interstate land sales full disclosure act: cfpb...

The audio portion of the conference may be accessed via the telephone or by using your computer's

speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

Presenting a live 90-minute webinar with interactive Q&A

Interstate Land Sales Full Disclosure Act:

CFPB Enforcement Activity, Condo

Exemption, Litigation Updates Ensuring ILSA Compliance, Avoiding Contract Rescission, Fines and Penalties

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, MARCH 29, 2017

Mark D. Hillier, Shareholder, Greenberg Traurig, Boca Raton & West Palm Beach, Fla.

Joseph E. Lubinski, Partner, Husch Blackwell, Denver

Tips for Optimal Quality

Sound Quality

If you are listening via your computer speakers, please note that the quality

of your sound will vary depending on the speed and quality of your internet

connection.

If the sound quality is not satisfactory, you may listen via the phone: dial

1-866-873-1442 and enter your PIN when prompted. Otherwise, please

send us a chat or e-mail [email protected] immediately so we can

address the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing Quality

To maximize your screen, press the F11 key on your keyboard. To exit full screen,

press the F11 key again.

FOR LIVE EVENT ONLY

Continuing Education Credits

In order for us to process your continuing education credit, you must confirm your

participation in this webinar by completing and submitting the Attendance

Affirmation/Evaluation after the webinar.

A link to the Attendance Affirmation/Evaluation will be in the thank you email

that you will receive immediately following the program.

For additional information about continuing education, call us at 1-800-926-7926

ext. 35.

FOR LIVE EVENT ONLY

Program Materials

If you have not printed the conference materials for this program, please

complete the following steps:

• Click on the ^ symbol next to “Conference Materials” in the middle of the left-

hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

FOR LIVE EVENT ONLY

G R E E N B E R G T R A U R I G , L L P | A T T O R N E Y S A T L A W | W W W . G T L A W . C O M

©2014 Greenberg Traurig, LLP. All rights reserved.

Strafford ILSA Presentation

Mark Hillier [email protected]

Title of Presentation Greenberg Traurig, LLP | gtlaw.com

Intro to ILSA

> The federal Interstate Land Sales Full Disclosure Act, 15 U.S.C.A. §1701, et seq. (the "Act") prohibits the sale or lease of "lots" in a "subdivision" to residents of the United States, regardless of whether the subdivision is located within the United States, using any means of interstate commerce, unless the lots are either fully or partially exempt from the Act or registered with the Consumer Finance Protection Bureau (“CFPB”). Historically, ILSA has been implemented by the Department of Housing and Urban Development's (“HUD”) Interstate Land Sales Registration Program, 24 CFR Parts 1710, 1715 and 1720. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) amended a number of consumer financial protection laws, including ILSA, resulting in transfer of regulatory oversight of the Act to CFPB.

> Although the Act was originally adopted to prohibit and punish fraud in land development enterprises, McCown v. Heidler, 527 F.2d 204 (10th Cir. 1975), particularly by developers selling unbuildable lots and land without access or utilities and without full disclosure, the applicability of the Act is by no means limited to the sale or lease of unbuildable lots or even traditional platted lots. HUD's implementing regulations at 24 C.F.R. Part 1710 through 1730 and later reissued by the CFPB as 12 C.F.R. Part 1010 through 1012 (the "Regulations") define a "lot" to include "any portion, piece, division, unit or undivided interest in land [...] if the interest includes the right to the exclusive use of a specific portion of the land." 12 C.F.R. §1010.1.

> This includes units to be developed as part of a condominium, Winter v. Hollingsworth Properties, Inc., 777 F.2d 1444 (11th Cir. 1985) but in 2014 Congress amended the Act to exclude condominiums as discussed hereinafter, as well as unimproved lots or parcels of land within a horizontal or vertical subdivision, whether intended for residential, commercial, mixed-use, or industrial development. The term "lot" will be used in this presentation to refer to any of the above.

