Bill Morris in Bricks & Bucks on November 11, 2020
Buyers of recently built condominiums with construction defects – by no means an exclusive club in New York City – have reason to rejoice. In a new ruling, the Appellate Division of the State Supreme Court has clarified a 2013 ruling, paving the way for condo boards to seek compensation from sponsors and investors for shoddy construction – without having to clear a high hurdle imposed by the earlier ruling.
The new case centers on 90 William St., a 113-unit condominium in the Financial District of Lower Manhattan, where unit-owners began complaining about construction defects in 2010, just two years after the building was completed. But their efforts to recoup money ran up against the 2013 ruling that said condo boards could seek compensation from investors only if the board could prove a fiduciary relationship between itself and the investors. This hurdle made it virtually impossible for many condo boards to win compensation for construction defects because in New York, condominiums are often developed by a single-purpose entity formed to construct the building, sell units and then distribute the proceeds to investors. Once the entity sells out the building and pays the investors, it typically closes up shop – to the dismay of unit-owners in a poorly constructed building.
“This is a critical decision that now enables boards to claw back funds disbursed to investors in construction-defect cases,” says Steven Sladkus, a partner at the law firm Schwartz Sladkus Reich Greenberg Atlas (SSRGA), who represented the condo board at 90 William St., known as Be@William. “Investors must now be extremely cautious about the quality of the developers with whom they work, as the investors could be on the hook for damages resulting from construction flaws.”
The implications of the new ruling could be extensive. “Condo boards can now move to renew previously dismissed claims under the erroneous 2013 ruling,” says Jared Paioff, a partner at SSRGA who also worked on the Be@Williams case. “We have multiple pending construction-defect cases in which certain claims have been dismissed based on the 2013 ruling. Since those cases are still pending, we now have the right to seek renewal of those claims. For cases like it, where the sponsor entity has sold all the units, there’s now a real possibility for the unit-owners to actually receive compensation for their claims.”
Adds Sladkus, “This does not mean investors are automatically liable for construction defects. But it does mean that should the development become problematic and the sponsor claims to have no money, we can find out where the sponsor paid money to investors. And we’re going to follow the money trail to try to make an aggrieved board whole. This new ruling allows us to do that.”
“The implications,” Paioff adds, “are that investors who receive distributions from a project can no longer be assured that that money won’t be clawed back. As a result, to avoid their own liability, investors might be inclined to put pressure on the sponsor to resolve construction defects.”
Be@William’s condo board is seeking $3 million in damages from investors in the project. The amount the board can recoup will be decided at a trial, which has not yet been scheduled.
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