B-215845, OCT 23, 1984

B-215845, OCT 23, 1984

INTERSTATE LAND SALES FULL DISCLOSURE ACT - ENFORCEMENT - SECRETARY OF HOUSING AND URBAN DEVELOPMENT DIGEST: THE INTERSTATE LAND SALES FULL DISCLOSURE ACT, AS AMENDED, 43 U.S.C. SEC. 1701 ET SEQ., AUTHORIZES SECRETARY OF HOUSING AND URBAN DEVELOPMENT (HUD) TO INVESTIGATE ALLEGED FRAUD IN REAL ESTATE TRANSACTIONS. WILLFUL VIOLATIONS OF ACT ARE PUNISHABLE UPON CONVICTION BY CRIMINAL PENALTIES. 15 U.S.C. SEC. 1717. WHEREAS HUD'S INVESTIGATION OF DEVELOPER'S ALLEGED FAILURE TO INCLUDE A STATEMENT OF TOPOGRAPHY AND OTHER INFORMATION IN PROPERTY REPORT FAILED TO UNCOVER ANY EVIDENCE OF WILLFUL VIOLATION OF ACT, MATTER WAS PROPERLY RESOLVED WITHOUT HUD SEEKING CRIMINAL ACTION.

THE HONORABLE STEVE SYMMS UNITED STATES SENATOR 211 FEDERAL BUILDING IDAHO FALLS, IDAHO 33401

DEAR SENATOR SYMMS:

THIS RESPONDS TO YOUR LETTERS OF MARCH 14, AUGUST 2, 7, AND 28, 1984, CONCERNING A LAND SALE TRANSACTION BETWEEN YOUR CONSTITUENT, MR. KENNETH R. FREITAS, AND PENN PHILLIPS LANDS, INCORPORATED, A REAL ESTATE DEVELOPER. MR. FREITAS COMPLAINS THAT THE DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD) HAS FAILED TO INVESTIGATE PENN PHILLIPS' OMISSION OF A MATERIAL FACT IN ITS PROPERTY REPORT, THAT HUD HAS FAILED TO TAKE PUNITIVE ACTION AGAINST PENN PHILIPS DESPITE A "DIRECT OR INDIRECT" OMISSION OF MATERIAL FACTS FROM HIS PROPERTY REPORT, THAT THE PROPERTY REPORT HE RECEIVED PRIOR TO THE LAND PURCHASE INVOLVED HEREIN DID NOT INCLUDE A TOPOGRAPHICAL STATEMENT, AND THAT HUD ALLOWED PENN PHILLIPS TO AMEND ITS PROPERTY REPORT TO INCLUDE THE OMITTED MATERIAL FACTS WITHOUT INFORMING PROPERTY OWNERS AND WITHOUT FINDING PENN PHILLIPS TO BE IN VIOLATION OF THE LAW. FOR THE REASONS DISCUSSED BELOW, WE CONCLUDE THAT HUD'S INVESTIGATION AND RESOLUTION OF MR. FREITAS' CONCERNS ARE IN ACCORDANCE WITH ITS RESPONSIBILITIES UNDER THE INTERSTATE LANDS SALES FULL DISCLOSURE ACT, AS AMENDED. 15 U.S.C. SEC. 1701 ET SEQ. (SUPP. V 1965-1969).

THE PURPOSE OF THE INTERSTATE LAND SALES FULL DISCLOSURE ACT (THE ACT) IS GENERALLY TO PROHIBIT AND PUNISH FRAUD IN LAND DEVELOPMENT ENTERPRISES. MCCOWN V. HEIDLER, 527 F.2D 204, 207 (10TH CIR. 1975). IN FEBRUARY 1970, WHEN PENN PHILLIPS REGISTERED THE LAND IN QUESTION, DEVELOPERS WERE REQUIRED TO FILE A STATEMENT OF RECORD WITH HUD AND FURNISH INTERSTATE LAND PURCHASERS WITH A PRINTED PROPERTY REPORT IN ADVANCE OF SIGNING ANY LAND SALES CONTRACT COVERED BY THE ACT. 15 U.S.C. SEC. 1703(A)(1) (SUPP. V 1965-1969). SECTION 1406 OF THE ACT PROVIDES THAT THE STATEMENT OF RECORD FILED WITH HUD SHALL CONTAIN A STATEMENT OF TOPOGRAPHY AND OTHER INFORMATION SET OUT IN THIS SECTION OF THE ACT. 15 U.S.C. SEC. 1702(2) (SUPP. V 1965-1969). ALTERNATIVELY, THE SECRETARY OF HUD MAY ACCEPT MATERIALS FILED WITH, AND FOUND ACCEPTABLE BY, THE APPROPRIATE STATE AUTHORITIES AS THE STATEMENT OF RECORD IF THE SECRETARY CERTIFIES THAT SUCH ACTION IS APPROPRIATE IN THE PUBLIC INTEREST OR FOR THE PROTECTION OF PURCHASERS. 15 U.S.C. SEC. 1708(A) (SUPP. V 1965-1969).

