Monday, January 21, 2013

Land Purchasers Get Money Back


When a couple bought a lot for $1.7 million in what was to become a luxury golf course community, one of the selling points for them was the involvement of a prominent real estate management company. Before committing to the purchase, the buyers received assurances from the developer that the management company could not just "walk away" from the project and that the company was legally bound to the development for 30 years. Two years after the lot was purchased and before any house was built on it, the management company and the developer parted ways, ending the involvement of the company that had drawn the couple to the property.
The buyers sued under the federal Interstate Land Sales Full Disclosure Act. The Act requires that the prospective purchaser receive from the seller timely notice of its rights under the Act, as well as a property report. It was undisputed that these two requirements had not been met, but the developer sought to defend the lawsuit on the basis of a statute of limitations and an exemption in the Act that is based on the size of the development. Neither of these defenses was successful.
There is a two year statute of limitations in the Act for automatic revocation by right that, had it been applied, might have made the buyers' claim untimely. But the federal court ruled that another, three year limitations period in the Act was to be applied. Under that provision, the claim by the purchasers of the lot to rescind the sale was timely.
As for the exemption defense, the Act states that it does not apply to the sale of lots in subdivisions containing fewer than 100 undeveloped lots. The Act also does not apply to "the sale or lease of lots to any person who acquires such lots for the purpose of engaging in the business of constructing residential, commercial, or industrial buildings," the so called sales to builders exemption.
The sales to builders exemption is to be applied before the lot count is made; however, the developer could not include future sales in determining the number of sales that fell under the sales to builders exemption. Without subtraction of those future sales, the calculation did not bring the development under the 100 lot threshold, making the developer subject to liability for its violations of the Act.
In ruling for the purchasers, the court essentially canceled the contract of sale for the property, rendering it as though it did not exist. Thus, the remedy for the failure of the developer to disclose objectively material information was the return of the property title to the developer and the return of the purchase price, plus interest, to the purchasers.


The owner of a lot on which a four unit condo complex was to be built contracted with a small residential construction company to build the condos. The construction company was formed as a limited liability company (LLC), the only members of which were a licensed home builder and his wife. The licensed builder served as general contractor on the project, overseeing subcontractors that the LLC had selected.
A couple of months into construction, some structural problems surfaced. At first the builder's assurances that the problems would be fixed calmed the tensions with the owner, but over time, old defects weren't fixed and new ones arose, and the relationship deteriorated. Eventually the builder walked off the project, leaving dozens of defects unremedied. When the owner sued for damages, based on negligence and breach of warranties, he named as defendants not only the LLC but one of its individual members, the licensed builder.
One of the appealing characteristics of a limited liability company, as its very name indicates, is that a member of the LLC generally is not personally liable for the LLC's liabilities. In fact, the state LLC statute that applied in this case states that a "member or manager is not personally liable for a debt, obligation, or liability of the company solely by reason of being or acting as a member or manager."
As the individual builder discovered when he was found personally liable for a judgment of nearly $1 million, the LLC shield against personal liability is not impenetrable. The state supreme court ruled that the protection against personal liability applies only to vicarious liability for nontortfeasor members. An individual who has done nothing wrong will not be held liable simply by virtue of being a member or manager of the LLC. Where, as in this case, the individual is guilty of negligence, the protection of the LLC business form is lost.
The court acknowledged that, at least at first blush, its decision appeared to strip away one of the main reasons why a person chooses to form an LLC. But it was satisfied that there are other unaffected benefits to choosing to start a business as an LLC. The controlling rationale is akin to the concept of "piercing the corporate veil," that is, under some circumstances holding an individual corporate officer liable for wrongful conduct. Or as the court put it: "You don't buy immunity from suits for your torts by being a member of a business corporation."


What if Your Brakes Fail? Although rare, total brake failure can be a terrifying and perilous experience. As in all emergency situations, remaining calm is the first and most important step. In addition to that:
  • Shift into a lower gear if your car has an automatic transmission. If it has a manual transmission, downshift.
  • Engage the emergency brake.
  • Turn on your emergency flashers and carefully pull off onto the side of the road.
  • Turn off the engine and call for help.
For more information on this topic or help with other legal concerns please email us or visit our website.

Mark D. Klein, Esq. is a senior attorney at Klein Law Corporation, a Southern California-based law firm providing legal assistance to businesses and individuals alike. Klein Law Corporation provides an extensive range of legal services aimed at helping clients with issues involving corporate law, business law, intellectual property matters and estate planning while actively working with entrepreneurs starting business ventures and those purchasing or selling businesses.

The foregoing information is presented by Klein Law Corporation as a news reporting service to clients and friends of the firm and is distributed with the understanding that Klein Law Corporation is not rendering legal advice and assumes no liability whatsoever in connection with its use. If you have questions about the subject matter presented or desire to obtain more information on legal issues related to your business, please contact us at