Second Circuit Reverses Bacolitsas Decision in Rare Win for Condo Developers

by Ballard Spahr LLP
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A condominium developer has garnered a significant victory in a dispute with a buyer as the result of a decision by the U.S. Court of Appeals for the Second Circuit. In Bacolitsas v. 86th & 3rd Owner, LLC, a reluctant purchaser of a unit in New York sought to rescind his purchase and sale contract based on the developer’s alleged violations of the Interstate Land Sales Full Disclosure Act (ILSFDA).

The ILSFDA allows purchasers or lessees who purchase or lease lots in large housing developments under construction, including condominiums, to cancel their purchase or lease agreements if the developer fails to make certain disclosures. In Bacolitsas, the purchaser alleged that the developer failed to submit a description of the lot in a form “acceptable for recording” with the city.

In an opinion issued in 2009, the U.S. District Court for the Southern District of New York ruled in the purchaser’s favor and ordered the contract rescinded and earnest money deposit refunded. In its decision issued on December 19, 2012, the Second Circuit reversed and ordered judgment to be entered for the developer.

The project at the heart of the dispute is known as the Brompton Condominium in Manhattan. It was not finished when the developer sought to enter into contracts for the units, and rather than rely upon one of ILSFDA’s various exemptions, the developer registered the project with the Department of Housing and Urban Development under the law’s requirements. When the project was completed and the time came to close on the sale, the purchaser sought to rescind his contract on the basis that contract did not meet the requirements.

The District Court ruled that the language of the section of ILSFDA requiring that the contract include a “description of the [unit] which makes such lot clearly identifiable and which is in a form acceptable for recording …” must be interpreted to require that the contract itself be in recordable form. Because the signatures on the contract were not acknowledged (a requirement for recording under New York law) and because the contract contained a prohibition against recording, the District Court found that it violated the ILSFDA requirements.

On appeal, the Court of Appeals rejected the District Court’s interpretation and instead held that it is only the description of the lot or unit that must be in a form acceptable for recording, not the entire contract. In addition, the appeals court found that the contract at issue in fact complied with the pertinent provisions of ILSFDA. The court rejected the plaintiffs’ argument that the contract’s description of the unit was insufficient because the description was not “identical to the property specifications contained in the deed ultimately used to convey the unit.”

Based on statutory interpretation and the legislative history and purpose of ILSFDA, the Second Circuit concluded that the description must only be sufficient for recording purposes, not conveyance purposes. In the words of the court, “If, as Plaintiffs urge, the description of the lot must be in a form acceptable for recording the deed, then a purchase agreement for a unit could be executed only after construction was finished ... Nothing in [ILSFDA] suggests that Congress intended this outcome.”

The Bacolitsas decision is notable for several additional reasons. First, it resolves in favor of the developer a question litigated in several jurisdictions: whether ILSFDA’s legal description requirement effectively prevents a developer from entering into binding purchase and sale agreements for units in projects still under construction. As the Court of Appeals acknowledged, through the adoption of ILSFDA, Congress did not intend to abolish and was in fact aware of the common and long-standing industry practice of entering into pre-completion agreements.

This decision also may influence the evaluation of a recently proposed amendment to ILSFDA that would exempt condominium units from the law. In additional, it represents a significant victory for developers in an area of case law that has seen many unexpected interpretations result in judgments for plaintiffs seeking to rescind their contracts.

Ballard Spahr’s Resort and Hotel Group and Planned Communities and Condominiums Group are nationally recognized for their in-depth legal, industry, and market knowledge of condominium structuring, vacation ownership plans, and timeshare resorts, as well as the intricacies of the Interstate Land Sales Full Disclosure Act. The group advises clients on regulatory compliance throughout the United States.

If you would like more information about this decision and its application, please contact Christopher W. Payne at 303.299.7345 or payne@ballardspahr.com, Roger D. Winston at 301.664.6201 or winstonr@ballardspahr.com, Joseph E. Lubinski at 303.299.7359 or lubinskij@ballardspahr.com, or Patrick H. Pugh at 303.299.7325 or pughp@ballardspahr.com.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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