BulletProofBlog the blog on crisis communications

In this regular feature, Bulletproof interviews top plaintiffs' attorneys for their perspective on the crises likely to affect businesses in the near future. Today we talk to Matthew Ferguson of Garfield & Hecht, P.C. in Aspen, Colorado. Mr. Ferguson has filed a lawsuit against Related Westpac Real Estate LLC and Base Village Owners LLC on behalf of six buyers of eight units at the Viceroy in Colorado’s Snowmass Village, a hotel condo project.

Plaintiffs want their contracts voided, and deposits returned, claiming they are separated from shops, restaurants, and a vibrant ski area base by “a barren concrete and steel wasteland.” The banks stopped lending and the developers stopped building. The Related entities promised full amenities, including an arrival/transit center and connected Base Village. The lawsuit also claims defendants violated the Colorado Consumer Protection Act with “unfair and deceptive trade practices.”

The case is of abiding interest to all developers who may be exposed to increased liability as a result of
the unanticipated problems stemming from an intractable real estate market.

What are the lessons here for developers in a real estate market like this one?

Matthew Ferguson: The first lesson is that you are liable for what you cannot deliver. The developer’s contracts for this project are all lawyered up with disclaimers but, at the end of the day, they have not complied with the strict letter of the law, while the environment surrounding what they sold my clients is described by some of our clients as looking like downtown Bagdad – an Iraqi war site.

Economic cycles are inevitable and each downturn will predictably ignite litigation over unfinished or unsatisfactory deliverables. But a downturn can never excuse failure to comply with the law. For developers, the additional lesson is that litigation is a risk like any other business risk related to the business cycle. Their wiser strategy would have been to prepare ahead of time, with a plan to redress grievances or to at least communicate with, rather than stonewall their buyers

How would more open communications and fuller transparency have better served the defendant?

Matthew Ferguson: I am not saying that a more transparent approach would have prevented all the lawsuits that the defendants are now facing from my clients and others. But it would have certainly improved the situation for them had they been nimbler and more out front. The reputational damage is enormous. A local lawyer and columnist recently wrote in the Snowmass Sun Online News that their “total silence…has become ominous and disturbing. Even their local and New York PR flacks have stopped spinning their fantasy tales.”

The developers and their bankers in New York have totally lost sight of the local impact of their actions and decisions. They’ve lost any sense of the impact on people, not just the buyers but the hotel staff and workers whose lives are also affected. But we’re going to climb as far up on the food chain in discovery as we possibly can.

Has the Interstate Land Sales Full Disclosure Act (ILSA) taken on new impact in the current economic environment?

Matthew Ferguson: We’re seeing litigation like this occurring throughout the country, especially in
Florida, Texas, and California, that is supported by ILSA.

In Colorado, we believe that local law and ILSA support each other directly, especially in mandating that condo maps must be recorded before pre-sales are made. That was not done here.

Our opponents will argue that we are trying to make pre-sales illegal as a matter of course. No, we are trying to regulate pre-sales on the basis of laws that are already on the books and provide buyers a right to rescind. Our opponents will say that ILSA has never been applied in the way that plaintiffs are seeking to apply it now. But past downturns in the real estate market have likewise occasioned new applications of
ILSA, and there’s every reason to expect that, in the current financial crisis, ILSA will be more aggressively enforced.

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Larry Smith is Senior Vice President of Levick Strategic Communications, the nation's top crisis communications firm, and a contributing author to Bulletproof Blog. Connect with Levick on Twitter: @Levick.