Smith et al v. Myrtle Owner, LLC

Filing 84

ORDER ADOPTING REPORT AND RECOMMENDATIONS for (78 in 1:09-cv-01655-KAM-VVP) Report and Recommendations, (53 in 1:09-cv-01655-KAM-VVP) Motion to Dismiss. For the reasons set forth in the attached Order, Judge Pohorelsky's well-reasoned and thoro ugh Report & Recommendation is incorporated by reference and adopted in its entirely as the opinion of the court, and defendants' objections are overruled. Ordered by Judge Kiyo A. Matsumoto on 7/5/2011. Associated Cases: 1:09-cv-01655-KAM-VVP et al. (Iguina, Carmen)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
-----------------------------------X
MARGARET SANZ and KARL JUNKERSFELD,
Plaintiffs,
-againstMYRTLE OWNER, LLC, DONALD CAPOCCIA,
BRANDON BARON, and JOSEPH FERRARA,

NOT FOR PUBLICATION
ORDER ADOPTING REPORT &
RECOMMENDATION
09-cv-1655(KAM)(VVP)

Defendants.
-----------------------------------X
DALLAS BROADWAY and VINITA GUPTA,
Plaintiffs,
-againstMYRTLE OWNER, LLC, DONALD CAPOCCIA,
BRANDON BARON, and JOSEPH FERRARA,

09-cv-3809(KAM)(VVP)

Defendants.
-----------------------------------X
DANIEL FORSTER and BENJAMIN BLOCK,
Plaintiffs,
-againstMYRTLE OWNER, LLC, DONALD CAPOCCIA,
BRANDON BARON, and JOSEPH FERRARA,

09-cv-5484(KAM)(VVP)

Defendants.
-----------------------------------X
MARLENA KAPLAN,
Plaintiff,
-againstMYRTLE OWNER, LLC, DONALD CAPOCCIA,
BRANDON BARON, and JOSEPH FERRARA,
Defendants.
-----------------------------------X

10-cv-0326(KAM)(VVP)

-----------------------------------X
HUROL SENGUL,
Plaintiff,
-againstMYRTLE OWNER, LLC, DONALD CAPOCCIA,
BRANDON BARON, and JOSEPH FERRARA,

10-cv-0395(KAM)(VVP)

Defendants.
-----------------------------------X
HEESOO KIM and STEVEN MOI,
Plaintiffs,
-againstMYRTLE OWNER, LLC, DONALD CAPOCCIA,
BRANDON BARON, and JOSEPH FERRARA,

10-cv-0534(KAM)(VVP)

Defendants.
-----------------------------------X
MATSUMOTO, United States District Judge:
Plaintiffs 1 Margaret Sanz, Karl Junkersfeld, Dallas
Broadway, Vinita Gupta, Daniel Forster, Benjamin Block, Marlena
Kaplan, Hurol Sengul, Heeso Kim, and Steven Moi (collectively,
the “plaintiffs”) commenced the above-captioned six actions
against Myrtle Owner, LLC and its principals Donald Capoccia,
Brandon Baron, and Joseph Ferrara (collectively, the
“defendants”), alleging that the defendants violated the
Interstate Land Sales Full Disclosure Act, 15 U.S.C. §§ 1701 et
1

Lisa Smith and Alessandro Papa were originally named as plaintiffs in the
first filed complaint in docket number 09-cv-1655. These plaintiffs
dismissed their claims voluntarily. (ECF Nos. 18-19, Notice of Voluntary
Dismissal as to Alessandro Papa; ECF Nos. 82-83, Notice of Voluntary
Dismissal as to Lisa Smith.)

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seq.

(“ILSA,” the “statute,” or the “Act”).

Complaint; ECF No. 6, Amended Complaint.)

(See ECF 2 No. 1,

Presently before the

court is defendants’ joint motion to dismiss all six actions on
the ground that ILSA does not apply to the sale of high-rise
condominiums.

