Cooperatives & Condominiums

Martin Act Bars Some, But Not All, Claims Against Condominium Sponsors

Hamlet on Olde Oyster Bay Home Owners Association Inc. v. Holiday Organization, Inc.

NYLJ 8/17/06, p. 23, col. 3

Supreme Ct., Nassau Cty

(Austin, J.)

In an action by homeowners associations and their members against sponsors and developers for various construction defects, defendants moved to dismiss for failure to state a cause of action. The court granted the motion with respect to claims for unjust enrichment, fraud in the inducement, and negligent misrepresentation (among others), holding that the unjust enrichment claim duplicated the breach of contract claims, and that the fraud and negligent misrepresentation claims were barred by the Martin Act. The court, however, did not dismiss claims based on deceptive business practices and fraudulent concealment of construction defects.

The Hamlet, a gated community, consists of 130 homes owned in fee, 72 townhouse condominiums, and 160 other condominiums. Each owner became a member of a homeowners association including the entire community, and separate associations were set up for each of the condominium complexes. Each of the associations, and several individual owners, brought this action alleging construction defects, unreasonably inaccurate financial projections in the offering plans for revenue from outside sources, understated projected expenses for expenses, and failure by the sponsor's managing agent to perform its functions properly. The associations and owners contended that the sponsor and related entities were liable for breach of contract, unjust enrichment, fraudulent inducement, negligent misrepresentation, false advertising, fraudulent concealment, negligence, and breach of fiduciary duty (among other causes of action). Defendants moved to dismiss the complaint.

The court started by dismissing the unjust enrichment claims, emphasizing that the unjust enrichment claims were all premised on alleged breaches of the written contract, and that in that circumstance, a plaintiff cannot maintain claims for both breach of contract and unjust enrichment. The court then dismissed the claims for fraud in the inducement and negligent misrepresentation, concluding that these claims were premised on representations made in the offering plan, and were therefore within the exclusive jurisdiction of the Attorney General under the Martin Act.

On the other hand, the court held the Martin Act does not bar a claim of deceptive business practices under section 349 of the Business Corpora-tion Law. The court also held that the claim for fraudulent concealment of construction defects stated a cause of action, noting that plaintiffs had enumerated specific defects that they allegedly could not have discovered upon reasonable inspection. The court also permitted breach of fiduciary duty claims to stand, concluding that the same conduct can constitute both a breach of contract and a breach of fiduciary duty, but that the two causes of action are not duplicative.

COMMENT

The Court of Appeals has held that the Martin Act precludes a private cause of action for fraudulent practices stemming from the offering and sale of securities. See CPC Int'l v. McKesson Corp., 70 N.Y.2d 268, 276 (1987). In Kramer v. Zeckendorf, 10 Misc.3d 1056, the court held that the Martin Act pre-empts a condominium purchaser's common law claim for fraudulent concealment. Pur-chaser alleged that the defendant real estate developers concealed construction defects in amendments to the condominium offering plan. In granting developer's motion to dismiss, the court held that the Martin Act precludes a cause of action for fraudulent concealment premised on statements made in an offering plan.

The Martin Act also precludes a claim for deceptive business practices (BCL 349) against condominium sponsors that stems from statements made in an offering plan but courts have held that the statute does not preclude a deceptive business practice claim if the claim is not specifically premised on information in the offering plan. Thus, in Thompson v. Parkchester Apts. Co., 271 A.D.2d 311, the Appellate Division, First Department held that the Martin Act preempted condominium purchaser's claim for deceptive business practices stemming from information contained in the condominium offering plan. The court reasoned that since the claim was based on misstatements contained in the offering plan, it was preempted by the Martin Act, and stressed that the plaintiff failed to plead a 'unique set of circumstances whose remedy is not already available to the Attorney General.' Similarly, the Second Department in Hsin Shen v. Astoria Federal Savings and Loan, 295 A.D.2d 319, dismissed plaintiff's claim for deceptive business practices stemming from information contained in an offering plan reasoning that the Attorney General has exclusive jurisdiction under the Martin Act to prosecute sponsors making false statements in offering plans. On the other hand, the court in B.S.L. One Owners Corp. v. Key Int'l Mfg., 225 A.D.2d 643, allowed co-op shareholders to pursue a claim under BCL 349 when their claim was based on deceptive business practices in the advertising and sale of the shares but made no specific mention of an offering plan. The court reasoned that BCL 349 explicitly allowed for a private cause of action and that the sale of securities in a cooperative corporation constituted a consumer oriented transaction as required by the statute. Similarly, in Board of Managers of Bayberry Greens Condominium v. Bayberry Greens Condominium, 174 A.D.2d 595, the Second Department held that the Martin Act did not preclude a claim under BCL 349 when condominium purchasers alleged deceptive business practices in the advertisement and sale of condominium units, but did not specifically premise the cause of action on statements made in an offering plan.