6


Intro to ILSA

> For the purposes of the Act, the term "subdivision" refers to any land, whether or not contiguous, which is divided or proposed to be divided into separate interests for purposes of sale or lease as part of a "common promotional plan." A common promotional plan is any plan, undertaken by a single person or a group of persons acting in concert, to offer lots for sale or lease. 15 U.S.C.A. §1701(4).

> In determining whether or not a common promotional plan exists, consideration is given to whether there is (i) a thread of common ownership; (ii) same or similar name or identity; (iii) common sales agents; (iv) common sales facilities; (v) common advertising; and (vi) common inventory, although these are not the exclusive considerations. These considerations are set forth in Guidelines for Exemptions Available Under the Interstate Land Sales Full Disclosure Act, originally codified at 24 C.F.R. Part 1710, App. A, which HUD issued as an interpretive rule, not a substantive regulation. Appendix A was deleted from the published regulations and moved to a non-codified set of guidelines in 1996, and may now be found in the Federal Register at 61 Fed. Reg. 13,596-13,611 and on HUD's web site at: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/ils/ilsexemp

> A common promotional plan is presumed to exist if the land is contiguous, or is known, designated, or advertised as a common development by a common name. Thus, tracts of land several miles apart could be considered a single subdivision if they have a common promotional plan. 15 U.S.C.A. §1701(4).

7

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/rmra/ils/ilsexemp


Intro to ILSA

> There are a number of full and partial statutory exemptions from the Act. See 15 U.S.C.A. §1702. Statutory exemptions are self-determining, i.e., they are automatic and need not be applied for, but the burden is on the developer to ensure that each sale qualifies for an exemption and to maintain records demonstrating that the requirements of such exemption have been met. 24 C.F.R. §1710.4(d). It is not necessary for all of the lots in a subdivision to satisfy the requirements for the same exemption. Various exemptions may be combined to exempt all of the lots, or some lots may be registered and others sold in reliance upon exemption.

> Exemptions from the act are construed narrowly; therefore, any lots that do not clearly satisfy the requirements for an exemption must be registered. Often, for projects located outside of the United States, due to the size of the projects and the lengthy governmental approval processes and construction schedules involved, it is difficult to qualify for an exemption from the Act, and even if the project can qualify for an exemption, the advantages of registration, as discussed herein, outweigh the registration burdens.

> If the lots qualify for a full statutory exemption, the Act does not apply. If the lots qualify for a partial statutory exemption or a regulatory exemption, the lots need not be registered and the developer need not deliver a Property Report to purchasers, but the anti-fraud provisions of the Act still apply. 12 C.F.R. §1011. The anti-fraud provisions impose constraints on advertising and require the inclusion of specific provisions in each contract. 15 U.S.C.A. §1703(a)(2) and 12 C.F.R. §§1011.

8


Intro to ILSA

> Common full statutory exemptions include:

– (1) Twenty-five Lot Exemption: Exempts the sale or lease of lots in a subdivision that contains fewer than twenty-five lots. 15 U.S.C.A. §1702(a)(1).

– (2) Improved Lot Exemption: Exempts 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 obligating the seller or lessor to erect such a building on the lot within a period of two years. 15 U.S.C.A. §1702(a)(2).

– (3) Sales to Builders Exemption: Exempts the sale or lease of lots to any person who acquires the lots for the purpose of engaging in the business of constructing residential, commercial, or industrial buildings or for the purpose of resale or lease of the lots to persons engaged in such a business. 15 U.S.C.A. §1702(a)(7).

> Common partial statutory exemptions include:

– (1) One Hundred Lot Exemption: Exempts the sale or lease of lots in a subdivision that contains fewer than one hundred lots. 15 U.S.C.A. §1702(b)(1).

– (2) Single-Family Residence Exemption: Exempts the sale or lease of lots that are limited to single-family use if a comprehensive list of development requirements prescribed in the Act are satisfied. 15 U.S.C.A. §1702(b)(5).

