Kramer v Zeckendorf

[*1] Kramer v Zeckendorf 2005 NY Slip Op 51990(U) [10 Misc 3d 1056(A)] Decided on December 6, 2005 Supreme Court, New York County Solomon, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on December 6, 2005
Supreme Court, New York County

Richard L. Kramer, individually and as father and natural guardian of Alana Kramer, Tivia Kramer and Gary R. Siegel, as Trustee for Equity Resources Trust, Plaintiffs,

against

William Lie Zeckendorf, ARTHUR W. ZECKENDORF, W10Z/515 REAL ESTATE, L.P., ZECKENDORF REALTY, L.P., 515/ZGP, LLC, W10Z/515GEN-PAR, LLC, CHARLES IRWIN, DANIEL M. NEIDICH, STUART ROTHENBERG, WHITEHALL STREET REAL ESTATE, WH ADVISORS, LLC., WHITEHALL IX/X, INC., STEVEN DUN, CRAIG GOLDMAN, MELVIN HEINEMAN, FRANK NEWMAN, BRUCE SHERMAN, DANIEL ROSENBLUM, ALICE KULICK, 515 PARK AVENUE CONDOMINIUM, THE BOARD OF MANAGERS OF 515 PARK AVENUE CONDOMINIUM, BROWN HARRIS STEVENS RESIDENTIAL MANAGEMENT, LLC, FRANK EDWARD WILLIAMS, FRANK WILLIAMS AND ASSOCIATES N/K/A FRANK WILLIAMS & PARTNERS, ARCHITECTS LLP, JAROS BAUM & BOLLES, J.A. JONES-GMO, LLC, FRESH MEADOWS MECHANICAL CORP., CANTOR SEINUK GROUP, GUNDERLIN LTD, INC., Defendants. -and- CHRISTOPHER BROWNE, as President of the BOARD OF MANAGERS OF 515 PARK AVENUE CONDOMINIUM, Cross-claim Defendant.



128014/2002

Jane S. Solomon, J.

In June 1998, construction began on a luxury condominium building at 515 Park Avenue, a project of Messrs. Arthur William Zeckendorf and William Lie Zeckendorf, known to be major real estate developers in New York City. The sponsor of 515 Park Avenue and its selling agent marketed the building as synonymous "with privilege and luxury living," reminiscent of the residences of "the elite of Manhattan society." When prices for the condominium units reached $3,000 per square foot, William Lie Zeckendorf explained that the building would "reflect the grandeur and workmanship of the classic Park Avenue apartment house." He further explained, "nothing like it has ever been built then or now." Sales materials described the building's amenities as "truly unprecedented . . . inspired by the luxuries of another era", and touted the design elements as out of "a short story by Fitzgerald". The buyers may wish they had instead read the works of Jerome K. Jerome, who wrote "I want a house that has got over all its troubles; I don't want to spend the rest of my life bringing up a young and inexperienced house." Jerome K. Jerome, They and I (1909).

Problems which arose in the course of construction spawned a number of lawsuits against the Zeckendorfs and contractors and construction experts they engaged by the Board of Managers of the completed project and residential unit owners. Two of the unit owner plaintiffs claim they were fraudulently misled into purchasing their units.[FN1] A complaint was made to the office of the New York State Attorney General, which looked into the matter and apparently declined to take action.

New York has enacted the Martin Act (General Business Law § 352, et seq.), a set of laws designed to regulate the sale of securities, including the sale of condominium units. The Martin Act requires that prospective buyers of condominium apartments receive an offering plan disclosing information about the building. The responsibility for enforcing the Martin Act falls exclusively upon the Attorney General, who is vested with regulatory and remedial powers. To that end, the Attorney General has issued extensive regulations specifying the information that the offering plan and its amendments must contain. Individual purchasers of condominium apartments may not bring their own lawsuits for violations of the Martin Act, even [*2]if the violations are egregious. However, they are permitted to sue for common-law fraud. In theory, fraud is conceptually distinct from a Martin Act violation. But in this lawsuit, it is not.

The issue presented is whether an individual purchaser is barred from pursuing fraud claims against a condominium sponsor, when the alleged fraud mirrors violations of the Martin Act. Specifically, Richard Kramer, his wife, daughter, and the family trust, Equity Resources Trust (collectively, the Kramers) argue that the Zeckendorfs should have disclosed the building's ongoing design and construction problems in the offering plan and the amendments which were filed as the development proceeded. The Martin Act and the promulgated regulations do not expressly require this level of disclosure. To permit the fraud claims to go forward in this lawsuit would therefore enlarge disclosure beyond the obligations of the Martin Act, and intrude upon the purview of the Attorney General. As is more fully discussed in this decision, the Kramers cannot press their claims for fraud, and the motion before me to amend the Kramers' complaint is denied.