THE ACT AUTHORIZES THE SECRETARY TO CONDUCT INVESTIGATIONS TO DETERMINE IF A VIOLATION OF THE ACT HAS OR IS ABOUT TO OCCUR. 15 U.S.C. SEC. 1714(B) (SUPP. V 1965-1969). IF, AT ANY TIME A STATEMENT OF RECORD IS IN EFFECT, HUD DETERMINES THE STATEMENT OF RECORD IS INCOMPLETE IN ANY MATERIAL RESPECT, THE ACT PROVIDES THAT HUD SHALL ADVISE THE DEVELOPER WHO SHALL PROMPTLY AMEND THE STATEMENT OF RECORD. 15 U.S.C. SEC. 1706(D) (SUPP. V 1965-1969). IF THE DEVELOPER FAILS TO COMPLY WITH THE REQUEST, THE SECRETARY IS AUTHORIZED TO SUSPEND THE STATEMENT OF RECORD AFTER NOTICE AND AN OPPORTUNITY FOR A HEARING. 15 U.S.C. SEC. 1706(D) (SUPP. V 1965-1969). SECTION 1418 OF THE ACT SETS OUT CRIMINAL PENALTIES FOR THE CONVICTION OF ANY PERSON WHO WILLFULLY OMITS TO STATE ANY MATERIAL FACT IN A STATEMENT OF RECORD OR A PROPERTY REPORT PREPARED UNDER THE ACT. U.S.C. SEC. 1717 (SUPP. V 1965 1969).

THE RECORD IN THIS MATTER INDICATES THAT IN 1969, HUD CERTIFIED THAT THE LAWS AND REGULATIONS OF THE STATE OF CALIFORNIA WITH REGARD TO SUBDIVISIONS LOCATED WITHIN AND OUTSIDE THE STATE PROVIDED SUFFICIENT PROTECTION SUFFICIENT PROTECTION TO PURCHASERS TO BE ACCEPTED IN LIEU OF THE FEDERAL REQUIREMENTS. SEE E.G., 24 C.F.R. SEC. 1710.25 (1971). OFFICIALS IN THE CALIFORNIA DEPARTMENT OF REAL ESTATE INFORMALLY ADVISED US THAT AT THE TIME OF PENN PHILLIPS' APPLICATION TO SELL LOTS IN CALIFORNIA, ITS INVESTIGATORS PERSONALLY PREPARED BOTH THE STATEMENT OF RECORD AND THE PROPERTY REPORT DISTRIBUTED TO PROSPECTIVE PURCHASERS. FURTHERMORE, EACH SUBDIVISION SITUATED OUTSIDE THE STATE FOR WHICH APPROVAL WAS SOUGHT WAS PERSONALLY INSPECTED BY OFFICIALS OF THE CALIFORNIA DEPARTMENT OF REAL ESTATE. CALIFORNIA OFFICIALS REQUIRED DISCLOSURE OF INFORMATION IN THE PURCHASER'S REPORT THAT WOULD BE "FAIR, JUST, AND EQUITABLE" TO THE PURCHASERS. HUD RECEIVED COPIES OF THE REPORTS PREPARED BY CALIFORNIA AND REVIEWED THEIR CONTENTS TO INSURE THAT SUFFICIENT INFORMATION WAS DISCLOSED TO MEET THE CERTIFICATION REQUIREMENTS.