9


CFB ILSA Enforcement Activity

> 2015 Consent order with Hawk’s Bluff , Tenn.

> Summary:

– The CFPB publicized its enforcement action on May 1, 2015. The CFPB named the Tennessee developer and also named several individuals in the action that were also involved in the development and sale of the property in Tennessee. The parties entered into a consent order on April 30, 2015.

– The developer sold developed lots from the subdivided property from 2004 to 2008. According to the consent order, the developer and individuals made misrepresentations to purchasers of the lots regarding the maintenance of the roads in the subdivision. They made statements in both the property reports submitted to HUD and marketing materials provided to prospective purchasers that the development’s roads would be maintained by the developer until they were accepted by the county. However, the developer did not maintain the roads and the roads were not accepted by the county.

10




> Issues:

– Specifically, the consent order states that the ILSA property reports “contained false statements regarding the ongoing maintenance of the roads in the Development.” This violated ILSA section 1703(a)(1)(C), which makes it unlawful to “sell or lease any 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 required to be stated therein pursuant to sections 1704 through 1707 of this title or any regulations thereunder.”

– Further, the consent order states that the developer “falsely represented to purchasers and prospective purchasers that the roads in the Development would be maintained by the seller until they were accepted by [the county].” This violated ILSA section 1703(a)(2)(B), which makes it unlawful to “obtain money or property by means of any untrue statement of a material fact, or 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 of the overall offer and sale or lease) not misleading, with respect to any information pertinent to the lot or subdivision.”

11




> Resolution:

– Both the developer and the individuals admitted liability for the alleged conduct. Under the terms of the consent order, the developer must repair the development’s roads so that they satisfy the requirements established in an engineering report to be prepared by an independent consultant. Although civil money penalties of $1,000 for each violation up to a maximum of $1 million are permitted under ILSA, none were assessed in this enforcement action.

> Recommendations:

– Property developers subject to ILSA should closely examine the representations that they make in their property reports as well as their marketing materials to ensure that they do not contain misstatements or misrepresentations that could open the door to potential rescission claims, CFPB enforcement actions, or consumer rescission or class action claims.

12



> 2013 Consent Order with 3D Resorts-Bluegrass LLC

> Summary:

– The CFPB publicized its enforcement action on December 3, 2013. The CFPB named the Kentucky developer and entered into a consent order with the trustee for the developer on November 29, 2013 as the developer had filed a bankruptcy petition on November 16, 2011.

– The developer began development of a resort property including “a golf and recreation facility with hundreds of individual lots spread over several different development phases“ in late 2008, began marketing and selling lots by February 2009, provided financing for the sales of lots and filed with the Department of Housing and Urban Development a Property Report dated February 26, 2009. The developer filed an amendment in January 2010 including a new Property Report dated January 13, 2010. The developer made “material changes to the January 13, 2010 Property Report” in March of 2010 without filing it with HUD, but the new property report kept the January 13, 2010 date and was distributed to purchasers as the official property report.

13




> Issue:

– The consent order stated that all three versions of the Property Report contained “untrue statements of material face or omits material facts, which are set forth in the Notice of Charges.” It further stated that these misrepresentations pertained to “the infrastructure and amenities available to the lot or on the Resort Property to induce consumers to purchase lots on the Resort Property” and were knowing and material.

– The consent order further states that HUD had served a suspension notice on the developer on or about April 19, 2011 on the grounds that the January 2010 filing was “deficient in certain material respects.” The suspension notice prohibited the developer from selling or leasing any lot until the filing was amended and the notice lifted. The developer continued to market and sell lots after the date of the notice.

14




> Issue:

– In addition, the developer failed to comply with registration and filing requirements under ILSA including the requirement to file annual reports on sales within thirty days of the annual anniversary of and financial statements each year after the effective date of a filing. Reports were not filed in March of 2010 or March of 2011 and statements were not filed for 2010, 2011 and 2012.