(See ECF No. 53, Notice of Motion to Dismiss

(“Mot.”).)
Magistrate Judge Viktor V. Pohorelsky has issued a
Report and Recommendation (“Report & Recommendation” or “R&R”)
recommending that defendants’ joint motion to dismiss be denied
in its entirety.
2/9/11.)

(ECF No. 78, Report & Recommendation dated

Defendants have timely objected to the R&R.

(See ECF

No. 79, Defendants’ Objections to R&R dated 2/17/11 (“Obj.”);
ECF No. 80, Memorandum of Law in Support of Defendants’
Objections to R&R dated 2/17/11 (“Obj. Mem.”).)

Plaintiffs

filed a timely reply in opposition to defendants’ objections to
the R&R.

(See ECF No. 81, Reply in Opposition to Defendants’

Objections to R&R dated 2/24/11 (“Obj. Reply”).)

Having

undertaken a de novo review of the record in light of the
defendants’ timely objections pursuant to 28 U.S.C. § 636(b)(1),
the court incorporates the R&R by reference and adopts it in its
entirety.

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Unless otherwise specified, all citations are to docket number 09-cv-1655.

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STANDARD OF REVIEW
I.

Review of Report & Recommendation
To the extent that a party makes specific and timely

written objections to a magistrate’s findings, the district
court must apply a de novo standard of review.

See United

States v. Male Juvenile, 121 F.3d 34, 38 (2d Cir. 1997); see
also 28 U.S.C. § 636(b)(1).

Upon such de novo review, the

district court “may accept, reject, or modify, in whole or in
part, the findings or recommendations made by the magistrate
judge.”
II.

28 U.S.C. § 636(b)(1).
Underlying Dispute
Plaintiffs in these six actions executed purchase

agreements and paid purchase deposits ranging from $37,200 to
$115,000 for the purchase of units in the Toren Condominium, a
condominium development in downtown Brooklyn.

The development

consists of a 37-story high-rise residential building, parking
space, and parking garage.

The defendants in all six cases are

Myrtle Owner, LLC, the developer of the Toren Condominium, and
Donald Capoccia, Brandon Baron, and Joseph Ferrara, principals
of Myrtle Owner, LLC, alleged to have executed certifications
indicating that they have primary responsibility for compliance
with the laws and regulations applicable to the sale of units in
the Toren Condominium.

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The sole claim in each of the six complaints is
predicated upon ILSA.

Plaintiffs seek rescission of the

purchase agreements and return of their purchase deposits,
alleging that defendants violated ILSA by failing to file a
statement of record with the Department of Housing and Urban
Development (“HUD”) and by not providing plaintiffs with a
property report containing certain disclosures required by the
Act.

In addition, plaintiffs seek interest on their purchase

deposits, attorneys’ fees and costs, and other costs associated
with the purchase of the condominium units at issue.
ILSA requires developers of land to register with the
Secretary of HUD by filing a statement of record and, prior to
the signing of any agreement, to make certain written
disclosures to prospective purchasers of “lots” within a
“subdivision” in the form of a property report.
§ 1703(a)(1).

See 15 U.S.C.

The statute defines “subdivision” as “any land

which is located in any State or in a foreign country and is
divided or is proposed to be divided into lots, whether
contiguous or not, for the purpose of sale or lease as part of a
common promotional plan.”

Id. § 1701(3).

Nowhere in the

statute, however, is the term “lot” defined.
Defendants do not dispute that they did not comply
with the registration and disclosure requirements of the
statute.

Rather, defendants argue that the six actions should
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be dismissed because ILSA does not apply to the sale of units in
high-rise condominiums such as the Toren Condominium, and thus
the defendants had no obligation to comply with the requirements
of the statute.

Specifically, defendants argue that the term

“lot” does not include condominium units.
The question for the court in the instant joint motion
to dismiss, therefore, is not whether plaintiffs have alleged
sufficient facts in the complaints to plausibly claim a
violation of ILSA.

Rather, the question is whether the statute

under which plaintiffs seek relief, ILSA, applies to their
claims at all.