IN EARLY 1970, CALIFORNIA AND HUD APPROVED, EFFECTIVE FEBRUARY 13, 1970, PENN PHILLIPS' APPLICATION TO SELL LOTS AT THE SALMON RIVER MEADOWS SUBDIVISION IN IDAHO. THE PROPERTY REPORT, AS PREPARED BY CALIFORNIA OFFICIALS, DID NOT DISCLOSE THAT IDAHO WAS AN OPEN RANGE GRAZING STATE NOR DID PENN PHILLIPS APPARENTLY INFORM CALIFORNIA OF THIS FACT IN ITS APPLICATION. THUS, THE PROPERTY REPORTS AVAILABLE TO PROSPECTIVE PURCHASERS, INCLUDING THE ONE MR. FREITAS RECEIVED, DID NOT DISCLOSE THAT THE STATE OF IDAHO PERMITTED OPEN RANGE GRAZING RIGHTS. NOR DID SUCH REPORTS INCLUDE A "STATEMENT OF TOPOGRAPHY" WITHIN THE MEANING OF SECTION 1406 OF THE ACT.

IN MAY 1979, MR. FREITAS PURCHASED PROPERTY LOCATED IN THE SALMON RIVER MEADOWS SUBDIVISION IN IDAHO. BY LETTER DATED JUNE 28, 1982, MR. FREITAS COMPLAINED TO HUD THAT HIS PROPERTY RIGHTS. AT HUD'S REQUEST, PENN PHILLIPS AMENDED ITS PROPERTY REPORT IN OCTOBER 1982, TO INFORM POTENTIAL PURCHASERS OF THE OPEN GRAZING RIGHTS ISSUE. BY LETTER DATED JANUARY 24, 1983, HUD INFORMED MR. FREITAS THAT PENN PHILLIPS' VOLUNTARY CONCESSION TO AMEND ITS REPORT AND THE LACK OF ANY EVIDENCE THAT THE DEVELOPER DELIBERATELY WITHHELD INFORMATION FROM PROSPECTIVE PURCHASERS PRECLUDED FURTHER ACTION BY HUD.

BY REQUEST DATED MARCH 6, 1983, MR. FREITAS ASKED HUD FOR A COPY OF THE TOPOGRAPHICAL STATEMENT INCLUDED IN PENN PHILIPS' STATEMENT OF RECORD. HUD INFORMED MR. FREITAS THAT PENN PHILLIPS' APPLICATION WAS FILED UNDER CALIFORNIA LAW AND A TOPOGRAPHICAL STATEMENT WAS NOT REQUIRED BY THE STATE OF CALIFORNIA. THEREFORE, NEITHER HUD NOR CALIFORNIA COULD PROVIDE MR. FREITAS WITH A STATEMENT OF TOPOGRAPHY. HUD ALSO ADVISED MR. FREITAS THAT CONGRESS PROVIDED PURCHASERS WITH A PRIVATE RIGHT OF ACTION AGAINST A DEVELOPER FOR NONDISCLOSURE OF MATERIAL FACTS FOR UP TO 3 YEARS FROM THE DATE OF SALE TO THE PURCHASER. SINCE MR. FREITAS INITIALLY RAISED HIS COMPLAINTS AFTER THE 3-YEAR PERIOD HAD EXPIRED, HUD INDICATED THAT AS AUTHORIZED BY IDAHO LAW, MR. FREITAS COULD FENCE HIS PROPERTY TO PRECLUDE PUBLIC GRAZING. FINALLY, THE INSPECTOR GENERAL'S OFFICE CONDUCTED A REVIEW OF MR. FREITAS' CONCERNS AND, BY LETTER TO YOU DATED MAY 25, 1984, CONCLUDED THAT THIS CASE DID NOT WARRANT FURTHER INVESTIGATION.

