New Yorkers Check Pennsylvania Land Deal: Shuffling Off to Pocono

Although it became effective in early 1969, the Interstate Land Sales Full Disclosure Act of 1968 (ILSFDA)¹ has seen little use as a tool to control unscrupulous sales and development techniques used by subdividers who market their projects to distant audiences. Only seven indictments have been filed under the Act, the most recent coming in the Federal District Court for the Southern District of New York on June 27, 1973.² That action contains 27 counts alleging that Pocono International Corp., its management, and its subsidiaries failed to comply with the Act's procedural requirements and fraudulently represented the feasibility and availability of sewage treatment facilities.

The Act was passed in response to four main considerations.³ State laws have been largely ineffective in controlling conduct in what was largely a national industry. Second, many land development companies were acting fraudulently in this void to injure purchasers. Third, "fly-by-night" developers were not following through and completing their developments, to the detriment of prior purchasers and existing land-use plans. Finally, the more honest segments of the industry realized that dishonest promoters were giving the industry a bad image and harming legitimate sales.

The Act serves as a disclosure law and is patterned after the Securities Act of 1933, with enforcement and remedy options which include suspension of lot sales by the administering agency, injunctive relief, criminal proceedings brought by the Department of Justice, and civil action by the purchaser to recover damages. The Act basically requires that sellers of subdivided land comprising 50 or more lots register with the Office of Interstate Land Sales Registration (OILSR) by filing a Statement of Record, and further disclose all material facts to prospective purchasers via a Property Report. In addition, it contains antifraud provisions. The OILSR has interpreted the Act as being only informational, with no substantive regulatory requirements. Some have suggested that the antifraud provisions add little to the common law,⁴ although initial reactions expressed great expectations in this area.⁵

Until recently, few people outside the land development industry were aware that the Act existed. The OILSR has done little and the Justice Department less to [3 ELR 10132] enforce the procedural or criminal sections of the Act.⁶ Recently, however, the OILSR has been more rigorous in its own efforts, and the indictment against Pocono International suggests that the Justice Department is taking greater interest in interstate land sales as well.

The indictment against Pocono International was handed down by a Special Grand Jury which had been investigating this and other projects in Carbon County, Pennsylvania, with the help of the United States Attorney's Office and investigators from OILSR. This cooperation between the administrative agency and Justice Department to bring about a criminal indictment could suggest a much stronger "get tough" policy.

The indictment charges several repeated violations of two provisions of the ILSFDA. First, Pocono International failed to file a Statement of Record with the OILSR. Second, Pocono International is charged with fraudulently representing to prospective lot purchasers that human and household waste and sewage could be disposed of through the construction of septic tanks. The Act requires that the developer must disclose "the availability of sewage disposal facilities" in both the Statement of Record and the Property Reports sent to prospective customers.⁷ The indictment alleges that the option of using septic tanks is not available, however, because of a seasonal high-water table on most of the building lots and the soil's inability to absorb sewage. Should septic tanks prove infeasible, Pocono International may be held absolutely liable under ILSFDA even though it could not have ascertained the truth by reasonable investigation.⁸

The broader implications of the action, beyond the suggestion that OILSR and the Department of Justice are going to take a more rigorous approach to the ILSFDA, is not clear. Assistant United States Attorneys Anne Sidamon-Eristoff and Daniel Riesel, who presented the case to the grand jury, take an expansive view. Mr. Riesel said that the indictment indicates that certain rural lands are not suitable for development because of the ecological limitations of the area or the effect of the development on the surrounding environment. His optimism might be unwarranted, however, since ILSFDA merely requires the disclosure of information without granting substantive regulatory powers to OILSR, enforcement is limited to those cases where, as in the instant case, that disclosure is either not made or made improperly. Developers would still be allowed to sell ecologically unsuitable land as long as full disclosure of the limitations was made. Furthermore, the availability of sewage treatment facilities is a factor specifically required by ILSFDA. Other environmental factors do not come within the express boundaries of the Act and perhaps are not enforceable. Nevertheless, it is certainly pleasing to see a more rigorous enforcement of the ILSFDA, which appears to embrace consumer and environmental protection in an unexpected but welcome linkage.

1. 15 U.S.C. §§ 1701-20 (1970).

2. United States v. Pocono Intl. Corp., No. 73 Cr. (S.D.N.Y.).

3. Note, Interstate Land Sales Full Disclosure Act of 1968, 6 U. Mich. J.L. Ref. 512 (1973).

4. Id. at 514-15.

5. Morris, The Interstate Land Sales Full Disclosure Act: Analysis and Evaluation, 24 S. Car. L. Rev. 331, 350 (1972).

6. Interstate Land Sales Full Disclosure Act of 1968, supra, at 515-17.

7. 15 U.S.C. § 1705 (5).

8. Morris, supra, at 352.