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Presenting a live 90‐minute webinar with interactive Q&A
Interstate Land Sales Full Disclosure Act Under the CFPB: What's New? Navigating ILSA Compliance Options, Alternatives, Strategies and Pitfalls
T d ’ f l f
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
WEDNESDAY, JULY 24, 2013
Today’s faculty features:
Roger D. Winston, Partner, Ballard Spahr LLP, Bethesda, Md.
Patrick Pugh, Associate, Ballard Spahr LLP, Denver
Sarah T. Reise, Associate, Ballard Spahr LLP, AtlantaSarah T. Reise, Associate, Ballard Spahr LLP, Atlanta
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The CFPB and the Interstate Land Sales Full Disclosure Act: What's New?Sales Full Disclosure Act: What s New?
July 24, 2013
Roger D. WinstonReal Estate DepartmentTeam Leader, Mixed-Use Development &
Patrick H. PughReal Estate & Construction Litigation Group
Consumer Financial Services [email protected]
Sarah T. ReiseConsumer Financial Services [email protected]
Copyright 2013 by Ballard Spahr LLP
e ses@ba a dspa .co678.420.9370
Panelist – Roger D. Winston
• Team Leader of Ballard Spahr's Mixed-Use Development and Condominiums Team and Managing Partner of the firm’s Bethesda officeg g
• Concentrates on the representation of developers, investors, and lenders in connection with the planning, development, due diligence, and restructuring of many forms of mixed-use and condominium projects, including residential retail, office, and conversion condominiums; planned communities; senior housing projects; traditional
i hb h d d l d h i i f id i lneighborhood developments; and numerous other variations of residential, nonresidential, and mixed-ownership developments
• As past chair and current member of the American College of Real Estate Lawyers (ACREL) Common Interest Ownership Committee and a current member of the ACREL ILSA Subcommittee, Roger has had extensive experience and exposure to allACREL ILSA Subcommittee, Roger has had extensive experience and exposure to all aspects of the Interstate Land Sales Act
• Past Chair of the Real Property, Probate and Trust Law Section of the American Bar Association
• Secretary, American College of Real Estate LawyersCh b USA A i ' L di L f B i l l 2004 2013• Chambers USA: America's Leading Lawyers for Business, real estate law, 2004-2013 (highest ranking/band one)
• The Best Lawyers in America, real estate law, 2001-2013• Named among Top 100 Washington, D.C., Area Super Lawyers• Recipient Maryland State Bar Association's Distinguished Practitioner Award
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Recipient, Maryland State Bar Association s Distinguished Practitioner Award• Named by Washington Business Journal one of top five real estate lawyers in the region
Panelist – Patrick H. Pugh
• Litigation Associate in Ballard Spahr’s Denver office and a m mb r f th firm’ C mm r i l Liti ti n C n m rmember of the firm’s Commercial Litigation, Consumer Financial Services, and Real Estate and Construction Litigation Groups
• Has a di erse litigation practice foc sing primaril in the areas of• Has a diverse litigation practice focusing primarily in the areas of real estate, business disputes, and consumer financial services, including cases involving federal lending statutes and consumer protection laws.protection laws.
• Experience representing both lenders and developers in numerous cases involving ILSA, and has worked with HUD in ILSA investigations and with the CFPB regarding consumerILSA investigations and with the CFPB regarding consumer finance related complaints.
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Panelist – Sarah T. Reise
• Associate at Ballard Spahr and a member of the firm’s Consumer Fin n i l S r i nd M rt B nkin Gr pFinancial Services and Mortgage Banking Groups
• Practice focuses on complex civil litigation in the area of consumer financial services, including representing clients in the financial ser ices and mortgage banking ind stries in casesfinancial services and mortgage banking industries in cases involving lending-related issues, including claims arising under state and federal lending statutes and consumer protection laws.
• Experience advising clients in connection with civil investigative• Experience advising clients in connection with civil investigative demands issued by the Consumer Financial Protection Bureau and other governmental investigations.
• Has defended clients in class actions based on alleged ILSA• Has defended clients in class actions based on alleged ILSA disclosure violations.
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Overview of ILSA
• The Interstate Land Sales Full Disclosure Act regulates the sale of real property which using the language of ILSAsale of real property, which, using the language of ILSA, is an interest in a “lot”.- ILSA is a consumer protection statute modeled after the p
Securities Acts.
• ILSA accomplishes consumer protection through two t ti i i Di l d A ti f dprotective provisions: Disclosure and Anti-fraud
• ILSA also defines a number of exemptions either from the entire Act or just from the registration and disclosureentire Act or just from the registration and disclosure provisions.
