ILSA: Dead or alive?

Two federal court decisions siding with developers in Harlem and Long
Island City have thrown a wrench into the legal strategy a growing
number of New York condo buyers have pursued to get out of their
contracts.

The rulings, which involve the Interstate Land Sales Full
Disclosure Act, commonly referred to as ILSA, have also divided the
legal community on how hundreds of other similar cases will be decided
in New York.

ILSA, a consumer protection law first passed in 1968, requires
developers of new condos or time-shares of at least 99 units to
register their buildings with the U.S. Department of Housing and Urban
Development. But for years, the law went unused and unnoticed here in
New York, until hundreds, if not thousands, of condo buyers in the city
invoked it to get their deposits back after the 2008 market crash.

In the January ruling at Harlem’s Fifth on the Park, Judge Denise
Cote ruled that the project, located at 1485 Fifth Avenue, was exempt
from ILSA because it had sold only 90 apartments when it received a
temporary certificate of occupancy from the city.

The buyers had argued that when the building first went on sale, there were 160 units.

In March, the judge in the case involving One Hunters Point in Long
Island City also said the building was exempt based on its number of
units, adding that the eight buyers who sued the developer could not
include parking spaces and rooftop terrace units as part of the total
number of units in the building.

Some New York developers say they knew nothing about the law and
that their attorneys told them it didn’t apply to New York buildings.

“To be honest, we were kind of the guinea pigs,” said Robert
Ezrapour, vice president of Artimus Construction and managing member of
Fifth on the Park.

Attorney Lawrence Weiner, who represented buyers at Fifth on the
Park and One Hunters Point, argued that New York buyers should not
revamp their legal strategies in response to these first two decisions.

For one, he is appealing the rulings and is hopeful that they will be overturned.

Weiner also noted that in March, a federal court judge in Virginia
ruled against the developers of the Ritz-Carlton Golf Club at Creighton
Farms in a similar case.

Attorney Adam Leitman Bailey, who is representing buyers in a
number of ILSA cases in New York, said he believes the two rulings are
bad case law. He said the intent of the law was to measure the number
of units being offered at the time buyers signed purchase agreements,
not the number of units sold in a weak market.

“I’m hoping the court will do the right thing and overturn it on appeal,” said Bailey.

Legal experts are divided about the impact the recent decisions
will have on other ILSA cases and whether they have a chance of being
overturned on appeal.

“Based on the decisions that I’ve read, the two [New York ILSA]
decisions will definitely narrow the scope [of how many buildings will
face lawsuits],” said Manhattan-based attorney Allison Lissner of Cole
Schotz, who recently wrote a law journal article about ILSA. “A lot of
claims by condominium buyers will no longer be valid.

“That being said,” she continued, “a lot of projects will be determined on their specific facts.”

Attorney Robert Dady of the Florida-based Fieldstone, Lester Shear
& Denberg, one of the original authors of Florida law on time-share
projects, said he believes the Fifth on the Park and Hunters Point
decisions did properly limit the scope of the projects affected.
However, he also warned that the decisions do not mean that ILSA cases
are out of play for New York City buyers.

Despite the rulings, another Florida attorney, Derrick Gruner, who
has represented both developers and investors in ILSA cases, warned the
industry not to get too comfortable.

“I don’t see how that flies,” said Gruner, noting that the
developers who won exemptions had clearly intended to sell more than
100 units. “That’s a slippery slope. Now you’re going into what was the
true intent [of the developer].”

For his part, attorney Bruce Lederman, who represented the Simone Development in the One Hunters Point case, said New York condo buyers are using ILSA in a way it was never intended to be used.

“ILSA was never contemplated in the first place to provide a way for sophisticated urban purchasers that decided the market has gone south [to look] for a way out of a bad investment,” said Lederman.

Prior to the 2008 market crash, most lawyers seeking to rescind purchase contracts filed cases in state court or directly with state Attorney General Andrew Cuomo, under a state law called the Martin Act, widely considered the toughest statute for condo and co-op sales in the country.

The law requires developers to register their condo offering plans with the attorney general and disclose key documents, including building plans, prices, financial background of the sponsor and legal certifications by various experts.

Yet since the downturn, Cuomo’s office has been swamped by hundreds of rescission requests, creating a backlog that may take months, if not years, to resolve. In response, the AG’s office has encouraged buyers and developers to settle their claims and has turned a skeptical eye toward buyers who may be using the Martin Act to escape a speculative investment.

So buyers turned to ILSA.

Florida’s Dady warned that until the two-year statutory exemptions for ILSA cases expire, there will be plenty of additional cases in New York. “Buyers are going to continue to use it until they are worn out and until appeals are exhausted,” he said. “The buyers will do this because there is a group of them that are not primary users but are investors.”

Pending ILSA cases include the 505 Condominium, at 505 West 47th Street, where Weiner is representing about 50 buyers who filed to have their contracts rescinded. At that property, Lev Parkview Developers filed an amendment last year to take an ILSA exemption by claiming a lower number of available units.

Lawyers for the developer said a number of buyers have since agreed to settle and they are awaiting a decision from the court on a summary judgment motion they filed in January.

At Hakimian Organization’s Andaz hotel and condo at 75 Wall Street, meanwhile, about 27 buyers have filed for rescission, including a high-profile case where a Prudential Douglas Elliman broker alleged her purchase was a sham designed to generate sales and that she was misled about the number of hotel rooms at the property. That case had raised questions about whether the property could be subject to the ILSA law’s antifraud provisions.

In mid-April, a state Supreme Court judge ruled in favor of the developer, saying the broker, Hela Miodownik, failed to include specific language in her contract about the closing date and could not file a private lawsuit regarding other allegations.