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Court Holds Fraud Claim Against Sponsor To Be Preempted By Martin Act; Also Dismisses Indeminification And Contribution Claims

A court has dismissed several claims brought by a Condominium Board of Managers against the Sponsor and individual members of the Sponsor, as well as cross-claims against the Sponsor by a co-defendant. Board of Managers of 111 Hudson St. Condominium v. 111 Hudson Street, LLC, Index No. 651959/2014, NYLJ 1202734995922 (Sup. Ct., N.Y. Co. July 28 & Nov. 9, 2015).


In its Complaint, the Board of Managers asserted that the tenant in the ground-floor commercial unit caused water damage to the Condominium’s basement.  The Complaint further alleged that the Sponsor and its members failed to properly remedy the water damage and intentionally concealed the damage from putative purchasers. The court dismissed the fraud claim against the Sponsor.  This claim was predicated on the statement, contained in the Condominium offering plan and not modified in subsequent amendments, that the Sponsor had “no knowledge of any material defects or need for major repairs to the property.”  The court dismissed this claim because it was preempted by the Martin Act and New York State Attorney General’s regulations implementing it.  The regulations require that offering plans include a comprehensive description of the condition of the property and building, including any “defective condition which is hazardous or which requires immediate repair to prevent further deterioration.”  Thus, the fraud claim regarding the Sponsor’s alleged failure to disclose the damaged basement was based entirely on omissions from a required disclosure.  Moreover, active concealment of facts unrelated to omissions from Martin Act disclosures was not alleged.  Accordingly, “[t]he facts alleged by the Board of Managers fit entirely within the purview of the Martin Act, preempting any private right of action.”  The court also held that in addition to being preempted, the fraud claim was untimely under the applicable six-year Statute of Limitations.


In addition, the court dismissed all claims asserted against the Sponsor’s individual members. For example, the Board sued the Sponsor’s members for breach of contract for allegedly failing to properly fund a reserve fund for the Condominium.  However, the Sponsor is organized under the New York Limited Liability Company Law, which provides that members of an LLC are not personally liable for the LLC’s obligations or liabilities.  The court also dismissed a breach of fiduciary duty claim against members of the Sponsor who had previously served on the Board of Managers, alleging that, as board members, they had failed to repair the property and to cause the Sponsor to properly fund the reserve fund.  This claim was untimely under the three-year Statute of Limitations for a breach of fiduciary duty claim seeking only monetary damages.  Moreover, the Complaint failed to allege that the individuals had engaged in “any individual and separate tortious conduct committed in bad faith against the plaintiff.”


The Board of Managers also sued the Commercial Unit Owner for breach of the condominium By-Laws and for negligence in connection with the water damage. The Commercial Unit Owner asserted cross-claims for common-law indemnification and contribution against the Sponsor, thereby contending that the Sponsor must reimburse the Commercial Unit Owner in whole or part for any damages it might owe the Board.  The court granted the Sponsor’s motion to dismiss these cross-claims against it.  With respect to the claim for indemnification, such a claim requires the claimant to show that it is being subjected to “vicarious liability” for wrongdoing by another, “without actual fault on the part of the proposed indemnitee.  It follows that a party who has itself actually participated to some degree in the wrongdoing cannot receive the benefit of [this] doctrine.”  The court found that here, if the Commercial Unit Owner is ultimately found liable, it will be for its own actions in failing to adequately maintain and repair its unit and permitting its tenant to cause damage to the building.  Thus, there was no basis for the indemnification cross-claim.


With respect to the cross-claim for contribution, the court observed that the doctrine of contribution applies in tort cases, but not “where the underlying claim is for purely economic damages as a result of breach of contract and fails to assert an independent legal duty resulting in injury to property.” Here, the underlying claims were for breach of contract pursuant to the offering plan, and the remedy the Board sought was contractual damages (the cost of completing repairs).  Accordingly, both the indemnification and the contribution claims against the Sponsor were dismissed for failure to state a cause of action, without leave to replead.  Ganfer Shore Leeds & Zauderer, LLP represented the Sponsor and one of its members in this case.