New York's Cooperative and Condominium Community
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May a sponsor that converted a building to a condo be held personally liable for construction defects?
A discussion of the nuances involved when determining liability for construction defects.
Sponsor and Architect Liability
May the individual principal of a sponsor that converted a building to condominium ownership (who was also the architect) be held personally liable for construction defects? That was one of the issues addressed in The Board of Managers of the Lore Condominium v. Steven Gaetano and Lore Gaetano.
The plaintiff is the condominium, located at 261 West 112th Street in New York City. Steven Gaetano was a principal of Gateway IV, the sponsor of the condominium conversion. His wife, Lore, was the president and sole shareholder of Manhattan Property Managers Realty, the managing agent for the condominium. Mr. Gaetano was also the architect.
In the offering plan, Mr. Gaetano made affirmative representations concerning the construction quality of the building. Specifically, he represented that the construction quality would be comparable to prevailing local standards, in accordance with law and in accordance with the plans that had been filed concerning the condominium.
In the architect certification, Mr. Gaetano represented that the architect’s report, which he had prepared, adequately described the construction, would be relied on, did not omit material facts, did not contain any untrue statement of fact, did not contain statements that were fraudulent or deceptive, did not contain promises beyond reasonable expectations, and did not contain any false statement where he knew, or reasonably should have known, the truth.
In addition, Mr. Gaetano executed a certification in his capacity as the sponsor’s principal. That stated that the terms of the transaction were complete and accurate, gave potential purchasers an adequate basis to form their judgment, did not omit any material facts, did not contain untrue statements of material fact, did not contain fraudulent or deceptive purchases or sales, did not contain any promises or representations beyond reasonable expectations, and did not contain any representation that was false when he knew, or should have reasonably known, the truth.
Condo Complaint: Illegal Construction
The condominium asserted that the building was not built in accordance with law and that there were defects, including water leaks from the roof. The board asked Mr. Gaetano to cure the defects, but he did not do so. In addition to construction defect matters, the board sought to recover common charges owed by Gateway, as owner of the unsold units.
The board brought claims for negligence, fraud, breach of contract, and unjust enrichment against Mr. Gaetano in his capacity as an architect, and for breach of contract, fraud, and unjust enrichment in his capacity as a principal and alter ego of Gateway. As to Ms. Gaetano, the board sought claims against her for breach of contract, breach of fiduciary duty, and unjust enrichment as the alter ego of the management company.
In June 2010, Ms. Gaetano, on behalf of the management company, entered into a management agreement with Mr. Gaetano, who controlled the condominium’s board. As part of its duties, the management company was to collect common charges. After control of the board was turned over to the residents of the building in April 2011, the resident board members notified Ms. Gaetano that she could not issue letters that common charges to be paid by Gateway had been paid because, in fact, the money was not there. The board directed Ms. Gaetano to collect the common charges from Gateway, but she refused and resigned. In doing so, she refused to turn over receipts for financial transactions entered into by the management company on behalf of the condominium.
The board alleged that Mr. Gaetano, in his capacity as an architect, owed a duty to the condominium to perform design and construction work in a good, suitable manner free of defects, in accordance with industry standards and practices and in compliance with the law. The board asserted that he breached this duty in a negligent fashion, resulting in unsafe construction, defects, and noncompliance with the law.
Breach of Contract?
The court discussed long-standing principles that a breach of contract would not be considered a tort (such as negligence) unless there was a legal duty independent from contractual obligations. The court believed that the claims of negligence were merely a restatement of the claims for breach of contract. The court stated that the negligence claims arose from statements made in the offering plan and thus were duplicative of the claim against Mr. Gaetano, as architect, for breach of the plan.
As to the architect certification, it stated that the description of the building would be what existed upon completion of the building “provided that construction [was] in accordance with the plans and specifications” Mr. Gaetano examined. The court found that Mr. Gaetano could not be liable for negligent construction where he certified merely the plans and specifications relied on in his report.
The board also alleged that Mr. Gaetano, as architect, made express representations that the condominium would be of a quality construction in accordance with prevailing local standards and applicable law. The complaint asserted that the board knew or should have known that the representations were false, as the condominium building was not in compliance with the law and there were defects. The court dismissed this claim, as it was pre-empted by the Martin Act, General Business Law Article 23-A, under which only the attorney general has the right to sue for such claims.
