Land Use—Donor Recognition Text to Be Placed in a Park—Public Interest in Enforcing Recognition Contracts Outweighs Shifting Aesthetic Concerns—Doctrine of Impracticability or Impossibility

This decision involves the issue of whether "aesthetic considerations trump a carefully considered and crafted contractual provision dictating the specific location of an inscription on a work of art?" The Appellate Division, First Department (court) held that the contractual provision must be enforced.

The subject dispute involved a park which commemorates Franklin D. Roosevelt's famous "Four Freedoms" speech. For more than 30 years, efforts to develop the park had been unsuccessful. In 2005, at the urging of officers of a foundation, "the Franklin & Eleanor Roosevelt Institute formed the Franklin D. Roosevelt Four Freedoms Park, LLC (LLC) and undertook to raise the funds necessary to complete the Park." In March 2010, the foundation contracted to give the LLC a $2.5 million grant. In exchange for the grant, the LLC contractually agreed that a "Recognition Text" (text) would be placed "at a specific location near a bust of FDR…which was to be housed in the park."

The foundation had been among the early donors to the project and its contribution had been made "at a time when there remained considerable doubt as to whether the LLC could raise the funds necessary to complete the project." Based on the grant, the LLC qualified "for essential public funding from New York State and New York City, after which the LLC was able to raise the necessary funds to complete the Park." The park was "essentially completed." However, the LLC reneged on its obligation to engrave the text at the specified location, citing aesthetic concerns.

The terms of the grant had been embodied in a series of agreements. The agreements detailed "the LLC's obligation to engrave specific text recognizing the Foundation and its founders…on a…granite wall" near a bronze bust of FDR. The text was to be "low to the ground, in small font less than two inches high along the bottom of a solid 12 foot by 12 foot granite wall…." The agreements vested the foundation with the right in its sole discretion, to terminate the grant agreement under certain conditions and specified "the precise location and wording of the '…Text,' as well as requirements for the carving and maintenance of the inscription." The agreements further provided that the foundation would be entitled to specific performance in the event of a breach by the LLC.

The LLC pressured the foundation to consent to relocate the text to a different part of the Park, "where other donors' names were going to be engraved." The foundation declined and insisted that the LLC comply with the agreements. The LLC refused to perform, stating that its "architects and consultants have told us" that incorporating the text at the agreed upon location was not "the 'best aesthetic.'" The LLC offered to return the foundation's money. The foundation thereafter commenced the subject proceeding, "seeking a declaration that the LLC breached its contractual obligations, and an order directing specific performance of the [agreements]."

The LLC asserted that compliance with the agreements was "totally inconsistent with the objective of the Foundation's own gift, and that this was a case that 'cries out for equitable relief, not tipping on the side of a selfish private interest, but on the side of the public in a lasting historical monument.'" The LLC's "art expert" asserted that to place the text at the specified location would be "akin to signing a donor's name within the frame of [a] great painting, something…that no donor would ever insist on…doing to a great Picasso or Van Gogh canvas upon donating such to a museum." The LLC also contended that the text "would be inappropriate" and inconsistent with the design and artistic intention of the park's original highly respected architect. Thus, the LLC claimed that compliance with the agreements would damage the "design, the 'aesthetic purity of the space, and the purpose of the Park.'"

The court explained that "[a]esthetic considerations extraneous to a contract cannot trump its terms." The court found that "the LLC breached its contractual obligations to the Foundation" and the trial court had "properly ordered specific performance by directing the engraving of the…Text in accordance with the [agreements]…." The court also noted that "specific performance is appropriate in situations involving unique articles of property 'having a special and unascertainable quality'…."

The LLC had raised, for the first time on appeal, the defense of impracticability. The court found that "the LLC's changed aesthetic vision did not render its performance impracticable or impossible." Under the doctrine of "impossibility or impracticability," performance is excused "only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible" and that "the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract…." Here, the LLC could comply with the contract. The LLC chose not to do so because "its 'advisors' believe, on aesthetic grounds, that there should be no such engraving" at the location specified in the agreements.

