Scott E. Mollen
Scott E. Mollen ()

Condominiums—Construction Defects—Claims Against Architect and Engineer Dismissed—Sponsor and Contractor Had Settled—Martin Act—General Business Law (GBL) §§349 and 350—Piercing the Corporate Veil

A condominium board of managers (board) commenced an action against the sponsor, the sponsor’s architect (architect), the sponsor’s engineer (engineer) (collectively referred to as movants) and the sponsor’s contractor, seeking damages arising from the alleged “faulty design and construction” of the condominium building. The subject offering plan was filed with the Attorney General in May 2007. Title to the first unit had been transferred approximately two years later.

The board alleged that unit owners (owners) “immediately began complaining” about “workmanship and construction,” including defects with the HVAC system, mechanical and plumbing systems, the roof, the exterior, the cellar, apartment units, stairwells and corridors. The board, sponsor and contractor had entered into a settlement agreement.

The claims against the architect included claims for “common law fraud, deceit and misrepresentation,” “deceptive acts and practices and false advertising in violation of [GBL] §349 and §350,” “breach of contract, third party beneficiary,” “negligence,” “alter ego liability as against [the principal of the architectural firm],” and “aiding and abetting breach of fiduciary duties.” Most of the same claims were asserted against the engineer. However, the board was “not pursuing its claim against the [engineer] for fraud, deceit and negligent misrepresentation, GBL §349 and §350 or aiding and abetting breach of fiduciary duty….” The court granted the movants’ motion for summary judgment dismissing the complaint.

The architect asserted that at the time he issued his report and certification (report), there were no owners and he had no knowledge of who, if any, they might be. The engineer asserted that his services did not include “field supervision or supervision of any of the contractors, and…[he] did not certify the…offering plan” or prepare reports included in the offering plan. The movants further argued that the fraud, deceit and misrepresentation (fraud) claims are barred by the Martin Act.

The architect contended that there was “no private right of action for fraud or misrepresentation based upon misrepresentations or omissions by an architect in a certification and report contained within [a]…plan.” The architect emphasized that such certifications and reports are required by the Martin Act and attorney general regulations, “which reserve exclusively to the Attorney General all such claims and pre-empt all private causes of action such as the instant one.” The engineer also argued that there were “no allegations…of any specific misrepresentation and/or omission of material fact by them or on their behalf.” The movants further asserted as to the fraud claims, there is no “privity” between the board and either movants.

Additionally, they argued that GBL §§349 and 350 were intended “to protect consumers at large” and “not individual [owners] in a single condominium…building.” They also argued that the breach of contract claim should be dismissed because the movants performed their services “pursuant to a contract with the sponsor.” That contract stated that nothing in the contract “shall create a contractual relationship with or a cause of action in favor of a third party against either the Owner or the Architect.” They contended that the board is not a third-party beneficiary and lacks standing as to the breach of contract claims. Rather, the board is at most, “an incidental beneficiary.” The movants also argued that the negligence claim was duplicative of the breach of contract claim and the defendants did not owe a duty to the board.

The architect further asserted as to the alter ego liability claim, that there was no showing that “the owner, through its dominion, abused the privilege of doing business as a corporation” or that “the acts complained of were performed with malice and calculated to impair plaintiffs business for the personal profit of the defendant….” He argued that the allegations were “conclusory” and did “not meet the pleading standard.”

The movants further argued that as to the aiding and abetting breaches of fiduciary duties claim, the board cannot show that the movants had “actual knowledge of the tort” and the claims should be dismissed because the board had “been made whole through its settlement with the sponsor.”

The board countered that motions for summary judgment are premature since discovery was not complete. It asserted that discovery may show that the architect is “a serial abuser of the New York City Department of Buildings’ Self-Certification Program for Architects.” The architect had only produced an unsigned version of his contract with the sponsor and the board and argued that “factual gaps” preclude summary judgment.

The board also argued that the fraud misrepresentation claims were not precluded by the Martin Act since they were not based on omissions in the offering plan, but on “representations in the architect’s [report] that [he] researched the facts stated in the architect’s report,” “researched the facts underlying those stated facts” and “stated that the report described the condition of the building that would exist upon completion of construction.”

