Cooperatives & Condominiums

Martin Act Does Not Preclude Common Law Fraud Claim

Kramer v. W10Z/515 Real Estate Limited Partnership

NYLJ 10/18/07, p. 36, col. 3

AppDiv, First Dept.

(memorandum opinion)

In an action by condominium purchasers against the sponsor and various construction defendants, purchasers appealed from Supreme Court's denial of their motion to serve an amended complaint alleging claims for common law fraud and gross negligence. The Appellate Division modified to grant the motion with respect to the sponsor, holding that the Martin Act does not preclude a co-op or condominium purchaser from asserting an otherwise valid claim for common law fraud.

In this action asserting a number of claims against the sponsor and other defendants, The Supreme Court concluded that section 352-e of the Martin Act, which regulates real estate offerings but does not create a private right of action for purchasers, operates to bar common law fraud claims. The Appellate Division disagreed, concluding that so long as the complaint, with adequate particularity, alleges every element of a common law fraud claim, the Martin Act does not serve as a bar to the claim. Only when the complaint presents no evidence to support one or more of the elements of common law fraud should such a claim be dismissed. That is, the court expressed continuing disapproval of the practice of engaging in 'artful pleading' to transform a Martin Act violation into a common law fraud claim, even though one of the elements of common law fraud might be missing. But in this case, where purchasers had adequately pleaded every element of common law fraud, the purchasers were entitled to amend their complaint to add the fraud claim.

COMMENT

In holding that the Martin Act does not foreclose a common law action for fraud, the court in Kramer attempted to clear up the confusion generated by the First Department's earlier decision in Whitehall Tenants Corp. v. Estate of Olnick, 213 A.D.2d 200. In that case, the court dismissed a common law fraud claim because the plaintiff had not proven all of the elements essential to common law fraud. In Whitehall, co-op Housing Corporation sued the sponsor, alleging fraud. The court held for the sponsor, reasoning that corporation's claim without proof of actual reliance by the shareholders on sponsor's statements (one of the essential elements of common law fraud), was reserved for the Attorney General under the Martin Act. In dicta, however, the court suggested that petitioners may not, through artful pleading, 'press any claim based on the sort of wrong given over to the Attorney General under the Martin Act.' Based on that dicta in Whitehall, a number of courts have dismissed common law fraud actions even where the petitioners have adequately pleaded all elements of common law fraud. In Thompson v. Parkchester Apts. Co., 249 A.D.2d 68, the court dismissed a common law fraud action by the tenants against an apartment owner reasoning that their claim fell under the Martin Act, even though they presented evidence of elements of common law fraud. Other courts in the first department have made similar decisions. (See, e,g, 511 W. 232^nd Owners Corp v. Jennifer Realty, 285 A.D.2d 244).

Likewise, relying on Whitehall, some courts in the Second Department dismissed common law fraud claims. Thus, in Hamlet on Olde Oyster Bay Home Owners Ass'n, Inc. v. Holiday Organization, Inc., 12 Misc.3d 1182(A), the court dismissed a common law fraud action stating that if a claim falls under the Martin Act, it may not be brought as a private action by petitioners. Other courts, however, have permitted common law fraud claims to stand. Thus, in Board of Managers of the Arches at Cobble Hill Condominium v. Hicks & Warren, 14 Misc.3d 1234 (A), the court upheld the private action for fraud stating that condo owners are not precluded from common law causes of action where the remedy is available under the Martin Act as well.

By holding that when a petitioner pleads all elements of fraud with particularity, the fraud claim will be sustained even if the Martin Act also provides a remedy, the First Department eliminates the confusion generated by the Whitehall dicta.

Martin Act Does Not Preclude Common Law Fraud Claim

Kramer v. W10Z/515 Real Estate Limited Partnership

NYLJ 10/18/07, p. 36, col. 3

AppDiv, First Dept.

(memorandum opinion)

In an action by condominium purchasers against the sponsor and various construction defendants, purchasers appealed from Supreme Court's denial of their motion to serve an amended complaint alleging claims for common law fraud and gross negligence. The Appellate Division modified to grant the motion with respect to the sponsor, holding that the Martin Act does not preclude a co-op or condominium purchaser from asserting an otherwise valid claim for common law fraud.

In this action asserting a number of claims against the sponsor and other defendants, The Supreme Court concluded that section 352-e of the Martin Act, which regulates real estate offerings but does not create a private right of action for purchasers, operates to bar common law fraud claims. The Appellate Division disagreed, concluding that so long as the complaint, with adequate particularity, alleges every element of a common law fraud claim, the Martin Act does not serve as a bar to the claim. Only when the complaint presents no evidence to support one or more of the elements of common law fraud should such a claim be dismissed. That is, the court expressed continuing disapproval of the practice of engaging in 'artful pleading' to transform a Martin Act violation into a common law fraud claim, even though one of the elements of common law fraud might be missing. But in this case, where purchasers had adequately pleaded every element of common law fraud, the purchasers were entitled to amend their complaint to add the fraud claim.

COMMENT

In holding that the Martin Act does not foreclose a common law action for fraud, the court in Kramer attempted to clear up the confusion generated by the First Department's earlier decision in Whitehall Tenants Corp. v. Estate of Olnick, 213 A.D.2d 200. In that case, the court dismissed a common law fraud claim because the plaintiff had not proven all of the elements essential to common law fraud. In Whitehall, co-op Housing Corporation sued the sponsor, alleging fraud. The court held for the sponsor, reasoning that corporation's claim without proof of actual reliance by the shareholders on sponsor's statements (one of the essential elements of common law fraud), was reserved for the Attorney General under the Martin Act. In dicta, however, the court suggested that petitioners may not, through artful pleading, 'press any claim based on the sort of wrong given over to the Attorney General under the Martin Act.' Based on that dicta in Whitehall, a number of courts have dismissed common law fraud actions even where the petitioners have adequately pleaded all elements of common law fraud. In Thompson v. Parkchester Apts. Co., 249 A.D.2d 68, the court dismissed a common law fraud action by the tenants against an apartment owner reasoning that their claim fell under the Martin Act, even though they presented evidence of elements of common law fraud. Other courts in the first department have made similar decisions. (See, e,g, 511 W. 232 nd Owners Corp v. Jennifer Realty, 285 A.D.2d 244 ).

Likewise, relying on Whitehall, some courts in the Second Department dismissed common law fraud claims. Thus, in Hamlet on Olde Oyster Bay Home Owners Ass'n, Inc. v. Holiday Organization, Inc., 12 Misc.3d 1182(A), the court dismissed a common law fraud action stating that if a claim falls under the Martin Act, it may not be brought as a private action by petitioners. Other courts, however, have permitted common law fraud claims to stand. Thus, in Board of Managers of the Arches at Cobble Hill Condominium v. Hicks & Warren, 14 Misc.3d 1234 (A), the court upheld the private action for fraud stating that condo owners are not precluded from common law causes of action where the remedy is available under the Martin Act as well.

By holding that when a petitioner pleads all elements of fraud with particularity, the fraud claim will be sustained even if the Martin Act also provides a remedy, the First Department eliminates the confusion generated by the Whitehall dicta.