– The developer also failed to amend its filing when it hired an agent in October 2010 and failed to amend its filing when its general store burned down in February of 2010. Material changes are required to be disclosed within 15 days.

15




> Resolution:

– The consent order included a cease and desist from “engaging in interstate land sales and any other activity governed by ILSA.”

– The consent order also included a judgment for equitable monetary relief and the developer was ordered to pay affected purchasers for the harm identified in the consent order. However the consent order noted the demonstrated inability to pay by the developer and suspended the payment of the judgment for equitable relief upon the developer’s withdrawal of its objection to the CFPB’s proof of claim in the bankruptcy case and allowing an unsecured claim of $500,000 in the case with any distributions to be deposited in a fund to be used to provide redress.

– $1 in civil money penalties was also awarded. The rights of affected purchasers were not affected in any way.

> Recommendations:

– Property developers subject to ILSA should update their filings and property reports upon changes to ensure that they do not contain misstatements or misrepresentations that could open the door to potential claims or CFPB enforcement actions. Property developers should also make all of the required reports and financial disclosures.

– In this enforcement action, there were clear violations for the CFPB to pursue.

16

Interstate Land Sales Full Disclosure Act

Joseph E. Lubinski

[email protected]

Registrations and Exemptions

mailto:[email protected]

Overview of ILSDA

• The Interstate Land Sales Full Disclosure Act, codified at 15 U.S.C. §1701 et seq., is a

consumer protection statute modeled after the Securities Acts.

• ILSA regulates the sale of subdivided land that is marketed and sold through interstate

commerce.

― ILSA aims to prevent deceptive practices in land sales by requiring developers to

disclose material information to purchasers. See Flint Ridge Develop. Co. v.

Scenic Rivers Ass’n, 426 U.S. 776, 778 (1976).

― The underlying purpose of the Act is to insure that a buyer . . . is informed of

facts which will enable him to make an informed decision about purchasing the

property.” Law v. Royal Palm Beach Colony, Inc., 578 F.2d 98, 99 (5th Cir. 1978).

18

Registrations and Exemptions

19

Registration Under ILSA

• While many of the cases interpreting ILSA decided since 2007 primarily dealt with

proper reliance on exemptions, a significant number of the cases decided in 2010 and

2011 dealt with projects for which the developer had registered and had not sought

to rely on an exemption.

• Of note are recent cases interpreting ILSA’s contract property description

requirements.

• Also, cases involving disclosures contained in the property report provided to

potential purchasers.

20

Components of a Registration

• Property Report

― Variety of required disclosures regarding the project

― Given to potential purchasers prior to signing a contract

― If not provided prior to contract signing, purchaser holds a 2-year rescission right

• Additional Information

― Information about the developer and the project

― Provided to CFPB as part of registration application

― Not given to purchasers

― And plenty of exhibits

21

Property Report

• Must be formatted in accordance with regulations

• Must disclose specific information about the project

• Must include cost sheet and forms for cancellation

22

Property Report – Twists and Turns

• ILSA prohibits the sale of any lot where any part of the property report contained an

untrue statement of a material fact or omitted to state a material fact required to be

stated.

15 U.S.C. § 1703(a)(1)(C).

• Reliance May be an Issue for Claim Under this Section.

23

Property Report – Twists and Turns

• Different from Fraud Provisions in Section 1703(a)(2).

― While there is a split, many courts have held that reliance is an element of all

claims under Section 1703(a)(2).

― See Dongelewicz v. First Eastern Bank, 80 F. Supp. 2d. 339, 348 (M.D. Pa. 1999).

• Colorado Courts (for example) have generally agreed.

― See Ivar v. Elk River Partners, LLC, 705 F. Supp. 2d 1220, 1237-38 (D. Colo. 2010)

― Stewart Title v. SV Timbers Steamboat, LLC, Case No. 11 CV 149, Pitkin County

District Court (Feb. 15, 2012).

