Nahigian v. Juno-Loudoun, LLC, Nos. 10-2198, 10-2231, and 10-2373

Decided: May 1, 2012

The Ritz-Carlton Holtel Company, LLC (“Ritz”) and Juno-Loudoun, LLC (“Juno”) planned to develop a community in Loudoun County, with Juno retaining title to the land.  Ritz held no ownership interest and its agreement with Juno provided that the community could not be marketed as having any association with Ritz.  Some of the development’s marketing advertisements stated that the community was “Ritz-Carlton Managed” and included the Ritz trademark.  The Nahigians purchased undeveloped land in the community after asking questions about the extent of Ritz’s involvement, concerned that Ritz might just walk away.  Juno subsequently failed to make a payment and Ritz terminated its involvement with the project.

The Nahigians sued Juno under the ILSFDA and the Virginia Consumer Protection Act.  The district court awarded the Nahigians summary judgment because Juno failed to provide a property report to the purchasers, as required by ILSFDA, and granted equitable rescission.  The district court awarded the Nahigians the purchase price of the property and pre-judgment interest but did not award interest on the money borrowed to buy the real estate.  Both parties appealed.

Juno challenged the award of equitable rescission, arguing first that the Nahigians’ claim was barred by a two-year statute of limitations pursuant to § 1703(c).  The district court instead relied on § 1711(a)(1), which provides a three-year statute of limitations in circumstances where “a purchaser seeks rescission that is not automatic.” This was a matter of first impression for the Fourth Circuit, but the district court was correct in its ruling.  ILSFDA grants aggrieved purchasers a contractual right to rescission and lawsuits for equitable rescission.  Contractual rescission requires invoking rights under §§ 1703(b)-(e) within two years, but equitable rescission permits suits seeking relief within three years, pursuant to § 1701(a) and § 1711(a).

Juno also claimed that the development was exempt from ILSFDA’s requirements, as they do not apply to developments containing fewer than 100 undeveloped lots or where the sale or lease of lots is for the purpose of “engaging in the business of constructing residential, commercial, or industrial buildings,” also known as the “sales-to-builders” exemption.  Juno argued the sales-to-builders exemption applies before a lot count is performed, thus the number of lots in the development was below the threshold. The Fourth Circuit agreed that the exemption applied before counting lots.  Juno argued for deference to the HUD guidelines, which permit deducting lots intended for future sales to building contractors.  The Fourth Circuit stated that adopting the HUD interpretation is contrary to the plain language of ILSFDA and the guidelines’ view is not practical.  Accordingly, the ILSFDA requirements applied to the 164 lots in the development.

Because Juno is not exempt from ILSFDA, it should have filed a statement of record with HUD and provided a property report to the Nahigians prior to executing the purchase agreement.  In order to be granted equitable rescission, the Nahigians had to show that the ILSFDA violations were objectively material and would have influenced a reasonable purchaser’s decision to enter a purchase agreement.  The Fourth Circuit found the violations of ILSFDA were material.  Section 1707(a) lists the information that must be included in a property report to meet the statutory requirements and would have required the disclosure of the Ritz-Juno relationship.  Juno argued that it was obvious that Ritz might not be a partner in the development forever, so disclosures cannot be material.  The court stated that this is precisely the information that should have been disclosed to potential purchasers, especially the Nahigians, as they specifically asked about Ritz’s involvement.  Juno asserted that the Nahigians’ desire to live in a community with the Ritz name does not merit rescission, but the Fourth Circuit disagreed, as the Ritz name is what drew customers.  A reasonable purchaser would find the information about Ritz’s minimal involvement relevant in determining whether to purchase within the development.

Equitable rescission requires a showing that the parties can be restored to their position prior to the contract.  Juno argued restoration to the status quo ante was impossible because the fair market value of the property declined for unrelated reasons.  The court emphasized the fact that the Nahigians would have exercised their automatic contractual right of rescission within two years had they known of the right, thus they successfully established the elements of equitable rescission, so all that remained was for the district court to ascertain the proper recovery.

The district court determined that return of the property to Juno and the equity purchase price plus 4.99 percent prejudgment interest to the Nahigians was the proper remedy, but refused to award interest on the debt portion of the purchase price.  The district court correctly found that the status quo ante should include the “value of the next-best alternative use of [the Nahigians’] capital” — the costs of entering into the purchase agreement.  Juno has enjoyed the use of the purchase price, equity and debt, so there is no reason for the district court to distinguish between the two in awarding equitable rescission.  Failure to include the debt portion of the purchase price would unjustly enrich Juno and would not make the Nahigians whole and thus was an abuse of discretion.  The district court’s imposition of a 4.99 percent interest rate on the equity portion was not an abuse of discretion.  The Nahigians had been paying 7 percent interest on their bank loan and therefore the Fourth Circuit found that was the appropriate interest rate.

Accordingly, the Fourth Circuit affirmed the district court’s award of rescission, but reversed the district court’s denial of prejudgment interest on the debt portion of the Nahigians’ purchase price and award prejudgment interest at 7 percent.

Circuit Judge Shedd dissented to both of the Fourth Circuit’s decisions.  First, Judge Shedd believes that the plain language of the ILSFDA does not in fact “unambiguously exclude” future sales from the sales-to-builders exemption.  The statutory language of § 1702 is unclear, which permits consideration of other sources to assess the meaning of the statute.  The HUD guideline allowing inclusion of future sales should be given deference and Juno should be exempt from ILSFDA requirements.  Second, the decision to award prejudgment interest on the debt portion of the purchase price was error.  The district court did not abuse its discretion in narrowly tailoring its decision to award prejudgment interest only on the equity portion of the purchase price.

Full Opinion

-Michelle Theret

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