Board of Managers of Loft Space Condominium v. SDS Leonard, LLC et al.,
Supreme Court of the State of New York, Appellate Division, First Department, September 27, 2016
Plaintiff, a residential Board of Managers of a condominium, commenced an action against the sponsor, its principals, the selling agents and the engineering firm to recover damages for construction defects in the condominium. The sponsor, individual defendants, and the managing agent all moved to dismiss the complaint on the grounds that the complaint was barred by statute of limitations governing defect claims, barred by the Martin Act, duplicative in causes of action, and failed to allege sufficient facts.
The Supreme Court dismissed the breach of contract cause of action on the grounds that the units were offered “as is” without an obligation to perform improvements and case law holds that “as is” clauses preclude a breach of contract claim. The cause of action for fraud in the inducement was dismissed as duplicative of the breach of contract claim because the claims were
all related to statements from the offering plan and were not extra-contractual. The Supreme Court dismissed the remaining causes of action which related to violations of the Debtor and Creditor Law on the grounds that because the sponsor maintained a reserve fund, it was not insolvent and therefore could not be considered a debtor for purposes of the Debtor and Creditor Law. The Supreme Court also held that even though the sponsor transferred the condominium’s commercial units to a related entity for no consideration, the allegations did not satisfy the definition of a “badge of fraud” which includes: “(1) the close relationship among the parties to the transaction, (2) the inadequacy of consideration, (3) the transferor’s knowledge of the creditor’s claims, or claims so likely to arise as to be certain, and the transferor’s inability to pay them, and (4) the retention of control of property by the transferor after the conveyance,” as the Sponsor could not be considered a debtor and the transfer could have had “no effect on any claims arising out of the inadequacy of the building.”
On appeal, the Appellate Division reversed dismissal of the breach of contract claim as the claim was based on items that were “hazardous, dangerous and/or violate the law” which are exceptions to the “as is” clause. Additionally, a temporary certificate of occupancy does not refute claims for hazardous conditions. Further, the sponsor’s failure to obtain a permanent certificate of occupancy was grounds on its own for the breach of contract claim as the sponsor was required to obtain a permanent certificate of occupancy within 180 days of the first closing of a residential unit.
The Appellate Division also reversed the dismissal of the cause of action related to the conveyance of the four commercial units for $0 because the conveyance violated the Debtor and Creditor Law §274 as $0 for four commercial condominium units is not fair consideration. Further, even if there was a reserve fund established, the court held that this does not refute the allegation that the sponsor was left with “unreasonably small capital.”
Finally, the Supreme Court erred in dismissing the cause of action related to Debtor and Creditor Law §276 as Plaintiff alleged “sufficient badges of fraud to support the claim.