24

Property Report

• Burns v. Duplin Land Development, Inc., 621 F. Supp. 2d 292, 304-6 (E.D.N.C. 2009)

― Purchasers filed suit against developer because property report omitted lots’

flood plain status.

― Purchasers knew lot was in flood plain.

― The purchase contract stated that lot was in a flood plain.

― Declaration stated that lot was in a flood plain.

• Purchasers were able to rescind the contract because property report contained

untrue statement. Did not matter that purchasers knew information or relied upon

property report.

25

Property Report

• Keefe, et al. v. Base Village Owner, LLC, Case No. 09 CV 273, Pitkin County District

Court (March 30, 2011)

― The court held that the property report that was provided to potential purchasers

contained misleading material information.

― Because the statute prohibits untrue statements of material facts in the property

report, the court held that reliance in not an element of that particular claim.

― Whether or not a potential purchaser even reads the property report, if the

property report contains a false or potentially misleading statement of material

fact, the purchaser may be able to rescind the contract.

26

Additional Information

• Provided to the CFPB as part of the application

• Discloses information not just about the property, but also about the developer

• Must disclose financial status and information

27

Exemptions

• Not all projects must register under the ILSFDA

• Exemptions may be partial

― Meaning that a registration requirement is not required, but the anti-fraud

provisions of the act apply

• OR Exemptions may be full

― Anti-fraud provisions do not apply

28

Description of Exemptions

• See 12 CFR 1010.4 – 1010.16

― § 1010.4 — Exemptions—general.

― § 1010.5 — Statutory exemptions.

― § 1010.6 — One hundred lot exemption.

― § 1010.7 — Twelve lot exemption.

― § 1010.8 — Scattered site subdivisions.

― § 1010.9 — Twenty acre lots.

― § 1010.10 — Single-family residence exemption.

― § 1010.11 — Manufactured home exemption.

― § 1010.12 — Intrastate exemption.

― § 1010.13 — Metropolitan Statistical Area (MSA) exemption.

― § 1010.14 — Regulatory exemptions.

― § 1010.15 — Regulatory exemption—multiple site subdivision—determination

required.

― § 1010.16 — Regulatory exemption—determination required.

29

Exemption Stacking

• HUD Guidelines – Permitted stacking of exemptions

• Stacking under the HUD Guidelines allowed developer to qualify under 99-lot

exemption and sell remaining lots under improved lot exemption.

30

Exemption Stacking

• Notably, CFPB, who now administers ILSA, has not adopted HUD Guidelines.

• Recent case law provides no deference to HUD Guidelines

― Intent to qualify under another exemption in future not sufficient. See Nickell v.

Beau View of Biloxi, L.L.C., 636 F.3d 752, 756-57 (5th Cir. 2011).

― Exemptions determined at the time purchase contract is signed. See Bodansky v.

Fifth on Park Condo, LLC, 635 F.3d 75, 83-84 (2d Cir. 2011)

31

New Exemption for

Condominiums

32

Application of ILSFDA to Condos

• “Lots” in a subdivision offered for sale must be registered and a property report

provided to contract purchasers unless one or more of a defined set of statutory or

regulatory exemptions apply.

33

What is a “Lot”?

• “Lot” is not defined in the statute but rather in the regulations.

― “any portion, piece, division, unit, or undivided interest in land located in any

State or foreign country, if the interest includes the right to the exclusive use of

a specific portion of the land”

24 C.F.R. § 1710.1

• Includes condominium units.

― See Winter v. Hollingsworth Props., Inc., 777 F.2d 1444, 1448 (11th Cir. 1985)

― Berlin v. Renaissance Rental Partners, LLC, No. 12-2213-CV, (2d. Cir. May 6, 2013)

(Issued Post-HUD enforcement and confirms CFPB’s and HUD’s interpretation of a

lot)

34

Description Requirement

• The purchase contract for a project registered under ILSA must include a “description

of the lot . . . in a form acceptable for recording.”

