Second Circuit Issues ILSA Ruling in Bodansky

On March 15, 2011, the United States Court of Appeals for the Second Circuit issued its first decision interpreting the Interstate Land Sales Full Disclosure Act (“ILSA”), 15 U.S.C. ” 1701-20, in Bodansky v. Fifth on the Park Condo, LLC and Romero v. Borden East River Realty LLC. The two cases involved developers selling pre-construction units in condominiums containing more than 99 units relying on a combination of available exemptions in a practice known as “stacking.”

Background

Neither developer had registered its project with the Office of Interstate Land Sales Registration (“OILSR”) or issued a Property Report to the purchasers, although both had filed Offering Plans with the New York Attorney General. Both sponsors offered units in condominiums that were each scheduled to contain more than 100 units, although less than 100 units had been sold. When the sponsors were sued by purchasers for violating ILSA, both district courts held that the sponsors were exempt from ILSA. The district court in Bodansky held that because the sponsor had obtained a temporary certificate of occupancy (“TCO”) prior to selling more than 100 units in the Fifth on the Park Condominium, the sale of the first 99 units was exempt under the 100-Lot Exemption (15 U.S.C. ' 1702(b)(1)) and the balance of the units would be exempt under the Improved Lot Exemption (15 U.S.C. ' 1702(a)(2)). Similarly, the district court in Borden East, relying on Bodansky, held in favor of the developer of the One Hunters Point Condominium, which had also sold less than 100 units in One Hunters Point and Hunters View.

The Suit

The Condominiums argued that the units were exempt because fewer than 99 units had been sold although there were more than 100 units. The Second Circuit explained that the principal issue in both cases was at what point a developer loses its qualification for ILSA's 100-lot exemption (i.e., whether the exemption should be measured from when a developer sells its 100th non-exempt unit, or when the first unit is sold in a project planned to have over 100 lots). The 100-lot rule exempts from ILSA's registration and disclosure requirement “the sale or lease of lots in a subdivision containing fewer than 100 lots which are not exempt under subsection (a) of this section ' ” 15 U.S.C. ' 1702(b)(1). The Second Circuit noted that “ this provision explicitly allows a developer to combine the 100-lot partial exemption with the full exemption in section 1702(a). The relevant full exemption is the improved land exemption, which exempts from ILSA: the sale or lease of any improved land on which there is a residential, commercial, condominium or industrial building ' ” 15 U.S.C. ' 1702(a)(2).

The Court's Analysis

The Second Circuit's concern with the district courts' position was that the purchasers of the first 99 lots would never know if they had rights under ILSA, and would not be able to enforce their ILSA rights in the future if a developer sold the 100th lot after ILSA's statute of limitation had run out. The Second Circuit held that purchasers of these units were ” ' entitled to know at the time of contract signing, or at a statutorily defined period thereafter, whether developers must provide them with a property report disclosing information ' ” about their purchase. The court went on to explain that, “ [w]hether a lot is exempt under the 100-lot exemption is determined as of the time a purchaser or lessee signs a contract to purchase or lease that lot. The 100-lot exemption is not determined at an uncertain date in the future when the developer actually sells or leases (or conclusively does not sell or lease) 100 or more non-exempt lots.”

The parties attempted to compare their situation with the way in which ILSA's 12-month exemption, which exempts from registration 12 or fewer lots in a subdivision that are sold or leased in the previous months, is handled. The developers argued the 100-lot exemption should also be open-ended because the 12-month exemption is calculated over time, but the Second Circuit disagreed, noting that, “although the twelve-month exemption exempts a purchased or leased lot based on sales or leases of other lots in the subdivision, Congress strictly limited the scope of the other relevant sales to a twelve-month period. This is well within the 2-year revocation period under Section 1703(c). With this explicit limitation, the twelve-month exemption allows every purchaser and lessee to learn, with enough time to exercise the right of revocation, whether the purchased or leased lot is exempt. The 100-lot exemption, by contrast, contains neither this explicit limitation, nor does it explicitly depend on future sales or leases of other lots in the subdivision.”

The Second Circuit also declined Borden East's request to deny relief to the plaintiff-purchasers, due to their failure to specifically allege fraud by noting that “' Congress gave purchasers an exclusive right to revoke and did not provide for affirmative defenses other than the revocation and limitation periods.” Finally, the developers raised the duplication of State disclosure laws and the Second Circuit responded that “we are not unsympathetic to Defendants' claims that developers could be burdened by two sets of disclosure regulations for condominium sales. State disclosure laws and regulations could substantially overlap with ILSA's disclosure requirements, without providing additional protection for consumers. However, Congress was aware of such a possibility and explicitly provided a solution, allowing states to request HUD to certify that the state's disclosure requirements are 'at least substantially equivalent' to ILSA's disclosure requirements or otherwise 'provide sufficient protection for purchasers and lessees' with respect to such matters.”

Conclusion

One final note: The Second Circuit did not rule on the applicability of ILSA to the sale of condominium units. It was not raised by either developer because they had been successful in the district court arguing for the stacking of exemptions, so they did not want to raise an issue relating to the application of the Interstate Land Sales Full Disclosure Act to condominiums. The result is that a ruling on the applicability of ILSA to something other than land will have to wait for another day.

Stuart Saft is a Partner at Dewey & LeBoeuf LLP.

