Originally published October 5, 2009
On September 30, 2009, the U.S. Court of Appeals for the Eleventh Circuit published its long-awaited opinion on Stein v. Paradigm Mirasol, LLC,1 which marks a milestone in federal jurisprudence concerning the proper application of the Interstate Land Sales Full Disclosure Act ("ILSA or Disclosure Act")2 in condominium purchaser lawsuits in the state of Florida. ILSA is a detailed, complicated area of federal law occupying 20 distinct subsections of Chapter 42 of Title 15. ILSA is an anti-fraud statute, created to prevent sellers from defrauding out-of-state purchasers of land. The statute mandates registration of developments subject to ILSA, to register with the U.S. Department of Housing and Urban Development, and requires detailed disclosures, in the form of a property report, prior to closing.3 Should a seller of property subject to ILSA requirements fail to provide a property report to prospective purchasers, the purchaser has the right to revoke the contract.4
Florida courts have held that ILSA applies to condominium contracts.5 Given the somewhat draconian remedies available to condominium purchasers under ILSA, and as a result of the onerous nature of the ILSA disclosure requirements, many developers attempted to draft sales contracts that fell within one of the ILSA exemptions.6 While numerous ILSA exemptions exist, the one upon which sellers frequently rely is the so-called "two-year completion exemption," which dictates that contracts in which the seller is obligated to complete the project within a period of two years are exempt from ILSA.7 This exemption has been the subject of numerous lawsuits in the state of Florida over the past five years.
Between 2000 and 2005, a housing boom took place in the state of Florida, during which housing prices rose more than 82%.8 After the housing bubble "burst," many condominium purchasers found themselves regretting their decisions. These purchasers sought a way out of their contracts by invoking ILSA, contending that their contracts' failed to fit within an ILSA exemption, were thus subject to the statute, and, consequently, were voidable.9
Alan and Karen Stein were two such purchasers. They entered into a condominium contract in March 2005, with Paradigm Mirasol, LLC ("Paradigm"), pursuant to which they made a down payment of $205,370.10 The contract specified that the condominium would be completed within two years, subject only to a standard force majeure clause stating that Paradigm "shall not be responsible for any delay caused by acts of God, weather conditions, restrictions imposed by any governmental agency, labor strikes, material shortages or other delays beyond the control of the Seller and the completion and occupancy date shall be extended accordingly."11 Paradigm did not provide the Steins with a property report.12
On January 16, 2007, the Steins submitted a letter to Paradigm, notifying Paradigm that they were terminating their contract due to its violation of ILSA and demanding return of their deposits.13 Paradigm refused to either cancel the agreement or return the requested deposits. On February 8, 2007, 23 months after the contract was signed, and the same day as Paradigm provided the Steins with a notice of the issuance of a certificate of occupancy, the Steins filed a complaint in the Middle District of Florida, seeking revocation of the contract and the return of their deposit.14 In their Complaint, the Steins alleged that the contract fell outside the exemption for two reasons. First, the Steins argued that the contract's force majeure clause did not unconditionally obligate15 Paradigm to complete the unit in two years. Second, the Steins contended that the contract's limitation of their remedies, should Paradigm default, to direct and actual damages, rendered the developer's obligation to complete the unit in two years illusory.16 The Steins and Paradigm filed cross motions for summary judgment.17
While questions of federal law are involved with the interpretation of ILSA, such federal questions also concern questions of state contract law.18 Thus, when faced with the task of determining whether the Steins' contract fell within the aegis of an ILSA exemption, the district court had to look to Florida law governing interpretation of contracts.19
In its analysis of the Steins' first argument, the district court proceeded on the assumption that, in order for the force majeure clause to fit within the two year completion exemption, the enumerated force majeure events had to meet the standards for impossibility of performance under Florida law.20 The district court determined that the inclusion of the language "other delays beyond the control of Seller" in the clause, allowed Paradigm "to excuse completion on a wide variety of events" that did not satisfy impossibility of performance standards.21 The district court held that the two-year completion obligation in the Steins' contract was illusory and did not qualify for an ILSA exemption.22
Turning to the Steins' limitation of remedies argument, the district court, relying on the case Samara Dev. Corp. v. Marlow,23 stated that the limitation of remedies in the Steins' contract rendered the contract illusory. While the district court noted that a contract might limit remedies to a degree without being rendered illusory, the court held that the restriction on "special damages" did.24
The district court held that the contract did not fall within an ILSA exemption and, therefore, Paradigm was obligated to comply with the reporting requirements of ILSA. The court held that the "Plaintiffs were entitled to terminate the Agreement on January 16, 2007, and are entitled to the return of $179,180.00 in deposits and $26,190.00 paid for option upgrades, including pre-judgment interest accrued thereon through February 7, 2008."25
