Cooperatives & Condominiums

AppDiv, First Dept.

(memorandum opinion)

In an action by a condominium board against owners of a garage unit and a commercial unit to recover common charges allegedly owed by those owners, the garage and commercial owners appealed from Supreme Court's grant of summary judgment to the condominium board. The Appellate Division modified to dismiss several of the board's claims, and to deny summary judgment on the others, holding that the garage and unit owners had raised questions of fact about whether the condominium board was properly constituted.

The subject condominium is comprised of a residential cooperative, together with the garage and the commercial unit. The condominium bylaws require a five-member board, three members to be designated by the residential cooperative, and one each by the garage and commercial unit. In 1992, at a meeting of the residential cooperative board, a motion was made and carried purporting to elect the same condominium board as the cooperative board. Although the facts for the period before 2003 are disputed, it appears that for much of the time since 2003, the commercial and garage unit have had no representation on the condominium board, and in 2010, when those unit owners demanded representation, the board refused. Meanwhile, the condominium board continued to assess a number of common charges against the garage and commercial units, including for repair and maintenance of the residential lobby and for repair of plumbing servicing the residential unit. The condominium board brought this action to collect those charges, and the garage and commercial unit owners resisted, contending that the board was improperly constituted and that the charges were not properly assessed against the non-residential owners. Supreme Court awarded summary judgment to the board.

In modifying, the Appellate Division first held that the non-residential owners were entitled to dismissal of the complaint for the period since 2004 (except for amounts they concede they owe) because the board was not properly constituted and had no authority to impose the charges. The court emphasized that the board had come forward with no evidence to establish that the condominium's bylaws had been amended to permit the residential co-op board to serve as the condominium board.

With respect to pre-2004 charges, the court concluded that the non-residential owners were entitled to dismissal of the claims for charges inconsistent with the governing documents, such as maintenance of the residential lobby area. With respect to the pre-2004 charges, the court held that questions of fact remained about whether the charges were appropriately assessed against the non-residential owners.

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Claim Against Architect Not Pre-Empted by Martin Act

Newswalk Condominium v. Shaya B. Pacific, LLC

NYLJ 2/1/13, p. 24, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In an action by a condominium board against an architect for architectural malpractice, the architect appealed from Supreme Court's denial of his summary judgment motion. The Appellate Division affirmed, holding that the architect had not demonstrated that he was not in privity with the condominium association, and had not demonstrated that the claim was pre-empted by the Martin Act.

When the owners of three industrial buildings undertook to convert the buildings to residential use, they hired the architect to prepare a report and certification that would be incorporated into the condominium offering plan. The architect's certification recited that the report was intended to be incorporated into the offering plan “so that prospective purchasers may rely thereupon.” In particular, the report was designed to afford purchasers a basis “on which to found their judgment concerning the description and/or physical condition of the property” upon completion of the renovation, provided that the renovation work was done in accordance with plans the architect examined. In 2001, the report and certification were included in the plan, and the condominium conversion was subsequently approved. In 2007 the condominium association brought this action against the sponsor, its principals, and its architects and engineers, asserting a variety of claims. The architect moved for summary judgment dismissing the claim against him, but Supreme Court denied the architect's motion.

In affirming, the Appellate Division first held that the architect had not demonstrated that the causes of action against him were based entirely on omissions from filings required by the Martin Act and implementing regulations. The court then held that the architect failed to establish, prima facie, that he was not in privity or the functional equivalent with the condominium and its members. As a result, the architect failed to demonstrate that he was entitled to judgment as a matter of law.

COMMENT

The Martin Act will not preclude a litigant from asserting a private cause of action unless the cause of action is based on fraud. Thus, the Court of Appeals in Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Management Inc., 18 N.Y.3d 341, 351 reinstated claims for breach of fiduciary duty and gross negligence brought by a guarantor as a third-party beneficiary of an investment management agreement between an obligor and an investment manager.

Even when plaintiff asserts a fraud claim, the Martin Act does not bar the claim if plaintiff's claim is based on an statements or actions that would have supported a fraud claim at common law. In Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Management Inc., the Court of Appeals reconciled an apparent conflict between two of its earlier holdings, and indicated that the Martin Act pre-empts fraud claims only when the purported fraud claim would not exist in the absence of the Martin Act. Thus, in CPC Intl. v. McKesson Corp., 70 NY2d 268, where plaintiff's fraud claim was based on allegedly fraudulent actions inflating the price of stock sold to plaintiffs, the court held that plaintiff's claim was not preempted by the Martin Act because plaintiff stated a common-law fraud cause of action that would withstand a motion to dismiss. By contrast, an allegation based on a mere omission of information in the offering plan, as required by the Martin Act, will not suffice to establish a private right of action. Hence, in Kerusa Co. LLC v. W10Z/515 Real Estate Ltd. Partnership, 12 N.Y.3d 236 the court held that a condominium purchaser's fraud claim was preempted by the Martin Act because the claim was predicated solely on alleged material omissions from the offering plan amendments mandated by the statute and implementing regulations. On those facts, the court in Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Management Inc. explained that, “to accept the pleading as valid would invite a back door private cause of action to enforce the Martin Act.“ 18 N.Y.3d at 353.

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Questions on Proper Constitution of Condominium Board

Board of Managers of the 85 8th Avenue Condominium v.Manhattan Realty LLC

NYLJ 1/24/13, p. 24, col. 2

AppDiv, First Dept.