OUR REVIEW OF THE DOCUMENTS IN THIS TRANSACTION AND THE INFORMATION PROVIDED TO US FROM HUD AND THE CALIFORNIA DEPARTMENT OF REAL ESTATE ALSO DEMONSTRATES THAT FURTHER ACTION BY HUD IS NOT WARRANTED. WITH THE PASSAGE OF THE ACT, CONGRESS DID NOT GIVE HUD UNLIMITED POWER TO PROTECT PURCHASERS IN THE INTERSTATE LAND SALES MARKET. WHILE THE ACT REQUIRES DEVELOPERS TO DISCLOSE MATERIAL INFORMATION TO PROSPECTIVE PURCHASERS, IT PROVIDES BOTH PURCHASERS AND HUD WITH VERY SPECIFIC ALTERNATIVES TO REDRESS THE FAILURE OF DEVELOPERS TO COMPLY WITH ITS PROVISIONS. FOR EXAMPLE, HUD IS EMPOWERED TO REJECT OR SUSPEND THE DEVELOPER'S STATEMENT OF RECORD IF HUD'S INVESTIGATION INDICATES THAT THE DEVELOPER HAS FAILED TO INCLUDE MATERIAL FACTS IN ITS STATEMENT OF RECORD. 15 U.S.C. SEC. 1706 (SUPP. V 1965-1969). IF HUD DETERMINES THAT A WILLFUL VIOLATION OF THE ACT HAS OCCURRED, IT MAY SEEK CRIMINAL SANCTIONS AGAINST THE DEVELOPER. 15 U.S.C. SEC. 1717 (SUPP. V 1965 1969). ALTERNATIVELY, CONGRESS AUTHORIZED PURCHASERS TO INITIATE PRIVATE ACTIONS AGAINST DEVELOPERS IF THEY DO SO WITHIN THE 3-YEAR TIME PERIOD CONGRESS PRESCRIBED FOR SUCH ACTIONS. 15 U.S.C. SECS. 1709, 1711 (SUPP. V 1965-1969).

WHILE IT APPEARS MR. FREITAS DOES NOT BELIEVE HUD HAS EXERCISED ITS AUTHORITY IN ACCORDANCE WITH THE ACT, WE DISAGREE. THE RECORD INDICATES THE LAND SALES ENFORCEMENT BRANCH, INTERSTATE LAND SALES REGISTRATION DIVISION, OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING, HUD, INVESTIGATED PENN PHILLIPS' ACTIVITIES IN RESPONSE TO MR. FREITAS' CLAIMS AND SUBSEQUENTLY OBTAINED AN AMENDMENT TO THE QUESTIONED PROPERTY REPORT. APPROPRIATELY, HUD DID NOT SEEK CRIMINAL PENALTIES SINCE THE RECORD INDICATES THAT PENN PHILLIPS OFFICIALS WERE UNDER A GOOD FAITH BELIEF THAT IT NEED NOT DISCLOSE THE OPEN GRAZING RIGHTS BECAUSE SUCH RIGHTS DO NOT CONSTITUTE AN ENCUMBRANCE, LIEN, NUISANCE, EASEMENT OR OTHER LIMITATION ON THE TITLE OF PROPERTY OWNERS UNDER IDAHO LAW. SEE, MAGUIRE V. YANKE, 99 IDAHO 829, 590 P.2D 85 (1978); JOHNSON V. OREGON SHORT-LINE R.R., 7 IDAHO 355, 63 P.2D 112 (1900). ACCORDINGLY, HUD DETERMINED THAT PUNITIVE ACTION AGAINST PENN PHILLIPS WAS NOT SUPPORTABLE BASED ON THE RECORD BEFORE IT.

MR. FREITAS POINTS OUT THAT SECTION 1404 OF THE ACT MAKES IT UNLAWFUL TO "DIRECTLY OR INDIRECTLY" USE INTERSTATE COMMERCE TO SELL LAND BY A MATERIAL MISREPRESENTATION OF FACTS IN THE PROPERTY REPORT. 15 U.S.C. SEC. 1703(A)(2)(B) (SUPP. V 1965-1969). CONGRESS HAS PROVIDED, HOWEVER, VERY SPECIFIC ACTIONS FOR PURCHASERS OR HUD TO TAKE WHEN ANY SUCH UNLAWFUL ACTIVITY OCCURS. AS MENTIONED PREVIOUSLY, HUD MAY SEEK CRIMINAL PENALTIES AND SUSPEND A DEVELOPER'S REGISTRATION MATERIALS, BOTH OF WHICH HUD DETERMINED WERE NOT APPROPRIATE IN THIS CASE. SIMILARLY, THE FAILURE OF MR. FREITAS TO FILE A COMPLAINT WITHIN 3 YEARS FROM THE DATE OF SALE OF THE LAND BARS MR. FREITAS' OPTIONS AS AN AGGRIEVED PURCHASER UNDER THE ACT.

