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(This story, in slightly different form, originally appeared in ALM’s Daily Business Review.)

MIAMI-Bucking the Florida Supreme Court, a federal appellate panel waded into the battle between condo developers and buyers over the use of a consumer protection law to void contracts. The 11th US Circuit Court of Appeals sided with developers in a Sept. 30 decision, giving them wide latitude in claiming an exemption from the Interstate Land Sales Full Disclosure Act, better known as ILSA.

Passed in 1968 to protect consumers from unscrupulous swampland salesmen, the plaintiff bar seized on the law when the real estate bubble burst as a way to get their clients out of their purchase contracts with developers and get back deposits. Much of the litigation centers on promises by developers to deliver their product within two years to be exempt from ILSA’s onerous requirements, such as providing a building report to the buyer and registering with the US Department of Housing and Urban Development.

Judge Ed Carnes, who wrote the 18-page opinion for the unanimous panel, said buyers have used ILSA disingenuously, changing their minds on what morphed into a bad real estate investment once the market turned. Circuit Judge Gerald Bard Tjoflat and US District Judge Joseph M. Hood, sitting by designation from Lexington, KY, concurred.

“The bigger the bubble, the bigger the pop. The bigger the pop, the bigger the losses. And the bigger the losses, the more likely litigation will ensue,” Carnes wrote.

The case is centered on a Lee County condominium contract signed in 2005 by Alan and Karen Stein for a unit at the Paradigm Mirasol development for $895,000. The Steins paid $205,370, including a $179,180 deposit, and sued under ILSA for the return of the money, the appellate opinion said.

The six-story condo building was completed within the two-year timeframe, but the Steins argued they should be able to get out of their contract because they did not receive the building report required by ILSA. Their argument centered on the vast number of contract provisions that would allow Paradigm to go beyond the two-year limit. The so-called “force majeure” clause starts with acts of God and goes from there.

“After the housing bubble burst, the Steins had second thoughts about their decision to purchase the condominium unit,” Carnes wrote. “Wanting out of their contract, they seized onto the Interstate Land Sales Full Disclosure Act, 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.”

Three weeks before the scheduled closing date, the Steins asked for their down payment back, claiming the developer violated ILSA. Paradigm refused, saying the property was exempt from the law because it was promised to be complete within two years.

US District Judge John E. Steele in Fort Myers agreed with the Steins, ruling Paradigm indeed violated ILSA and ordered the return of the Steins’ money. He ruled Paradigm could not claim the two-year exemption because it built into the contract so many excuses for going beyond the completion date that the developer rendered the obligation “illusory”–basically meaningless.

Stein attorney Joseph Stern at Saraga & Lipshy of Delray Beach said the appellate court was clearly biased against the buyers. “They talk about our clients having buyer’s remorse. Statements like that have no place in the opinion. Those statements weren’t part of the record,” Stern says, adding that he will ask the full 11th Circuit to hear the case en banc.

The impact of the appellate opinion in state court is still to be determined. ILSA is a unique federal law that defers to state contract law on enforcement. The Florida Supreme Court has given developers little or no excuse for going beyond ILSA’s two-year rule.

The state’s high court in 1990 ruled a court deciding whether a developer is entitled to an exemption must “ensure that the ‘obligation’ to complete construction is not illusory.”

Carnes saw it differently. The appellate court “said the developers are excused for anything beyond the seller’s control. That’s not a legal defense under Florida contract law,” Stern says.

But Carnes took the district court to task for its review of the “force majeure” clause that gave a litany of reasons for giving the developer more than two years to complete the building. Steele pointed to a Florida case where a delay was excused due to excessive rain and another where a development company president had a heart attack.

“No seller can command the sky to open up and more rain to fall, and we are not aware of anyone deliberately inflicting a heart attack on himself to delay the performance of a contractual duty,” Carnes wrote.

Attorney Mary Clapp of the John H. Rains III law firm in Tampa, who represented Paradigm, said the decision is an important one. “The court wasn’t narrow in its interpretation of the force majeure clause about when things happened beyond the control of the developer,” Clapp says.

Real estate attorneys say they envision chaos in the courts as federal and state judges try to sort through the opposing opinions in ILSA cases.

“This is a big decision,” says Jared Beck with Beck & Lee Business Trial Lawyers. “It comes from the 11th Circuit. It’s pretty extensive and reasoned.”

During the next real estate boom, Beck says attorneys won’t know what to do when writing real estate contracts. He also expects buyers to stick to state court rather than risk dismissal in federal court.

“This has really been a big war in the courts over the past two or three years,” Beck says. “Now you’ve got a situation of total confusion.”

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