A lawsuit alleging Detroit property owner Michael Kelly uses multiple and confusing contracts to lure vulnerable Detroiters into a “real estate bait and switch” was denied class-action status earlier this month for the very reason the suit was filed: multiple contracts.
The lawsuit, James v. Detroit Property Exchange, will still move forward on behalf of a few individual land contract purchasers who believe Kelly broke the law or violated their rights after Judge Sean Cox denied the class-action request in the lawsuit against Kelly and his real estate company Detroit Property Exchange (DPX). The judge said because Kelly uses so many different contracts, it would be impossible to say all potential class-members have the same experience, a requirement necessary for a class-action lawsuit.
“The Court shall deny motion because the commonality and typicality requirements are not met in this case,” wrote Cox in his Aug. 17 opinion.
Filed in federal court in November 2018 by the law firm Mantese Honigman and Michigan Legal Services, the lawsuit alleges Kelly, DPX and various associated LLCs use complicated and “predatory” contracts to treat customers as either land contract holders (i.e. home purchasers) or tenants (i.e renters) based on what serves the company’s bottom line, since land contract purchasers typically pay taxes and fix up a property while tenants can be evicted at a faster speed.
According to the complaint, Kelly-owned LLCs purchased neglected homes through the Wayne County tax auction then marketed them as rent-to-own with a high interest rate. In land contract deals like these, after hitting an agreed upon “sale price,” the deed should be transferred to the buyer. According to the lawsuit, most buyers never reached this phase because they were saddled with additional tax and repair costs. When the “buyers” then fell behind on payments, the complaint said, Kelly’s company (or one of his 36 LLCs) evicted the purchaser as a tenant, rather than a land contract holder. In Michigan, tenants have less time to pay back missed payments, which would allow Kelly’s companies to start the scheme over with a new purchaser.
The suit tried to make the case that Kelly has “buyers” sign multiple contracts—some that refer to them as buyers and others as tenants—and uses multiple and contradictory contracts to blur lines and avoid adhering to the Truth in Lending Act, a 1968 federal law aiming to protect consumers in dealings with lenders and creditors.
It is this use of multiple documents that ultimately protected Kelly from this case becoming a class-action lawsuit.
“Because the named Plaintiffs and the putative class members executed different contracts, with different terms and conditions, under different circumstances, a ruling that one person’s transaction constitutes a land contract does not aid the others,” wrote Cox, who acknowledged that while some of the named plaintiffs were summoned to 36th District Court as tenants and ultimately determined to be “land-contract vendees,” at least one person was found not to be a land contract vendee. Therefore, Cox ruled it would be impossible to put everyone into one class for a legal case against Kelly.
Cox emphasized Kelly submitted an affidavit explaining that he has “at least” seven different contracts that he uses with customers: A Lease to Land Contract; Lease with Option Version A; Lease With Option Version B; Lease With Option Version C; 12-Month Contingency Lease With Option; Rent to Own; and a Rent With Option.
“Even among the named Plaintiffs who entered into the same general transaction type, they executed similar but not identical documents,” Cox wrote.
Attorneys for the plaintiffs maintain that while the documents may have different names and slightly different terms, their usage—and predation—was the same.
“We believe that the variations in the forms used by Kelly to accomplish his schemes are distinctions without a material difference,” said attorney Gerard Mantese. “The key parts of the documents he used required him to comply with the Truth in Lending Act and related law.”
Although a class-action suit is not possible, Mantese intends to move ahead with a case.
“We plan to continue forward on behalf of our individual clients to obtain a judgment against Mr. Kelly,” Mantese said, noting that there are still eight named plaintiffs attached to the case.
Outlier reached out to Kelly’s attorney William Semaan for comment on the judge’s decision, but he declined to comment.
LAND CONTRACT CONFUSION
The denial of the class-action suit highlights the broad gaps in Michigan’s regulation—as well as understanding—of land-contracts even as they remain a common way for Detroiters to buy property.
“Complexity is used to avoid accountability,” said Peter Hammer, director of the Damon J. Keith Center for Civil Rights at Wayne State University Law School. Speaking of the case against Kelly, Hammer said, “You can view this as a form of land-contract technocracy. The mere fact of making things more complicated lets you avoid being accountable in the legal sphere.”
Marketed as an alternative home-buying instrument, land contracts—also commonly known as contract for deed—gained popularity in America between the 1930s and 1960s. This is particularly true in Black communities where redlining kept Black potential homebuyers from accessing traditional mortgages, the lawsuit notes.
While land contracts lost some popularity after the Fair Housing Act, they regained popularity in Detroit after the financial crisis in 2008. In addition to bank-backed loans drying up—homebuyers in Detroit, for example, were issued fewer than 250 mortgages in 2012—the Wayne County tax auction allowed investors to acquire large numbers of properties cheaply. This, according to the lawsuit, is how Kelly acquired the majority of his portfolio.
Just how many land contracts have been executed is undetermined. There are few state laws or regulations around the documents, which don’t need to be filed or recorded anywhere, unlike typical mortgages.
“There is almost no regulation, and from that standpoint, there’s no standards for ensuring equity and fairness,” Hammer said. “Really, people are on their own.”
State law dictates that land contracts cannot have an interest rate over 11%, and the seller must hold the deed. But what kind of deal is considered as a land contract is unclear.
“Does it have to have the name land contract?” asked Ted Phillips, the director of United Community Housing Coalition, pointing out that there is a lack of cohesion around the language.
This gray space, according to Phillips and the suit, is what Kelly and DPX has exploited.
According to Phillips, many investors like DPX try to make the case that a “Lease with Option to Purchase” or “Rent to Own” is not a land contract because it may have a line in the document calling the customer a “tenant.” But, said Phillips, the arguments typically fall away when they dig into the nitty-gritty and find occupants are in charge of almost everything from maintenance of the house to taxes.
“We are generally able to convince judges these are land contracts, regardless of what they’re called—rent with option to buy, lease with purchase,” Phillips said. “They have a dozen names that they used. But when there’s a sales price, the buyer is identified as a buyer, taxes are on the buyer, it becomes clear it’s a land contract.”
Through his work with the housing coalition, Phillips said he has seen a few hundred Kelly-associated homebuyers come through 36th District Court, where they are being treated as tenants. And the failure to gain class-action status means the game of whack-a-mole continues.
“Each individual case has to be litigated,” he said, “as opposed to recognizing this as a much bigger problem.”