In particular, the court must determine whether

the term “lot” in the statute includes condominium units such
that the purchase agreements for the units in the Toren
Condominium were subject to the ILSA registration and disclosure
requirements.
III. Report & Recommendation
As Judge Pohorelsky noted in the R&R, “the Supreme
Court set forth the approach to be taken by the courts in
interpreting a statute that is administered by an administrative
agency.”

(R&R at 7.)

The first step for the court is to

determine whether “the intent of Congress is clear” with respect
to the particular statutory provision in question.

Chevron,

U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837,
842-43 (1984).

The court looks at the “legislation and its
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history” to determine whether Congress has expressed a clear
intent or whether the statute is ambiguous.

Id. at 845.

“Once

a statute is determined to be ambiguous, the court must look to
the agency interpretation of the statutory provision, to
consider the level of deference due the agency’s interpretation
. . . .”

United Airlines, Inc. v. Brien, 588 F.3d 158, 171 (2d

Cir. 2009).

While agency interpretations of a statute contained

in “opinion letters . . .[,] policy statements, agency manuals,
and enforcement guidelines, all of which lack the force of law
. . . do not warrant Chevron-style deference,” they are still
“‘entitled to respect’ under . . . Skidmore v. Swift & Co., 323
U.S. 134, 140 (1944), but only to the extent that those
interpretations have the ‘power to persuade.’”
Harris County, 529 U.S. 576, 587 (2000).

Christensen v.

Finally, “[a]n

agency’s interpretation of its own regulations is controlling
unless plainly erroneous or inconsistent with the regulation.”
Brien, 588 F.3d at 172 (internal quotation marks and citation
omitted).
Judge Pohorelsky conducted a careful review of the
text, structure, legislative history, and purpose of ILSA to
determine whether the statute is ambiguous or whether Congress
expressed a clear intent with respect to the definition of the
term “lot” and its application to condominium units.
14.)

(R&R at 8-

After carefully scrutinizing the text and structure of
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ILSA, Judge Pohoreslky concluded that “while not clear, the text
of the statute favors a construction of the term ‘lot’ that
would include units in high-rise condominium buildings.”
at 12.)

(R&R

Similarly, Judge Pohoreslky found that “although the

legislative history provides no clear answer, it does not favor
a narrow reading of the Act that would preclude its
applicability to high-rise condominium buildings.”

(Id. at 14.)

Finding the statute to be ambiguous, Judge Pohorelsky
next turned to HUD’s regulation defining the term “lot” and its
interpretation of such regulation.

(Id. at 14-19.)

The R&R

noted that “HUD’s position has consistently been that ‘lot’
applies to units in a condominium building” and that the agency
sought to “solidify this view in formal regulations,” which were
adopted after a formal notice and comment period and a public
hearing.

(Id. at 15.)

The HUD regulation defines the term

“lot” as “‘any portion piece, division, unit, or undivided
interest in land if such interest includes the right to the
exclusive use of a specific portion of the land.’”

(Id.

(quoting Land Registration, 24 C.F.R. § 1710.1(h) (1973)).)
Further, the R&R noted that in the preamble to the regulation,
“HUD affirmed its long-standing position that the Act applies to
condominiums” writing that “‘condominiums carry the indicia of
and in fact are real estate, whether or not the units therein
have been constructed’” and that “‘[a] condominium is
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accordingly viewed by [the agency] as equivalent to a
subdivision, each unit being a lot.’”

(Id.)

Upon review of

HUD’s authority to issue regulations which, inter alia, defined
the term “lot,” and HUD’s interpretation of the Act and
regulations to include within the term “lot” units in
condominium buildings, Judge Pohorelsky found that the agency’s
construction and interpretation of the statute and regulations
were not plainly erroneous or inconsistent, and were thus
controlling.

(Id. at 17, 19 (“HUD’s interpretation is neither

‘plainly erroneous or inconsistent’ with the regulation nor an
unpersuasive interpretation of the statute. . . . Deferring to
HUD’s long-standing decision to apply ILSA to condominiums is
both persuasive and consistent with [ILSA’s] policy goal.”).)
Consequently, Judge Pohorelsky concluded that “the court is
convinced by the history and policies underlying the statute as
well as HUD’s interpretation of it that the Act applies to the
Toren Condominium.”