15 U.S.C. § 1703(d)(1).

• A purchase contract prepared in accordance with an exemption is not required to

include a legal description in recordable form.

35


• Berkovich v. Vue-North Carolina, 2011 WL 5037124 (W.D.N.C. Oct. 24, 2011 )

― The court determined that because the contract for an ILSA-registered project

described a condominium unit not yet legally in existence, the contract failed to

satisfy ILSA’s requirement for the legal description.

― Because North Carolina law prohibits the legal creation of a condominium unit

prior to substantial completion of the building, the court’s decision calls into

question whether it is possible in North Carolina to have an enforceable

preconstruction contract for a condominium unit if the underlying project is

registered under ILSA.

― North Carolina common interest ownership statutes is the same as Colorado’s

CIOA.

36


• Keefe, et al. v. Base Village Owner, LLC, Case No. 09 CV 273, Pitkin County District

Court (Aug. 31, 2010)

― Opposite to the North Carolina court, the court determined that the developer

did not violate ILSA “simply because it sold units before recording the final plat

and condominium map.”

― The court determined that because the HUD regulations required a seller to

disclose whether the final plat was recorded, that Congress envisioned that lots

would be sold before the plats are approved and recorded.

― Unlike in North Carolina, in Colorado, it is possible to have an enforceable

preconstruction contract for a condominium unit if the underlying project is

registered under ILSA.

37


• “Form Acceptable for Recording”

• Bacolitsas v. 86th & 3rd Owner LLC, 2010 WL 5299867 (S.D.N.Y. December 20, 2010).

― The court found that because the purchase contract used in an ILSA-registered

project recited that it was not to be recorded and because the contract failed to

be notarized (as would be required under New York law for recording), the

contract failed to meet the requirements of the Act (and as such the purchasers

were entitled to rescission).

― Pending appeal in the Second Circuit – decision expected at any time.

38

Condo Exemption

• Provides amendment to ILSA to exempt the sale of condominium units from ILSA’s

registration and disclosure provisions.

― (i.e., developers would not have to register condominium projects or provide

property report to purchasers)

• Is not a full exemption – projects remain subject to the antifraud provisions of ILSFDA

39

Condo Exemption

• Under amendment a “condominium unit” is defined as “a unit of residential or

commercial property to be designated pursuant to a condominium plan or declaration

provided that upon conveyance –

― (1) the owner of such unit will have sole ownership of the unit and an undivided

interest in the common elements appurtenant to the unit; and

― (2) the unit will be an improved lot.

• Adoption of amendment has not been a panacea for condominium sales

40

What is Timeshare?

• Projects with Fractional Interests Engaged in Stacking Because Little Guidance

Regarding Application of ILSA to Fractional Interests

• Is a fractional interest a lot under ILSA?

• Recent Colorado Case – PFW, Inc. v. Residences at Little Nell Development, LLC, 2012

WL 3518019 (Colo. App.)

41

Timeshare

• PFW, Inc. v. Residences at Little Nell Development, LLC, 2012 WL 3518019 (Colo. App.

Aug. 16, 2012)

• Is a fractional interest a lot under ILSA?

― “Lot” as defined in regulations expressly requires that an ownership interest

“includ[e] the right to exclusive use of a specific portion of the land.”

24 C.F.R. 1710.1(b)

― Referring to HUD's Guidelines, the Court stated that a “lot” exists only if the

purchaser of an interest has exclusive repeated use or possession of that specific

designated lot.

•

42

Timeshare

• PFW, Inc. v. Residences at Little Nell Development, LLC, 2012 WL 3518019 (Colo. App.

Aug. 16, 2012)

• Project Documents (i.e., Declaration and Reservation Policies) confirmed that all

fractional interests must participate in rotating priority reservation system that gave

owners a right to use specific types of units, but not to use any particular unit.

• Those fractional interests did not provide exclusive occupancy rights and, therefore,

were not “lots” under ILSA.

