Recently, in The Board of Managers of 266 West 115th Street Condominium v. 266 West 115thStreet, LLC, et al., 2014 NY Slip Op 33047 (Sup. Ct. 2014) – a precedent-setting decision on two separate issues – the New York State Supreme Court held that: (i) the principal of a Sponsor can be found to be personally liable for construction defect claims under a veil piercing or alter ego theory; and (ii) a Sponsor risks waiving an explicit notice requirement as to defective conditions when it voluntarily undertakes repairs beyond the expiration of the notice period.
Below, we discuss how a Board of Directors or Home Owners Association can pierce the corporate veil to impose personal liability upon a Sponsor’s principal.
The Facts of The Case
In The Board of Managers of 266 West 115th Street Condominium, the Condominium Board commenced a lawsuit against the Sponsor, as well as its principals, alleging, inter alia, damages flowing from construction defects, and seeking to hold the principals of the Sponsor personally liable for such damages under an alter ego theory because the principals executed the certification to the Offering Plan explicitly representing that the building would be constructed free from material defects. Subsequently, the Sponsor and its principals made a motion to dismiss the Condominium Board’s complaint.
The Sponsor argued that the Condominium’s breach of contract claims should be dismissed because the Board and/or unit owners failed to notify the Sponsor in writing of defects within thirty (30) days after the closings of each unit pursuant to the specific notice mandates contained in the Offering Plan.
Although it was undisputed that no written notice was ever timely tendered by the Board and/or the individual unit owners, the Condominium argued that because the Sponsor repeatedly elected to intermittently repair defects within the Condominium and individual units from 2008 through 2013, the Sponsor waived the provision of the Offering Plan requiring written notification concerning defective conditions.
The Condominium argued that by returning to the property to make necessary repairs after the notice period had already elapsed constituted a tacit concession on the part of the Sponsor that the defective conditions existed prior to the expiry of the notice period. Additionally, the Condominium argued that each time that the Sponsor returned to the property to make repairs amounted to a separate tort for which the Sponsor could be held liable rendering any notice requirement contained in the Offering Plan irrelevant altogether.
The Court found that a triable issue of fact existed as to whether the Sponsor waived the notice requirement in the Offering Plan by voluntarily undertaking repair work after the notice period had already expired, thereby allowing the Condominium to continue with the prosecution of its breach of contract claims.
Individual Sponsor Liability
As The Board of Managers of 266 West 115th Street Condominium Court succinctly explained, “[a] principal of a sponsor may be held separately liable where it executes the certification to the offering plan in its ‘separate capacity’ and “thereby knowingly and intentionally advanced the alleged misrepresentations of the Offering Plan…”
While some Courts in the Second Department have found that a principal of a Sponsor that individually executed the certification to the Offering Plan was personally liable for construction defect claims under a veil piercing or alter ego theory (Birnbaum v. Yonkers Contr. Co., 272 AD2d 355 [2nd Dep’t 2000]; see also Zanani v. Savad, 228 AD2d 584 [2nd Dep’t 1996]), no courts in the First Department had definitively resolved this issue.
In fact, some other First Department cases dealing with individual sponsor liability have ruled that a Sponsor’s principal could not be found to be personally liable, where that principal certified the Offering Plan, even though the Board asserted, inter alia, fraud, veil piercing and alter ego claims. (Board of Managers of 184 Thompson Street Condominium v. 184 Thompson Street Owner LLC, 106 A.D.3d 542 [1st Dep’t 2013]; see also 20 Pine St. Homeowners Assn. v 20 Pine St. LLC, 109 AD3d 733 [1st dep’t 2013]).
In Board of Managers of 184 Thompson Street Condominium v. 184 Thompson Street Owner LLC, supra, the Court held that the Board could not pursue the Sponsor’s principal individually because the Board failed to allege any veil piercing or alter ego theories in its pleading.
On the other hand, the Court in 20 Pine St. Homeowners Assn. v 20 Pine St. LLC, 109 AD3d 733, supra, found that theclaims against the individual principals of the Sponsor could not be sustained because the unit owners failed to allege particularized facts to warrant piercing the Sponsor’s corporate veil.
