Cooperatives & Condominiums

Unit Owner May Not Sue Sponsor

Bauer v. Beekman International Center

NYLJ 9/19/13

'Supreme Ct., N.Y. Cty.

(Silver, J.)

In condominium purchaser's action alleging that sponsor breached an implied promise to sell all of the condominium units within a reasonable time, both parties moved for summary judgment. The court granted sponsor's summary judgment motion, holding that purchaser had not raised triable issues of fact to support her claim that she was damaged by seller's alleged breach.

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Purchaser bought three residential apartments in the newly constructed building in 2002, pursuant to a 2000 offering plan in which seller offered 65 residential units for sale. Although sponsor sold a total of 35 units by 2005 at prices of between $1 million and $5.7 million, sponsor stopped selling units at that point and began renting the unsold units. Purchaser then brought this action, alleging that the failure to sell the remaining units breached a promise implied from the terms of the offering plan, and that she had been damaged in a reduced ability to sell or finance her units, and in causing damage to the common elements of the building.'

In awarding summary judgment to the sponsor, the court conceded that sponsor had impliedly promised to sell the units within a reasonable time, but noted that purchaser's affidavit did not establish that she was unable to obtain favorable financing, and did not establish that she was unable to sell her units. Indeed, she admitted that she had sold two of the units, albeit at an alleged loss. With respect to purchaser's claim that sponsor's breach had caused damages to the common elements, the court noted that only the condominium board, not individual purchasers, can enforce rights with respect to common elements. The court acknowledged an exception to the rule when a unit owner's complaint alleges that a demand made to the board would be futile, but held that purchaser had not established futility. Although the sponsor's principal was one of the board members, the other two were not affiliated with the sponsor, and purchaser made only conclusory allegations that they were interested in the transaction, allegations insufficient to avoid an award of summary judgment to sponsor.

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COMMENT

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A condominium unit owner lacks standing to sue a sponsor individually for injury to the common elements or finances of their building, but may bring a derivative action on behalf of the condominium. In Caprer v. Nussbaum, 36 A.D.3d 176, an individual unit owner made claims of financial mismanagement and fraud by the sponsor and its affiliates, and also asserted derivative claims on behalf of the condominium against a variety of defendants, including the condominium's accountants. The Second Department held that the individual claims were properly dismissed because an individual unit owner has no right to the exclusive use of a building's common elements, but reinstated several of the derivative claims, holding that even though condominium associations may not be corporate entities, condominium owners should be able to use the derivative action in the same way as shareholders in co-op or business corporations.

Although plaintiffs in a derivative action must generally allege that they have demanded that the board bring suit against the alleged wrongdoer, that pleading requirement may be unnecessary if a condominium unit owner can show that making a demand to the board would be futile. In Falkenberg v. Silver Village Condominium, LLC, 2008 WL 620748, the Supreme Court of Suffolk County concluded that when the sponsor of the building also holds a majority of seats on the board of directors, a unit owner can bypass the demand requirement. The unit owners in Falkenberg alleged that the sponsor breached contracts and warranties, and acted negligently in constructing the condominium. Since unit owners established that the sponsor controlled the board by personally designating a majority of the members, unit owners had met their burden of showing why demand would be futile.

In holding that a demand to the board was unnecessary, the Falkenberg court applied a standard set forth in Marx v. Akers, 88 N.Y.2d 189, a corporate waste case in which the Court of Appeals held that demand on the board was unnecessary on shareholder's complaint that IBM's board of directors had wasted corporate assets by awarding excessive compensations to other board members. The court noted that a demand on the board would be excused as futile, when the complaint alleges with particularity that: 1) a majority of the directors are interested in the transaction; 2) the directors failed to inform themselves to a degree reasonably necessary about the transaction; or 3) the directors failed to exercise their business judgment in approving the transaction.

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Unit Owner May Not Sue Sponsor

Bauer v. Beekman International Center

NYLJ 9/19/13

'Supreme Ct., N.Y. Cty.

(Silver, J.)

In condominium purchaser's action alleging that sponsor breached an implied promise to sell all of the condominium units within a reasonable time, both parties moved for summary judgment. The court granted sponsor's summary judgment motion, holding that purchaser had not raised triable issues of fact to support her claim that she was damaged by seller's alleged breach.

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Purchaser bought three residential apartments in the newly constructed building in 2002, pursuant to a 2000 offering plan in which seller offered 65 residential units for sale. Although sponsor sold a total of 35 units by 2005 at prices of between $1 million and $5.7 million, sponsor stopped selling units at that point and began renting the unsold units. Purchaser then brought this action, alleging that the failure to sell the remaining units breached a promise implied from the terms of the offering plan, and that she had been damaged in a reduced ability to sell or finance her units, and in causing damage to the common elements of the building.'

In awarding summary judgment to the sponsor, the court conceded that sponsor had impliedly promised to sell the units within a reasonable time, but noted that purchaser's affidavit did not establish that she was unable to obtain favorable financing, and did not establish that she was unable to sell her units. Indeed, she admitted that she had sold two of the units, albeit at an alleged loss. With respect to purchaser's claim that sponsor's breach had caused damages to the common elements, the court noted that only the condominium board, not individual purchasers, can enforce rights with respect to common elements. The court acknowledged an exception to the rule when a unit owner's complaint alleges that a demand made to the board would be futile, but held that purchaser had not established futility. Although the sponsor's principal was one of the board members, the other two were not affiliated with the sponsor, and purchaser made only conclusory allegations that they were interested in the transaction, allegations insufficient to avoid an award of summary judgment to sponsor.

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COMMENT

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A condominium unit owner lacks standing to sue a sponsor individually for injury to the common elements or finances of their building, but may bring a derivative action on behalf of the condominium. In Caprer v. Nussbaum, 36 A.D.3d 176, an individual unit owner made claims of financial mismanagement and fraud by the sponsor and its affiliates, and also asserted derivative claims on behalf of the condominium against a variety of defendants, including the condominium's accountants. The Second Department held that the individual claims were properly dismissed because an individual unit owner has no right to the exclusive use of a building's common elements, but reinstated several of the derivative claims, holding that even though condominium associations may not be corporate entities, condominium owners should be able to use the derivative action in the same way as shareholders in co-op or business corporations.

Although plaintiffs in a derivative action must generally allege that they have demanded that the board bring suit against the alleged wrongdoer, that pleading requirement may be unnecessary if a condominium unit owner can show that making a demand to the board would be futile. In Falkenberg v. Silver Village Condominium, LLC, 2008 WL 620748, the Supreme Court of Suffolk County concluded that when the sponsor of the building also holds a majority of seats on the board of directors, a unit owner can bypass the demand requirement. The unit owners in Falkenberg alleged that the sponsor breached contracts and warranties, and acted negligently in constructing the condominium. Since unit owners established that the sponsor controlled the board by personally designating a majority of the members, unit owners had met their burden of showing why demand would be futile.

In holding that a demand to the board was unnecessary, the Falkenberg court applied a standard set forth in Marx v. Akers, 88 N.Y.2d 189, a corporate waste case in which the Court of Appeals held that demand on the board was unnecessary on shareholder's complaint that IBM's board of directors had wasted corporate assets by awarding excessive compensations to other board members. The court noted that a demand on the board would be excused as futile, when the complaint alleges with particularity that: 1) a majority of the directors are interested in the transaction; 2) the directors failed to inform themselves to a degree reasonably necessary about the transaction; or 3) the directors failed to exercise their business judgment in approving the transaction.

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