In the ever-evolving landscape of New York City’s residential housing market, condominium boards may find themselves needing to take legal action against the sponsors of their buildings, particularly after the co-op conversion boom of the 1980s. The sponsor, typically a single-purpose entity, is responsible for assembling the land, constructing the building, and selling the units. However, when construction defects arise or mismanagement is identified, and the sponsor lacks the assets to satisfy claims, unit owners or the condo board may seek to extend liability to the sponsor’s parent companies and principals.
The potential legal claims condo boards can pursue include breach of contract, fraud or misrepresentation under the offering plan, breach of fiduciary duty by sponsor-appointed board members, and fraudulent conveyance of unit sale proceeds.
Breach of Contract Under the Martin Act and AG Regulations, sponsors issue an offering plan that forms part of the contract to sell a condominium unit. When sponsors fail to fulfill the promises made in the offering plan, buyers and boards can enforce these through a breach of contract claim. However, individual principals of the sponsor, despite signing a certification attached to the offering plan, have been found not to be contractually liable based on this certification alone.
Fraud and Misrepresentation The Martin Act uniquely allows only the Attorney General to enforce claims for non-compliance with its statutes and regulations, barring private plaintiffs from bringing such claims. However, if an offering plan contains an affirmative misrepresentation, sponsors can be held liable for fraud. Recent case law has clarified that while sponsors are not liable for undisclosed issues, they may be accountable for active misrepresentations or concealments regarding the property’s condition. Courts have upheld fraud claims against individual principals where there are affirmative misrepresentations.
Breach of Fiduciary Duty Sponsor-appointed board members owe a fiduciary duty to the condominium, not just to the sponsor. Claims of fiduciary duty breaches may be upheld if individual board members have conflicts of interest or engage in wrongdoing. However, claims against board members for collective actions taken on behalf of the condominium are often dismissed unless there is a tort against a third party, such as discrimination.
Fraudulent Conveyance Under Debtor & Creditor Law Transfers made without fair consideration that render a sponsor unable to pay creditors may be considered fraudulent conveyances. Constructive fraudulent conveyance claims do not require proving intent and can be upheld against sponsors and related transferees. Intentional fraudulent conveyance requires proof of intent to defraud but is often inferred from badges of fraud, such as below-market transfers.
In conclusion, while sponsors often use limited liability to protect their assets, there are legal avenues for condo boards to breach this shield. The viability of extending liability to a sponsor’s principals and parent companies will depend on the specifics of the alleged misrepresentations and the actions taken by the sponsor and its board members.
