Scott E. Mollen
Scott E. Mollen ()

Condominiums—Construction Defects—Breach of Express and Implied Warranties—Negligent Construction/Supervision—Fraud/Misrepresentation—General Business Law (GBL) §§349-350—Breach of Contract—Negligence—Breach of Contract/Third-Party Beneficiary

A plaintiff board of managers (board) commenced an action on behalf of unit owners (owners) “to recover compensatory and punitive damages allegedly sustained as a result of purported defects in the renovation” of the subject building. The plaintiffs asserted claims for, inter alia, “breach of express and implied warranties, negligent construction/supervision, fraud/misrepresentation, violation of [GBL] §§349-350, breach of contract, negligence, and breach of contract/third party beneficiary.” The complaint named as defendants, the sponsor, the developer, the contractor, the sponsor’s managing partner and general manager (managing partner), the architect and engineer and the sponsor’s individual members (member or members). Two of the members were also members of the developer and the third member of the sponsor was the contractor’s principal and founding member. Defendants had moved, pre-answer, for an order dismissing certain or all causes of actions against some or all of them.

Most of the condominium units had been sold pursuant to an offering plan that had been accepted for filing by the attorney general’s office on July 11, 2008. The offering plan contained the sponsor’s representations that it would renovate the building substantially in accordance with the plans and specifications (plans) set forth in the architect’s report, and that it had applied for a J-51 tax abatement.

The offering plan appended a “Certification by Sponsor and Sponsor’s Principals,” executed by the sponsor’s principals, individually and on the sponsor’s behalf. The offering plan also included the architect’s report and a “Certification by Sponsor’s Engineer.” The engineer’s certification stated that “the architect prepared ‘building plans…approved by the [New York City] Building Department” and the engineer had read the architect’s report “in its entirety and investigated with due diligence both the facts stated in it and the facts on which it was based, and that it accurately…described the building on completion of construction, assuming that construction was performed in accordance with its plans….” The architect’s certification, however, warned that its certification was “not intended as a guarantee or warranty of the physical condition of the property.”

The purchase agreements (contracts) incorporated the offering plan. The sponsor covenanted in the contracts that “the construction of the building, units, and materials, equipment and fixtures…is substantially in accordance with the [offering plan] and the architect’s report.” The contract contained “a sunset provision” pursuant to which “written notice of defects had to be given by a date certain in order to invoke the sponsor’s obligations to cure.” The contracts also provided a purchaser’s acknowledgment that “he or she ‘[had] not relied upon any architect’s plans,…including…any relating to the description of physical condition of…the Building or the Unit….” The offering plan, in turn, provided that “the architect’s statement to the ‘Sponsor that the Building [had] been completed substantially in accordance with the [architect's] Plans…shall neither constitute a representation by [the architect] to the Unit Owners or to the Board…nor give rise to any claim by any Unit Owner or by the Board…against the Sponsor’s Architect with respect to completion of construction or defects therein.’”

The offering plan had become effective, a final certificate of occupancy (C of O), dated April 6, 2009, had been issued and a declaration of condominium was filed on April 17, 2009. The first closing occurred on April 25, 2009.

The complaint alleged that the building had “substantial design and construction defects, inadequate and negligent workmanship, missing or defective materials, and gross deviations from the architect’s report.” The alleged defects included “water intrusion, mold infestation, foundation cracking, floor buckling, fire-safety issues, bulging and saturation in load bearing walls.” The plaintiffs’ consultants had allegedly found “significant construction deficiencies, sub-standard conditions, and instances of property damage, either resulting from design defects or from incomplete or inadequate workmanship.”

The sponsor asserted that its managing partner had been named in a litigation based on “typographical error by the sponsor’s attorney,” i.e., a draft condominium declaration, as annexed to the offering plan, “incorrectly named” the sponsor’s managing partner, as the sponsor. The sponsor noted that a final condominium declaration, had correctly named another LLC as the sponsor and the operating agreement for the sponsor’s managing partner “restricted its activities to other properties not involving” the subject building.

The plaintiff countered that the sponsor’s managing partner was part of the sponsor member’s “corporate empire and that the condominium’s bank records reflected that [an individual member] had transferred funds” to and from various other related accounts. Although the court accepted the member’s “innocent explanation,” the court noted that such individual had not proffered any rebuttal affidavit with respect to such issue.

The defense counsel had “pooh-pooh[ed]” the plaintiff’s affidavit as “ ambiguous and lacking in documentary support, while insisting that the generic language in the operating agreement of [sponsor's managing partner] beats her fairly specific affidavit.” The court concluded that the members and the architect had failed to meet their heavy burden under CPLR 3211(a)(1) and those branches of their respective motions were denied.

