Maryland’s intermediate appellate court has reversed a lower court’s ruling that would have sent a homebuilder to jail for 12 years, because a statute requiring buyers’ money to be held in escrow accounts did not apply to his case.
In reversing the Prince George’s County Circuit Court’s decision, the Court of Special Appeals said Tuesday that the General Assembly did not intend for Real Property Article §10-301 to cover sales where a residential unit and a lot are not conveyed simultaneously.
A jury found Leon Thomas Coleman Jr. guilty in June 2009 of eight counts of failure to deposit money in an escrow account and eight counts of theft over $500. He was to serve time and pay back more than $500,000.
On appeal, Coleman contended that the evidence was insufficient to sustain his convictions under the law. He argued that, if he had an obligation to put money he received from purchasers in escrow accounts, it was extinguished when he deeded the land to the buyers.
But the state argued that under the Deposits on New Homes subtitle, his obligation only ended upon the “granting of a deed to the property on which the residential unit is located,” and not when he granted the deed to a lot alone.
In reviewing the law, the court said the legislature clearly intended it to protect purchasers from “unscrupulous vendors and builders … . The type of conveyance covered by the statute, however, is ambiguous.”
Resolving the ambiguity in favor of the appellant, the court determined that the statute applied to instances where construction of a residential unit had already begun — but Coleman never started construction.
Elizabeth M. Walsh, an attorney with Howrey LLP in Washington, D.C., who handled Coleman’s appeal, said the opinion pleased her because affirming the circuit court’s ruling would have set a “dangerous precedent” for other homebuilders in Maryland.
“The state was trying to create a new set of escrow obligations that would totally work against how deals are done now,” she said. “It doesn’t make practical sense.”
The appellate court also reversed the theft by deception ruling, finding that although the record indicates Coleman’s “incompetence as a builder and his failure to perform contractual obligations adequately,” the appellant did not possess the requisite intent to deceive to sustain a criminal conviction.
“Our sense was this was not the best deal, it was not the best plan, but it did not rise to criminal action as the state said,” Walsh said. “Homebuilders can get it wrong sometimes and not go to jail for that.”
Coleman’s and his wife’s company, Opportunities Investment Group, acquired the right to purchase a plot in Prince George’s County called Kings Grant Court.
According to court documents, the land had been subdivided into 11 plots in 1978. Several of the lots were in a flood plain, meaning Coleman would need to apply for permits and produce plans before building, a process that could take a year to 18 months.
Coleman contracted with 10 buyers from February through June 2004 to build their homes. He did not mention any potential delays in construction, and told some of the purchasers that their homes would be completed within six to nine months.
Each buyer executed a contract with OIG, which was to convey a lot to the buyer and build a house on it. The buyers paid between $2,250 and $3,500 for blueprints, and some made down payments or remitted deposits for their lots. Only one deposit was placed in OIG’s escrow account, while the rest were placed in its operating account.
Each buyer received a construction loan of $256,000 to $381,000 from First Mariner Bank or Washington Savings Bank to cover the cost of the lots, construction of the homes, closing costs and interest payments.
At settlement, initial advances were made for the purchase of each lot so the borrowers would receive the deeds to the land; the bank held the remaining funds in a construction escrow account.
Coleman contracted with two different firms over the course of six months to draw up plans and obtain the necessary building permits. During that time, he notified purchasers that home construction was “moving right along.” One permit application was submitted, but not approved.
In December 2004, First Mariner alerted borrowers that funds had not been disbursed to Coleman and no draws would be permitted following the maturity date, in early 2005. The bank would then consider the loans immediately due and payable.
Eight purchasers testified at Coleman’s trial — four of them had their property foreclosed upon; three refinanced their loans and owned the lots at the time of trial, although one had defaulted; and one couple filed for bankruptcy.