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Overview of ILSA – Registration and DisclosureDisclosure• Unless an exemption applies, “Lots” offered for sale must
be registered and a property report provided to purchasersbe registered and a property report provided to purchasers.
• The property report must include many disclosures.
h h l i l d i• The purchase contract must also include certain terms:- Description of the lot that is in a form acceptable for
recordingrecording.
- Right of purchaser to remedy any default within 20 days.
Limited damages to de eloper in e ent of breach b- Limited damages to developer in event of breach by purchaser.
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Overview of ILSA –Anti-Fraud
Anti-fraud language modeled after Securities Act.g g
• Prohibits “any device, scheme, or artifice to defraud.”
• Prohibits the use of any untrue statement of a material fact• Prohibits the use of any untrue statement of a material fact, or omission of material fact to obtain money or property.
In addition, ILSA prohibits:In addition, ILSA prohibits:
• Selling a lot where the property report or registration statement contains an untrue statement or fact or omission of material fact
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What Is A Lot?
• “Lot” is not defined in the statute but rather in the regulationsregulations.- “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 unitsIncludes 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)
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p )
What Is A Lot? (cont’d)
• “Lot” does not include fractional interests in condominium units so long as no exclusive right to use specific unitunits so long as no exclusive right to use specific unit.
• PFW, Inc. v. Residences at Little Nell Development, LLC, 2012 WL 3518019 (Colo. App. 2012)2012 WL 3518019 (Colo. App. 2012)- The Court stated that a “lot” exists only if the purchaser of an
interest has exclusive repeated use or possession of that specific d i t d l tdesignated lot.
- Each whole condo unit was a “lot” for purposes of ILSA.
BUT Fractional interests were not separate “lots” under ILSA- BUT Fractional interests were not separate lots under ILSA because they did not provide exclusive occupancy rights.
- Rotating priority reservation system gave owners a right to use ifi f i b i l i
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specific types of units, but not to use any particular unit.
Exemptions From ILSA
• ILSA Does Not Apply to Certain Projects:- Sale of less than 25 lots;
- Existing or completed units or buildings;
U di i l i l l i i hi 2- Unconditional promise to complete lot or unit within 2 years;
- Sales to home builders;
I d t i l/C i l D l t- Industrial/Commercial Developments.
E t f ll f ILSA ti f d i i• Exempt from all of ILSA – even anti-fraud provisions.
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Exemptions From Registration
• Certain projects do not have to register under ILSA:- Sale of between 25 to 99 lots;
- Residential subdivisions with many defined conditions;
- Intrastate sales with many defined conditions;
• Sales are still subject to ILSA’s anti-fraud provisions.
• ILSA exemptions are self-effectuating. No review by any p g y ygovernmental agency or third party.
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Remedies Under ILSA
• 2 year right for purchaser to rescind contract for certain y g pviolations of §1703;
• Private Cause of action with all remedies at law and in equity under §1709, including award of attorneys’ fees;
• Criminal penalties;
• Regulatory – Civil penalties.
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Litigation Under ILSALitigation Under ILSA
Attacking ILSA’s Exemptions
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Litigation Under ILSA
• While the Act has been in effect since 1968, ,approximately half of all reported state and federal decisions interpreting ILSA have been issued since just 20072007.
• The great majority of the cases between 2007 and 2010 involved developments in which the developer had not p pregistered under the Act and had instead attempted to rely on an exemption.
• Many cases address exemption stacking under HUD Guidelines
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Exemption Stacking – HUD Guidelines
• HUD Guidelines – Guidelines were published by HUD to assist developers in complying with ILSA regulations.p p y g g
• HUD Guidelines expressly permitted developers to stack ILSA exemptions.
• Providing no deference to HUD Guidelines, courts invalidated practice of exemption stacking.
All d h i d h d l- Allowed purchasers to rescind contract even where developer relied upon HUD Guidelines.
- Must qualify for exemption at time project begins selling. Intent q y p p j g gto qualify under another an exemption in the future not sufficient. See Nickell v. Beau View of Biloxi, L.L.C., 636 F.3d 752, 756-57 (5th Cir. 2011) (HUD Guidelines not entitled to Chevron d f b d d d l ki )
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deference because not adopted under rulemaking process)
Litigation Under ILSALitigation Under ILSA
Attacking Projects Registered Under ILSA
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Registration Under ILSA
• While many of the cases interpreting ILSA decided since y p g2007 primarily dealt with proper reliance on exemptions, a significant number of the cases decided since 2010 dealt with projects for which the developer had registered andwith 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 p gproperty description requirements.
• Also, cases involving disclosures contained in the property report provided to potential purchasers.
