Condominium associations often deal with a variety of issues during the transition process from developer control to homeowner control. One common challenge is holding “sponsor members” accountable for problems that arise during the construction or sale of units. Sponsor members are typically developers, builders, or other entities that establish the condominium and retain a level of control during the initial phases.
Under most state condominium laws, sponsor members owe certain legal duties to the association and unit owners. These duties relate to completing construction properly, providing adequate funding for reserves, and disclosing all relevant information about the property’s condition. If sponsor members breach these duties, the condominium association may have valid legal claims against them.
There have been many cases across the country where condo associations have pursued legal action against sponsor members for construction defects, budget deficits, or incomplete turnover documentation.
In a recent case, we were able to tie up the sponsor with an injunction claim and motion from dissipating its assets. It is critical to hold the sponsor and its members responsible as early as possible before they transfer assets and liquidate the sponsor entity. Even if the sponsor can’t be stopped, associations can still go after the sponsor members and others who have responsibility.
For example, the Board of Managers the 443 Greenwich Street Condominium sued its sponsor’s members who were designated as board members of the condo during the control period. Like all board members, sponsor members have a fiduciary duty to act in the best interest of the condo and not the sponsor. The 443 Greenwich Street Condominium averred that the sponsor board members fraudulently passed on to the unit owners the costs of construction and maintenance disguised as condominium common charges, and that they deliberately cut corners when renovating the building by making the renovations in a manner departing from the operating plan and calculated to save the sponsor money. The Appellate Division First Department upheld the trial court’s refusal to dismiss the claims of breach of fiduciary duty against the sponsor board members. The Court held that the business judgment rule does not foreclose the cause of action for breach of fiduciary duty. At the pleading stage, the allegations are sufficient to overcome the business judgment rule, as plaintiff has alleged that the sponsor’s principals acted in bad faith and that their actions were tainted by conflict of interest and fraud. See the decision.
When problems arise, it is critical for condo boards to consult experienced legal counsel to review their options. An attorney can help determine if the sponsor member violated any legal duties and whether a lawsuit or settlement demand is warranted. The condo’s governing documents and state laws must also be carefully examined, as they may impact what claims are viable. With proper guidance, condo associations can potentially hold sponsor members financially accountable for their actions.
