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Caton Court Condominium v Caton Development Published Decision

By John M. Desiderio


Realty Law Digest
Scott E. Mollen
New York Law Journal
Mar 26, 2014

Condominiums Board Sued Sponsor, Sponsor Related LLC, Members of the LLC and Architect Breach of Warranty, Negligence, Professional Malpractice, Fraud, Negligent Misrepresentation, Negligent Supervision and New York General Business Law (GBL) 349 Court Denied Motions to Dismiss Most Claims Court Dismissed “Piercing Corporate Veil” Claims Split in Appellate Divisions As to Whether Sales of Condominiums Meet the “Consumer” Threshold Under GBL 349

On July 28, 2011, a board of managers of a condominium (board) commenced an action against, inter alia, the condominium’s sponsor, sponsor related defendants (sponsor defendants) and architect. The causes of action included claims for breach of contract, breach of express warranty, breach of common law implied housing merchant warranty, negligence, professional malpractice against the architects, fraud and negligent misrepresentation, violation of GBL 349(a), negligent supervision, specific performance and equitable relief.

The board alleged, inter alia, that “all of the defendants failed to comply with the terms of the [subject] purchase agreement” by failing “to construct the building substantially in accordance with the Offering Plan [Plan], the Plans and Specifications” filed with the New York City Department of Buildings, the City Building Code (code), and local industry standards. The board cited numerous “construction defects which have caused life, health and safety hazards to the residents of the Condominium.”

The architect moved, pre-answer, to dismiss the complaint and all cross-claims, on the grounds that documentary evidence established that the board’s claims are barred by the Martin Act, the statute of limitations, the condominium purchasers lack of privity and that the purchasers were not intended beneficiaries of the architect’s contracts. The architect had alleged that “he did not know the identity of any individual condominium unit owner, that he had no interaction or communication with any individual condominium unit owner and that he did not make any known false misrepresentations.”

The court explained that there is a three-year statute of limitations for a professional malpractice claim against an architect and such claim accrues “upon the actual completion of the work to be performed and the consequent termination of the professional relationship.” An owner’s claim against an architect accrues “when the designer completes its performance of significant (i.e. non-ministerial) duties under the parties’ contract.” Here, the complaint alleged that the architect had performed architectural services for the condominium until at least Aug. 20, 2009. The court found that the architect had “failed to submit documentary evidence conclusively establishing that the time in which to sue them had expired.”

For the architect to establish its lack of privity defense and to defeat the board’s third-party beneficiary claim, the architect would have had to annex a copy of its contract with the sponsor demonstrating such fact. The contract had not been submitted. Thus, the architect’s motion to dismiss the breach of contract claim was denied.

As to the claim that the architect had been negligent in failing “to exercise reasonable care and skill in the oversight of the construction , contrary to the [plan], resulting in numerous construction defects,” such violation sounded “in breach of contract rather than tort . A simple breach of contract is not to be considered a tort unless a legal duty independent of the contract itself has been violated.” The court found that the negligence claim was “unsustainable” since the complaint failed to allege facts showing that the architect owed a legal duty to the unit owners.

The architect asserted the unit owner’s lack of privity and preemption by the Martin Act as defenses to the professional malpractice claim. Based on the architect’s failure to provide its contract with the sponsor and “a complete and properly authenticated copy of the [plan],” the court rejected the lack of privity defense. The court further noted that the attorney general “bears sole responsibility for implementing and enforcing the Martin Act .” The court found that the architect had failed to demonstrate that the malpractice claims “rest[ed] entirely on alleged omissions from filings required by the Martin Act and the [attorney general’s] implementing regulations.”