As recounted in the proposed complaint, construction on 515 Park Avenue began in June 1998, with problems along the way. The minutes of regular construction meetings indicated water infiltration and water damage, a lack of integrity in the building's facade and external envelope, and inadequate installation of insulation at the building, resulting in freezing pipes, leaking and flooding. Field reports indicated that unfilled holes in the concrete structure of the building needed to be sealed. An engineering firm hired by the building's architectural firm issued a report concluding that there were numerous avenues for ground water to infiltrate the building, and that no apparent effort had been made to seal and damp-proof the exterior masonry wall and its joints. In 1999 and 2000, leaks attributed to either riser breaks or freezing pipes caused hundreds of thousands of dollars in water damage throughout the building.

Meanwhile, the closing on the Kramers' apartment took place in April 2000, and the Kramers took residence in January 2001. In August 2001, the Kramers returned from summer vacation to discover water damage to their unit and its contents, along with an odor of mold concentrated in their master bedroom. By February 2002, the Kramers discovered that their antiques, art, and other valuable items were deteriorating, which they attributed to the building's deficient internal climate controls. In the fall of 2002, the Kramers learned that their apartment was infested with high levels of toxic strains of mold, fungi, and bacteria, including the cladosporium, penicillium and aspergillus molds, and the stachybotrys fungus. In November 2002, a report [*3]commissioned by the condominium's Board of Managers concluded that mold was present in most areas of the unit and that the unit was unfit for occupancy. The Kramers moved out in December 2002, and this lawsuit followed, naming 28 defendants, some of which were subsequently dismissed from this action. With court approval, the Kramers also discontinued the personal injury claims.

The main characters are: 1) the "Sponsor defendants": the sponsor; the sponsor's principals, the Zeckendorfs, defendant Daniel Neidich and defendant Stuart Rothenberg; and the sponsors' general partners, defendants 515/ZGP, LLC and W10Z/515 Gen-Par, LLC2) the "Whitehall defendants", alleged alter-egos of W10Z/515 Gen-Par, LLC: defendants WH Advisors, LLC and Whitehall IX/X, Inc.3) the "Construction defendants": the building's architect and architectural firm, defendants Frank Edward Williams and Frank Williams and Associates (Williams); the construction manager, defendant J.A. Jones-GMO LLC (JA Jones); the structural engineer, defendant Cantor Seinuk Group, PC; and the mechanical, electrical, and plumbing engineer, defendant Jaros, Baum & Bolles (JB&B).

On October 7, 2004, by a decision on the record, this court granted defendants' motion to dismiss the first amended complaint with respect to, among other things, the eighth and ninth causes of action (see Plaintiffs' Ex 1 [Oct. 7, 2004 Tr.], at 71). The former sounded in aiding and abetting breach of fiduciary duty against the Sponsor defendants, the Whitehall defendants, and the Construction defendants; the latter sounded in fraud against the Sponsor defendants and the Whitehall defendants. On the issue of fraud, the court ruled that the sponsor's original certification, dated April 1998, was not fraudulent because it predated the alleged construction and design defects that the Kramers argued should have been disclosed (id. at 64), and that the first amended complaint did not adequately plead fraud with particularity against any specific defendant (id. at 67).

Because the Kramers seek leave to amend causes of action that were previously dismissed, they must offer sufficient evidentiary grounds to support the proposed amended pleadings (Travelers Ins. Co. v Ferco, Inc., 122 AD2d 718, 719-720 [1st Dept 1986]; CPLR 3211 [e]). The burden of production is similar that of summary judgment (Pritchard Servs. (NY) Inc. v First Winthrop Props., 172 AD2d 394, 395 [1st Dept 1991]). Leave to amend a pleading is freely given as a matter of the court's [*4]discretion, but the court must examine the underlying merit of the proposed amendment (Zaid Theatre Corp. v Sona Realty Co., 18 AD3d 352, 354-355 [1st Dept 2005]).

A. Aiding & Abetting Breach of Fiduciary Duty against the Construction defendants

The Kramers allege that the Construction defendants aided and abetted a breach of fiduciary duties that the Zeckendorfs owed to the Kramers to disclose the construction problems. However, the allegations of the Construction defendants' knowledge of the alleged breaches of fiduciary duty are conclusory (Proposed Complaint ¶ 120), and the Kramers offer no evidentiary support for this theory (cf. National Westminster Bank USA v Weksel, 124 AD2d 144, 150 [1st Dept 1987]["where the actual assistance allegedly given the fraud is not clearly substantial, the allegations of scienter must be all the more detailed if the requisite connection of the purported aider and abettor with the fraud is to be made out"]).

