First published: Nov 2022
Fix My Condo!
Newly constructed condominiums often have construction defects, and it is not uncommon for newly constituted condominium boards to sue their sponsor for contract and non-contract claims (such as fraud and fiduciary duty claims). It is equally common for the sponsor to move to dismiss those claims. In particular, sponsors and their representatives are often successful in dismissing fraud claims on the theory that those claims are really just duplicative of contract claims, but phrased in more “intimidating” language. The plaintiffs in this case were able to survive the motion to dismiss because they described specific building defects that the sponsor and its representatives were actually aware of and actively concealed or failed to address.
BD. OF MGRS. OF 87-89 LEONARD ST. CONDO. V. LEONARD ST. OWNER, LLC
IT ALL STARTED WHEN. The Leonard Street building, a 150-year old cast iron structure, was acquired by Go Cat Go LLC (GCG) in 2004 to renovate and convert to a condominium. GCG borrowed funds for the work, completed most of it, but defaulted in 2013 with over $30 million outstanding. A year later, the Leonard Street building was acquired by the Leonard Street Owner LLC, which became the new sponsor. Thereafter it filed an offering plan to begin selling seven condominium apartments and four storage rooms. The total value of the sponsor’s initial offering was about $58 million.
WHAT HAPPENED The seven units were sold and the board of managers filed this complaint against the sponsor shortly after the unit owners took over the board in 2018. The complaint, in seven separate causes of action, alleges that the building suffered from poor workmanship and shoddy construction practices (including for example, cracks and voids in the façade, improperly waterproofed windows, and a defective roof), all of which were materially and directly inconsistent with the representations made in the offering plan. In addition, the complaint alleges that the sponsor (including the individuals) was made “fully aware” of the issues and did nothing to amend the offering plan or take appropriate action when the sponsor controlled the board. In fact, the complaint alleges that the sponsor actively concealed some of the problems from prospective purchasers (by, for example, painting over some of the exterior cracks in the façade). The complaint also alleges that the defendants made fraudulent conveyances depleting the condominium’s reserves. The defendants moved to dismiss all but the plaintiff’s first cause of action for breach of contract.
IN THE COURT The court denied most aspects of the sponsors’ motion to dismiss. The court found that the plaintiff had adequately pleaded a claim for fraudulent inducement by alleging specific defective conditions in the building paired with specific allegations that the sponsor failed to address or actively concealed those conditions. The plaintiff also sufficiently alleged breaches of fiduciary duties against the individual sponsor representatives, because they sat on the board and did nothing to address complaints they received from unit owners about the building’s condition. To the contrary, they permitted the sponsor to take money out of the condominium and distribute it to its investors. It was not a complete victory for the plaintiff, however—the court dismissed some, but not all, of the plaintiff’s fraudulent conveyance claims, a subset of the plaintiff’s fiduciary claims as being time-barred, and also the plaintiff’s claims for attorneys’ fees.
COUNSEL For the board suing on behalf of its unit owners Andrea Caruso SCHWARZ SLADKUS REICH GREENBERG ATLAS / For the sponsor David Tyler, STARR ASSOCIATES / JUDGE Margaret A. Chan
