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Principal Of A Sponsor May Be Held Separately Liable Where It Executes The Certification

By Adam Leitman Bailey


New York Law Journal

March 18th, 2015

By Scott E. Mollen


 

Condominiums—Alleged Construction Defects -Since Sponsor Made Repeated Repairs, There Was A Triable Issue of Fact As to Whether and to What Extent Sponsor Waived the Offering Plan’s Written Notice Requirement

A CONDOMINIUM Board of Managers (board) commenced an action against a sponsor-developer (sponsor) of a residential building and other defendants (“A”), whom the board alleged were “alter egos of the sponsor.” The defendants had moved to dismiss the complaint, pursuant to CPLR 3211(a) (7).

The complaint alleged that

each of the unit owners began experiencing conditions indicating that the design and construction of their individual units and the building was defective, and not constructed in a skillful manner, in that the workmanship and materials used in the construction did not confirm [sic] with (i) the [offering] plan; (ii) applicable code and laws; (iii) the plans and specifications filed with the [NYC] Department of Buildings; and (iv) industry standards…. Plaintiff engaged [an engineering and architectural firm (engineer)]…to survey the defects…. [engineer] issued two reports recommending ‘proposed courses of action for many defects’ and estimating the cost of remediation…

The complaint asserted, inter alia, claims for “breach of contract based on the construction defects and the failure to remediate them” and for “breach of the express warranty contained in the offering plan [plan], also based on the failure to remediate the defects….” The defendants moved to dismiss on the ground that the plaintiff failed to provide timely written notice of the defects, as required by the plan.

The plaintiff acknowledged that it did not give written notice to the defendants within 30 days of the sales of the units or within 30 days of the first annual meeting, as required by the plan. However, the plaintiff argued that the “written notice requirement was waived by the sponsor by virtue of its repeated repairs of various defects at the premises over the years.” The sponsor had made numerous repairs to the building after the notice period had expired.

The court found that there was “a triable issue of fact as to whether, and to what extent, the sponsor waived the written notice requirement in the [plan]” and denied the motion to dismiss the breach of contract claim.

The court dismissed General Business Law §349 claims, on the grounds that the allegations did “not involve a fraud aimed at consumers at large….” and such claim may not be based on “alleged frauds by [‘A’] in connection with other, unrelated projects.” Additionally, the court dismissed an Interstate Land Sales Act claim, on the grounds that the statute “exempts ‘the sale or lease of lots in a subdivision containing less than twenty-five lots.'” The court dismissed a punitive damages claim, since punitive damages are “not recoverable for an ordinary breach of contract as their purpose is not to remedy private wrongs but to vindicate public rights.” The court acknowledged that “if the breach of contract involves a fraud ‘evincing a high degree of moral turpitude’ and ‘wanton dishonesty,’ then punitive damages may be recovered if the conduct was ‘aimed at the public generally.'” The court denied the motion to dismiss the specific performance claim which seeks to compel the defendants to comply with its contractual allegations to remediate the building defects.

Although the court held that the “alter ego claims” would survive at this stage of the proceeding, the court explained that in order to pierce the corporate veil, a plaintiff must plead “not only that an individual ‘exercised complete dominion and control over the corporation’ but also that the individual ‘abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice.'” The court opined that since there was evidence that the plan was certified by the “sponsor and principals of the sponsor,” the alter ego claim should not be dismissed. The court stated that “[a] principal of a sponsor may be held separately liable where it executes the certification to the offering plan in its ‘separate capacity’ and ‘thereby knowingly and intentionally advanced the alleged misrepresentations of the…plan.”

The defendants had also moved to dismiss claims based on three units that had been re-sold after the first sale by the sponsor. The court held that such claims “are barred by the express terms of the [plan]….”

Comment: Adam Leitman Bailey, counsel for the condominium board stated, inter alia, “[w]hile some courts…have found that a principal of a sponsor that individually executed the certification to the offering plan was personally liable for construction defect claims under a veil piercing or alter ego theory, no courts in the First Department had yet resolved the issue.” He also stated that there were no other cases “directly on point on whether a sponsor waives the…notice requirement to submit timely written notice regarding defects where the sponsor returned to the property to make repairs after the expiration of the subject notice period.”

Sponsor attorneys often cite appellate authorities which hold that a sponsor’s principals are not personally liable to unit owners or boards because they complied with a regulatory requirement that they sign an offering plan and the claims are premised “solely on alleged violations of the offering plan and certification.” Only the attorney general may bring an action based on the “Martin Act.”

Moreover, it is generally difficult to prevail on an alter ego claim, given the proof required, including the need to establish that the defendant not only exercised complete dominion and control over the corporation, but also “abused the privilege of doing business in the corporate form to perpetuate a wrong or injustice.” See Board of Mgrs. of the Gansevoort Condominium v. 325 W. 13th, 2014 NY Slip Op 07256; Board of Managers of 184 Thompson Street Condominium v. 184 Thompson Street Owner, 106 A.D.3d 542, 965 N.Y.S.2d 114 (2013); Berenger v. 261 W. LLC, 93 A.D.3d 175, 940 N.Y.S.2d 4 (1st Dept. 2012); Kerusa Co. v. W10Z/515 Real Estate Ltd. Partnership, 12 N.Y.3d 236, 879 N.Y.S.2d 17 (2009).

Sponsor attorneys also assert that contractual notice provisions are generally enforceable with respect to contract claims and the fact that a sponsor voluntarily addresses a construction problem even though it had never received timely notice, should not constitute a waiver of the sponsor’s lack of timely notice defense. Otherwise, it would be a classic illustration of the “no good deed should go unpunished” principle and discourage sponsors from making repairs that they are not legally obligated to make.

Sponsors may do remedial work which they are not legally obligated to do because, inter alia, it will be less costly than litigation, a sponsor may want to avoid adverse publicity and reputational harm, it is part of an overall settlement that is viewed as beneficial and it may generate good will with the attorney general. Of course, a lack of timely notice defense may not be effective where there are allegations of fraudulent concealment or latent defects. Moreover, although a purchaser’s contractual claim may not be viable, because of a lack of notice to sponsor or a statute of limitations, etc., a sponsor may still, in certain cases. be subject to a Martin Act claim by the attorney general.

It is often in everyone’s interest to avoid this kind of litigation over new condominium construction issues. It is not only a sponsor that may incur monetary and reputational damage. Condo boards will often have to increase maintenance or issue special assessments in order to pay for litigation (unless they can hire experienced counsel on a contingency fee basis). Today, because of the length and complexity of construction litigation and cost of retaining experts, many construction lawyers will not take matters on a contingency basis. Even more salient, a public fight over building conditions may seriously damage a building’s reputation in the real estate brokerage community and the market place at large. Thus, litigation may adversely impact unit owners’ ability to sell or refinance. When a complaint is drafted, it is usually a “somewhat aggressive” document which may “exaggerate” building defects. It is not a document that would make a prospective purchaser or lender “comfortable.”

Of course, if a party is unreasonable, then there may be no choice but to pursue litigation. In many such cases, after each side receives the “fourth” legal bill, they will reconsider their positions and resume settlement dialogue.

The Board of Managers of 266 West 115th Street Condominium v. 266 West 115th Street, 159552/2013, NYLJ 1202713355524, at *1 (Sup., NY, Decided Dec. 2, 2014), M. Friedman, J.

 

Adam Leitman Bailey, P.C.

NEW YORK REAL ESTATE ATTORNEYS