Potential Claims: Don’t Forget ILSA (Federal Interstate Land Sales Full Disclosure Act)

Ross v. R.A. North Development, Inc. (In re Total Realty Management, LLC), 706 F.3d 245 (4th Cir. 2013) –

Interstate land sales may be subject to registration and anti-fraud provisions under the Federal Interstate Land Sales Full Disclosure Act (ILSA).  In addition to civil and criminal penalties, a purchaser may sue for damages in connection with a violation.  The chapter 7 trustee for a developer debtor sued other development companies (and their sales and marketing affiliates) seeking contribution for the debtor’s potential liability under ILSA on the grounds that they engaged in a scheme with the debtor to sell properties at inflated prices.  The district court dismissed the claims, and the trustee appealed to the 4th Circuit.

The trustee alleged that the debtor (TRM) bought a number of lots from a developer (R.A. North), resold the lots within hours at a premium that was substantially above fair market value, and then used the proceeds from the sales to finance the purchases it had made earlier in the day.

TRM attracted buyers by holding seminars.  Sales and marketing affiliates of R.A. North provided materials and participated in presentations at the seminars.  Among other things, the debtor falsely represented that it owned the lots it was selling and that it purchased the lots at a bulk discount from R.A. North.  The trustee contended that R.A. North was aware of these misrepresentations, and that it benefited from the scheme in several ways.

One group of purchasers sued TRM and R.A. North, and put TRM into an involuntary bankruptcy.  (R.A. North settled with most of these plaintiffs.)  When the trustee brought an adversary proceeding against R.A. North and its affiliates for contribution, the district court granted R.A. North’s motion to dismiss on the basis that it would not have been liable if sued separately.

The 4th Circuit began by noting that under the Interstate Land Sales Act a person who is liable “may recover contribution as in cases of contract from any person who, if sued separately, would have been liable to make the same payment.”  In other words a contribution claim can proceed if:  (1) plaintiff has become liable, (2) defendant is independently liable for the same conduct, and (3) plaintiff is entitled to contribution.

The court assumed that TRM was liable.  So the critical questions were whether R.A. North was independently liable, and whether TRM was entitled to contribution.  Under the statute:

  • It is unlawful for “any developer… directly or indirectly… with respect to the sale or lease, or offer to sale or lease… to employ any device, scheme, or artifice to defraud [or] to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon a purchaser…”
  • A developer is defined as “any person who, directly or indirectly, sells or leases, or offers to sell or lease, or advertises for sale or lease any lots in a subdivision.”

The trustee argued that R.A. North and its affiliates were liable because they participated in the sales and marketing efforts, while R.A. North contended that it could not be liable since the purchasers could recover only from the developer who was a party to the sale of lots.

The court marshaled a series of rules of statutory interpretation, including

  • Start with the plain language of the statute.
  • Avoid interpretations that cause provisions to be surplusage.
  • Presume consistent usage, so that the same terms used in different parts of the statute have the same meanings.

Applying these rules to the provisions of ILSA, the court concluded that a developer involved in the sales and marketing could be liable even if it is not the seller.  It noted with approval district court cases where parties were found to be liable when they allowed their name to be used in marketing materials and advertisements – “in effect lending its prestige and good name to the sales effort.”

Given the plain language of the statute, Congress’ intent, and 4th Circuit precedent that ILSA should be interpreted broadly, the court held that entities that participate in advertising and promotional efforts can be liable even if they are not parties to the challenged real estate transaction.

Turning to contribution, the question turned on whether payment was a necessary condition for a contribution claim or whether it was sufficient that a party “becomes liable.”  In this case, the court found the statutory language was at least ambiguous as to whether payment was required.

As one consideration, a common law claim for contribution requires that the plaintiff have already paid more than its share.  Looking to legislative history, the court noted that Congress patterned ILSA after the Securities Act of 1933; and under the Securities Act, courts have found that payment is required in order to be able to seek contribution.  Consequently, the 4th Circuit concluded that payment was a condition for seeking contribution under the Interstate Land Sales Act.

The result was that R.A. North could be independently liable under ILSA even though it wasn’t a party to any of the sales, but the trustee was not entitled to contribution because there was no demonstration that the debtor had already paid.

For purchasers, the court’s broad interpretation of potential liability for damages under ILSA is worth keeping mind in any circumstances involving possible fraud in the interstate sale of lots.  For a debtor that wants to share liability with other non-debtor companies, the requirement that it pay before it can seek contribution can pose a significant hurdle.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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