Sunset falls over the Florida Supreme Court building
Sunset falls over the Florida Supreme Court building (Phil Sears)

Developers can keep all kinds of escrow money from condo buyers in a single account as long as that account keeps the buyer’s funds from commingling with the developer’s own cash, the Florida Supreme Court ruled Thursday.

That somewhat technical decision was the conclusion of a nearly 4-year-old dispute between the buyers of two units at the Canyon Ranch Living condo-hotel in Miami Beach and developer WSG Development Co.

But it likely has bearing on hundreds of other lawsuits filed since the housing bust when buyers sought creative ways to get their deposits back.

In the case at hand, the buyers sued a company linked to developer WSG, North Carillon LLC, for their deposits.

At the heart of the lawsuit was the issue of whether state law requires a developer to hold pre-construction funds handed over by condo buyers in more than one escrow account.

Florida protects condo buyers’ cash of up to 10 percent of the purchase price and forbids developers from using that money during construction. Dipping into that reserve is a third-degree felony. The developer may use funds that exceed the 10 percent purchase price but must still hold them in an escrow account that is not commingled with the builder’s funds.

10 Percent Hold

In the newly decided case, the developer banked all of the buyer’s reservation money in a single account—albeit using accounting that didn’t touch the first 10 percent. The Canyon Ranch buyer, CRC 603 LLC, claimed the developer should have used a different escrow account for the portion of funds not meant for construction. They also claimed failure to do this was essentially an act of criminal defalcation by the developers.

“The underlying question presented by this case is whether a developer may maintain the two different types of deposits in a single escrow account, as North Carillon contends, or must place them in separate escrow accounts, as the buyers argue,” Supreme Court Justice Charles Canady wrote in the 6-1 decision. Justice Peggy Quince dissented.

Canady concluded, “The buyers’ claims against North Carillon for the maintenance of deposits in a single escrow account … were properly dismissed by the trial court.”

The ruling reversed a 2011 decision by the Third District Court of Appeal and remanded the case to that forum.

Rationale

In reaching its decision, the Supreme Court ruled Section 718.202 governing how many accounts a developer must establish to hold buyer deposits was ambiguous. The court could not clarify the meaning through either a plain reading of the law or a look at its legislative history. Given the fact an interpretation of the statute against the developer would likely have opened the door to criminal liability, the court decided to apply the rule of lenity in their favor.

Fort Lauderdale attorney Joseph Altschul, who represented the buyers, said he believed the Supreme Court’s rationale had been faulty and said he was exploring further action.

“I was surprised at the result, and I was even more surprised by the rationale,” he said. “You have multiple courts stating that the statute was unambiguous, and yet the Supreme Court concluded the contrary, that it was ambiguous, something it had to do to eventually get to the decision that it did.”

Altschul said applying the rule of lenity in civil cases will result in decisions that “will be in favor of the wrongdoer.”

An attorney for the developer, Jason Block of Rennert Vogel Mandler & Rodriguez in Miami, characterized the case differently, saying the rule of lenity was not the lynchpin in the decision.

“From the trial court argument through the defense of the appeal and into the Florida Supreme Court, the developer’s position was always the same, and that was that one account was sufficient to satisfy the statute requirement,” Block said. “We are extremely happy that the Florida Supreme Court agreed and ruled this way.”

The North Carrillon case is one of the many still being fought between developers and buyers who scooped up properties near the tail end of the last real estate boom. Many buyers who signed contracts for condo units during the frothiest days of that real estate mania later sued developers, using a variety of legal arguments to get their money back and void contracts.

Hundreds of lawsuits were filed after the real estate crash that fed the arguments rejected by the Florida Supreme Court Thursday, according to Block. Those still pending would be affected by the decision, he said.