The court further held that under Real Property Law §339-dd, “a condominium board of managers may assert on behalf of two or more unit owners ‘any cause of action relating to the common elements or more than one unit.’” Since the complaint alleged numerous defects impacting the building’s common areas, the court found that “the commonality elements required by the statute” were met and denied the members’ motion to dismiss based on lack of capacity to sue.

The architect moved to dismiss the contract and negligence claims as time-barred. “CPLR 214(6) imposes a three-year statute of limitations [SOL] for professional malpractice (with certain exceptions not applicable here), ‘regardless of whether the underlying theory is based in contract or tort.’” The court explained that “[a] cause of action to recover damages against an architect for professional malpractice accrues upon the work completion and the resulting termination of the architect’s professional relationship with its client….”

Further, “[a] client’s professional malpractice claim accrues when its architect completes performing significant, non-ministerial contractual duties….” Here, the action was commenced more than three years after the final C of O and thus, the court held that the claims against the architect for breach of contract and negligence were time-barred.

The plaintiff had submitted an affidavit asserting that the unit owners had been advised by the sponsor that the architect had, but “failed to fulfill its responsibility for obtaining the J-51 tax exemption for the Building.” The court noted “the obvious hearsay nature of [such] affidavit” and stated that “it contradicts plaintiff’s complaint…and the offering plan, which placed responsibility for applying for the tax abatement exclusively on the sponsor.” Thus, such affidavit was “insufficient to rebut the architect’s prima facie showing.”

The court also found that the breach of express and implied warranties asserted against the sponsor were “legally identical” to the breach of contract claims, i.e., the warranty claims were essentially a “redundant repleading of the contract claim” and they were dismissed.

The complaint also alleged that the sponsor breached its duty to “construct, supervise and manage the building” and sought punitive damages. The court explained that “a simple breach of contract is not to be considered a tort unless a legal duty independent of the contract has been violated.” The court found that the plaintiff failed to establish that “the sponsor owed the unit owners a legal duty of care that was independent of its contractual duty that arose from its [contracts] with the unit owners.” Moreover, adding the request for punitive damages could “not change the fundamental fact that it is duplicative of the contract claim.” Accordingly, the court dismissed the negligent construction/supervision claims.

The court then explained that the common-law fraud, deceit and misrepresentation allegations, “for the most part” arise “out of the misrepresentations and omissions of the contents of the [contracts] and offering plan.” The court noted that the fraud claim was not pre-empted by the Martin Act since the complaint alleged “affirmative misrepresentations, rather than solely omissions….” and that the fraud claim met “the particularity requirements of CPLR 3016 (b)….”

However, the court found that the fraud claim against the sponsor failed as a matter of law since it was “subsumed in the contract claim.” The court explained that a claim “to recover damages for fraud does not lie where the only fraud asserted relates to an alleged breach of contract….” Here, the complaint limited the “universe of misrepresentations and omissions to only those that are inconsistent with the express terms of the [contracts].”

The complaint also lacked “supporting allegations that are collateral or extraneous to their express terms.” The plaintiff had failed to allege or identify “what legal duty the sponsor owed to the prospective purchasers, other than the duty the sponsor owed them [contracts] and the offering plan….” Moreover, the complaint did not allege that the sponsor had a “‘preconceived and undisclosed intention of not performing’” under the contracts.

Although the complaint alleged that “false statements were made ‘outside the [offering] plan after [the] Units were purchased,” such allegation was “not fleshed out by some concrete examples or affidavits, but is buried in a mass of the complaint’s repetitive allegations about the offering plan’s misrepresentations and omissions.” The contract claim and the fraud claim both alleged that “the sponsor failed to deliver to plaintiff and the…owners a well-constructed condominium with defect-free apartments/common areas and a J-51 tax abatement.

The fraud alleged against the sponsor is based on the same facts that underlie the contract claim, is not collateral to the contract, and does not call for damages that otherwise would be unrecoverable under a contract theory….” The court noted that fraud claims demand “a higher burden of proof than a contract claim” and dismissed the fraud claim “as duplicative of the contract claim.”

The court held that the complaint’s allegations as to deceptive practices in the advertisement and sale of the condominium units were “sufficient to state a claim under [GBL] §§349-350.” This claim alleged that the sponsor had “prepared and disseminated ‘promotional materials…and advertisements concerning the Building to consumers,’ and that the representations contained therein and in the…plan were false and misleading.” The court explained that “the Martin Act does not bar claims under [GBL] §349 or §350″ and that the claims “are not preempted by the Martin Act.”

