May 24, 2017

First Department Reverses Trial Court And Sustains Derivative Construction Defect Claims

Written By: Ethan Kobre

Loren Ridinger v. West Chelsea Development Partners LLC

Supreme Court of the State of New York, Appellate Division, First Department, May 23, 2017

Plaintiff, an individual unit owner in the subject 100 Eleventh Avenue Condominium (the “Condominium”), sued the Condominium’s sponsor/developer and related persons and entities (collectively, the “Sponsor”) for construction defects plaguing her unit and the Condominium’s common elements, including its distinctive glass curtain wall. Plaintiff previously had resolved certain other disputes with the Sponsor pertaining to her individual unit, concerning which she signed an extremely board release and covenant not to sue—or in any way participate in litigation against—the Sponsor.

The Sponsor moved to dismiss on several grounds, chiefly that the action was precluded by Plaintiff’s prior release and covenant not to sue. Plaintiff opposed the motion to dismiss and cross-moved to substitute and/or add additional Condominium unit owners to prosecute the Condominium’s claims derivatively. The trial court granted the Sponsor’s motion to dismiss and denied Plaintiff’s cross-motion.

On appeal, the First Department reinstated the Condominium’s derivative claims and granted Plaintiff’s cross-motion for leave to amend the complaint. In so holding, the Court reaffirmed that, as merely one individual unit owner, Plaintiff “could not and did not release the derivative claims on behalf of the unit owners.” The Court further held that Plaintiff’s prior release and covenant not to sue does not preclude the Condominium’s claims prosecuted derivatively. And, because the derivative claims were not barred by Plaintiff’s release, Plaintiff did not lack standing when the action was commenced and an amendment could relate back to the time of her original pleading, notwithstanding that the statute of limitations had lapsed.

As for the Sponsor’s remaining grounds for dismissal, the First Department found them to be “largely unavailing.” The Court found that Plaintiff adequately pleaded demand futility by alleging that the Condominium’s board of managers was comprised not merely of Sponsor appointees but Sponsor principals. The Sponsor’s reliance upon a contractual limitation on remedies also was unavailing, held the Court, because the Sponsor unreasonably delayed in providing the agreed-upon remedy, i.e., repairing the Condominium building. The Court also upheld Plaintiff’s claims for fraudulent conveyances under Debtor and Creditor Law §§ 273 and 274, which are not subject to CPLR 3016’s particularity requirement since they involve allegations of constructive, not actual, fraud.