43

Take Away

44

Take Away

• Exemption may be less risky than registration

― More guidance regarding exemptions - While still patchwork of case law, more

circuit court rulings may help reconcile some of the inconsistencies.

― Exemptions have objective tests and elements.

― Registration has subjective component regarding propriety of disclosures

― Projects who have registered have more potential fact issues to litigate.

45

Take Away

• Need Extensive Planning At Outset of Project to Ensure Meet All Exemption

Requirements

― No reliance on former HUD Guidelines.

― Questions Regarding Stacking - Must satisfy the exemption at time enter into

contract.

46

Take Away

• If Registering a Project with CFPB - Need Extensive Planning to Ensure Full Disclosure

― The Type of Information That Should be Disclosed May Change On a State-by-State

Basis.

― Importance of disclosing all potential material facts and including specific

exculpatory provisions in contracts.

― Structure Disclosures to Avoid Potential for Non-Disclosure.

47

Take Away

• Note that registration or exemption under ILSFDA is not the end of the inquiry

― Many states have their own land and condominium registration requirements

― Some statutes tie into ILSFDA, but not all

― Some state registrations are significantly more onerous than ILSFDA registration

― State registration requirements need to be considered not only for situs state, but also

states in which active sales and marketing efforts will be undertaken.

48


Private ILSA Litigation

Dalzell vs. RP Steamboat Springs, LLC, 781 F.3d 1201 (10th Cir., March 24, 2015).

> Summary: Purchasers sought rescission and return of deposits from developer of master planned subdivision under 2007 Colorado condominium contracts.

> Issue: Whether master developer is liable under ILSA when different developer sells condominium units in the subdivision without registering under ILSA.

> Resolution: District court ruled that master developer “did not exercise sufficient control over the sale of the condominium units to qualify as a direct or indirect seller” and thus was not required to provide a property report or statement of record by filing under ILSA. Appeals court held that the master developer’s “status as a developer is not enough by itself to make RP liable for the failure to file a statement or record or to deliver a property report when the Buyers entered the Contracts with Trailhead LLC.” Appeals court refused to recognize master developer was an indirect seller by virtue of advertising the master project or by hosting sales trainings about the master project.

49



Dalzell vs. RP Steamboat Springs, LLC, 781 F.3d 1201 (10th Cir., March 24, 2015).

> Recommendations:

– Appeals court noted that the anti-fraud provisions of ILSA might have provided relief but were not raised at the district court level and thus were not at issue. Master developers may find themselves liable under Section 1703(a)(1)(D) as “Congress intended to hold advertisers and promoters liable for certain acts, even if they did not sell a property.”

– Master developers should make sure sub-developers do not imply that they are involved in the sales process by retaining a review right over project marketing materials and contracts.

50



Dolphin LLC v. WCI Communities, Inc., (11th Cir., May 1, 2013).

> Summary: Purchaser sought rescission on 2004 Florida condominium contract and district court granted summary judgment to developer.

> Issue: Whether a common promotional plan was present when two condominium developments were being developed by same developer and shared a sales office.

> Resolution: Appeals court affirmed summary judgment and award of attorney’s fees to developer. Ruled that shared ownership and sales office was not enough to demonstrate projects were “known collectively” by name of owner and thus subject to common promotional plan.

51



Dolphin LLC v. WCI Communities, Inc., (11th Cir., May 1, 2013).

> Recommendations:

– Here developer was developing 15 condominiums and using the under 25 exemption to avoid registration. Purchaser seeking rescission tried to group with other project sharing sales office.

– Purchasers also tried to use developer name as brand for common promotional plan.

– Appeals court referenced marketing materials that did not mention second project. Developers need to be careful how their marketing materials reference other projects.

52



Nahigian v. Juno-Loudoun, LLC, (677 F.3d 579, 4th Cir., May 1, 2012).