Right to Sue Sponsor Debated
The court reviewed the law concerning the right to sue a sponsor. In another case, New York’s highest court had held that purchasers could not bring claims for fraud when the fraud was predicated solely on alleged material omissions from the offering plan (i.e., Martin Act requirements). Two years later, the same court clarified its position, stating that a purchaser may bring an action for fraud if it is not entirely dependent on the Martin Act. It stated, “Mere overlap between the common law and the Martin Act is not enough to extinguish common-law remedies.” However, the Lore court noted, a fraud claim could be precluded by the Martin Act if it is primarily based upon the certification that the attorney general requires be included in the offering plan. Here, the board’s fraud claim was based on Mr. Gaetano’s certification, and the claim was dismissed.
The board also sued Mr. Gaetano, as architect, for breach of the offering plan because he failed to obtain a permanent certificate of occupancy, and because he failed to construct the building in accordance with the offering plan and all laws. The court dismissed the claim, as there was no contractual relationship between Mr. Gaetano, as architect retained by the sponsor, Gateway, and the board of managers. The court asserted that the board’s support for this claim was really based on Mr. Gaetano’s liability as a principal of Gateway, and not in his role as architect.
The court then turned to the board’s claim against Mr. Gaetano in his capacity as a principal of Gateway, the sponsor. The court found that the claim was duplicative of the contract claim and, therefore, was dismissed.
Failure to File and Pay
The board also brought two claims against Mr. Gaetano for breach of contract, alleging that he was a principal and alter ego of Gateway. One claim was that he failed to obtain a permanent certificate of occupancy and failed to construct the condominium in accordance with the plan and law. The board also alleged that Mr. Gaetano failed to pay common charges and other money due by Gateway.
Mr. Gaetano asserted that the board failed to show facts sufficient to allow the court to “pierce the corporate veil” and hold him personally responsible for the actions of Gateway. The court stated that it did not need to address whether the board had pleaded sufficient facts to allow the court to pierce the corporate veil, because a plaintiff could seek damages against individual principals of a sponsor for breach of contract based upon the certification made by the individual in the offering plan.
Although Mr. Gaetano did not dispute that the certification created personal liability for alleged misrepresentations, he asserted that the claims had to be dismissed because there were “as is” disclaimers in the plan and because the board failed to give him notice of defects under the plan. The court found that the board stated a claim for breach of contract against Mr. Gaetano as a result of his failure to obtain a permanent certificate of occupancy and his failure to pay common charges and other money due on the unsold units owned by Gateway.
As to the claim of notice, the court observed that there were issues of fact that precluded dismissal of the claim. As to Mr. Gaetano’s claim that he is protected from liability because the offering plan stated that purchasers accepted their unit in “as is” condition, the court determined that whether the units were delivered as described in the offering plan was a factual issue that could only be decided in court.
Unjust Enrichment Claims
The board also set forth causes of action for unjust enrichment against Mr. Gaetano in his capacity as an architect. The court found that Mr. Gaetano, in his role as architect, was not responsible for overseeing construction and therefore could not be liable for a claim that he deprived the board and unit-owners of the benefit of a properly constructed condominium. As to an unjust enrichment claim against Mr. Gaetano in his capacity as a principal of sponsor, the court found that such a claim was not viable because there was a valid contract claim.
Concerning the claims against Ms. Gaetano: in order to hold her personally responsible for the acts of the management company, the board had to show that she exercised complete dominion and control over the company and abused the privilege of doing business in the corporation form. In this instance, the board had not sufficiently alleged claims that Ms. Gaetano had such control over the company and used it to perpetuate a wrong. Although the board asserted that Ms. Gaetano employed the management company to commit breach of contract, fraud, and other dishonest acts – including failing to collect common charges owed by Mr. Gaetano – there were no allegations that she used the company for her personal use, that funds were being commingled, or that corporate formalities were dispensed with. The most the board alleged was that Ms. Gaetano acted in bad faith while representing the management company, and that was not enough to pierce the corporate veil.
This case is significant because it addresses many of the issues typically raised in a case where a plaintiff claims construction defects, and does so in a circumstance where the Gaetano family played many roles in the conversion, something that is, in our experience, not the norm. The court discussed the impact and import of Mr. Gaetano signing certifications that are required by the Office of the Attorney General – both in his capacity as sponsor and in his capacity as architect. Consistent with other cases we have seen, the court found that the architect’s certification did not expose Mr. Gaetano to liability for fraud in his capacity as an architect and determined that only the attorney general had the right to sue him for fraud, in accordance with the Martin Act.
However, when Mr. Gaetano signed a certification in his capacity as a principal of sponsor, it did expose him to potential liability for breach of contract, consistent with other case law. Here, the court not only held that there was potential personal liability relating to alleged construction defects, but also to the sponsor’s failure to pay common charges. These claims were not precluded by the Martin Act. As to the fraud claims, they were duplicative of the breach of contract claims and were dismissed for that reason.
Law Offices of Ilene H. Guralnick
Bartels & Feureisen
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