However, those cases are distinguishable from The Board of Managers of 266 West 115th Street Condominium, where the Court held that the Board did plead its fraud and alter ego claims against the Sponsor’s principals with the requisite level of particularity, thereby allowing the Board to prosecute its individualized claims against the Sponsor’s principals.
Thus, the Courtarmed Condominiums and Cooperatives throughout Manhattan with a sword that allows them to pierce the Sponsor’s corporate form to impose personal liability upon the Sponsor’s principals for defect claims in instances where those principals certify the offering plan in their individual capacities.
Therefore, going forward, real estate attorneys must initially perform their due diligence to determine whether the Sponsor’s principal has executed the certification to the Offering Plain in his/her individual capacity.
If the answer is yes, then the next line of inquiry is whether any specific misrepresentations were made in the certification related to the construction and/or overall condition of the subject structure, which can be supported by, among other things, physical evidence and expert analysis outlining the defective conditions.
Moreover, the practitioner must plead the fraud, alter ego/veil piercing causes of action in detail with specific particularity citing who committed the fraud, and when and how the fraud or injustice was perpetrated.
As such, there is clearly some dissension within the ranks of the First Department with regard to the personal liability flowing from a Sponsor’s principal’s execution, and representations and warranties related to the condition of the building pursuant to the certification to the Offering Plan.
The Board of Managers of 266 West 115th Street Condominium Court was willing to consider the facts and not issue a knee-jerk decision based on other appellate cases that are distinguishable, and, if attorneys do their homework they may get other judges to follow its lead, which may ultimately assist in fostering settlements given that the Sponsor’s principals now have skin in the game, both literally and figuratively.
Sponsor’s Waiver of The Offering Plan’s Notice Requirements
Additionally, another issue of first impression decided by the Court in The Board of Managers of 266 West 115th Street Condominium was whether a Sponsor waives the explicit notice requirement contained in the Offering Plan when the Sponsor voluntarily engages in repairs beyond the applicable notice period.
Prior to this matter, there were no cases in New York that were directly on point concerning whether a Sponsor waives the Offering Plan notice requirement requiring the Board and/or unit owner(s) to submit timely written notice regarding defects, where the Sponsor returned to the property to make repairs after the expiration of the subject notice period.
Impact of The Board of Managers of 266 West 115th Street Condominium
The decision in The Board of Managers of 266 West 115th Street Condominium will surely have a deep impact on condo and co-op litigation going forward, in at least five different ways:
First, it will have a chilling effect on the certifications made in the Offering Plan by the Sponsor’s individual principals, requiring them to think long and hard about what representations they are actually certifying in the Offering Plan before putting their John Hancock on the dotted line;
Second, it will permit the Sponsor’s individual principals to be personally liable for breach of contract and/or negligence claims resulting from defective construction even though they believe that they are protected from such claims by virtue of the corporate form;
Third, the Sponsor’s individual principals will now have risk incurring the costs to defend themselves from such claims, and depending on the policy at issue, if any, possibly without the protection of insurance;
Fourth, the threat of significant personal liability on the line may foster the facilitation of settlements in construction defect cases in the future;
And fifth, notwithstanding the specific notice requirements and procedure set forth in the Offering Plan for defective building conditions, breach of contract claims against a Sponsor for such defects may still be pursued where the Sponsor voluntarily engaged in repairs after the expiration of the notice period under a theory of waiver.
Thus, only time will dictate the full significance and far-reaching effect of The Board of Managers of 266 West 115th Street Condominium decision, but every Condominium/Cooperative and practitioner should be aware of its existence.
For purposes of full disclosure, it should be noted that Adam Leitman Bailey, P.C. represented the Board of Managers in the Board of Managers of 184 Thompson Street Condominium v. 184 Thompson Street Owner LLC, 106 A.D.3d 542 [1st Dep’t 2013] and the Home Owners Association in 20 Pine St. Homeowners Assn. v 20 Pine St. LLC, 109 AD3d 733 [1st dep’t 2013]).