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Description Requirement
• The purchase contract for a project registered under ILSA p p j gmust include a “description of the lot . . . in a form acceptable for recording.” 15 U S C § 1703(d)(1)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 p q g precordable form. - In other words, the purchase contract need only reasonably
id tif th t t t d f It d t b f th t iidentify the property contracted-for. It need not be a form that is sufficient for recording in the real property records of the jurisdiction where the property sits.
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Bacolitsas v. 86th & 3rd Owner, LLC
• Bacolitsas v. 86th & 3rd Owner, LLC, 2010 WL 5299867 , ,(S.D.N.Y. December 20, 2010).- The district court found that because the purchase contract used
in an ILSA registered project recited that it as not to bein 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 suchcontract failed to meet the requirements of the Act (and as such the purchasers were entitled to rescission).
- Appealed to Second Circuit Court of Appeals.
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Bacolitsas v. 86th & 3rd Owner, LLC (cont’d)
• Bacolitsas v. 86th & 3rd Owner, LLC, 702 F.3d 673 (2d. , , (Cir. 2012)- In a rare win for developers, the Court of Appeals reversed
holding that it is onl the description of the lot or nit that m stholding that it is only the description of the lot or unit that must be in a form acceptable for recording, not the entire contract.
- The Second Circuit concluded that the description must only be sufficient for recording purposes, not conveyance purposes.
- “If, as Plaintiffs urge, the description of the lot must be in a form acceptable for recording the deed, then a purchase agreement foracceptable for recording the deed, then a purchase agreement for a unit could be executed only after construction was finished. ... Nothing in [ILSA] suggests that Congress intended this outcome.”
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Bacolitsas v. 86th & 3rd Owner, LLC (cont’d)
• The developer was permitted to retain escrow deposit and p p pwas also awarded its attorneys’ fees in the case. - The purchase contract provided for the award of the developer’s
attorne s’ fees to protect its rights or enforce the p rchaser’sattorneys’ fees to protect its rights or enforce the purchaser’s obligations under the purchase contract,
• The purchaser-plaintiff, who breached the purchase p p , pagreement by refusing to close on the purchase of the property, was ordered to pay over $575,000 in attorneys’ fees to the developerfees to the developer.
25
Property Report – Untrue Statements
• ILSA prohibits the sale of any lot where any part of the t t t i d t t t t f t i lproperty 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).
• Several courts have held that reliance on the false or omitted statement by the purchaser is not required for a l i d thi S ti b th t t t hibitclaim under this Section because the statute prohibits any
untrue statements of material fact in the property report, - Whether or not a potential purchaser even reads the property- 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.
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Fraud Provisions – Untrue Statements
• Different from Fraud Provisions in Section 1703(a)(2).( )( )
• While there is a split, most 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).
S I Elk Ri P LLC 705 F S 2d 1220 1237- See Ivar v. Elk River Partners, LLC, 705 F. Supp. 2d 1220, 1237-38 (D. Colo. 2010) (“Because reliance is required under Rule 10b-5 it is logical that it would be required under the nearly identical anti fraud provision of ILSA ”)identical anti-fraud provision of ILSA. )
• Important where project is exempt from registration but still subject to anti-fraud provisions.
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still subject to anti fraud provisions.
Transition of AdministrationTransition of Administration from HUD to CFPB
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Consumer Financial Protection Bureau
• Effective July 21, 2011, administration and enforcement of ILSA transferred to CFPBILSA transferred to CFPB.
• HUD had been responsible for administering ILSA since its adoption in 1968.its adoption in 1968.
• CFPB has not been very active with ILSA to date (and has not been any more active than HUD). y )- Limited staff (one supervisor and one examiner with ILSA
history)
- Focus of CFPB on mortgage and consumer lending products
• There are signs that ILSA will become a greater priority at CFPB i th f t
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CFPB in the future.
CFPB Regulation: Stagnation
• CFPB issued interim final rules effective December 21, 20112011.- These rules re-adopt the regulations previously implemented by
HUD.
• CFPB, however, has not adopted the HUD Guidelines.
• CFPB recognizes that there is significant disarray in the• CFPB recognizes that there is significant disarray in the ILSA landscape.- Inconsistent court decisions
- Outdated regulations
- Holes left by abandonment of HUD Guidelines
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CFPB – Planning for the Future and Bringing ILSA into the 21st Centuryy
• New software for ILSA Registrations to modernize process and provide for easier updatesprocess and provide for easier updates.
