Board of Mgrs. of the 125 N. 10th Condominium v. 125North10, LLC, 50050/16, 1/11/2016 (Demarest, J.)

Breach of Contract; Breach of Express Warrant; Negligence and Negligent Misrepresentation; Strict Liability; Fraud; Commission of Deceptive Trade Practices; Commission of Deceptive Advertising Practice

By: Jeanelle Dawes | Managing Editor

125North 10 LLC (“Sponsor”) is a limited liability company comprised of three members, and non-member principals, (collectively “Defendants”). Pursuant to a contract sale, Sponsor agreed to purchase real property located at 125 North 10th Street, in Williamsburg, Brooklyn (“Property”).  Sponsor’s Operating Agreement provided that Sponsor was formed to acquire the Property and to own, hold, develop, operate, sell, finance, and convert the Property into a condominium. Later, Sponsor created a condominium-offering plan (“Offering Plan”) for the establishment of condominium ownership of the Property. The Offering Plan required the Sponsor to construct the building and the units in accordance with plans, specifications, and applicable law. Prior to the filling of the Offering Plan, Defendants executed a Certification of Sponsor and Principals (the “Certification”), which confirmed that Defendants: (1) read the entire Offering Plan; (2) investigated the facts of the Offering Plan; (3) exercise due diligence to form the basis for the Certification; and jointly and severally certify the Offering Plan. Sponsor sold the condominiums to the Board of Mgrs. Of the 125 N. 10th Condominium (“Plaintiffs”).  In connection with the condominium sales, Plaintiffs executed a form purchase agreement (“Purchase Agreement”) with Sponsor. The Purchase Agreement included a clause that stated that the construction of the building, units, and the correction of any defects in the construction, to the extent required under the Offering Plan, is the sole responsibility of Sponsor.

Later, Plaintiffs commenced an action against Defendants alleging there were construction and design defects in the building and the design and construction of the building and the units deviated from what was promised to Plaintiffs. Plaintiffs brought several causes of action, the first of which was for breach of contract on the basis that Defendants were in breach of the Purchase Agreement by failing to construct the building in accordance with the Offering Plan and the Purchase Agreement. Further, Plaintiffs sought to pierce Sponsor’s corporate veil to sue Defendants because Defendants certified the Purchase Agreement.

The Defendants sought dismissal of the breach of contract action, arguing that since the Sponsor was a limited liability company, Defendants were exempt from personal liability for the Sponsor’s contractual obligations. In addition, Defendants argued that the allegations by Plaintiffs are insufficient to warrant the piercing of Sponsor’s corporate veil.

The Court denied Defendants’ motion to dismiss on Plaintiffs’ breach of contract claim, but rejected Plaintiffs’ argument to pierce Sponsors’ corporate veil.  First, the Court found Plaintiffs’ breach of contract claim was valid because Defendants executed the Certification, which was incorporated into the Purchase Agreement. A plaintiff may seek damages for breach of contract against individual principals of the corporation based on the certification of an offering plan when the terms of the offering plan are incorporated by specific provisions into a purchase agreement. Here, prior to the filling of the Offering Plan, Defendants executed a certification of the Offering Plan, which incorporated the terms that the building and units would be constructed in accordance the plans into the Purchase Agreement. Because Defendants certified the Offering Plan in their individual capacity, they became jointly and severally liable for breach of the Purchase Agreement. Second, in the context of piercing the corporate veil, the Court held that Plaintiffs’ allegations failed to establish a basis to pierce Sponsor’s limited liability veil. To successfully pierce a corporate veil, a plaintiff must prove that the owners (1) exercised complete domination of the corporation with respect to the transaction attacked, and (2) such domination was used to commit a fraud or wrong against the plaintiff, which resulted in the plaintiff’s injury. Here, Sponsor, not Defendants, had complete dominion and control of the construction of the building and units. The Court found that Defendants did not exercise any control over the construction of the building and units outside of Sponsor, and, therefore, Defendants did not pierce Sponsor’s corporate veil. Thus, the Court did not accept Plaintiffs’ argument on piercing the corporate veil for Sponsors.

Nonetheless, the Court denied Defendants’ motion.

Board of Mgrs. of the 125 N. 10th Condominium v. 125North10, LLC, 50050/16, 1/11/2016 (Demarest, J.)

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