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Appeals Court Sustains Board’s Contract And Fraud Claims Against Sponsor, But Rejects Claims Under Consumer Statute

A recent court decision by the Appellate Division, First Department reviews the law governing various causes of action that a condominium board of managers can assert against a sponsor for alleged construction defects. The court sustained the Board’s pleading of some causes of action while dismissing others.  Board of Managers of the South Star v. WSA Equities, LLC, NYLJ 1202674470258 (Sup. Ct. N.Y. Co. Oct. 20, 2014).


Among the claims the court sustained was the Board of Managers’ cause of action for breach of contract, predicated upon alleged construction defects in the building. The Sponsor asserted that this claim should be dismissed because it was filed after the six-year statute of limitations had expired.  The validity of this defense turned on when the statute of limitations began to run.  The court held that the time began to run as of the date the first sale of a unit closed, and that since the complaint was filed within six years of that date, the contract claim was timely.  The court rejected the Sponsor’s position that the claim accrued on the earlier date when the certificate of occupancy was issued, stating that it would be incongruous for the statute of limitations to begin to run before there existed any unit owners on whose behalf the Board could have asserted a claim.


The court also sustained the Board’s claim for common-law fraud claim against the Sponsor as well as against individual members of the Sponsor. In doing so, the court found that the Complaint contained sufficient allegations to permit a reasonable inference that the Sponsor and its members knew about the allegedly seriously defective condition of the exterior facade and lintels, yet misrepresented that their condition was “generally good” in the Offering Plan to induce the unit owners to purchase. The court rejected the familiar contention that the fraud claim was impermissibly duplicative of the breach of contract claim.  The court described the fraud claim as based upon defendants’ alleged material misstatements about the condition of the building in the Offering Plan, which the unit owners allegedly relied upon in purchasing. The contract claim, by contrast, was based on defendants’ failure to provide various features, finishes, and amenities as provided for in the unit owners’ purchase agreements.


The court dismissed claims brought on behalf of the unit owners under Sections 349 and 350 of the General Business Law (“GBL”). These sections are New York State consumer-protection statutes designed to protect consumers against deceptive acts and practices and false advertising.  The court relied on precedent from the Appellate Division, First Department (which covers Manhattan and the Bronx) that these statutes do not cover claims arising in a single condominium building.


The court also dismissed the Board’s claims that the Sponsor made fraudulent conveyances of assets in violation of several sections of the New York Debtor and Creditor Law. This law invalidates transfers that either are made with the deliberate intent to defraud creditors, or that are made without an exchange of fair value and leave the transferor insolvent.  The fraudulent transfer claims were held insufficient because they lacked detail and contained only conclusory allegations.