Martin Act Bars Claims Against Architect And Engineer For Fraud And Misrepresentation Based On Contents Of Offering Plan
A series of claims made by a condominium Board of Managers on behalf of its unit purchasers against an architect and engineer for alleged faulty design and construction of a newly-developed condominium were dismissed in Board of Managers of the Sevenberry Condominium v. N7B LLC, Index No. 23910/10, NYLJ 1202652854743 (Sup. Ct. Kings Co. Apr. 9, 2014). Consistent with an increasing body of precedent following the Court of Appeals’ Assured Guaranty decision in 2011, the court held that the Martin Act precluded the Board from asserting private causes of action for common-law fraud, deceit, and negligent misrepresentation relating to statements made in the architect’s report and certification located only in the Offering Plan.
In this decision, the court also focused on the necessity of “privity of contract” before an architect or engineer that has allegedly made fraudulent or negligent misrepresentations or performed shoddy work can be held liable to the ultimate beneficiaries of their work. To allege fraud or negligent misrepresentation based on a representation in an agreement, a plaintiff must show that the plaintiff had a contract with the architect or engineer. Here, neither the Board nor the individual unit owners were parties to any such contract. In fact, there was no evidence that at the time the design professionals made the disputed representations, they even knew who the unit owners or purchasers were or would be. This is fatal to a claim of privity, which requires “known parties.”
The Board also filed claims, on behalf of itself and the unit purchasers, asserting that the Board and unit purchasers were third-party beneficiaries under the contracts between the design professionals and the sponsor, and should therefore be allowed to assert claims under those contracts. The court dismissed these claims, observing that the contracts contained no language stating that the contracting parties intended to benefit the Board or the unit purchasers.
The Board’s claim against the design professionals for negligence was equally unsuccessful was. This claim was rejected because the Board failed to set forth any basis for finding that the design professionals owed a duty to the Board or the unit purchasers. Next, the court dismissed claims against the design professionals for aiding and abetting an alleged breach of fiduciary duties owned by the sponsor, because there were no facts alleged from which it could be inferred that the design professionals had actual knowledge of the sponsor’s alleged breach.
Finally, the court also dismissed the Board’s claims for violations of General Business Law §§ 349 and 350, which are consumer-protection statutes that protect against deceptive acts and practices and false advertising. The court reasoned that those statutes are designed to protect consumers in situations where there is a broad impact on consumers at large, and that claims limited to a single condominium building do not involve the public at large.
This case exemplifies New York courts’ consistent refusal to hold architects and engineers responsible to ultimate purchasers of apartments in newly developed buildings. The design professionals contract with and perform work for the sponsor, and any recourse the purchasers may have is generally only against the sponsor, not other parties.