• Likely revisions to regulations through proposed rulemaking and comment process.rulemaking and comment process.- Possible revisions to the content, format and medium of Property
Report
- Will likely address exemptions in light of disarray in court decisions
CFPB l t i it G id li t l HUD’• CFPB plans to issue its own Guidelines to replace HUD’s.- Once resources are available, CFPB goal is to be more active in
issuing guidance than HUD.
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g g
CFPB – Amicus Program
• The Bureau has stated that it plans to file amicus briefs pmore frequently than other agencies, to attempt to shape interpretations of consumer financial laws.
• Correct legal errors relatively quickly, without resort to the rulemaking process.
I h th i i ifi t ti l i t• Issues where there is a significant practical impact.
• CFPB has filed amicus briefs in cases involving the interpretation of TILA FDCPA RESPA and recentlyinterpretation of TILA, FDCPA, RESPA, and, recently, ILSA.
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CFPB – Amicus Program (cont’d)
• Berlin v. Renaissance Rental Partners, LLC, No. 12-2213-, ,CV, Second Circuit Court of Appeals- Issue before the court was whether the term “lot” includes
ertical high rise condomini m nitsvertical high-rise condominium units.
- Appellants argued that the condominium units at issue were not “lots” under ILSA because they did not include any interest in the land underlying the condominium as defined by HUD’s regulation.
- In its amicus brief, CFPB cited HUD’s 1996 Guidelines andIn its amicus brief, CFPB cited HUD s 1996 Guidelines and argued that ILSA applied to any condominium unit in an uncompleted development.
The Second Circuit adopted the CFPB position on May 6
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- The Second Circuit adopted the CFPB position on May 6.
CFPB: Consumer Complaints
• Consumer Complaint Processp- Consumer submits complaint to the CFPB.
- CFPB reviews for completeness and forwards to theCFPB reviews for completeness and forwards to the developer.
- The developer reviews and provides the CFPB with a h l iresponse to the complaint.
- CFPB invites the consumer to review the response.
- Complaint prioritized for investigation where the developer either failed to respond within timeframe or the response is disputed.
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CFPB: Consumer Complaints (cont’d)
• Consumer complaints are not handled by the ILSA Departmenth ll l i h dli- Creates challenges to complaint handling
- Many ILSA complaints get misidentified as RESPA or TILA complaints.p
• CFPB highlights private right of action when responding to consumer complaints.
• CFPB will use consumer complaints to identify targets for investigation and enforcement.
CFPB h i di d h ff l i ill lik l l d- CFPB has indicated that one-off complaints will not likely lead to an investigation or enforcement action.
- Multiple complaints against the same developer or project will
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p p g p p jdraw attention.
CFPB: Civil Investigative Demands
• CFPB Investigations – Civil Investigative Demands g g(CIDs)
• CIDs can require: (1) the production of documents; (2) answers to interrogatories; and/or (3) appearance for testimony
M t d d th• Must respond under oath
• Must hold a meet and confer within 10 calendar days of being served with the CID and CFPB generally will notbeing served with the CID, and CFPB generally will not agree to postpone this deadline
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CFPB Administrative Proceedings and Civil Actions
• CFPB plans to be much more active than HUD in enforcing ILSA.
- HUD rarely filed formal administrative or civil enforcement actions
- CFPB will take “different” approach
• Wide array of remedies including rescission and reformation of contractsWide array of remedies, including rescission and reformation of contracts, refund of money, restitution, disgorgement of compensation, payment of damages or other monetary relief, injunctive relief and civil money penalties
• With respect to civil monetary penalties the CFPB has taken the positionWith respect to civil monetary penalties, the CFPB has taken the position that it may seek penalties under both Dodd-Frank and ILSA.
- Dodd-Frank Act: Up to $1 million for each day during which a knowing violation of ILSA occurs 12 U S C § 5565(c)violation of ILSA occurs. 12 U.S.C. § 5565(c).
- ILSA: Up to $1,000 for each violation, with a maximum annual penalty amount of $1 million. 14 U.S.C. § 1717a(a)(2).
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ILSA Options and StrategiesILSA Options and Strategies
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Strategy to Lessen Risk
• At This Time, Satisfying Exemption May Have Less Risk Th R i t ti U d ILSAThan Registration Under ILSA.- More guidance regarding exemptions - While still patchwork of
case law, more circuit court rulings may help reconcile some of , g y pthe inconsistencies.
- Exemptions have objective tests and elements.
- Registration has subjective component regarding propriety of disclosures.
- Projects that have registered have more potential fact issues toProjects that have registered have more potential fact issues to litigate.
- Changes to CFPB regulations regarding registration and disclosure may create uncertainties in the near term
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disclosure may create uncertainties in the near term.
