bodansky, a New York federal district court ruled that if a developer had not sold more than 99 units, it could use the Improved Lot Exemption and the Under 100 Lot Exemption together.  While there are a number of Florida court decisions that require a developer to have a “plan” at the outset of its sales offering to qualify for the exemptions permitted under 15 U.S.C. § 1702 of ILSA, the Bodansky court did not consider them binding.  The case suggests that a “plan” or a “legitimate business purpose” for such a plan may not be required in order to rely on the Under 100 Lot Exemption.  The Bodansky court noted ILSA does not specify that a developer must have a formal “plan” in place at the time any particular unit is sold in order to qualify for the Under 100 Hundred Lot Exemption.  Further, the Bodansky court explained that the text of ILSA does not limit the availability of the Under 100 Hundred Lot Exemption only to subdivisions (or condominiums) in which the developer offers for sale fewer than one hundred non-exempt lots from the outset.   

 

However, in what appears to be a well-reasoned decision, a Virginia federal district court specifically rejected the Bodansky court’s recognizing future sales to qualify for exemption eligibility when ruling on the defendant developer’s motion to dismiss. In Rensin v. Juno-Loudon, LLC, 2010 U.S. Dist. LEXIS 30621 (E.D. Va. Mar. 30, 2010), the Rensin court refused to allow intended, but not yet completed, future sales of lots to builders to be considered “exempt” under ILSA.  In Rensin, the defendant developer attempted to combine the “Sales to Builders” exemption (15 U.S.C. § 1702(a)(7)) with the Under 100 Lot Exemption to say that it was exempt from the registration requirements of ILSA.  However, the Rensin court refused to allow intended, but not yet completed, future sales of lots to builders to be considered “exempt” from the outset.  The Rensin court reasoned that to permit the unfulfilled intention to sell lots in the future to a builder would bypass Congress's intent to protect potential purchasers through pre-purchase disclosure.  For example, if a developer had been unable to fulfill its intention to sell builder lots in the future and then sold them to individuals, purchasers of the first 99 lots would have been denied their right to full disclosure and the statutory remedy of rescission. The Rensin court noted that that Congress recognized the need for buyer protection by mandating disclosures be provided by a developer to buyers prior to their signing of a purchase agreement, and therefore, that the duties and rights imposed by ILSA vest prior to (or contemporaneously with) entering into a purchase agreement.  The Rensin court explained its decision by stating that the plain language of the statute reads that ILSA’s registration requirements do not apply to “the sale or lease of lots in a subdivision containing fewer than one hundred lots which are not exempt under subsection (a)” Id. at 12.  Since the statute is drafted in the present tense, a development will only be exempt from ILSA’s disclosure and reporting requirements if it is a subdivision containing fewer than one hundred lots which are currently exempt under § 1702 subsection (a).     

 

In Bodansky and Rensin, the developers sought to piggyback the Under 100 Lot Exemption with one of the separate exemptions under 15 U.S.C. § 1702(a) to protect themselves from their failure to register with HUD and distribute the required disclosure documents prior to entering into a purchase agreement with the buyer.  Although both courts appear to have interpreted the clear “plain language” of the Under 100 Lot Exemption, the courts reached opposite conclusions as to whether piggybacking with another exemption was acceptable from the outset as basis for exemption from ILSA’s registration and disclosure requirements.  Our sideline analysis of the conflicting opinions is that Congress would not have intended a consumer protection statute to leave the first 99 lot/unit purchasers in a state of limbo until the 100th unit was purchased and then deprive the first 99 lot/unit purchasers their rescission rights due to the lapsing of a statute of limitations.  However, the appearance of a lack of clarity creates the possibility of differing interpretations by various state or federal courts. 

 

Despite these two conflicting ILSA opinions, one thing remains clear: a plan for land sales registration compliance will significantly decrease the chances of successful consumer rescission lawsuits down the road.  And, the cost of a HUD registration is insignificant in comparison to rescission rights being afforded to lot/unit purchasers for the preceding two or three year time period, even in the current sales environment.  Even if you believe that you are exempt from ILSA, we suggest you periodically re-evaluate the basis of your exemption to protect yourself from rescission claims based upon an exemption from ILSA.

 

If you have any questions in regards to these decisions, or ILSA compliance questions contact Frank Carmel (fcarmel@carmel.us or 202-237-1700) or Aaron Eidelman (aeidelman@carmel.us or 202-787-1322) to discuss your legal compliance needs.

 

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.