The court reasoned that "[t]he time for the LLC to have voiced its aesthetic concerns was at the time the [agreements] [were] negotiated, not after it had 'accepted and spent the Foundation's money….'" Moreover, the court rejected the LLC's argument that there was a public interest in "protecting the aesthetics of the Park." The court explained that "the public interest in enforcing donor recognition agreements outweighs the shifting aesthetic concerns regarding the LLC…." The court reasoned that "the failure 'to protect the interest of donors' risks the result that 'donors may become more hesitant to contribute at all.'" Furthermore, the court stated that "a donor's desire to perpetuate his name as a benefactor of a particular charitable institution and humankind is not a selfish one. These desires are deeply ingrained in human nature and are effective motivating forces in donations of this character…."

Comment: Similar donor issues arise in many contexts other than real estate, e.g., contributions relating to programs sponsored by, e.g., educational, hospital and other non-profit organizations. This case did not involve a situation where performance of the contract was impossible or even difficult. Thus, the case was different from a situation where a donor chooses to abandon a project because the project is no longer feasible.

In re Reed Foundation v. Four Freedoms Park, 653482/12, NYLJ 1202598611842, at *1 (App. Div., 1st, Decided May 2, 2013) Before: Tom, J.P., Acosta, Saxe, Freedman, Feinman, JJ. Opinion by Acosta, J. All concur.

Condominiums—Litigation Against a Condominium Sponsor and Architect—Architect's Motion to Dismiss Third Party Beneficiary, Negligent Misrepresentation and Professional Malpractice Claims Granted

A plaintiff association of condominium owners commenced an action against, inter alia, the sponsor of a condominium and the sponsor's architect based on alleged construction defects. The sponsor had retained the architect to design and prepare drawings for the development and to file those drawings with the NYC Department of Buildings. The complaint alleged that the architect prepared plans, specifications, a description of the property, an architect's report and an addendum thereto, which were included in the offering plan (plan).

The architect had moved to dismiss, noting that its contract did not mention the plaintiff homeowners. The plaintiff asserted that it had standing to assert a breach of contract claim as a third-party beneficiary of the contract. However, the contract between the sponsor and the architect contained "no provision expressly stating an intention to benefit plaintiff, and the plaintiff did not otherwise plead any facts or circumstances that would support a finding that it was more than a mere incidental beneficiary of the contract, therefore the plaintiff is not a third-party beneficiary…." Thus, the court dismissed the breach of contract cause of action.

The court also dismissed a negligent misrepresentation cause of action. The plaintiff had failed to show either "privity of contract or a relationship so close as to approach that of privity…." Absent such evidence, the negligent misrepresentation claim could not be sustained. Moreover, the plaintiff had failed to allege that "when the defendants made any representation for which it [was] being sued, the defendants knew the plaintiff would be among them, or in fact, that the defendants knew or even had the means of knowing of plaintiff's existence…." Rather, the plaintiff was "merely a member of a potential class of purchasers rather than a known party" and therefore, the plaintiff "was not in so close a relationship to have the functional equivalency of privity necessary to support a cause of action for negligent misrepresentation."

Additionally, the court dismissed a professional malpractice cause of action. The plaintiff had "failed to plead any facts sufficient to establish that [the architect] owed a duty to the plaintiff as there was no contractual privity nor the functional equivalent of contractual privity necessary to support such a cause of action…." The court distinguished cases where the evidence was sufficient to demonstrate that "the eventual purchasers were beneficiaries of the agreement." Accordingly, the court granted the architect's motion to dismiss the complaint.

Comment: Condominium sponsors and their experts are frequently sued for construction defects after the purchasers acquire control of the condominium board. Responsible sponsors timely address construction and operating budget issues in order to, inter alia, protect their professional reputation, the reputation of their development, avoid expensive and protracted litigation and avoid possible action by the New York State attorney general.

Purchasers and sponsors should try to resolve construction and budget issues through negotiation, mediation or intervention by the attorney general before commencing litigation. Why? Many complaints in law suits are "aggressive" documents which tend to "magnify" the problems. Since these documents are part of a public record, they may adversely impact a purchaser's ability to sell or refinance their condominium unit. Real estate brokers do not want to recommend that their clients purchase in a development that has significant construction or budget problems. Moreover, existing owners and potential purchasers may be concerned about open ended exposure to special assessments to fund litigation. Of course, even if one side of a dispute is fair and reasonable, the other side may be unreasonable and litigation may be the only practical alternative.