THUS, WHETHER OR NOT A "DIRECT OR INDIRECT" VIOLATION OF THE ACT OCCURRED WHEN PENN PHILLIPS FAILED TO DISCLOSE THE OPEN RANGE GRAZING RIGHTS ISSUE, MR. FREITAS IN A TIMELY MANNER DID NOT AVAIL HIMSELF OF THE PRIMARY VEHICLE AVAILABLE UNDER THE ACT TO REDRESS SUCH POTENTIAL VIOLATIONS - AN ACTION BY THE AGGRIEVED PURCHASER WITHIN 3 YEARS OF THE DATE OF SALE. THUS, THE QUESTION OF WHETHER PENN PHILLIPS' FAILURE TO INCLUDE THE GRAZING RIGHTS ISSUE IN THE PROPERTY REPORT WAS A MATERIAL OMISSION IS TIME BARRED UNDER THE ACT. 15 U.S.C. SEC. 1709, 1717.

THE RECORD INDICATES THAT, AS ALLEGED BY MR. FREITAS, HUD PERMITTED PENN PHILLIPS TO AMEND ITS PROPERTY REPORT AND DISCLOSE THE OPEN RANGE GRAZING MATTER. WHILE THIS ACTION IS CLEARLY AUTHORIZED BY SECTION 1407 OF THE ACT, 15 U.S.C. SEC. 1706(C) (SUPP. V 1965-1969), WE AGREE WITH MR. FREITAS THAT THE TIMING OF THE AMENDMENT AND THE DISCLOSURE OF THIS INFORMATION WAS NOT HELPFUL TO PURCHASERS SIMILARLY SITUATED TO MR. FREITAS. HOWEVER, THE ABSENCE OF A "WILLFUL" VIOLATION ON THE PART OF PENN PHILLIPS COUPLED WITH PENN PHILLIPS' VOLUNTARY AMENDMENT OF THE PROPERTY REPORT PREVENTS HUD FROM TAKING ACTION AGAINST PENN PHILLIPS EVEN IF THE OPEN GRAZING RIGHTS ISSUE WAS DETERMINED TO BE A "MATERIAL" NONDISCLOSURE. FINALLY, CONCERNING MR. FREITAS' COMPLAINT THAT PURCHASERS WERE NOT INFORMED OF THIS AMENDMENT, WE NOTE THAT THE ACT DOES NOT REQUIRE DEVELOPERS TO DISCLOSE CHANGES IN THEIR PROPERTY REPORTS TO PERSONS WHO HAVE PREVIOUSLY PURCHASED LOTS.

MR. FREITAS ALSO COMPLAINS THAT HE DID NOT RECEIVE A STATEMENT OF TOPOGRAPHY FROM PENN PHILLIPS IN HIS PROPERTY INFORMED MR. FREITAS, AND WE AGREE, THAT SECTION 1406 OF THE ACT DOES NOT REQUIRE DEVELOPERS TO FURNISH PURCHASERS A STATEMENT OF TOPOGRAPHY IN A PROPERTY REPORT. 15 U.S.C. SEC. 1705 (SUPP. V 1965-1969). SECTION 1408 PROVIDES THAT A PROPERTY REPORT NEED ONLY CONTAIN SUCH OF THE INFORMATION CONTAINED IN THE STATEMENT OF RECORD AS THE SECRETARY MAY DEEM NECESSARY. 15 U.S.C. SEC. 1707 (SUPP. V 1965-1969). WHILE SECTION 1406 DOES SPECIFY THAT A STATEMENT OF RECORD SHALL CONTAIN A TOPOGRAPHICAL STATEMENT, 15 U.S.C. SEC. 1705(2), THE STATEMENT OF RECORD IS FILED WITH THE SECRETARY OF HUD UNDER FEDERAL FILING REQUIREMENTS AND IS NOT REQUIRED TO BE DELIVERED TO PURCHASERS. U.S.C. SEC. 1704 (SUPP. V 1965-1969). WE NOTE, HOWEVER, THAT HUD INFORMED MR. FREITAS BY LETTER DATED MARCH 18, 1983, THAT HUD DID NOT RECEIVE A TOPOGRAPHICAL STATEMENT OF THE PENN PHILLIPS PROJECT IN IDAHO BECAUSE CALIFORNIA FILING REQUIREMENTS WERE ACCEPTED BY HUD IN LIEU OF FEDERAL REQUIREMENTS IN 1969 AND CALIFORNIA DID REQUIRE THE FILING OF A TOPOGRAPHICAL STATEMENT.