(memorandum opinion)

In an action by a condominium board against owners of a garage unit and a commercial unit to recover common charges allegedly owed by those owners, the garage and commercial owners appealed from Supreme Court's grant of summary judgment to the condominium board. The Appellate Division modified to dismiss several of the board's claims, and to deny summary judgment on the others, holding that the garage and unit owners had raised questions of fact about whether the condominium board was properly constituted.

The subject condominium is comprised of a residential cooperative, together with the garage and the commercial unit. The condominium bylaws require a five-member board, three members to be designated by the residential cooperative, and one each by the garage and commercial unit. In 1992, at a meeting of the residential cooperative board, a motion was made and carried purporting to elect the same condominium board as the cooperative board. Although the facts for the period before 2003 are disputed, it appears that for much of the time since 2003, the commercial and garage unit have had no representation on the condominium board, and in 2010, when those unit owners demanded representation, the board refused. Meanwhile, the condominium board continued to assess a number of common charges against the garage and commercial units, including for repair and maintenance of the residential lobby and for repair of plumbing servicing the residential unit. The condominium board brought this action to collect those charges, and the garage and commercial unit owners resisted, contending that the board was improperly constituted and that the charges were not properly assessed against the non-residential owners. Supreme Court awarded summary judgment to the board.

In modifying, the Appellate Division first held that the non-residential owners were entitled to dismissal of the complaint for the period since 2004 (except for amounts they concede they owe) because the board was not properly constituted and had no authority to impose the charges. The court emphasized that the board had come forward with no evidence to establish that the condominium's bylaws had been amended to permit the residential co-op board to serve as the condominium board.

With respect to pre-2004 charges, the court concluded that the non-residential owners were entitled to dismissal of the claims for charges inconsistent with the governing documents, such as maintenance of the residential lobby area. With respect to the pre-2004 charges, the court held that questions of fact remained about whether the charges were appropriately assessed against the non-residential owners.

'

Claim Against Architect Not Pre-Empted by Martin Act

Newswalk Condominium v. Shaya B. Pacific, LLC

NYLJ 2/1/13, p. 24, col. 1

AppDiv, Second Dept.

(memorandum opinion)

In an action by a condominium board against an architect for architectural malpractice, the architect appealed from Supreme Court's denial of his summary judgment motion. The Appellate Division affirmed, holding that the architect had not demonstrated that he was not in privity with the condominium association, and had not demonstrated that the claim was pre-empted by the Martin Act.

When the owners of three industrial buildings undertook to convert the buildings to residential use, they hired the architect to prepare a report and certification that would be incorporated into the condominium offering plan. The architect's certification recited that the report was intended to be incorporated into the offering plan “so that prospective purchasers may rely thereupon.” In particular, the report was designed to afford purchasers a basis “on which to found their judgment concerning the description and/or physical condition of the property” upon completion of the renovation, provided that the renovation work was done in accordance with plans the architect examined. In 2001, the report and certification were included in the plan, and the condominium conversion was subsequently approved. In 2007 the condominium association brought this action against the sponsor, its principals, and its architects and engineers, asserting a variety of claims. The architect moved for summary judgment dismissing the claim against him, but Supreme Court denied the architect's motion.

In affirming, the Appellate Division first held that the architect had not demonstrated that the causes of action against him were based entirely on omissions from filings required by the Martin Act and implementing regulations. The court then held that the architect failed to establish, prima facie, that he was not in privity or the functional equivalent with the condominium and its members. As a result, the architect failed to demonstrate that he was entitled to judgment as a matter of law.

COMMENT

The Martin Act will not preclude a litigant from asserting a private cause of action unless the cause of action is based on fraud. Thus, the Court of Appeals in Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Management Inc., 18 N.Y.3d 341, 351 reinstated claims for breach of fiduciary duty and gross negligence brought by a guarantor as a third-party beneficiary of an investment management agreement between an obligor and an investment manager.

Even when plaintiff asserts a fraud claim, the Martin Act does not bar the claim if plaintiff's claim is based on an statements or actions that would have supported a fraud claim at common law. In Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Management Inc., the Court of Appeals reconciled an apparent conflict between two of its earlier holdings, and indicated that the Martin Act pre-empts fraud claims only when the purported fraud claim would not exist in the absence of the Martin Act. Thus, in CPC Intl. v. McKesson Corp., 70 NY2d 268, where plaintiff's fraud claim was based on allegedly fraudulent actions inflating the price of stock sold to plaintiffs, the court held that plaintiff's claim was not preempted by the Martin Act because plaintiff stated a common-law fraud cause of action that would withstand a motion to dismiss. By contrast, an allegation based on a mere omission of information in the offering plan, as required by the Martin Act, will not suffice to establish a private right of action. Hence, in Kerusa Co. LLC v. W10Z/515 Real Estate Ltd. Partnership, 12 N.Y.3d 236 the court held that a condominium purchaser's fraud claim was preempted by the Martin Act because the claim was predicated solely on alleged material omissions from the offering plan amendments mandated by the statute and implementing regulations. On those facts, the court in Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Management Inc. explained that, “to accept the pleading as valid would invite a back door private cause of action to enforce the Martin Act.“ 18 N.Y.3d at 353.

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