Martin Act Bars Some, But Not All, Claims Against Condominium Sponsors

Hamlet on Olde Oyster Bay Home Owners Association Inc. v. Holiday Organization, Inc.

NYLJ 8/17/06, p. 23, col. 3

Supreme Ct., Nassau Cty

(Austin, J.)

In an action by homeowners associations and their members against sponsors and developers for various construction defects, defendants moved to dismiss for failure to state a cause of action. The court granted the motion with respect to claims for unjust enrichment, fraud in the inducement, and negligent misrepresentation (among others), holding that the unjust enrichment claim duplicated the breach of contract claims, and that the fraud and negligent misrepresentation claims were barred by the Martin Act. The court, however, did not dismiss claims based on deceptive business practices and fraudulent concealment of construction defects.

The Hamlet, a gated community, consists of 130 homes owned in fee, 72 townhouse condominiums, and 160 other condominiums. Each owner became a member of a homeowners association including the entire community, and separate associations were set up for each of the condominium complexes. Each of the associations, and several individual owners, brought this action alleging construction defects, unreasonably inaccurate financial projections in the offering plans for revenue from outside sources, understated projected expenses for expenses, and failure by the sponsor's managing agent to perform its functions properly. The associations and owners contended that the sponsor and related entities were liable for breach of contract, unjust enrichment, fraudulent inducement, negligent misrepresentation, false advertising, fraudulent concealment, negligence, and breach of fiduciary duty (among other causes of action). Defendants moved to dismiss the complaint.

The court started by dismissing the unjust enrichment claims, emphasizing that the unjust enrichment claims were all premised on alleged breaches of the written contract, and that in that circumstance, a plaintiff cannot maintain claims for both breach of contract and unjust enrichment. The court then dismissed the claims for fraud in the inducement and negligent misrepresentation, concluding that these claims were premised on representations made in the offering plan, and were therefore within the exclusive jurisdiction of the Attorney General under the Martin Act.

On the other hand, the court held the Martin Act does not bar a claim of deceptive business practices under section 349 of the Business Corpora-tion Law. The court also held that the claim for fraudulent concealment of construction defects stated a cause of action, noting that plaintiffs had enumerated specific defects that they allegedly could not have discovered upon reasonable inspection. The court also permitted breach of fiduciary duty claims to stand, concluding that the same conduct can constitute both a breach of contract and a breach of fiduciary duty, but that the two causes of action are not duplicative.

COMMENT

The Court of Appeals has held that the Martin Act precludes a private cause of action for fraudulent practices stemming from the offering and sale of securities. See CPC Int'l v. McKesson Corp., 70 N.Y.2d 268, 276 (1987). In Kramer v. Zeckendorf, 10 Misc.3d 1056, the court held that the Martin Act pre-empts a condominium purchaser's common law claim for fraudulent concealment. Pur-chaser alleged that the defendant real estate developers concealed construction defects in amendments to the condominium offering plan. In granting developer's motion to dismiss, the court held that the Martin Act precludes a cause of action for fraudulent concealment premised on statements made in an offering plan.

The Martin Act also precludes a claim for deceptive business practices (BCL 349) against condominium sponsors that stems from statements made in an offering plan but courts have held that the statute does not preclude a deceptive business practice claim if the claim is not specifically premised on information in the offering plan. Thus, in Thompson v. Parkchester Apts. Co., 271 A.D.2d 311, the Appellate Division, First Department held that the Martin Act preempted condominium purchaser's claim for deceptive business practices stemming from information contained in the condominium offering plan. The court reasoned that since the claim was based on misstatements contained in the offering plan, it was preempted by the Martin Act, and stressed that the plaintiff failed to plead a 'unique set of circumstances whose remedy is not already available to the Attorney General.' Similarly, the Second Department in Hsin Shen v. Astoria Federal Savings and Loan , 295 A.D.2d 319, dismissed plaintiff's claim for deceptive business practices stemming from information contained in an offering plan reasoning that the Attorney General has exclusive jurisdiction under the Martin Act to prosecute sponsors making false statements in offering plans. On the other hand, the court in B.S.L. One Owners Corp. v. Key Int'l Mfg., 225 A.D.2d 643, allowed co-op shareholders to pursue a claim under BCL 349 when their claim was based on deceptive business practices in the advertising and sale of the shares but made no specific mention of an offering plan. The court reasoned that BCL 349 explicitly allowed for a private cause of action and that the sale of securities in a cooperative corporation constituted a consumer oriented transaction as required by the statute. Similarly, in Board of Managers of Bayberry Greens Condominium v. Bayberry Greens Condominium, 174 A.D.2d 595, the Second Department held that the Martin Act did not preclude a claim under BCL 349 when condominium purchasers alleged deceptive business practices in the advertisement and sale of condominium units, but did not specifically premise the cause of action on statements made in an offering plan.