Strategy if Relying Upon Exemption
• Need Extensive Planning At Outset of Project to Ensure g jSquarely Satisfy All Exemption Requirements- No reliance on former HUD Guidelines.
- No reliance on stacking exemptions.
- Must ensure that the project satisfies the exemption at the time the purchaser enters into a contractthe purchaser enters into a contract.
- Because exemptions are self-effectuating, the developer should document project’s qualification under exemption in the event h i i h ll dthe exemption is challenged.
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Strategy if Registering Project
• 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 Due to State Law PrinciplesOn a State by State Basis Due to State Law Principles.• Description requirement for purchase contracts interpreted
differently by state.
• How something must be described may depend on state law.
- Importance of disclosing all potential material facts and including specific exculpatory provisions in contracts.p p y p• See, e.g., cases regarding square footage of units
- Structure Disclosures to Avoid Potential for Non-Disclosure.
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Strategy to Lessen Risk• Limit the persons involved in the marketing or sale of any lots
in the project whether the project is exempt or not.
• “Developer” is broadly defined and includes any person or entity involved in the marketing or sale of the lot or unit.- “any person who, directly or indirectly, sells or leases, or offers
to sell or lease, or advertises for sale or lease any lots in a subdivision.” 15 U.S.C. § 1701
• Hotel operators and licensors who have injected themselves or have been injected into the marketing for a project have been found to be “developers” under ILSA subjecting them tofound to be developers under ILSA, subjecting them to liability.- See Aaron v. Trump Organization, Inc., No. 8:09–cv–2493 (M.D.
Fl J l 15 2011)
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Fla. July 15, 2011)
Questions? If you have questions about anything we covered today, please contact:
Roger D. WinstonReal Estate DepartmentTeam Leader, Mixed-Use Development
d C d i i
Patrick H. PughCommercial LitigationReal Estate & Construction Litigation GroupC Fi i l S i Gand Condominiums
Consumer Financial Services [email protected]
Sarah T. ReiseConsumer Financial Services [email protected]
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References - ILSA• ILSA is codified at 15 U.S.C. § 1701, et seq.
• 15 U S C § 170315 U.S.C. § 1703- (a)(1) Registration and disclosure requirements
(a)(2) Prohibits fraud or deception in sale of a lot- (a)(2) Prohibits fraud or deception in sale of a lot
• But (a)(1)(C) – prohibits selling any lot where disclosures contain untrue statement or omission of material fact
- (b) 7-day right to revoke contract
- (d) Required contract provisions unless exemption applies
44
References – Improved Lot Exemption
• Stein v. Paradigm Mirasol, LLC, 586 F.3d 849 (11th Cir. 2009) g ( )
- “Allowing for reasonable delays caused by events beyond the seller's control does not promote or permit fraud. It does not transform the seller's [two year contractual completion] obligation into an option.” [ y p ] g p
• Dalzell v. Trailhead Lodge at Wildhorse Meadows, LLC, 2010 WL 4932682 (D. Colo. November 30, 2010).
A provision in a contract that allows termination of the contract by the- A provision in a contract that allows termination of the contract by the developer if there is a substantial casualty does not obligate seller to build within 2 years, and, therefore, does not qualify for exemption.
45
References – Exemption Stacking
- Exemption stacking not permitted by ILSA. Intent to qualify under p g p y q yanother an exemption in the future not sufficient. See Nickell v. Beau View of Biloxi, L.L.C., 636 F.3d 752, 756-57 (5th Cir. 2011).
- Exemptions are determined at the time purchase contract is signed. See p p gBodansky v. Fifth on Park Condo, LLC, 635 F.3d 75, 83-84 (2d Cir. 2011).
- “HUD did not intend its guidelines to have binding effect. …We decline g gto defer to the guidelines because the plain language of the statute forecloses the inclusion of future sales in the 99–lot count.” Nahigian v. Juno-Loudoun, LLC, 677 F.3d 579 (4th Cir. 2012).
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References - Description Requirement• 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 forin existence, the contract failed to satisfy ILSA s requirement for the legal description.
- Because North Carolina law prohibits the legal creation of a d i i it i t b t ti l l ti f th b ildicondominium 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 registeredfor a condominium unit if the underlying project is registered under ILSA.
- This analysis becomes a state-by-state determination, which ILSA t h b d i d t id
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ILSA appears to have been designed to avoid.
References - Property Report
• Burns v. Duplin Land Development, Inc., 621 F. Supp. 2d 292 304 6 (E D N C 2009)292, 304-6 (E.D.N.C. 2009)- Purchasers were able to rescind the contract because property
report contained untrue statement or an omission of a material fact. Did not matter that purchasers knew information or relied upon property report.
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