Though the proposed complaint also alleges that the Construction defendants should have known that the Zeckendorfs violated their fiduciary duties (see ibid.), the predominant view is that actual knowledge of the tort is required to establish aider and abettor liability (see e.g. Kaufman v Cohen, 307 AD2d 113, 125 [1st Dept 2003]; see also Kolbeck v LIT America, Inc., 939 F Supp 240, 246 [SD NY 1996], affd 152 F3d 918 [2d Cir 1998][discussing New York cases]; but see Liberman v Worden, 268 AD2d 337, 338 [1st Dept 2000]).

B. Fraud against the Sponsor defendants

The proposed complaint alleges that the sponsor and the Zeckendorfs fraudulently concealed construction defects that should have been disclosed in amendments to the condominium offering plan, which were filed months before the Kramers closed on their unit. According to the Kramers, the Sponsor defendants falsely certified in plan amendments that "there have been no material changes of the facts or circumstances affecting the Property or the offering," when they allegedly knew of unfilled holes in the concrete structure of the building (see Proposed Complaint ¶¶ 49, 126), and leaks and water damage that allegedly were attributed to riser breaks and/or freezing pipes (id. ¶¶ 52, 127).

The Sponsor defendants maintain that the allegations of misrepresentation and concealment are still conclusory, and that the Kramers' "meager" documentary submissions do not support such claims. They also argue that the Martin Act bars this proposed cause of action, because the Kramers are attempting to plead a private right of action under the Martin Act. In any event, the Sponsor defendants argue that they had no duty to disclose the holes in the exterior walls and the water leaks, because the problems did not materially impede construction of the building. [*5]

Contrary to defendants' argument, the proposed complaint generally does not lack particularity. The allegedly false statements at issue are amendments to the offering plan, and plaintiffs have specifically set forth the wording of the amendments, and when and to whom they were made (see Proposed Complaint ¶¶ 51-55). Plaintiffs also submit field reports, project meeting minutes, and project change orders that may show that the Sponsor defendants knew of construction issues such as the unfilled holes and water leaks (see Plaintiffs' Exs 6-7, 9-10). However, a few allegations that defendants repeatedly misrepresented either the quality of the building's construction, or the extent of the alleged design and construction issues, are not pled with particularity (see id. ¶¶ 5, 61, 63).[FN2] If the Martin Act did not exist, much of the proposed cause of action for fraudulent concealment might stand.

But the Kramers' theory of fraud is too intertwined with the disclosure obligations of the Martin Act. Under the Martin Act, "an omission as well as a concealment or suppression of information may be actionable as a fraudulent practice" (State of New York v Rachmani Corp., 71 NY2d 718, 726 [1988]). The Kramers' claims are "based on the sort of wrong given over to the Attorney-General under the Martin Act" (Whitehall Tenants Corp. v Estate of Olnick, 213 AD2d 200, 200 [1st Dept 1995]; and see, Kralik v 229 East 79th Street Owners Corp 5 NY3d 54 [2005] [the Attorney General bears sole responsibility for implementing and enforcing the Martin Act, and may investigate and initiate civil or criminal actions when he believes there is fraud]). The failure to disclose information in an offering plan is considered as "nothing more than a private cause of action which is prohibited under the Martin Act" (15 E. 11th Apt. Corp. v Elghanayan, 220 AD2d 295, 296 [1st Dept 1995]).

Furthermore, allowing these fraud claims to go forward would have broad policy repercussions on every sponsor of a condominium project. The Martin Act regulations require disclosure of any material defects or needed major repairs to the building (see 13 NYCRR 20.3).

In response to a question from the court at oral argument, plaintiffs maintained that offering plan amendments must also disclose the historical fact that a construction problem occurred, even if the sponsor fixed the problem (July 27, 2005 Tr. at 19). Because it seemed that the duty of disclosure sought by the Kramers would significantly expand a sponsor's [*6]disclosure obligations and burdens under the Martin Act, the court voiced doubt over whether an offering plan should disclose the transitory construction problems of a building under construction. In briefing this specific issue, the Kramers cited provisions of the Martin Act regulations set out at 13 NYCRR 20.1 (b), to show that the failure to disclose construction problems constituted material omissions. Their reliance on these Martin Act regulations only underscores that they are pressing an action reserved to the Attorney General under the Martin Act (see Rego Park Gardens Owners v Rego Park Gardens Assocs., 191 AD2d 621, 623 [2d Dept 1993]).