Paradigm appealed the case to the Eleventh Circuit, which ultimately overturned the entirety of the district court's holding.26 The court first rejected the Steins' contention that the limitation of remedies rendered the contract illusory, reasoning that,
[E]ven with the limitation of remedies clause, the Steins had an effective remedy to enforce Paradigm's contractual promise to complete the construction of the condominium within two years. They could have obtained an injunction and brought to bear the threat of civil and criminal contempt if Paradigm was in the process of breaching by not working fast enough. Or if Paradigm had breached the contract by selling the property to another buyer, the Steins could have recouped the benefit of their bargain in the form of damages equal to the difference between their contract price and the fair market value of the property. That is in addition to the return of their deposit with interest. Insofar as remedies are concerned, the law would have threatened or inflicted enough pain on Paradigm for breaching the contract to make the contract one "obligating the seller or lessor to erect such a building thereon within a period of two years" within the meaning of § 1702(a)(2).27
The court similarly disposed of the Steins second argument, that the force majeure clause was overbroad and rendered the two year completion obligation illusory. Rather than reading the catch-all "other delays beyond the control of Seller" as an "opt-out provision," the court noted that these provisions are "limited in scope."28 The court determined that "[t]he clause does not make the two-year duty illusory" and did not "make the two-year duty subject to the seller's discretion," noting that "[e]vents beyond a party's control are, by definition, not in its discretion."29
The court concluded its holding by noting that,
The Disclosure Act is an anti-fraud statute. . . . 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 obligation into an option. . . . Even though the contract excuses delays beyond the seller's control, it is still one "obligating" Paradigm to complete construction of the condominium within two years for purposes of § 1702(a)(2) of the Disclosure Act.30
The court remanded the case and ordered judgment in favor of Paradigm.31
This decision will impact all the pending condominium purchaser cases involving ILSA. Nearly all of these cases are founded on the theory that the purchasers' contracts are void based on the failure to satisfy the exemption requirements of 15 U.S.C.A. § 1702(a). Both developers and purchasers have anticipated an appeals court ruling on the two-year completion exemption and speculation as to which position would triumph in the inevitable holding abounded. The Eleventh Circuit's holding in Stein v. Paradigm Mirasol, which effectively quashes the two theories most popular with litigious purchasers, will no doubt form the basis for summary judgment motions from developers embroiled in disputes in Florida.
Footnotes
1. Stein v. Paradigm Mirasol, LLC, 2009 WL 3110819 (C.A. 11th (Fla.), September 30, 2009)
2. 15 U.S.C.A. § 1701, et seq.
3. 15 U.S.C.A. § 1703
4. 15 U.S.C.A. § 1703(c)
5. Hamptons Development Corp. of Dade v. Sackler, 522 So.2d 1035 (Fla. 3d DCA 1988); Finst Dev., Inc. v. Bemaor, 449 So.2d 292 (Fla. 3d DCA 1984).
6. See 15 U.S.C.A. § 1702 for an itemization of ILSA exemptions.
7. 15 U.S.C.A. § 1702(a)(2)
8. Stein, 2009 WL 3110819.
9. In his opinion, Judge Carnes described ILSA as "a federal statute that has become an increasingly popular means of channeling buyer's remorse into a legal defense to a breach of contract claim." Id. at *1.
10. Id.
11. Stein v. Paradigm Mirasol, 551 F.Supp.2d 1323, 1329 (M.D. Fla. 2008).
12. Id. at 1326.
13. Id.
14. Id. at 1326.
15. The court noted that, while the two year completion obligation must not be "illusory," it did not have to be "unconditional." Id. at 1329.
16. Id. at 1326.
17. The Steins made a claim for conversion in addition to their ILSA claims, which was rejected by the district court. Id. at 1332-1333.
18. This interplay between federal and state law arises from the fact that courts must use state contract laws to determine if a contract is exempt from ILSA. See, e.g., Samara Development Corp. v. Marlow, 556 So. 2d 1097, 1100 (Fla. 1990); see also Hardwick Properties, Inc. v. Newbern, 711 So. 2d 35, 38 (Fla. 1st DCA 1998) (applying Florida contract law to 15 U.S.C. § 1701 et. seq. and ultimately reversing the trial courts finding that a contract was not exempt from § 1701).
19. Stein, 2009 WL 3110819, at * 1.
20. In support of this standard, the district court relied on two prior cases, Hardwick Props., Inc. v. Newbern, 711 So.2d 35 (Fla. 1st DCA 1998), review denied, 727 So.2d 908 (Fla.1998), and Schatz v. Jockey Club Phase III, Ltd., 604 F.Supp. 537, 541 (S.D.Fla.1985).
21. Stein 551 F.Supp. at 1330.
22. Id.
23. Samara Dev. Corp. v. Marlow, 556 So.2d 1097 (Fla. 1990).
24. Stein, 551 F.Supp. at 1331.
25. Id. at 1333.
26. Stein v. Paradigm Mirasol, LLC, 2009 WL 3110819, *6 (C.A. 11th (Fla.), September 30, 2009)
27. Id. at *5.
28. Id. at *6 (citing Gen. Injectables & Vaccines, Inc. v. Gates, 527 F. 3d 1375, 1377 (Fed.Cir.2008); Hutton Contracting Co. v. City of Coffeyville, 487 F.3d 772, 779 (10th Cir. 2007); Stand Energy Corp. v. Cinergy Servs., Inc., 144 Ohio App. 3d 410, 760 N.E. 2d 453, 457 (Ohio Ct. App. 2001).
29. Id.
30. Id.
31. Id.
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This article is for informational purposes and is not intended to constitute legal advice.