Appeals court overturns key city ILSA ruling

From left: Fifth on the Park and One Hunters Point

In one of the nation’s most closely watched Interstate Land Sales Full Disclosure Act cases, a federal circuit court yesterday overturned a controversial lower court ruling involving two New York condominiums, forcing the release of millions of dollars in escrow funds and potentially ending the debate over whether the federal statute applies in New York City real estate.

The U.S. District Court previously ruled that Harlem’s Fifth on the Park condo and One Hunters Point condo in Long Island City were exempt from ILSA laws because even though the condos were larger than the federally mandated 100-unit limit, the developers sold less than 100 units when they got the temporary certificate of occupancy from the New York City Department of Buildings.

The buyers, led by Harlem’s Fifth on the Park condo unit buyer Lola Bodansky, argued that the developers failed to claim the exemption at the time the contracts were signed. The Fifth on the Park case involved seven apartments and $460,000 in escrow money, while the One Hunters Point case involved nine units and $535,000 in escrow money.

The panel ruled that the district court judge misinterpreted the statute and buyers must be notified of an exemption at the time of the contract.

“Whether a lot is exempt under the 100-lot exemption is determined as of the time a purchaser or lessee signs a contract to purchase or lease that lot,” the panel wrote. “The 100-lot exemption is not determined at an uncertain date in the future when the developer sells or leases [or conclusively does not sell or lease] 100 or more non-exempt lots.”

Lawyers for the condo developers expressed dismay about the ruling.

“Obviously we’re disappointed in the decision,” Dan Ross, a partner at Stroock, Stroock & Lavan, representing Fifth on the Park, told The Real Deal. “It’s too early to say what we’re going to do.”

Meanwhile, Bruce Lederman, a partner at D’Agostino, Levine, Landesman & Lederman, representing One Hunters Point, said he plans to appeal the case all the way to the U.S. Supreme Court, and warned the ruling will make it tougher for developers to sell condos in New York.

“This particular decision will affect many developments in New York,” Lederman told The Real Deal. “It improperly puts numerous developers at risk in contracts where the buyers got exactly what they bargained for.”

Attorney Andrew Weltchek, who was not involved in the case, but has closely watched the Bodansky case, said the appeals court sent a harsh message to the developers for what he considered a flawed bit of legal reasoning.

“The arguments of the defendants are frankly desperate and illogical and not in keeping with the clear meaning of the statute,” Weltchek said.

Lawrence Weiner, the attorney for Bodansky and several other buyers at both condo buildings, said the ruling will not only impact those clients, but will help his clients at other New York properties with existing ILSA cases — the 505 at 505 East 47th Street, the Laurel at 400 East 67th Street and the Powerhouse, in Long Island City.

“The Second Circuit correctly applied the clear and unambiguous terms of ILSA and corrected the flawed analysis of the trial courts,” Weiner said. “This is a great day for consumer protection.”