Appeals panel finds no personal liability for signing condo certification
By Bruce H. Lederman and John D’Agostino,
senior partners, D’Agostino, Levine, Landesman & Lederman, LLP
On May 18, 2013, the Appellate Division, First Department, in the case Board of Managers v. 184 Thompson Street Owner LLC, issued an important decision specifically holding that individual members of a corporate sponsor of a condominium offering in the State of New York may not be held personally liable for claims against a corporate sponsor simply because they signed the certification required as part of the condominium offering plan.
This article is intended to alert the real estate professional to the interplay among (a) the Attorney General Regulations (“Regulations”) which require that an individual sign the sponsor certification which is part of any condominium offering in the State of New York even if the sponsor is a company, (b) ongoing developments in the law about whether individuals can bring lawsuits based upon alleged Martin Act violations, and (c) traditional common law theories allowing claims to pierce the corporate veil based upon either fraudulent abuse of corporate forms or fraudulent conveyances.
The primary law governing condominium conversions in New York is the Martin Act. Under the current Regulations, any condominium offering plan must disclose the “principals of the Sponsor,” as that term is defined in the Regulations, and a certification signed by the corporate sponsor and all principals of sponsor.
Historically, based upon Court of Appeals cases decided in 1987 and 2009, few people questioned whether signing the required condominium certification could somehow create personal liability for the principals of a sponsor because there is no private right of action under the Marin Act.
In 2010 and 2011, in two cases before the Appellate Division, Second Department, the Court declined to dismiss claims against individual sponsors which, at their early stages, involved allegations of fraudulent activities. In the last two years, some lower level cases have interpreted the Second Department’s 2010 case as recognizing an independent breach of contract theory against the principals of the sponsor. For example, a trial level Judge in Brooklyn stated:
“it is well settled with the Second Department that a plaintiff may seek damages for a breach of contract against the individual principals of the sponsor, based upon certification of the offering plan….
This is why the recent decision of the Appellate Division, First Department is so important.
In the recent decision, the First Department stated: “Non-Sponsors may not be held individually liable for any of the plaintiff’s claims premised solely on the alleged violations of the offering plan and certification … The statements made by defendants in the certification and the plan were mandated by the Martin Act, and plaintiff does not posit any basis of liability outside of that statute, nor assert that the Non-Sponsors are liable under any alter-ego or other veil piercing theory.”
Because of the structure of New York’s court system, where there are separate Appellate Divisions governing different counties, it is possible that we will have a situation where there are different rules in different parts of the State until the Court of Appeals addresses the issue. The authors believe it is more likely that the Second Department will clarify its prior decisions to agree with the recent First Department decision.
It is equally important to understand the issues involving what is known as piercing the corporate veil. Individuals have always been free to do business as corporations to avoid potential personal liability.
There have always been exceptions, known as piercing the corporate veil, where individuals were found to have used a corporation for fraudulent purposes.
In general, so long as a corporation or LLC operates in a bona fide manner, maintaining its own bank accounts, tax returns, books and records, without improperly commingling funds or paying non-corporate expenses and is not used for any deliberate fraudulent purpose, individuals should be shielded from liability.
Also, under the Debtor and Creditor Law, transfers made with actual intent to defraud a creditor, or transfers made while someone is a defendant in a lawsuit, are subject to being set aside. What this means is that if a sponsor has money in its bank account when it is being sued for sponsor defects and it distributes such funds to members to render the sponsor judgment proof, there could be potential claw-back type claims.
With the understanding that claims of fraud and fraudulent transfers are always possible, the recent Appellate Division decision is welcomed news for real estate developers.