Adam Leitman Bailey, P.C. Defeats Successor Sponsor Construction Defect Claim against Developer Who Bought Units from Bankrupt Sponsor

By William J. Geller

Brooklyn supreme court

In a decision of first impression, the Brooklyn Supreme Court held that a successor condominium sponsor is not liable for building defects caused by the original sponsor’s construction of the condominium. Justice Lawrence Knipel threw out a condominium board’s claim seeking to impose construction defect liability on a developer who purchased the interest of the condominium’s bankrupt original sponsor under a Chapter 11 Plan.

The Bayard Views Condominium, a 62 unit luxury building overlooking McCarren Park in Brooklyn, was completed just before the 2008 recession, which forced the original sponsor into Chapter 11 bankruptcy after it could sell only 25 apartments.  In 2011 a subsidiary of the property group of the successor sponsor, a Brooklyn developer who was uninvolved with the building’s construction, was able to purchase the remaining 37 apartments under the sponsor’s Chapter 11 Plan.

To sell its 37 apartments, the new developer was required to file an amendment to the Condominium’s offering plan in which it was designated as a “sponsor” with respect to the units it was selling, as well as signing a required certification that it believed the offering plan to be complete and accurate. In 2014, after the new developer had sold all of its apartments, the condominium’s board sued the developer, claiming that it was responsible for the almost $4 million cost of correcting building defects resulting from the original construction of the condominium by the original sponsor.

Adam Leitman Bailey, P.C. used a two-step process to defeat the Board’s claims. First, it moved in Brooklyn Bankruptcy Court to enforce the provisions of the original sponsor’s Chapter 11 Plan which discharged all pre-bankruptcy claims and specifies that the developer acquired their units “free and clear” of all claims against the original sponsor. Bankruptcy Judge Elizabeth S. Stong issued an Order in Aid of Plan Confirmation absolving the new developer of all pre-bankruptcy liability.

Second, armed with the Bankruptcy Court ruling, Adam Leitman Bailey, P.C. moved in Brooklyn Supreme Court to dismiss the board’s claims with respect to any pre-bankruptcy defects. The board argued that because the new developer had signed the sponsor’s certification required by the Attorney General’s condominium sale regulations, it had adopted the original’s sponsor’s promise that when units were sold, the units and common areas would be free of construction defects. Justice Knipel disagreed, dismissing the board’s complaint to the extent that it sought damages for construction defects for work done before the developer obtained the units in the Chapter 11.

Although this case arose in the bankruptcy context, the result is important to all bulk purchasers of condominium units, because they are each required to sign the Attorney General’s certification as a successor sponsor before they can offer units for sale. By rejecting the claim that the certification renders the successor liable for the original sponsor’s promise of non-defective construction, Justice Knipel’s decision protects purchasers of units from financially troubled sponsors from taking on the unknown, often unknowable, risk that the building has hidden defects.

William J. Geller and Massimo F. D’Angelo represented the client in both Bankruptcy and Supreme Court.

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