The Kramers do their best to characterize this claim as common-law fraud, which the Martin Act does not bar (CPC Intl. v McKesson Corp., 70 NY2d 268, 285 [1987]). They argue that these claims are permissible because they do not seek injunctive relief or restitution, which are remedies available to the Attorney General. However, this cosmetic distinction is unavailing. It is well-settled that "plaintiffs are not permitted to disguise claims which rightfully belong to the Attorney General as their own" (511 W. 232nd Owners Corp. v Jennifer Realty Co. 285 AD2d 244, 248 [1st Dept 2001], affd on other grounds 98 NY2d 144 [2002].

In additional letter submissions, the Kramers also stress that William Zeckendorf intentionally withheld information. Of course, a line of cases distinguishes fraud from a Martin Act violation based on whether the sponsor allegedly possessed an intent to deceive (see Eagle Tenants Corp. v Fishbein, 182 AD2d 610, 611 [2d Dept 1992], citing Horn v 440 E. 57th Co., 151 AD2d 112, 120 [1st Dept 1989]). The distinction has some appeal, because the Attorney General does not need to prove scienter to establish a Martin Act violation (Rachmani Corp., 71 NY2d at 725). But this distinction is unworkable on these allegations, because the nature of the wrong is based on omissions of legally required disclosures. An intentional omission is no less a violation of the Martin Act than a careless omission, and the Attorney General may prosecute both. As a corollary, a fraud claim that fails to plead scienter is not dismissed because it is an impermissible Martin Act claim; it simply is not fraud.

A distinction should be drawn between fraud based on the omissions of an offering plan, which is not actionable, and fraud based on affirmative misrepresentations of fact, which is not barred. This distinction appears in CPC International, where the plaintiff claimed that defendants deliberately and fraudulently prepared false projections of the financial condition of a wholly-owned subsidiary of a defendant. The plaintiff also claimed that defendants intentionally withheld other accurate projections (CPC Intl., 70 NY2d at 274). In [*7]permitting the common-law fraud claim to proceed, the Court of Appeals focused on the false financial projections, and not the financial projections that allegedly were omitted. In Vermeer Owners v Guterman (78 NY2d 1114 [1991]), the common-law fraud claim that was not barred under the Martin Act was based on demonstrably false statements in the cooperative offering plan, not omissions.

The Kramers argue that, even if the Martin Act bars this cause of action against the sponsor, they may proceed against the Zeckendorfs individually because they signed the sponsor's certification in their individual capacities (see Birnbaum v Yonkers Contr. Co., 272 AD2d 355, 356 [2d Dept 2000]; Zanani v Savad, 228 AD2d 584 [2d Dept 1996]; Residential Bd. of Mgrs. of Zeckendorf Towers v Union Sq.-14th St. Assocs., 190 AD2d 636 [1st Dept 1993]). This argument is unconvincing. Regardless of whether the cause of action is against the sponsor or the principals of the sponsor, the nature of the wrong that falls under the Attorney General's exclusive jurisdiction is still the same. The cases that the Kramers cite did not address the issue of impermissible private rights of action under the Martin Act. These cases also involved fraud based on misrepresentations of fact, not omissions.

Therefore, the court denies leave to amend with respect to the fifth cause of action of the proposed second amended complaint.

C. Other Matters

The Sponsor defendants also contend that the Martin Act bars the Kramers' causes of action for negligence and breach of fiduciary duty, and they object to proposed allegations that add "the Zeckendorfs, through Zeckendorf Realty" and "the Zeckendorfs, through Brown Harris" to the complaint (see Proposed Complaint ¶¶ 30-31, 90). They interpret these clauses as an attempt to hold the Zeckendorfs individually liable based on their relationship to Zeckendorf Realty L.P. Last, defendants JB&B and Williams maintain that punitive damages are not warranted.

These arguments are outside the confines of the motion here. Defendants may only challenge the merits of any proposed new cause of action, which negligence, breach of fiduciary duty, and punitive damages are not. Defendants already had the opportunity to move for dismissal of these causes of action and claims.

CONCLUSION

Though defendants did not object to the addition of certain allegations (see e.g. Proposed Complaint ¶ 106), it would be too burdensome to require answers of all defendants to a fundamentally unchanged pleading. Accordingly, it hereby is

ORDERED that plaintiffs' motion for leave to amend the [*8]complaint is denied.



Dated: December 6, 2005ENTER:

J.S.C. Footnotes

Footnote 1: See Board of Mgrs. of 515 Park Ave. Condominium v W10Z/515 Real Estate L.P., Sup Ct, NY County, Solomon, J., index No. 604629/2002; see also Kerusa Co. LLC v W10Z/515 Real Estate L.P., Sup Ct, NY County, Solomon, J., index No. 601610/03 [decided in conjunction herewith]).

Footnote 2: To the extent that plaintiffs are alleging that the offering plan and the original certification were false, it is the law of the case that they cannot support an action for fraud, as they predated the occurrence of the alleged construction problems at issue.