> Summary: Purchaser sought rescission on a 2007 Virginia lot purchase for misrepresentations in state court. Developer removed to federal court. Between purchase and rescission action, Ritz-Carlton terminated its management of the amenities. Developer did not register with HUD.

> Issue: Whether developer could stack exemptions and whether failure to disclose absence of long-term management agreement with brand was objectively material.

> Resolution: District court granted summary judgment to purchaser and both parties appealed, purchaser on issue of prejudgment interest. Appeals court affirmed summary judgment and awarded interest.

53



Nahigian v. Juno-Loudoun, LLC, (677 F.3d 579, 4th Cir., May 1, 2012).

> Recommendations:

– Here developer tried to stack the sales to builders exemption and the under 100 lot exemption. The appeals court held that the developer could not count lots for future sales to builders towards that exemption when determining if it met the under 100 lot exemption. Stacking exemptions attempts will be strictly reviewed and conditions must be satisfied up front and not in the future.

– Developer had disclosed that a management agreement with brand will be entered in the future, but courts held that failure to disclose ability to terminate management was material. Brand management of project amenities warrant disclaimers that brand is not endorsing project and there is not guarantee of no long-term involvement.

54



Veneklase v. Bridgewater Condos, L.C., 670 F.3d 705 (6th Cir. Ct. App. Feb. 6, 2012).

> Summary: Purchasers sought rescission in 2009 on a 2006 Michigan condominium contract due to failure to deliver property report. District court granted summary judgment for developer on grounds that rescission demand was not made within 2 years as required by Section 1703.

> Issue: How does Section 1711 three year statue of limitations interacts with Section 1703 two year rescission period.

> Resolution: Appeals court held that a purchaser may be entitled to equitable relief (rescission) under Section 1709 if filed within thre year period of Section 1711 and remanded case back to district court.

> Recommendations: This case shows the need to file or qualify for an exemption and that the two year automatic period is not the only period with which a developer must concern itself.

55



PFW, Inc. v. Residences at Little Nell Development, LLC, 292 P.3d 1094 (Col. Ct. App. Div. C, August 16, 2012).

> Summary: Purchasers sought to rescind a 2006 fractional interest in a condominium contract and vacate an arbitration award to developer.

> Issue: Whether a fractional interest is a “lot” for ILSA purposes.

> Resolution: State appeals court held that since contracts did not provide for exclusive use of a specific unit, the fractional interest in the case was not a “lot.” And it held that the determination whether ILSA applies must be made as of the date of the contract and not consider future events.

> Recommendations: This case was included for two reasons. First is that fractional units are not “lots” if rights are granted to a type of residence and not a specific residence. Second is timing of ILSA application is determined at the time of contract.

56



Rai v. WB IMICO LEXINGTON FEE, LLC, 802 F3d 353 (2nd Cir. Ct. App. Sept. 21, 2015).

> Summary: Purchasers of condominiums sued to rescind their purchase agreements and recover deposits. Developer counterclaimed for breach of contract and sought declaratory judgment that it could retain deposits

> Issue: Whether furnishing property report to purchaser’s attorney was sufficient for ILSA’s mandate for property report to be furnished to purchaser and whether failure to include tax lot number in agreement violated ILSA.

> Resolution: Appeals court held that furnishing property report to designated attorney for the purchaser was sufficient to meet developer’s obligations under ILSA and that failure to include tax lot number did not violate ILSA if description of unit given to purchaser was adequate.

> Recommendations: This case was included for the agency issue and because the CFPB filed an amicus brief in the case in favor of the developer’s position on the agency issue.

57



> Common Threads of cases:

– Purchasers seeking rescission will claim that ILSA applies and developer has not provided required property reports/statements of record.

– Purchasers have won rescission where misrepresentations are deemed present or the lack of disclosure deemed material.

– Developers have to be careful what sales people, marketing materials and sub-developers say regarding project.

– Application of ILSA to a project will be measured at time of contract signing.

58


Future of CFPB

59