IN OUR VIEW, HUD'S ACCEPTANCE OF CALIFORNIA'S FILING REQUIREMENTS UNDER THE ABOVE CIRCUMSTANCES DOES NOT CONTRAVENE THE ACT. THE RECORD INDICATES THAT PENN PHILLIPS FILED ITS REGISTRATION MATERIALS WITH CALIFORNIA IN EARLY 1970 AND HUD DETERMINED PENN PHILLIPS' BASIC REGISTRATION WAS EFFECTIVE ON FEBRUARY 13, 1970. SECTION 1409 OF THE ACT, IN EFFECT AT THIS TIME, AUTHORIZED THE SECRETARY OF HUD TO CERTIFY STATE FILING REQUIREMENTS IN LIEU OF FEDERAL ONES IF SUCH AN ACTION WAS "APPROPRIATE IN THE PUBLIC INTEREST OR FOR THE PROTECTION OF PURCHASERS." 15 U.S.C. SEC. 1708(A) (SUPP. V 1965-1969). HUD INFORMS US THAT IT CERTIFIED CALIFORNIA'S REGISTRATION LAWS EVEN THOUGH THEY DID NOT CALL FOR A TOPOGRAPHICAL STATEMENT BECAUSE CALIFORNIA REGULATORY OFFICIALS WERE REQUIRED TO CONDUCT ON SITE INSPECTIONS OF LAND SITUATED WITHIN OR OUTSIDE THE STATE BEFORE IT APPROVED THE DEVELOPER'S REGISTRATION. SINCE THE STATE OFFICIALS INSPECTING SUCH LANDS DETERMINED WHAT TOPOGRAPHICAL INFORMATION, IF ANY, SHOULD BE INCLUDED IN THE STATEMENT OF RECORD AND THE PURCHASER'S PROPERTY REPORT, HUD CONCLUDED THAT CALIFORNIA'S LAWS RELATIVE TO A STATEMENT OR RECORD SUFFICIENTLY PROTECTED PURCHASERS. OFFICIALS AT THE CALIFORNIA DEPARTMENT OF REAL ESTATE CONFIRM THAT THIS WAS THE PROCEDURE USED BY THEIR OFFICE AT THE TIME PENN PHILLIPS' REGISTRATION WAS APPROVED. ACCORDINGLY, THE RECORD BEFORE US INDICATES THAT PENN PHILLIPS WAS NOT REQUIRED TO SUBMIT A STATEMENT OF TOPOGRAPHY TO MR. FREITAS OR TO HUD. MR. FREITAS RAISES A NUMBER OF QUESTIONS UNDER THE ACT INVOLVING THE APPLICATION OF IDAHO STATE LAW, SUCH AS WHETHER HIS PROPERTY IS FREE AND CLEAR OF ALL LIENS AND ENCUMBRANCES, AND WHETHER HIS SUBDIVISION IS SUBJECT TO OPEN GRAZING IN VIEW OF VARIOUS SECTIONS OF THE CRIMINAL LAW OF THE STATE OF IDAHO. SEE IDAHO CODE SECS. 25-1004, 25-1908 (1977). EXPRESS NO OPINION CONCERNING ANY REMEDY AVAILABLE TO MR. FREITAS UNDER STATE LAW.

WE TRUST THE FOREGOING WILL BE USEFUL TO YOU. IF YOU OR MR. FREITAS HAVE ANY QUESTIONS CONCERNING THE ISSUES DISCUSSED HEREIN, PLEASE CONTACT CHARLES ROBERTS, ESQUIRE, (202) 275-5212, OF MY STAFF.