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Board of Managers of Cathedral Tower Condominium v. Sendar Assoc Published Decision

By Adam Leitman Bailey


Condominiums—Claim Sponsor Underfunded the Reserve Fund—Statute of Limitations—The Term “Total Price” Within the NYC Admin. Code §26-703 Means the Price in Effect Just Prior to the “Effective Date”—Sponsor’s Principal Not Personally Liable

A defendant sponsor and defendant member and principal of the sponsor (principal) moved to dismiss a complaint which had been filed by the plaintiff condominium board of managers (board). The offering plan (plan) contained a certification signed by the sponsor and principal (certification), pursuant to which the defendants certified that the plan and documents that “amend and supplement, it will, inter alia, (1) set forth the detailed terms of the transaction and will be complete, current and accurate; (2) afford potential investors, purchasers and participants an adequate basis on which to found their judgment; (3) not omit any material fact and (4) not contain any false representation or statement.”

The complaint cited NYC Admin. Code §§26-703, which requires that “a sponsor of a condominium conversion provide a minimum reserve fund….” Pursuant to Code §26-703(b), the fund may be established either by “a lump sum deposit equal to 3 percent of the total price…or through installments to be made over a statutorily prescribed time period, pursuant to a statutorily-prescribed calculation.”

The plaintiff alleged that in creating the subject fund, the sponsor had used “the incorrect price in calculating its funding obligation.” The plaintiff asserted that “the sponsor was required to fund ‘3 percent of the sum of the cost of all units in the offering at the last price which was offered to tenants in occupancy prior to the effective date’…and that the calculation of the ‘last price’ is made by reference to relevant provisions in the…plan, and the Fourth Amendment to the plan dated February 14, 2005 which announced new…prices for all of the units….”

The plaintiffs contended that the fund had been underfunded in the amount of at least $522,760 and that all purchasers signed purchase agreements that incorporated the defendants’ obligations in the plan and that the plan contained a section titled ‘Reserve Fund’ which embodied defendants’ “contractual obligation to properly fund the Reserve Fund….” The plaintiffs sought a declaratory judgment, an “injunction directing defendants to make additions to the…fund which calculates 3 percent of the total price as $1,346,048” and asserted claims for “breaches of the…plan.”

The defendants argued that they had deposited the correct sum in the fund using the installment method. They claimed that the Sixth Amendment had calculated the minimum fund contribution as $823,288. That sum was calculated based on the last price offered to tenants before the plan was declared effective.

The defendants further argued that the board had acknowledged in its financial statements that the sponsor had fully paid the “fund contribution.” The defendants submitted evidence which allegedly refuted the plaintiff’s allegation that “the insider price had been modified by the Fourth Amendment to the…plan.” The defendants contended that the Fourth Amendment modified only the outsider price and did not contain a new insider price offered to tenants in occupancy, which is the relevant price used in calculating the minimum reserve fund contribution.

The defendants asserted that the Sixth Amendment, which became effective after the price increased to outsiders in the Fourth Amendment, continued to calculate the minimum reserve fund contribution of $823,288 and the board’s financial statements all reflect that the amount required to be paid into the fund was $823,288. The defendants also argued that this action is barred by the Statute of Limitations (SOL).

The defendant reasoned that the relevant dates for a SOL analysis are August 2005, when a notice advised unit owners and purchasers that the minimum fund contribution was set at $823,288, Aug. 19, 2005, the date that such figure was set forth in the Sixth Amendment and Aug. 23, 2005, the date on which the Sixth Amendment was served on all unit owners and unit purchasers. The defendants emphasized that such figure was specified in numerous board financial statements and plan amendments without challenge until the filing of this action, “more than 8 years after the figure was set.” The defendants further argued that the plaintiff’s claims were barred by the doctrine of laches since the board and its resident owners had “unreasonably sat on their rights for more than eight years.”

The plaintiff countered that its claims did not accrue until at least June 2010, at least five years and 30 days after the conversion on May 20, 2005, or August 2010, when defendants made their last payment. Since the action was commenced in 2013, the plaintiff believed that the action had been timely commenced.

The plaintiff also argued that the claims were not barred by laches because the defendants had not demonstrated how they had been prejudiced by any delay. Moreover, the plaintiff asserted that it lacked knowledge that the fund was underfunded until the sponsor relinquished control of the board and there was no voluntary or intentional abandonment of the plaintiffs’ rights.

The court explained that “§26-702(b)(2) defines the term ‘total price’ as used in the relevant funding provisions, with respect to condominium conversions, as ‘the sum of the cost of all units in the offering at the last price which was offered to tenants in occupancy prior to the effective date of the plan regardless of number of sales made.'”

An Appellate Division, First Department decision had held that the term “total price,” “with respect to cooperative conversions,” is “the price in effect just prior to the effective date and not,…, the price in effect during the purchase period, i.e., the ‘insider’s price.'” The court explained that “[a]bsent governing Second Department authority to the contrary,” that ruling is “authoritative.”

The court then granted the defendants’ motion to dismiss the requests for a declaratory judgment and for injunctive relief since the plaintiff had an adequate remedy at law through its breach of contract claims and dismissed all claims asserted against the principal personally and otherwise, denied the motion. Additionally, the court held that the defendants had not established the applicability of its laches defense. The court found that the complaint sufficiently stated a claim for breach of contract.

The defendants’ evidence did “not conclusively or utterly [refute] the plaintiff’s allegations” since there was support for the plaintiff’s contention that, “because the insider period had expired before the Fourth Amendment was filed, the prices contained in that amendment were necessarily offers applicable to all purchasers at that juncture, and there was no distinction in the prices offered or applicable to insiders and outsiders.” Certain evidence demonstrated that the sponsor’s final fund deposit had been made in 2010 and therefore, the defendants did not establish that this action was time-barred.

The principal had executed the certification “exclusively as [sponsor’s] principal, not separately or in his individual capacity.” The plaintiff had not alleged that the principal had acted fraudulently. Thus, the court found that there was “no basis for holding [the principal] personally liable.”

Comment: Adam Leitman Bailey, counsel for the plaintiff, stated that this decision established a new precedent in the Second Department on the issues of sponsor reserve fund obligations and the Statute of Limitations with respect to such obligations.

Board of Managers of Cathedral Tower Condominium v. Sendar Assoc., Sup. Ct., N.Y. Co., Index No. 601602/13, decided May 20, 2014, Driscoll, J.

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