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Policy Concerning Retroactive Regulation Gets Even Cloudier

A Third District Court of Appeal opinion has added to the recent spate of cases that further cloud the issue of the Legislature’s ability to codify policy that affects already existing contractual rights.

A three-judge panel in the case of CRC 603, LLC v. North Carillon, LLC (Nos. 3D-10-2230 & 3D10-2231) held Sept. 7 that recent amendments to a developer’s statutory escrow deposit requirements contained in the Florida Condominium Statute cannot be applied retroactively to void contracts that were executed before the amendment was enacted.

The escrow requirements, which are set forth in Florida Statute 718.202, apply to payments made before a developer has substantially completed construction, furnishings or landscaping in accordance with its disclosed plans and representations. This statutory provision requires the developer to place into an escrow account all payments received from the buyer toward the sales price up to 10 percent. The statute further requires that all payments in excess of the 10 percent sales price received prior to completion of construction shall be held in a special escrow account, and not be used other than for certain expressly provided purposes.

Prior to being amended in 2010, the wording of this statute was open to interpretation as to whether a developer is required to maintain two separate escrow accounts — one for “10
percent” buyer deposits and another special escrow account for those buyer deposits “in excess of 10 percent.”

Here, the lawsuit filed by the purchasers did not initially address the manner of how their
deposits were held in escrow by the developer. But, after the CRC suit was filed, the U.S.
District Court for the Southern District Court of Florida issued an opinion in the case of Double
AA International Investment Group, Inc. v. Swire Pacific Holdings, directly affecting this issue.
In Double AA, the federal court interpreted the language of the statute as requiring developers to
maintain a second, separate escrow account for buyer deposits in excess of 10 percent of the
sales price. After this decision was issued, the purchasers immediately amended their suit to add
a count seeking to void their contracts based on the developer’s failure to place their deposits in
excess of 10 percent into a second escrow account.

Single account provision

But, in the first legislative session after the Double AA case was decided, the Legislature
amended the statute to add a new provision permitting developers to use only one escrow
account so long as separate accounting records are maintained for each purchaser. This
amendment was ostensibly for the purpose of clarifying the apparent ambiguity, as it included
wording noting its “intent is to clarify existing law.”

The trial court relied on the 2010 statutory amendment as the basis to hold that a developer need
not maintain a separate escrow account for deposits in excess of 10 percent. The trial court
dismissed the purchaser’s suit and issued a final judgment in favor of the developer. The decision
Wednesday by the 3rd DCA reverses the trial court’s decision on the ground that the 2010
amendment to the escrow requirements contained in Fla. Stat. 718.202 cannot be applied
retroactively to contracts that were executed back in 2006.

The DCA went on to adopt the interpretation of the pre-2010 version of the statute rendered by
the Double AA case, holding that this language must be read to require a developer to maintain
separate escrow accounts for the two types of deposits contemplated by the statute. Based on this
interpretation, the court remanded the case back to the trial court, holding that the buyer’s
allegations that the developer used only one escrow account in this instance are legally sufficient
to state a statutory violation permitting voiding of the contracts.

The developer unsuccessfully raised the standard argument in favor of retroactive application of
the amendment — that the amendment merely clarified the statute. The court noted that despite
the express language in the amendment of its intent “to clarify existing law,” the added language
served to amend a statutory provision that was enacted more than 25 years ago. Such a large gap
in time was found to be persuasive evidence by the court that the amendment is more than mere
clarification thereby precluding retroactive effect. Notably, although not addressed by the court
in its decision, amendment language reflecting an intent to clarify is fairly standard and often
placed into amendments merely to avoid a constitutional impairment of contracts argument
against amendments that do not necessarily serve merely to clarify existing law.

The developer also argued that the amendment should not be retroactively applied, since it was
procedural and remedial in nature. But the court rejected this argument without addressing
whether the amendment was indeed procedural or substantive. Instead, the court broadly held
that a contract includes, as a matter of law, all statutes in effect upon the date of the contract’s
execution and that retroactive application of amendments to those existing statutes would impair
these vested contractual rights.

Question for Supreme Court?

Quite some time ago, in the case Pomponio v. Claridge of Pompano Condominium, Inc., the
Florida Supreme Court held that retroactive application of statutory amendments that result in an
impairment to existing contract rights can be permitted based on a balancing test. The balancing
test must weigh the degree to which a party’s contract rights are statutorily impaired against both
the state’s authority to alter contractual relationships and the evil which it seeks to remedy.
Recent cases, such as this one, have seemingly ignored the Pomponio balancing test in holding
that a statutory amendment cannot be retroactively applied to impair individual contract rights.
It is not clear if the Pomponio balancing test is not being utilized, or if courts are simply not
bothering to expressly reference when assessing the retroactive application of amendments that
are not considered to be of great significance to society in general.

But, given the counterbalance between the importance of an individual’s right to contract and the
Legislature’s need to regulate, the manner in which courts consider the retroactive effect of
legislative amendments may ultimately need to be sorted out in more detail by the Florida
Supreme Court.

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