Cooperatives & Condominiums

Martin Act Does Not Preempt Common Law Fraud Claims

Caboara v. Babylon Cove Development LLC

NYLJ 7/24/08, p. 27, col. 3

AppDiv, Second Dept.

(Opinion by Ritter, J.)

In an action by condominium purchasers for common law fraud and breach of contract, purchasers appealed from the Supreme Court's grant of defendant sponsor's motion to dismiss. The Appellate Division reversed, holding that the Martin Act does not pre-empt claims for common law fraud.

When the condominium sponsor secured zoning approval for the townhouse project, a condition for zoning approval was that all units be owner occupied and not rented. The offering plan, by contrast, stated that the owners retained the right to rent units. The terms of the offering plan were incorporated by reference into the contracts for sale of the units. When purchasers learned of the discrepancy, they brought this action for common law fraud and breach of contract. The sponsor and its members moved to dismiss for failure to state a claim, arguing that purchasers were seeking to prosecute violations of the Martin Act, and noting that the Martin Act creates no private cause of action. The Supreme Court agreed and dismissed the complaint.

In reversing, the Appellate Division noted that the Martin Act permits the Attorney General to prevail against a sponsor without proving either scienter or intentional fraud. A private party may not prosecute a Martin Act claim. The Appellate Division held, however, that purchasers in this case were not asserting a Martin Act claim; their claim, by contrast, was one for common law fraud and breach of contract. The court held that the Martin Act does not preclude purchasers from bringing fraud and breach of contract claims just because the facts alleged in the complaint would also support a Martin Act claim. As a result, the court reinstated purchasers' complaint.

COMMENT

The Court of Appeals in Vermeer Owners, Inc. v. Guterman, 78 N.Y.2d 1114, held that a private right of action does not exist under section 352-e of the Martin Act, but it did not preclude future condominium purchasers from maintaining a common-law fraud action. In Vermeer, the purchasing tenants argued the sponsors of an apartment house conversion misrepresented the lease transaction in the offering plan. Even though the statements in the offering plan were demonstrably false, the purchasers did not show that they relied on any of the misrepresentations to their detriment. Without showing reliance, the purchasers could not prove by clear and convincing evidence the elements of common-law fraud, which include a representation of material fact, falsity, scienter, reliance and injury. Although the evidence presented might have met the less demanding standards of a Martin Act violation, the court held that the Attorney General has exclusive remedy under the Act. Therefore, the court affirmed the lower court's dismissal of the private complaint.

In Kramer v. W10Z/515 Real Estate Ltd. Partnership, 44 A.D.3d 457, the First Department held that the Martin Act does not bar private causes of action for common-law fraud if purchasers meet the more demanding pleading and proof elements required in a common law fraud action. In Kramer, the purchasers claimed the sponsor knowingly certified amendments to the offering plan that included false representations. Although the evidence presented could also constitute a Martin Act violation, the court held that the Act did not deprive the purchasers of their right to recover on a properly pleaded common law fraud claim. Kramer disproved earlier lower-court cases in the First Department holding that the Martin Act barred a private plaintiff's claims if the Attorney General could also take action based on the same facts.

The Second Department in Caboara appears to adopt the First Department's approach in Kramer, but the court's citation of Hsin Shen v. Astoria Fed. Sav. & Loan, 295 A.D.2d 319, leaves some lingering confusion. In Hsin Shen, the Second Department had held that the condominium owners could not maintain their common-law fraud claims where the sponsors made false representations in the offering plan. According to the court, the Martin Act barred the owners' claims, and the Attorney General had exclusive jurisdiction to prosecute sponsors who made false statements in condominium offering plans. The court in Caboara cited Hsin Shen with apparent approval, despite the inconsistency between that court's approach and the holding in Caboara itself. Perhaps the court reads Hsin Shen to hold only that if a purchaser fails to plead all of the elements of common law fraud, then the claim should be dismissed as in Hsin Shen.