A negligent misrepresentation claim requires proof that a defendant was obligated “to use reasonable care to impart correct information due to a special relationship existing between the parties, that the information was false, and that a plaintiff reasonably relied on the information.” The complaint alleged that the architect had “affirmatively misrepresented, as part of the [plan], a material fact about the condominium.” The complaint cited the architect’s representation, inter alia, that “the building would be constructed according to the [code] and they knew that the representations were false and misleading when made.” The court held that the board had adequately pleaded claims for fraud and negligent representation. Thus, the architect’s motion to dismiss was granted only as to the negligence claim and denied as to the other causes of action.

Additionally, the sponsor moved pursuant to CPLR 7506, for an order “directing the Board to arbitrate its claims and dismissing the complaint.” The sponsor also moved, in the alternative, to dismiss all or some of certain claims pursuant to CPLR 3013, 3016, and 3211(a)(3) and (7). The sponsor’s attorney’s affirmation demonstrated “no personal knowledge of the facts alleged in the complaint or in his affirmation” and was therefore of “no evidentiary value.” The affirmation purported to provide a copy of the purchase agreement, but offered “no explanation of the basis of his knowledge.” Since the exhibit was “not of undisputed authenticity and [was] not a self authenticating” document, the court disregarded the exhibit.

The sponsor contended that “unit owners, by purchasing their respective units, necessarily accepted the [plan] which contains the clause compelling arbitration” and that “the Board, as the representative of the unit owners, is necessarily bound by that clause.” However, the sponsor failed to annex the individual purchase agreements and instead, relied on its attorney’s affirmation and his unsupported assertions that an exhibit was “a typical form purchase agreement.” Since the board was “not a signatory to any agreement to arbitrate with the sponsor,” the court denied the sponsor’s motion to dismiss the complaint and compel the board to arbitrate.

The sponsor defendants had also moved, inter alia, to dismiss all piercing the “corporate veil” claims against sponsor related LLC and individual members of the LLC.

Nothing in the complaint asserted or suggested that the LLC or the subject individuals had “acted other than within their capacities as agents or principals of [LLC], or that any one of them failed to respect the separate legal existence of [LLC], or that anyone one of them treated [LLC’s] assets as their own, or that anyone of [them] undercapitalized [LLC], or did not respect corporate formalities, or, in any other way, abused the privilege of doing business in the corporate form .” Therefore, the court dismissed such causes of action.

The court also dismissed the negligence claims against the sponsor defendants since the complaint failed to demonstrate that they owed a legal duty to the unit owners apart from the contractual duties. However, the court found that the board had adequately pleaded causes of action for fraud and negligent misrepresentation. Those claims arose from “different facts than the cause of action for breach of contract.”

Additionally, the court denied the sponsor’s motion to dismiss the fraud and negligent misrepresentation claim on the ground that the board could not have relied upon any statements by them. The sponsor cited a paragraph in the purchase agreement which stated that purchasers acknowledge that they have not relied on any representation made by the sponsor defendants. However, the purchase agreement that had been submitted was disregarded since it was “incomplete, it is not of undisputed authenticity and is not self authenticating .”

The sponsor had also moved to dismiss the GBL 349 claim on the grounds that the board lacked standing under the Martin Act and the claim requires “a consumer oriented act or practice.” The court opined that the sponsor had failed to demonstrate that such claim rested “entirely on alleged omissions from filings required by the Martin Act and the [attorney general’s] implementing regulations .” The court explained that “[a] breach of a private contract affecting no one but the parties to the contract, whether that breach be negligent or intentional, is not an act or practice affecting the public interest .” The court further noted that there was “a split in the Appellate Departments as to whether sales of condominiums within a development meet the ‘consumer’ threshold .” The court then held that pursuant to a controlling decision of the Appellate Division, Second Department, the board had “sufficiently pled a claim for violations of [GBL] 349.”

Caton Court Condominium v. Caton Development, 17044/11, NYLJ 1202631189300, at *1 (Sup., KI, Decided Nov. 26, 2013), Rivera, J.

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.

Adam Leitman Bailey, P.C.

NEW YORK REAL ESTATE ATTORNEYS