11th Circuit Court of Appeals Overturns Pukka -- A Long-Standing Interpretation Is Reestablished
Condominium and resort developers had something to be thankful for this past holiday season. A court of appeals has overturned a case that had previously resulted in a significant rise in rescission lawsuits by purchasers. A federal trial court in Florida held in December 2007 that certain mandatory provisions must be contained in a purchase and sale agreement in order for a developer to comply with an exemption commonly referred to as the Fewer Than 100 Lots Exemption (“100 Lots Exemption”) under the Interstate Land Sales Full Disclosure Act (ILSA). As its name indicates, this exemption from registration under ILSA applies to projects with fewer than 100 lots or units. The trial court’s decision was a devastating holding since developers and practitioners have always understood that projects with fewer than 100 lots or units were exempt from registration without having to include certain “magic” language in the purchase and sale agreement.1 The appellate court agreed with the practitioners’ and the U.S. Department of Housing and Urban Development’s (HUD) reading of the act and reversed the lower court’s holding, allowing developers around the country to relax, at least a little, knowing that one of the potential plaintiffs’ claims has been shut down.
On December 9, 2008, the 11th Circuit Court of Appeals published its much anticipated opinion in the appeal by Pukka Development, Inc. from the lower court’s grant of summary judgment in favor of the plaintiff purchasers who were looking to rescind purchase and sale agreements for condominium units. In late 2007, a Florida federal district court interpreting the 100 Lots Exemption under the ILSA held for the first time that the information contained in Section 1703(d)(1)-(3) must be included in a purchase and sale agreement in order for it to comply with the 100 Lots Exemption.2 Section 1703(d) states that its terms apply to those contracts that are “not exempt under section 1702 of this title.” In analyzing Section 1702, the trial court stated that the exemptions set forth in that section were divided into two groups, with Section 1702(a) containing the “full” exemptions which exempt developers from “the provisions of this chapter,” and Section 1702(b) containing the “partial” exemptions which exempt developers from “the provisions requiring registration and disclosure.” The trial court held that only developers who were fully exempt under Section 1702(a) were actually exempt from the provisions of Section 1703(d) and the 100 Lots Exemption is only a partial exemption and thus to comply with that exemption, the provisions of Section 1703(d) must be followed.
Plain Language Prevails
The 11th Circuit Court of Appeals reversed this holding finding that to interpret the statute as the district court did would be to in essence change the language of Section 1703(d) from “not exempt under section 1702” to “not exempt under section 1702(a).” The appellate court reached this conclusion by looking at the plain language of the statute and by looking to principles of statutory construction. The appellate court found that Congress, when drafting ILSA, used more specific phrases in other subsections within ILSA, such as in Section 1703(a)(2) which reads “not exempt under section 1702(a).” This demonstrates that Congress understood how to be more specific, but chose to use broader language in Section 1703(d). The appellate court also deferred to the interpretation of HUD, the agency responsible for the administration of ILSA. In an opinion letter from Ivy Jackson, the Director of the RESPA and Interstate Land Sales Office of HUD, she indicated that the requirements of Section 1703(d) do not apply to the sale of lots that are exempt under any exemption listed in Section 1702. This letter, together with the analysis of the pre-1996 regulations which included language which clarified that if a lot was exempt under Section 1702(b), that it was also exempt from Section 1703(d), was entitled to deference. The appellate court concluded that the phrase “not exempt under section 1702” found in Section 1703(d) means that if a sale of a lot is exempt from any ILSA provision under Section 1702, then it is also exempt from the provisions of Section 1703(d).
Developers have been eagerly awaiting this decision, which will halt the floodgate of rescission claims and lawsuits that were brought by purchasers relying on the district court’s decision in challenging whether purchase agreements complied with the requirements of the 100 Lots Exemption. As real estate and condominium developers continue to struggle through depressed markets, this decision certainly brings cause for a sigh of relief.
1 This alert does not address instances in which a project containing fewer than 100 lots or units would not qualify for the Fewer Than 100 Lots Exemption because it is marketed and sold as part of a common promotional plan with one or more other projects.
2 Section 1703(d)(1)-(3) requires that a contract include a legal description which is acceptable for recording, a 20-day cure period in favor of buyers before they can be declared in default and a limitation of 15 percent of the purchase price as the amount of damages a developer may retain if the buyer is in default, regardless of the amount of the deposit placed by the buyer.