Harbour Pointe v. Bejamin Beechwood LLC, 5882/12, NYLJ 1202603735759, at *1 (Sup., QU, Decided May 20, 2013), McDonald, J.

Condominiums—Adequacy of Reserve Fund—Claim Against Principals of Sponsors Rejected

A condominium sponsor elected to fund a condominium's reserve fund pursuant to Administrative Code §26-703(b)(i) (the Total Price Method). According to "the plain language of the governing statutes, the 'total price' referred to in §26-703(b)(i) is not 'the price in effect during the exclusive purchase period, i.e., the so-called insider's price,' but rather the 'last price…offered to tenants in occupancy prior to the effective date of the plan'…." The Appellate Division, First Department agreed with the motion court finding that the record contained "no conclusive evidence that the tenant-offeree prices set forth in the offering plan were increased prior to the plan's effective date."

The court rejected the plaintiff's argument that the tenant-offeree prices specified in the plan were "illusory." Of the 140 units listed, 96 were vacant. However, the court explained that "disregarding the vacant apartments would only result in lowering the amount of the reserve fund, which would be illogical and run counter to the statutory total price method's purpose of providing for an adequate building reserve fund."

The court also rejected the plaintiff's contention that "a sponsor may take a credit for capital replacement work only when it has opted to use the second reserve funding method (the roll-over method) listed in Administrative Code §26-703, which provides for ongoing contributions to the reserve fund of 3 [percent] of actual sales over the course of up to five years…."

The plaintiff argued that "the use of the term 'initial' in §26-703(c) indicates that further reserve fund contributions are required, which in turn would refer to the Roll-Over Method, and not the Total Price Method…." The court opined that the plaintiff's argument "reads far too much into the statute's use of the term 'initial.'" The court noted that "[t]he statute's opening sentence refers to the 'contributions required' pursuant to the section." The court explained that the use of the plural "indicates a legislative intent to encompass both of the reserve funding methods provided for in §26-703(b)."

The court stated that "the use of the term 'initial' would call for the credit to be applied solely against the 'initial' contribution required under whichever of the two methods was being used." Similarly, §26-703(c) concludes "by capping the amount of the capital replacement credit at the lesser of the actual cost of the capital replacement work or 'one per cent of the total price.'"

The court further stated that such reference to "total price" supports the conclusion that "the capital replacement credit is intended to apply to either reserve funding method, since 'total price' is an element in the calculation of both methods…." The court also noted that "construing §26-703(c) as providing for a capital replacement credit only under the Roll-Over Funding Method would run counter to the statutory intent of encouraging sponsors to perform needed capital replacement work in conjunction with condominium conversions."

Additionally, the court held that the motion court had properly determined that "the Non-Sponsors may not be held individually liable for any of plaintiff's claims premised solely on alleged violations of the offering plan and certification…." The court reasoned that such "statements made by defendants in the certification and the plan were mandated by the Martin Act…, and plaintiff does not posit any basis of liability outside of that statute, nor assert that the Non-Sponsors are liable under an alter-ego or other veil-piercing theory."

Comment: Douglas P. Heller, a partner at Herrick, Feinstein, who specializes in condominiums and co-ops, stated that "[t]his statute is more complicated than it seems, and it is not surprising that the plaintiff 'tripped over it.'"

"Trying to convince a court that the reduced price to tenants before the plan is declared effective is 'illusory' might surprise those sponsors of past conversions who lowered tenant prices only to see so many buyers that profits were significantly diminished."

"Further, if the plaintiff had successfully argued that the credit for work performed would only apply if the reserve fund were funded over time, instead of up front, the result could simply convince more sponsors to fund over time. Ironically, under this scenario, in those buildings where significant work is being performed, the maximum credit may exactly equal the mandatory initial contribution. Where this happens, the condominium board has to begin to operate the building with nothing in its reserve fund. Also, the court clarified that the line of cases which permits private actions against individual principals of sponsors for violations of the offering plan, just because they signed a certification in the offering plan required by the Attorney General's regulations, are an aberration. Piercing the corporate veil is subject to strict requirements in New York and this court did not believe it appropriate to 'lower the bar.'"

Board of Mgrs. of 184 Thompson St. Condominium v. 184 Thompson St. Owner, App. Div., 1st Dept., decided May 16, 2013, Tom, J.P., Andrias, Renwick, DeGrasse, JJ.

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