The board contended that these statements were “affirmative misrepresentations.” It also argued that “[p]rivity or a close relationship between the parties is necessary for a claim of negligent misrepresentation but not for one of common law fraud.” It further contended that the sponsor could not have breached its fiduciary duties without the architect’s report and the architect must have learned the details relating to the sponsor’s breach of fiduciary duty. The board also argued that there were at least 15 significant construction/design deficiencies that were beyond the scope of the prior settlement.

The board had submitted an attorney’s affirmation and referred to “the attachments and memorandum of law with no affidavit from anyone with personal knowledge of the facts….” It argued that the architect had to be deposed because he has “‘less than a stellar reputation,’ citing a newspaper article.” The court opined that because some architects “may not respect [the architect's] designs, which is the crux of the referenced article,” does not constitute “an evidentiary showing that further discovery is necessary by the Board.” Since “the Board presented only arguments and…no evidence, much less evidence in admissible form that further discovery may lead to relevant facts that are essential in opposing the motions for summary judgment,” the court held that the motions were not premature.

The court then acknowledged that “[c]laims of affirmative misrepresentation, as opposed to omission, are not pre-empted by the Martin Act.” It explained:

the alleged misrepresentations here do not fall outside the scope of the Martin Act. While the courts have recognized common-law claims not pre-empted by the Martin Act, those claims have been based on affirmative misrepresentations that were made in the offering plan and then incorporated by reference into the contract of sale…, affirmative misrepresentations set forth in brochures, advertisements and purchase agreements…and affirmative misrepresentations in offering plan as to floor dimensions of purchasers’ units….

The architect’s report…in this proceeding follow the statutory language required by the Act and its regulations. There is no evidence from any plaintiff that a purchaser relied upon affirmative misrepresentations from some other source. In addition, the architect’s [report]…describes the property as it was to be constructed based upon the plans and specifications, pursuant to the regulations. The statements at issue in the report…do not constitute material affirmative misrepresentations that would support a common-law claim that is not entirely dependent on the Martin Act for its viability…. Accordingly, the claim of common-law fraud, deceit and negligent misrepresentation is dismissed as pre-empted by the Martin Act.

The court further held that even if the fraud claims were not pre-empted by the act, “they still would be dismissed.” “A plaintiff alleging negligent misrepresentation must show either privity of contract between the plaintiff and the defendant or a relationship ‘so close as to approach that of privity.’” A relationship “approaching privity,” i.e.., that “defendant have an awareness that his or her statement is for a particular purpose,” “a known party relies on the statement in furtherance of that purpose” and “there is some conduct linking defendant to the relying party and evincing its understanding of that reliance….”

The board had not pleaded or provided evidence that “[owners] were ‘known parties’ to the movants at the time” of the subject statements. Moreover, a fraud claim “requires a ‘particularized factual assertion which supports the inference of scienter.’” Additionally, the GBL claims did not allege “the acts or practices” that have “a broader impact on consumers at large” and were “limited to a single…building.”

The court also dismissed the breach of contract claims based on the lack of privity and the inability to demonstrate that the owners were third-party beneficiaries. The architect’s affidavit stated that the unsigned copy of his contract was an accurate copy of the final agreement and the board had merely speculated that “further discovery may reveal more on the issue of intent.” Thus, the court found that the owners were “incidental rather than intentional beneficiaries and,…, without standing to bring a breach of contract claim.”

The court dismissed the negligence claim because the board had not demonstrated that a duty exists by either movant to the board or the owners. Additionally, the court dismissed the “pierce the corporate veil” claim since the board failed to demonstrate that the corporate entity was dominated as to the subject transaction and “such domination was the instrument of fraud or otherwise resulted in wrongful or inequitable consequences.”

The court emphasized that “evidence of domination alone is not sufficient without a showing that it led to inequity, fraud or malfeasance.” It also dismissed the aiding and abetting a breach of fiduciary duty claim since it was based on conclusory allegations, rather than “facts alleged from which it could be inferred that the defendants had actual knowledge of the complained-of breach….” The court further found that the alleged building defects appeared to be “identical but for one item” to the items addressed in the prior settlement agreement. Thus, the court dismissed the complaint.

The Board of Managers of the Sevenberry Condominium v. N7B LLC, 23910/2010, NYLJ 1202652854743, at *1 (Sup., KI, Decided April 9, 2014), Pfau, J.

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