Buyers who balked stuck with NoVa condo deal

Merrifield Town Center

A group of buyers trying to get out of real estate contracts by relying on a little-used federal statute may have reached the end of their road in Alexandria U.S. District Court.

The goal of the Interstate Land Sales Full Disclosure Act (ILSFDA) is to protect unsuspecting buyers from unscrupulous developers. Like many consumer protection statutes, the ILSFDA requires certain disclosures, and lets a buyer avoid a transaction when the seller doesn’t jump through the right hoops.

The developers of the Merrifield Town Center condominium project in Fairfax County didn’t jump through the hoops, but the plaintiffs ultimately lost after two years of litigation because their circumstances were a poor fit for the perceived ills addressed by the statute. The condos weren’t swampland, and the purchasers were hardly gullible..

In the end, the buyers who balked had to rely on equitable relief, and the equities were not on their side.

In the most recent ruling in the litigation, Senior U.S. District Judge T.S. Ellis III said the buyers had no equitable remedy, as they admitted the disclosures would have made no difference in their purchase decisions. They just wanted to walk away from a bad deal.

That was then, this is now

The condos seemed like a great buy in the summer of 2005 – so good in fact that the developer had signed contracts on all 270 of them within six weeks, despite prices ranging from $380,000 to $900,000.

The deal didn’t look so good three years later when time came to close on the contracts. Only 20 purchasers closed on schedule.

Instead, many buyers wanted to back out, and they latched on to the act as a way of getting their deposits back. Prospects for the buyers looked good in the early rounds of litigation.

Two Alexandria federal judges ruled that ILSFDA applied to the development.

The act generally requires developers to file registration and disclosure statements with the Department of Housing and Urban Development outlining potential problems with a project. The Merrifield developers acknowledged they made no such filings.

The developers argued the act did not apply to them because of two exceptions in the law. The statements are not required if the development involves less than 100 units or if the dwelling is completed within two years of the sales contract. The law permits a project to be divided into two groups, with one exemption applying for units that might not be occupied within two years, and the second for those to be occupied within that period.

Ellis gave hope to a group of about 120 plaintiffs by ruling that the two-year exception did not apply because the units were not ready for occupancy until almost three years after the purchasers signed the agreements in June and July 2005.

Ellis ruled that the two years began to run when the purchasers paid their deposits and not the date that the developer attempted to specify.

On the other hand, the purchasers had missed the ILSFDA deadline that would have allowed them to rescind their contracts as a matter of right.

They argued that the absence of disclosure removed any requirement that the disclosures had to be material to their decision to buy the condominiums.

Ellis disagreed earlier this month in Plant v. Merrifield Town Center LLP (VLW 010-3-610). Such a conclusion would negate the provision that allowed for rescission as a matter of right if asserted in a timely fashion, he said.

That left the possibility of equitable rescission, which would have required plaintiffs to show that, had the information been disclosed, it would have influenced a reasonable decision-maker’s purchase decision.

The remaining 25 plaintiffs failed that test, Ellis said. More than 80 of the plaintiffs in the Plant case had their claims dismissed in March because of discovery violations.

Instead, said Edward W. Cameron, the attorney for Merrifield, “the plaintiffs testified very candidly that the statute had absolutely nothing to do with their decision to cancel.”

Rather, they acknowledged they were attempting to walk away from the contracts because the housing market had tanked.

Efforts to reach Henry St.John Fitzgerald, the attorney for the plaintiffs, were unsuccessful.

Cameron said he expects an appeal of Ellis’ ruling, but most of the trial litigation is over. In addition to the claims dismissed earlier in the Plant cases, between 75 and 100 cases settled in state or federal court, Cameron said.

One piece of litigation involving about 10 purchasers is still alive, he said.

U.S. District Judge Gerald Bruce Lee dismissed that group’s complaints after ruling that the exception for less than 100 units applied.

The 4th U.S. Circuit Court of Appeals reversed in July in Long v. Merrifield Town Center LP (VLW 010-2-136). Agreeing with Ellis’ analysis, the appellate court said the exception applied only if the 170 units the developer attempted to place in the two-year exception had been ready for occupancy within two years of the date the purchasers paid their deposits.

Those plaintiffs are back before Lee, but they are in the same position as the Plant plaintiffs, Cameron contends.

Their remedy is equitable rescission, and he will again argue the buyers are attempting to abandon the contracts because of the drop in the value of the condos and not because of any information in unfiled disclosure statements.