On March 15, 2011, the United States Court of Appeals for the Second Circuit issued its first decision interpreting the Interstate Land Sales Full Disclosure Act (“ILSA”), 15 U.S.C. ” 1701-20, in Bodansky v. Fifth on the Park Condo, LLC and Romero v. Borden East River Realty LLC. The two cases involved developers selling pre-construction units in condominiums containing more than 99 units relying on a combination of available exemptions in a practice known as “stacking.”

Background

Neither developer had registered its project with the Office of Interstate Land Sales Registration (“OILSR”) or issued a Property Report to the purchasers, although both had filed Offering Plans with the New York Attorney General. Both sponsors offered units in condominiums that were each scheduled to contain more than 100 units, although less than 100 units had been sold. When the sponsors were sued by purchasers for violating ILSA, both district courts held that the sponsors were exempt from ILSA. The district court in Bodansky held that because the sponsor had obtained a temporary certificate of occupancy (“TCO”) prior to selling more than 100 units in the Fifth on the Park Condominium, the sale of the first 99 units was exempt under the 100-Lot Exemption (15 U.S.C. ' 1702(b)(1)) and the balance of the units would be exempt under the Improved Lot Exemption (15 U.S.C. ' 1702(a)(2)). Similarly, the district court in Borden East, relying on Bodansky, held in favor of the developer of the One Hunters Point Condominium, which had also sold less than 100 units in One Hunters Point and Hunters View.

The Suit

The Condominiums argued that the units were exempt because fewer than 99 units had been sold although there were more than 100 units. The Second Circuit explained that the principal issue in both cases was at what point a developer loses its qualification for ILSA's 100-lot exemption (i.e., whether the exemption should be measured from when a developer sells its 100th non-exempt unit, or when the first unit is sold in a project planned to have over 100 lots). The 100-lot rule exempts from ILSA's registration and disclosure requirement “the sale or lease of lots in a subdivision containing fewer than 100 lots which are not exempt under subsection (a) of this section ' ” 15 U.S.C. ' 1702(b)(1). The Second Circuit noted that “ this provision explicitly allows a developer to combine the 100-lot partial exemption with the full exemption in section 1702(a). The relevant full exemption is the improved land exemption, which exempts from ILSA: the sale or lease of any improved land on which there is a residential, commercial, condominium or industrial building ' ” 15 U.S.C. ' 1702(a)(2).

The Court's Analysis

The Second Circuit's concern with the district courts' position was that the purchasers of the first 99 lots would never know if they had rights under ILSA, and would not be able to enforce their ILSA rights in the future if a developer sold the 100th lot after ILSA's statute of limitation had run out. The Second Circuit held that purchasers of these units were ” ' entitled to know at the time of contract signing, or at a statutorily defined period thereafter, whether developers must provide them with a property report disclosing information ' ” about their purchase. The court went on to explain that, “ [w]hether a lot is exempt under the 100-lot exemption is determined as of the time a purchaser or lessee signs a contract to purchase or lease that lot. The 100-lot exemption is not determined at an uncertain date in the future when the developer actually sells or leases (or conclusively does not sell or lease) 100 or more non-exempt lots.”

The parties attempted to compare their situation with the way in which ILSA's 12-month exemption, which exempts from registration 12 or fewer lots in a subdivision that are sold or leased in the previous months, is handled. The developers argued the 100-lot exemption should also be open-ended because the 12-month exemption is calculated over time, but the Second Circuit disagreed, noting that, “although the twelve-month exemption exempts a purchased or leased lot based on sales or leases of other lots in the subdivision, Congress strictly limited the scope of the other relevant sales to a twelve-month period. This is well within the 2-year revocation period under Section 1703(c). With this explicit limitation, the twelve-month exemption allows every purchaser and lessee to learn, with enough time to exercise the right of revocation, whether the purchased or leased lot is exempt. The 100-lot exemption, by contrast, contains neither this explicit limitation, nor does it explicitly depend on future sales or leases of other lots in the subdivision.”

The Second Circuit also declined Borden East's request to deny relief to the plaintiff-purchasers, due to their failure to specifically allege fraud by noting that “' Congress gave purchasers an exclusive right to revoke and did not provide for affirmative defenses other than the revocation and limitation periods.” Finally, the developers raised the duplication of State disclosure laws and the Second Circuit responded that “we are not unsympathetic to Defendants' claims that developers could be burdened by two sets of disclosure regulations for condominium sales. State disclosure laws and regulations could substantially overlap with ILSA's disclosure requirements, without providing additional protection for consumers. However, Congress was aware of such a possibility and explicitly provided a solution, allowing states to request HUD to certify that the state's disclosure requirements are 'at least substantially equivalent' to ILSA's disclosure requirements or otherwise 'provide sufficient protection for purchasers and lessees' with respect to such matters.”

Conclusion

One final note: The Second Circuit did not rule on the applicability of ILSA to the sale of condominium units. It was not raised by either developer because they had been successful in the district court arguing for the stacking of exemptions, so they did not want to raise an issue relating to the application of the Interstate Land Sales Full Disclosure Act to condominiums. The result is that a ruling on the applicability of ILSA to something other than land will have to wait for another day.

Stuart Saft is a Partner at Dewey & LeBoeuf LLP.