(Id. at 19.)
DISCUSSION

In light of defendants’ timely objections, the court
has undertaken a de novo review of the full record, including
the applicable law, the pleadings, the underlying record, the
parties’ submissions on the instant joint motion, the R&R, the
defendants’ objections to the R&R, and the plaintiffs’ reply in

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opposition to defendants’ objections to the R&R.

See 28 U.S.C.

§ 636(b)(1).
Defendants raise two principal objections to the R&R,
repeating the same arguments advanced in the joint motion to
dismiss and addressed by Judge Pohorelsky in the R&R.

First,

defendants object to the conclusion in the R&R “that the intent
of Congress in including high rise condominium buildings with
[sic] the scope and coverage of [the Act] is unclear.”
¶ 1; see also Obj. Mem. at 2-11.)

(Obj.

Defendants argue that

“Congress’ contextual use of the term ‘lot’ throughout the Act,
the legislative history of the Act, and the fact that compliance
with the Act in the case of certain purchase agreements related
to high rise condominium developments is impossible” demonstrate
that “Congress did not intend to include high rise condominium
buildings within the scope and coverage of the Act.”

(Obj. ¶ 1;

see also Obj. Mem. at 2-11.)
Second, defendants object to the conclusion in the R&R
“that deference or respect should be given to HUD’s interpretive
guidance concerning the applicability of the Act to high rise
condominium buildings.”
19.)

(Obj. ¶ 2; see also Obj. Mem. at 11-

Defendants argue that “HUD’s interpretive guidance is not

entitled to any weight because it does not have the ‘power to
persuade’” given that “it fails to analyze the statute and its

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regulation and fails to explain its reasoning except in the most
cursory manner.”

(Obj. Mem. at 14, 17.)

Plaintiffs respond to defendants’ objections, arguing
that the R&R “contains a thorough discussion and analysis of
ILSA, the use of the term ‘lot’ throughout ILSA and the
arguments made by Defendants that high-rise condominiums are not
within ILSA’s purview.”

(Obj. Reply ¶ 1.)

Plaintiffs argue

that Judge Pohorelsky correctly concluded that the text of ILSA,
when analyzed in conjunction with the legislative history and
the policy of the statute, “‘favors a construction of the term
‘lot’ that would include units in high-rise condominium
buildings.’”

(Id. (quoting R&R at 12).)

Further, plaintiffs

argue that Judge Pohorelsky “correctly applied the well
established standards and factors” to determine the level of
deference due to HUD’s regulations and interpretation of ILSA.
(Id. ¶ 2.)
The court has considered the foregoing objections and
undertaken a de novo review of the R&R, the underlying pleadings
and factual record upon which it is based, and the relevant
legal authorities.

Having conducted such review, and upon

careful consideration of the defendants’ objections, the
objections are overruled.

This court, fully concurring with

Judge Pohorelsky in all material respects, hereby adopts, in its
entirety, the rationale articulated in the detailed, thorough
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and well-reasoned R&R, which embodies a correctly grounded
analysis of the factual record and legal authorities.
Specifically, the court agrees with and fully adopts Judge
Pohorelsky’s conclusion that, although not completely clear, the
text, structure and legislative history of ILSA support a
reading of the term “lot” to include condominium units, and that
the HUD regulation defining the term “lot” and HUD’s
interpretation of the regulation to include units in condominium
buildings is persuasive and entitled to respect.

Consequently,

the court finds that ILSA applies to the Toren Condominium.
CONCLUSION
For the reasons set forth above, Judge Pohorelsky’s
well-reasoned and thorough Report & Recommendation is
incorporated by reference and adopted in its entirely as the
opinion of the court, and defendants’ objections are overruled.
SO ORDERED.
Dated:

July 5, 2011
Brooklyn, New York
/s/
Kiyo A. Matsumoto
United States District Judge
Eastern District of New York

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