Plaza Court, L.P., v. Baker-Chaput and O’Brien: Florida Adopts the Jankus Rationale on the Interstate Land Sales Act

In Plaza Court, L.P., v. Shane Baker-Chaput and Christine O’Brien, — So.3d —-, 2009 WL 1809921 (Fla. 5th DCA June 26, 2009), the Florida Fifth District Court of Appeals appears to have put to rest many of the issues dividing the federal courts on Florida law, as it applies to Interstate Land Sales Full Disclosure Act (“ILSA”).  First, let me say that in order to analyze ILSA you must examine the law of the state that applies to the sales contract.  In other words, the interpretation of ILSA is always a marriage between federal statutory law and the contract law of the forum state. Therefore, the applicability of ILSA may be different from state to state.  That is what makes the Plaza Court opinion so important, as the Federal courts are bound to follow this Florida opinion as to Florida state law.  Kamel v. Kenco/The Oaks At Boca Raton LP, 2008 U.S. App. LEXIS 21762 (11th Cir. Oct. 16, 2008)(Whether the contract “actually obligates” the seller to complete the building within two years, or whether the obligation is “illusory,” is determined under the law of the state where the development is located.)  See: Supplemental Information to Part 1710: Guidelines for Exemptions Available Under the Interstate Land Sales Full Disclosure Act, 61 Fed. Reg. 13595, 13599 (1996) (the “HUD Guidelines”). A federal court applying state law is bound by the rulings of the state’s highest court. If the state’s highest court has not ruled on the issue, a federal court must look to the intermediate state appellate courts. Tobin v. Mich. Mut. Ins. Co., 398 F.3d 1267, 1272 (11^thCir. 2005); Arawak Aviation, inc. v. Zebra Investments, LC, 285 F.3d 954, 959 (11^th Cir. 2002);Veale v Citibank, FSB, 85 F.3d 577, 580 (11^th Cir. 1996); Nussbaum v. Mortg. Svc. Am. Co., 913 F.Supp. 1548 (S.D. Fla. 1995) (Where court was confronted with interpreting a question of state law in the context of a federal consumer protection statute, the federal court was bound to follow the law as stated by Florida Supreme Court and intermediate state appellate courts, notwithstanding Eleventh Circuit precedent with a differing analysis of the state law issue).

1. Plaza Court Establishes Impossibility of Performance as the Standard For the Two-Year Completion Exemption

One of the main points of contention in ILSA litigation is the applicability of the “two-year completion” exemption.  If a developer obligates itself to complete a building in two years in the sales contract, that transaction is exempt from ILSA. See: 15 U.S.C. §1702(a)(2).  The problem is developers don’t like to get sued for breach of contract, and ostensibly have to return the buyer’s deposit, if they are a little late on that two-year deadline. That is where the creative lawyering on drafting  force majeure clauses, and other contractual provisions comes in.  The attorney drafting the sales contract does their best to provide the developer with the maximum flexibility while ensuring that the buyer is still obligated under the sales contract.  However, this practice does not mesh well with attempting to exempt a developer from ILSA application, as it is a strict liability statute. For instance, in Stein v. Paradigm Mirsol, LLC, 2008 U.S. Dist. Lexis 9073 (M.D. Fla. 2008) the court found the following language did not exempt the developer under the “two-year completion” exemption from ILSA because it rendered the developer’s obligation to complete in two years illusory, or “I will if I want to.”   The contract in Stein stated:

Construction of the condominium unit will be complete and ready for possession within two (2) years from the execution of this Purchase Agreement in compliance with the Interstate Land Sales Full Disclosure Act; provided, however, that Seller 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 seller and the completion and occupancy date shall be extended accordingly.

After the Stein case, the federal courts were anything but uniform in their results on the two–year completion exemption.  Most federal courts adopted the Stein’s illusory standard: but many courts found that just about any force majeure clause would not render the builder’s obligation illusory. Two competing schools of thought arose: (1) one where “all contract defenses” recognized by Florida law was sufficient for the two year exemption; or (2) one where only impossibility of performance was allowed as a defense in a force majeure clause.  No Florida Appellate court had spoken squarely to this issue until Plaza Court, and their opinion should finally lay the issue to rest in the state of Florida. The Plaza Court case states:

There appears to be some disagreement among the many recent federal decisions about the standard to apply to ascertain the validity of a “two-year completion” clause in one of these ILSFDA contracts. In Jankus v. Edge Investors, L.P., 2009 WL 961154 *8 (S.D.Fla. Apr. 8, 2009), Judge Hurley discussed the competing points of view and concluded, in line with a series of opinions ^FN3 by Judge Steele, in the Middle District of Florida, that the test is impossibility of performance under Florida law. Jankus, 2009 WL 961154 at *8. We agree with Judges Steele and Hurley that the question is whether Plaza’s contractual provisions are recognized within Florida’s doctrine of impossibility. See Hilton Oil Transport v. Oil Transport Co., 659 So.2d 1141, 1147 (Fla. 3d DCA 1995); Cook v. Deltona Corp., 753 F.2d 1552, 1558 (11th Cir.1985) (citing Shore Inv. Co. v. Hotel Trinidad, Inc., 29 So.2d 696 (1947)). * * * Similar to the Kamel purchase agreement, the purchase agreement here contains the modifying clause “or any other grounds cognizable in Florida contract law as impossibility or frustration of performance.” However, unlike the Kamel purchase agreement, the modifying clause here contains the subsequent language “including, without limitation, delays occasioned by wind, rain, lighting [sic] and storms.” We conclude, consistent with Jankus and Harvey, that Plaza is not exempt from ILSFDA. We agree that the two-year construction commitment is more broad than Florida’s defense of “impossibility.” Plaza Court, L.P., 2009 WL 1809921, *6-7 (Fla. 5th DCA June 26, 2009).

2.  Plaza Court Adopts a Three-Year Right of Rescission Where the Contract Does Not Include a Notice of the Right to Rescind Within Two Years

In my first blog post I discussed the different approaches taken by the Taylor v Holiday Isle Court versus the Jankus Court. That Post can be found here.  The Plaza Court opinion finds the reasoning in Jankus is “superior” to that of Taylor. The rule set forth in the Taylor decision actually encourages a developer not to comply with the statute.  Instead of facing rescission, the developer only faces a damage claim. The amount of damages resulting from a violation of ILSA is still the subject of some debate. I have seen first hand how a developer will argue that you did not suffer any real damage by their failure to include the two year notice, or deliver a Property Report for that matter. The end result is a diminished right to the purchaser, and extra leverage for a developer in litigation.  Insofar as the effect of the developer’s failure to include the required notice is governed by contract law: the Plaza Court ruling serves as additional authority to protect purchasers in the State of Florida.  The Plaza court does not mince words when it opined:

Although there is much in Taylor with which to agree, we are bound to separate from its analysis on the last issue – the effect of the failure of the developer to include § 1703(c)’s required notice of the two-year limit on the right of rescission for the failure to provide a property report. The Taylor court reasoned that the failure of the developer to provide the statutorily required “clear” notice of the two-year right of rescission could not affect the developer’s right to enforce the limitation because the statute did not include any remedy for violation other than, perhaps, the damages remedy in § 1709. The Taylor court also treated the two-year rescission right as a statute of limitations and concluded that the “extraordinarily limited” circumstances the law recognizes to avoid a statute of limitations could not apply, in part, because the two-year limitation is contained within the statute and everyone is expected to know the law. 561 F.Supp.2d at 1274-75.

As to the statute of limitations analysis, we do not accept the premise that the provision at issue is a statute of limitations. A statute of limitations sets the outer limits for the commencement of litigation and this provision does not do that. This is a two-year right of rescission and upon timely exercise, the statute of limitations for bringing suit to enforce the right is three years from the date of purchase. We see nothing in the statutory rescission right to which the “equitable tolling” analysis of Taylor should pertain. We also note that Judge Hurley in the Southern District of Florida has quite recently reached a similar conclusion in Jankus. 2009 WL 961154 at *5. The conclusion reached by the Jankus court was that the two-year right of rescission would not begin to run until proper notice of the right to rescind was given, up to expiration of the three-year statute of limitations. For the reasons well described in the Jankus opinion, this analysis is superior to the view taken by the Taylor court, which effectively holds the developer harmless for the failure to give the required notice. The result in Jankus is consistent with Florida law. ^FN4 See Engle Homes v. Krasna, 766 So.2d 311 (Fla. 4th DCA 2000). Because there is no suggestion that Plaza gave the statutorily required notice to Baker and O’Brien prior to their filing suit within the three-year statute of limitations, we affirm.

This article, and the comments posted in response, do not constitute legal advice or the formation of an attorney-client relationship, and is not for re-publication without express permission of the author.

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