Martin Act Does Not Preempt Common Law Fraud Claims

Caboara v. Babylon Cove Development LLC

NYLJ 7/24/08, p. 27, col. 3

AppDiv, Second Dept.

(Opinion by Ritter, J.)

In an action by condominium purchasers for common law fraud and breach of contract, purchasers appealed from the Supreme Court's grant of defendant sponsor's motion to dismiss. The Appellate Division reversed, holding that the Martin Act does not pre-empt claims for common law fraud.

When the condominium sponsor secured zoning approval for the townhouse project, a condition for zoning approval was that all units be owner occupied and not rented. The offering plan, by contrast, stated that the owners retained the right to rent units. The terms of the offering plan were incorporated by reference into the contracts for sale of the units. When purchasers learned of the discrepancy, they brought this action for common law fraud and breach of contract. The sponsor and its members moved to dismiss for failure to state a claim, arguing that purchasers were seeking to prosecute violations of the Martin Act, and noting that the Martin Act creates no private cause of action. The Supreme Court agreed and dismissed the complaint.

In reversing, the Appellate Division noted that the Martin Act permits the Attorney General to prevail against a sponsor without proving either scienter or intentional fraud. A private party may not prosecute a Martin Act claim. The Appellate Division held, however, that purchasers in this case were not asserting a Martin Act claim; their claim, by contrast, was one for common law fraud and breach of contract. The court held that the Martin Act does not preclude purchasers from bringing fraud and breach of contract claims just because the facts alleged in the complaint would also support a Martin Act claim. As a result, the court reinstated purchasers' complaint.

COMMENT

The Court of Appeals in Vermeer Owners, Inc. v. Guterman, 7 8 N.Y.2d 1114, held that a private right of action does not exist under section 352-e of the Martin Act, but it did not preclude future condominium purchasers from maintaining a common-law fraud action. In Vermeer, the purchasing tenants argued the sponsors of an apartment house conversion misrepresented the lease transaction in the offering plan. Even though the statements in the offering plan were demonstrably false, the purchasers did not show that they relied on any of the misrepresentations to their detriment. Without showing reliance, the purchasers could not prove by clear and convincing evidence the elements of common-law fraud, which include a representation of material fact, falsity, scienter, reliance and injury. Although the evidence presented might have met the less demanding standards of a Martin Act violation, the court held that the Attorney General has exclusive remedy under the Act. Therefore, the court affirmed the lower court's dismissal of the private complaint.

In Kramer v. W10Z/515 Real Estate Ltd. Partnership, 44 A.D.3d 457, the First Department held that the Martin Act does not bar private causes of action for common-law fraud if purchasers meet the more demanding pleading and proof elements required in a common law fraud action. In Kramer, the purchasers claimed the sponsor knowingly certified amendments to the offering plan that included false representations. Although the evidence presented could also constitute a Martin Act violation, the court held that the Act did not deprive the purchasers of their right to recover on a properly pleaded common law fraud claim. Kramer disproved earlier lower-court cases in the First Department holding that the Martin Act barred a private plaintiff's claims if the Attorney General could also take action based on the same facts.

The Second Department in Caboara appears to adopt the First Department's approach in Kramer, but the court's citation of Hsin Shen v. Astoria Fed. Sav. & Loan, 295 A.D.2d 319, leaves some lingering confusion. In Hsin Shen, the Second Department had held that the condominium owners could not maintain their common-law fraud claims where the sponsors made false representations in the offering plan. According to the court, the Martin Act barred the owners' claims, and the Attorney General had exclusive jurisdiction to prosecute sponsors who made false statements in condominium offering plans. The court in Caboara cited Hsin Shen with apparent approval, despite the inconsistency between that court's approach and the holding in Caboara itself. Perhaps the court reads Hsin Shen to hold only that if a purchaser fails to plead all of the elements of common law fraud, then the claim should be dismissed as in Hsin Shen.