The sponsor had argued that the subject dispute was “unique to the parties at this particular building and [did] not involve the public at large….” The plaintiff asserted that “the Second Department, unlike the First Department, has held that the advertisement and sale of residential apartments is a consumer-oriented transaction within the meaning of §§349-350….”

The court stated that “[a] sale of space in the building was not private in nature or a single-shot transaction.” Although several units had been sold, “the marketing campaign was still directed to the public at large.” Therefore, the court held that the acts complained of were “consumer-oriented in the sense that they affected similarly situated consumers….”

The court then held that the malpractice claims against the architect were “untimely” and failed to state a cause of action. The plaintiff’s claims were “contradicted by the ‘no representations’ and related disclaimer provisions in the [contracts], the offering plan, and the architect’s certification.” Moreover, the complaint pled “no facts indicating that plaintiff or the unit owners were in privity with the architect” and “[t]he agreement between the architect and the sponsor,… [did] not reflect an intent that the unit owners be its beneficiaries.” Accordingly, the court dismissed the contract claim against the architect.

The court further stated that all of the “fraud and related tort claims against the architect arise from the same provisions said to have been breached and seek the same damages, and thus merely duplicate the insufficient contract claim.”

The court also dismissed the negligent misrepresentation claim on the grounds that the contracts provided that each purchaser had “relied on his [or her] own examination and investigation [of the building and the unit].” A claim for negligent misrepresentation requires “the ‘existence of a special or privity-like relationship imposing a duty on the defendant to impart correct information to the plaintiff’…. Here, the negligent misrepresentation and other tort claims against the architect fail[ed] for lack of contractual privity or the functional equivalency of privity.” Additionally, the plaintiff failed to identify “any specific actions or inactions on the architect’s part that caused the complained-of defects in the building, nor does it offer an expert affidavit to correct this pleading deficiency….” Therefore, the architect’s motion to dismiss was granted in its entirety.

The complaint generically asserted the same claims against “the [sponsor's principals] as it does against the sponsor.” The claims against the principals “sound in contract, express and implied warranties, negligent construction/supervision, fraud, and [GBL] §§349-350….” For the reasons previously stated, the claims based on “express and implied warranties, negligent construction/supervision, and fraud” were dismissed. The claims against the principals for breach of contract and violation of GBL §§349-350 were found to be sufficient since the principals had “individually executed and delivered the sponsor’s certification….”

The complaint had broadly defined the term “sponsor” to include both an entity owned by the managing members of the sponsor and the developer. The plaintiff believed that the assets and resources of corporate entities and the members had been “comingled and indistinct” and certain funds had been transferred among various accounts. The plaintiff also asserted that members had operated out of the same office. The court held that the plaintiff did not have a cause of action against such defendants. The alleged comingling of funds and fraudulent money transfers had “nothing to do with plaintiff’s case-in-chief that the building and its units are of poor quality.” Thus, all claims against the sponsor’s general partner and the developer were dismissed with leave to amend to replead claims against such entities.

Finally, the court explained that “[a]n ordinary construction contract—i.e., one which does not expressly state that the intention of the contracting parties is to benefit a third party—does not give third parties who contract with the promisee the right to enforce the latter’s contract with another, and such third parties are generally considered mere incidental beneficiaries….” Here, members of the sponsor asserted that “there was no written contract between the sponsor and the contractor, ‘since these entities were related.’” The court found that such “blanket denial fails to establish conclusively that plaintiff possesses no contract claim against the contractor….” Thus, the court held that the claim against the contractor should not be dismissed.

Comment: The court had also explained that “an individual purchaser’s time to give notice of defects under the sunset provision began to run from the time of closing of such purchaser’s unit, rather than from the first date on which title to a unit was conveyed to a purchaser….”

This case is of interest because so many new construction or “rehab” residential projects involve some type of construction defects. Many sponsors and condo boards attempt properly to address these issues and work out the issues in an amicable and responsible manner. Some boards and unit owners will exaggerate the defects. Moreover, some problems are attributable to a board’s failure to properly maintain the property or equipment and/or provide timely notice of the problems to the sponsor.

Many boards realize that they should try to resolve their issues at the table, in order to avoid a litigation battle that could require substantial assessments for legal fees and damage the reputation of the property in the real estate brokerage community and thereby hurt the value of their own units. Similarly, most sponsors do not want to incur legal costs for litigation and possible damage to their reputation. We usually see litigations when one or both parties are unreasonable.

The Board of Managers of 550 Grand Street Condominium v. Schlegel LLC, 503081/13, NYLJ 1202653110339, at *1 (Sup., KI, Decided April 4, 2014), Schmidt, J.

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