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Opinions – 6/4/12: 4th U.S. Circuit Court of Appeals

Real Property

Interstate Land Sales Full Disclosure Act

BOTTOM LINE: Lawsuits seeking equitable rescission of contracts for purchase of real property for violations of the Interstate Land Sales Full Disclosure Act, which permits suits at law or in equity for violations, must be filed within three years from the signing of the contract; therefore, plaintiffs’ equitable rescission claim, filed within three years of signing of purchase agreement, was not barred by statute of limitations.

CASE: Nahigian v. Juno-Loudoun, Nos. 10-2198, 2231 and 2373 (decided May 1, 2012) (Judges GREGORY, Shedd & Gergel). RecordFax No. 12-0501-60, 27 pages.

COUNSEL: Thomas Folk, Reed Smith, LLP, Falls Church, VA, for Juno-Loudoun, LLC. John Petersen, Surovell, Isaacs, Petersen & Levy, PLC, Fairfax, VA, for Keith Nahigian and Courtney Nahigian.

FACTS: In 2004-2005, the Ritz-Carlton Hotel Company, LLC and Juno-Loudoun, LLC signed agreements outlining a plan to develop a luxury golf-course community in Loudoun County, Virginia, that would eventually become the Creighton Farms development. Under the agreement, Juno retained title to the development land and Ritz acquired no ownership interest. In addition, the residences at the development were not to be sold under the Ritz-Carlton brand, and all advertising had to include a disclaimer stating that the development was not owned, developed or sold by the Ritz-Carlton Hotel Company, LLC, although Ritz trademarks could be used with written consent.

In June 2006, the Virginia State Corporation Commission issued a certificate of incorporation to The Estates at Creighton Farms Property Owners’ Association, Inc. (the “POA”). According to a master declaration filed in Loudoun County, the POA was responsible for the maintenance of common property and other services, including maintenance of landscaping and security monitoring. The master declaration stated that it was anticipated that the Master Association (Juno) would enter into a management contract with Ritz. However, such an agreement never came to pass.

The lots at the development were marketed to the public in interstate media between 2006 and 2008. Some advertisements, including one read by Keith Nahigian, called the development a “Ritz-Carlton Managed Community” and included the Ritz trademark despite the lack of a management agreement between Ritz and Juno. On June 1, 2007, Keith and Courtney Nahigian entered into a purchase agreement with Juno and thereafter transferred to Juno $1,674,000 toward the sales price of their lot in Creighton Farms. Juno failed to tell the Nahigians of their rights under the Interstate Land Sales Full Disclosure Act (“ILSFDA”), 15 U.S.C. §1701 and to provide the Nahigians a property report, as required by that statute.

In 2009, Ritz notified Juno of an “event of default” under the golf course operating agreement because Juno failed to make a required payment of $325,000 to Ritz. Ritz, Juno, and M&T Bank entered into a termination agreement on March 6, 2009, ending Ritz’s involvement in the project. On May 27, 2009, the Nahigians filed a state-court suit seeking rescission of the 2007 contract because of Juno’s misrepresentations. The case was removed to a federal district court, and that Nahigians filed an amended complaint alleging fraud, violations of ILSFDA, and a violation of the Virginia Consumer Protection Act.

The district court awarded the Nahigians summary judgment on their rescission claim. Juno appealed to the 4th Circuit, and the Nahigians cross-appealed, arguing that they should have been awarded pre-judgment interest on the debt portion of their purchase financing. The 4th Circuit affirmed the district court’s award of rescission, but reversed the district court’s failure to award pre-judgment interest.

LAW: Juno argued that the Nahigians; rescission claim was barred by the two-year statute-of-limitations period provided by 15 U.S.C. §1703(c). The district court, however, relied on §1711(a)(1), which provides a three-year statute of limitations for suits. 15 U.S.C. §1711(a)(1). The district court found that the three-year limitations period from §1711(a) “governs those circumstances in which a purchaser seeks rescission that is not automatic, but must be supported by proper proof.” Nahigian v. Juno Lou-doun, LLC, 684 F. Supp. 2d 731, 745-46 (E.D. Va. January 19, 2010). This was a matter of first impression for the 4th Circuit, which ultimately found that the district court was correct in its ruling. In so deciding, the 4th Circuit joined the 11th Circuit. See Gentry v. Harborage Cottages-Stuart, LLLP, 654 F.3d 1247, 1262 (11th Cir. 2011).

ILSFDA provides two remedial avenues for aggrieved purchasers seeking rescission for ILSFDA violations: (1) a contractual right to rescission; and (2) lawsuits seeking equitable rescission for violations of ILSFDA. The first avenue requires invoking one of the implied contractual rights under §§1703(b)-(e) for per se violations of ILSFDA. These rights can be unilaterally invoked by the aggrieved party within two years of the signing of the contract. See 15 U.S.C. §§1703(b)-(e). If the seller refuses to rescind after a purchaser exercises one of these rights, §1709(b) allows the purchaser to file a suit to enforce that right, and the purchaser must do so within three years of the signing according to §1711(b).

The second avenue — the one pursued here — is under §1709(a), which permits suits “at law or in equity” for violations of §1703(a). This second avenue allows the court to order damages, specific performance, or such other relief as the court deems fair, just, and equitable, such as rescission. Id. §1709(a). Suits under §1709(a) must be filed within three years from the signing of the contract. Id. §1711(a).

Given that the Nahigians filed their action within three years of the signing of the purchase agreement, their claim for rescission under §1709(a) was timely. As such, the district court’s grant of summary judgment on the Nihigians’ rescission claim was affirmed. Because the district court abused its discretion in denying Nahigians pre-judgment interest on the debt portion of their purchase funds, this portion of the district court’s judgment was reversed, and the Nahigians were awarded pre-judgment interest on their BB&T-loaned funds at 7 percent.