Jim Porter: Subdivision developers sued by new-home buyers
October 7, 2011
TRUCKEE, Calif. andamp;#8212; If you purchased a home from a national developer like Centex, Lennar, Beazer Homes or Shea Homes at the top of the market and later learned the developer sold neighboring homes to unqualified buyers, which frequently resulted in foreclosures further reducing the value of your new home, would you be upset? Would you sue?Subdivision sales galoreIndividual homeowners purchased houses in new developments constructed by eight national home-builders between 2004 and 2006 andamp;#8212; financed by the developersandamp;#8217; financing entities. In a subsequently filed class action lawsuit, the plaintiff-homeowners claimed the developers represented they were building andamp;#8220;stable, family neighborhoods occupied by owners of the homesandamp;#8221; and that they andamp;#8220;discouraged speculation … and intended to sell homes only to people who will occupy them.andamp;#8221; And by marketing homes to high-risk buyers and financing those buyers, defendants created a andamp;#8220;buying frenzyandamp;#8221; that artificially increased demand in home prices, even beyond the hot market at the time. According to the plaintiffsandamp;#8217; pleadings, the developers marketed the houses to andamp;#8220;unqualified buyers who posed an abnormally high risk of foreclosure and sold homes to investors who had no intent to reside in homes and were more likely to walk away in times of economic hardship.andamp;#8221; These new-home buyers demanded their money back in Maya v. Centex Corp.Subdividersandamp;#8217; point of viewCentex, Lennar Homes and the other national developers countered by noting that none of the owners had sold their homes, so any loss in value of the homes was unknown. They pointed out the obvious: the housing market fluctuates with changes in the economy. In other words, the plaintiff homeownersandamp;#8217; claims were andamp;#8220;conjectural and speculative, not actual or imminent.andamp;#8221;The federal district court agreed with the developers, finding that any decreased desirability of the neighborhoods (unkempt yards, transient neighbors, etc.) was not linked to the developersandamp;#8217; conduct andamp;#8220;by more than speculation.andamp;#8221; The national economy generally determined the rise and fall of housing prices nationwide.The homeowners appealed to the 9th U.S. Circuit Court of Appeals.9th CircuitThe 9th Circuit wrote that the homeowners had essentially two claims: they had overpaid as a result of the developersandamp;#8217; misrepresentations; and two, their properties had decreased in value and desirability because of the easy financing and unqualified neighbors buying homes from the developer. As to the first damage claim, the 9th Circuit found the plaintiffs had sufficiently alleged in their pleadings that the developers, not solely the national market, had inflated the andamp;#8220;bubbleandamp;#8221; in their particular neighborhoods, causing them to pay too much by creating an andamp;#8220;artificial demandandamp;#8221; through their questionable financing practices.As to the second claim that the subdividers had reduced their home values by selling to unqualified buyers in the same subdivision, even above and beyond losses caused by general economic conditions, the Court allowed the homeowners to move forward with their case andamp;#8212; at least letting them bring in experts to prove their claims.Porterandamp;#8217;s takeThis in a potentially huge case andamp;#8212; based solely on the pleadings of the homebuyers who still have to prove their claims in trial. This federal Court of Appeals merely ruled the plaintiffs on paper stated a case andamp;#8212; not yet proved in court.While I am tempted to jump on the bandwagon with these homebuyers, especially in their claims that the developersandamp;#8217; own finance companies made the purchase terms so sweet that unqualified buyers got loans, this case may be on shaky legal ground. It is a slippery slope andamp;#8212; opening the door to millions of lawsuits by folks who bought at the top of the market and now face foreclosure.Reno caseOn the other hand, last week I met with clients who had purchased a home from a large subdivider in Reno. Their home is upside-down with a loan much higher than the present value of the home, yet the same developer continues to build new homes, further driving down prices. That developer owes a duty of good faith and fair dealing to its homebuyers. Building identical new homes in the same neighborhood where there are currently dozens of short sales and foreclosures is unconscionable.U.S. Supreme CourtBack to our case against Centex et al. While I understand what the Court is trying to do, I would not be surprised if this case is overturned on appeal. The conservative justices of the U.S. Supreme Court may have the last word.Jim Porter is an attorney with Porter Simon, with offices in Truckee, South Lake Tahoe and Reno. He is a mediator and was the Governorandamp;#8217;s appointee to the Fair Political Practices Commission and McPherson Commission, both involving election law and the Political Reform Act. He may be reached at firstname.lastname@example.org or at the firmandamp;#8217;s website http://www.portersimon.com.