Florida Supreme Court Rejects Challenge to Use of Single Escrow Account for Pre-Construction Deposits During South Florida Condominium Development Boom
On January 23, 2014, the Florida Supreme Court issued a highly anticipated decision rejecting a claim that a condominium developer violated Section 718.202 of the Florida Condominium Act during the South Florida real estate boom by holding pre-construction deposits up to 10% of the purchase price in the same escrow account as deposits in excess of 10%. In North Carillon, LLC v. CRC 603, LLC, Case No. SC12-75, the Florida Supreme Court found Section 718.202 (which has since been amended) to be ambiguously worded. Resorting to a criminal law doctrine of statutory construction known as the “rule of lenity,” the Supreme Court held that the maintenance of the deposits in a single escrow account did not violate Section 718.202, and therefore did not render the buyers’ pre-construction contracts voidable.
During the real estate boom of the mid-2000s, real estate speculators and investors flocked to South Florida in droves to sign pre-construction contracts for high-priced luxury condominium units, typically placing 20% of the purchase price in escrow with a third-party escrow agent. Several years later, when construction of these condominiums was substantially completed and the buyers were being called to close, the real estate market and credit market had crashed, leaving many of these buyers unable or unwilling to consummate their purchases. For developments subject to the Federal Interstate Land Sales Full Disclosure Act (ILSFDA), most of these defaulting buyers would have automatically been entitled to recoup their deposits in excess of 15% of the purchase price. 15 U.S.C. § 1703(d)(3). Unwilling to walk away from hundreds of thousands of dollars in additional deposit monies, however, many buyers retained counsel to sue for the return of 100% of their deposits. This ushered a huge wave of pre-construction condominium deposit litigation in Florida, some of which persists to this day.
Among the theories advanced by these buyers was a technical one. Generally speaking, Section 718.202(1) requires that all deposits up to 10% of the purchase price of a pre-construction condominium unit be held in an escrow account. Under Section 718.202(2), deposits in excess of 10%—which developers are entitled to withdraw for use in the actual construction and development of a condominium—are required to be held in a “special escrow account established as provided in subsection (1).” The failure to comply with Section 718.202 renders pre-construction contracts voidable at the election of the buyer, and a willful violation also constitutes a third degree felony. Section 718.202(7).
During the course of litigation, many buyers discovered that escrow agents had simply deposited the “first” 10% together with the “second” 10% in the same escrow account, and simply accounted for these funds using separate ledgers. As a result, buyers began asserting claims for rescission of their contracts under Section 718.202, contending that the contracts were voidable and their deposits should be returned because the monies had been improperly “commingled” in violation of the Condominium Act.
In North Carillon, the trial court had dismissed this exact claim with prejudice, finding that Section 718.202 did not require these monies to be held in separate accounts, as long as the monies were separately accounted for. In 2011, the Third District Court of Appeal reversed, holding that the monies were indeed required to be segregated in “separate accounts.” CRC 603, LLC v. North Carillon, LLC, 77 So. 3d 655 (Fla. 3d DCA 2011). The Third District adopted the reasoning of the Honorable Cecilia Altonaga of the U.S. District Court for the Southern District of Florida in Double AA International Inv. Group v. Swire Pacific Holdings, Inc., 674 F. Supp. 2d 1334 (S.D. Fla. 2009), aff’d in part, vacated in part, 637 F. 3d 1169 (11th Cir. 2011).
The Third District also refused to retroactively apply an amendment to Section 718.202 that was enacted by the Florida Legislature in July of 2010. The amendment modified the statute to make clear that the deposits could lawfully be held in a single escrow account, and expressed an intention to “clarify existing law.” Nonetheless, the Third District ruled that the statutory amendment could not be given retroactive effect because doing so would impair a vested contractual right, in contravention of Article I, Section 10 of the Florida Constitution.
The Florida Supreme Court accepted jurisdiction for review under Article V, Section 3(b)(1) of the Florida Constitution, on the basis that the Third District had declared a state statute to be invalid. In its decision, the Supreme Court held that Section 718.202 was indeed ambiguous, thereby permitting resort to legislative history as an aid to statutory construction. Yet the legislative history did not resolve the textual ambiguity. As a result, the Court resorted to the “statutory rule of lenity,” found at Section 775.021(1), Florida Statutes. Under the “rule of lenity,” “provisions of the [Florida Criminal] [C]ode and offenses defined by other statutes shall be strictly construed; when the language is susceptible of differing constructions, it shall be construed most favorably to the accused.” Because a willful violation of Section 718.202 constitutes a felony of the third degree, the Court applied the “rule of lenity” and construed the statute in the light “most favorably to the accused” real estate developer. As a result, the Court adopted the developer’s proffered statutory construction that Section 718.202 did in fact permit developers to maintain deposits in a single escrow account prior to the amendment (thereby mooting the constitutional argument against retroactive application of the amendment), and held that the trial court had properly dismissed the buyers’ claims.
Because the statute, as amended, now expressly permits pre-construction deposits to be maintained in a single escrow account, the main effect of the North Carillon decision is effectively limited to pending deposit litigation involving pre-construction contracts that were executed prior to the July 2010 statutory amendment. Nevertheless, it is believed that North Carillon will facilitate conclusion of many remaining deposit lawsuits from the “condo crash era.”
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