Bought Bedford Falls, Got Potterville

Thousands of homeowners who bought the American dream of their own home, found themselves in neighborhoods blighted with vacant and foreclosed houses in the aftermath of the mortgage meltdown.

An attempt by homeowners left behind to sue eight major housing developers for failure to disclose their aggressive subprime marketing got an unsympathetic hearing Tuesday in a federal appeals court.

The 9th U.S. Circuit Court of Appeals panel appeared unlikely to revive the lawsuit dismissed by U.S. District Judge Virginia Phillips in Los Angeles in 2012.

“I don’t want to tip my hand, but I’m having trouble finding a claim for a cause of action under California law,” said Judge William Fletcher, during arguments broadcast from the Pasadena courthouse.

The homeowners in Southern California claimed their neighborhoods “became seas of empty houses” when owners were forced into foreclosure or abandoned property worth less than their debts on them.  They also say the value of their own homes dropped as a result.

They argue it was especially pernicious in new housing developments built by the eight builders that allegedly sold houses to buyers who could not afford them at inflated prices.

The eight companies are: Standard Pacific Corp, which sold 130,000 homes nationwide from 2004-2006; Lennar Corp, which sold 120,000; MDC Holdings, which sold 40,000; Ryland Group, which sold 47,000; DR Horton, which sold 150,000 and Beazer Homes, which sold  50,000.

The homebuilders say they had no duty to disclose the financial wherewithal of neighboring property owners.  Judge Phillips agreed and dismissed the case in 2012.

The homeowners asked the 9th Circuit to reinstate the suit.

“Under California law, where you draw the line [on the duty to disclose] is whether it affects the value and desirability of the property,” said Andrea Bierstein, attorney for the homeowners.  The duty “doesn’t turn on the character of the information,” she said.

William Donovan, attorney for the builders said, the homeowners “have been unable to identify any California statute, regulation or any case law to require the duty to disclose that they seek.”

Bierstein argued that beginning in 2004, the eight builders “implemented a scheme to increase the number of homes sold and price of the sales by marketing to unqualified buyers with unqualified loans.”

If the court adopted her duty to disclose requirement, Judge Paul Watford asked about new cases.  “What would stop the next court from saying a defendant has a duty to disclose the number of undesirable buyers.”

Bierstein insisted throughout questioning, “We’re saying it was a scheme and they didn’t disclose their own scheme.”

Fletcher said, “Here is my problem with the case.  It is a good case.  But your argument is not misrepresentation, it is a failure to disclose.  Well, if there is a failure to disclose it might not have made much difference.  People thought the bubble was going to go on for some time,” he said.

The panel is expected to issue a written ruling in the coming weeks.

Case:  Kelly v. Beazer Homes, No. 12-55750


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