In Board of Managers of the Brighton Tower II Condominium v. Brighton Builder, LLC, the Second Department which overseas Brooklyn and Long Island lower courts, issued a decision which clarifies what condo boards and owners have to establish in order to succeed against sponsors and their principals in construction defect cases. The court offered important clarifications on when condo boards can sue sponsors and their principals, as well as time limits for doing so. Here’s what condo boards and their management need to know at least in the Second Department:
1. Limited Liability for Sponsor’s Principals:
- Merely signing the offering plan as a sponsor’s principal does not automatically create personal liability for contractual breaches related to the condo’s purchase agreements.
- Boards seeking to hold a sponsor’s principal individually accountable must establish grounds for “piercing the corporate veil”. This requires proof of complete domination of the sponsor entity and its abuse for fraudulent purposes that caused harm to the condo board.
2. Piercing the Corporate Veil: What Boards Need to Prove
- Complete Control: The principal must have exercised near-total control over the sponsor company’s actions related to the dispute. Being a manager or controlling principal is not enough on its own.
- Abuse and Fraud: The principal must have misused this control to commit a wrong (e.g., commingling assets, diverting condo funds) resulting in concrete harm.
3. Breach of Fiduciary Duty: Timing Matters
- The statute of limitations for a fiduciary duty breach by a sponsor principal acting as board member or officer doesn’t start until the relationship is terminated or the duty is openly repudiated.
- Condo boards should be mindful of the applicable limitations period (often 3-6 years) but may not need to rush to action if the fiduciary relationship is ongoing.
4. Conversion Claims: Be Aware of the Clock
- Unlike fiduciary breaches, the limitations period for conversion (misuse of condo funds) starts when the wrongful act occurs, not when it is discovered.
- Boards must act within the 3-year period from the date that funds were allegedly diverted or used improperly according to the Court.
It’s a good idea to thoroughly document any suspected wrongdoing, including control exercised by a principal, financial discrepancies, and communications indicating a breach of duty. While you’re doing that keep an eye on the statute of limitations clock and get early legal advice from experienced counsel.
Read the Court’s Decision here.
