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Kerusa Co. LLC v. W10Z/515 Real Estate Limited Partnership

April 2, 2009

KERUSA CO. LLC, RESPONDENT,
v.
W10Z/515 REAL ESTATE LIMITED PARTNERSHIP, ET AL., APPELLANTS.



The opinion of the court was delivered by: Read, J.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the Official Reports.

This appeal involves a lawsuit seeking damages for common-law fraud as a result of alleged construction and design defects in a 42-story, 39-unit luxury condominium building located at the corner of Park Avenue and 60th Street in New York City, having 515 Park Avenue as its address. For the reasons that follow, we hold that a purchaser of a condominium apartment may not bring a claim for common-law fraud against the building's sponsor when the fraud is predicated solely on alleged material omissions from the offering plan amendments mandated by the Martin Act (General Business Law art 23-A) and the Attorney General's implementing regulations (13 NYCRR part 20).

I.

On August 24, 1999, plaintiff Kerusa Co., LLC*fn1 executed a purchase agreement for the penthouse apartment, a suite on a lower floor, two storage units, and a wine cellar in the building at 515 Park Avenue. The purchase price was $13.3 million. The closings on the apartment and the other units took place in March and December 2000 respectively. Kerusa purchased the penthouse unit as raw space without, for example, drywall, studding and insulation, except at exterior walls; plumbing fixtures and branch piping; appliances; or electrical distribution (electrical service was terminated at the panel box) and spent $8 million building it out.

On May 22, 2003, Kerusa filed suit against those sponsoring, designing, constructing, marketing and selling units in the building, alleging causes of action for fraud, breach of contract and negligence among others. Kerusa complained generally that various construction and design defects caused significant water damage to the building and led to substantial water leaks, systems failures, widespread condensation and levels of mold posing serious health risks. As a result, Kerusa claimed to have "suffered a substantial, if not total, loss in the value of [its] investment."

After Kerusa filed a first amended complaint, Supreme Court on October 7, 2004 dismissed the cause of action for fraud because the allegations lacked particularity (see CPLR 3013; 3016 [b]; Channel Master Corp. v Aluminum Ltd. Sales, 4 NY2d 403, 406-407 [1958]; Barclay Arms v Barclay Arms Assocs., 74 NY2d 644, 646-647 [1989]). Accordingly, on May 13, 2005, Kerusa moved for permission to file a second amended complaint, which asserted a claim against W10Z/515 Real Estate, L.P. (the condominium building sponsor); Arthur W. and William Lie Zeckendorf (two principals of the sponsor); 515/ZGP, LLC (the sponsor's managing general partner); W10Z/515 Gen-Par, LLC (the sponsor's general manager); and Zeckendorf Realty, L.P. (the sponsor's selling agent) (collectively, the sponsor defendants) for "fraudulent inducement to sign and fraud and fraudulent concealment in connection with purchase agreements and closing of purchase of units."

The purported fraud stemmed from supposedly false and fraudulent representations and material omissions in the sponsor defendants' sales brochures and advertisements; and construction and design defects or problems alleged to have been known to the sponsor defendants but not disclosed in the offering plan amendments filed as construction progressed. On the latter point, while alleging no specific misrepresentations, Kerusa protested that the sponsor repeated in each amendment that "[e]xcept as set forth in this Amendment, there have been no material changes of the facts or circumstances affecting the Property or the offering" (see 13 NYCRR 20.5 [a] [2]). According to Kerusa, this statement concealed and omitted various construction and design defects and problems encountered during construction but either ignored or inadequately remedied, as evidenced by minutes of weekly meetings to review construction status, field reports and change orders.

Kerusa further alleged that the sponsor defendants knew that "these statements and representations were false" and "omissions . . . were material"; that "[t]hese misrepresentations and omissions" were made and "the defects were concealed" to induce Kerusa to purchase and close on units in the building; and that Kerusa believed the sponsor's "statements and representations to be true and reasonably relied on them in deciding to" make its purchases. It is clear that the complained of "representations" and "misrepresentations" in the amendments were simply representations that nothing material had been omitted. The allegedly undisclosed and concealed defects included holes in the building's concrete structure; an ongoing "water condition" in the cellars and elevator pits; inadequately insulated pipes that froze; and flooding during construction in November 1999 and January 2000, which caused water damage in the building. Finally, in the proposed second amended complaint, Kerusa also pleaded a new cause of action against the sponsor defendants for gross negligence.

By order dated December 8, 2005, Supreme Court denied Kerusa's motion. "With respect to allegedly false statements in brochures and advertisements," the court concluded that "Kerusa fail[ed] to plead the element of falsity with particularity" (Kerusa Co. LLC v W10Z/515 Real Estate, L.P. (10 Misc 3d 929, 935 [Sup Ct, NY County 2005]). In addition, "[s]ome of these statements [were] sales puffery . . ., and Kersua [did] not set forth in what manner the remaining statements [were] false" (id.).

While stating that Kerusa had cured the pleading deficiencies as to the alleged fraud of the offering plan amendments, Supreme Court held that the Martin Act ruled out this claim (id. at 935-936). The court reasoned that Kerusa's theory of fraud was "too intertwined with the disclosure obligations of the Martin Act" (id. at 936); and, if allowed to go forward, would "enlarge disclosure beyond that required under the Martin Act, and intrude upon the purview of the Attorney General" (id. at 931) as well as "significantly expand a sponsor's disclosure obligations and burdens" (id. at 936). As for gross negligence, Supreme Court opined that there were "no allegations of [a] duty of care owed to Kerusa by the sponsor defendants (other than the sponsor itself) that, in its breach, caused the alleged harm" (id. at 935). Kerusa appealed.

On October 16, 2007, the Appellate Division modified Supreme Court's decision and order so as to permit Kerusa to replead common-law fraud against the sponsor defendants and assert the proposed claim for gross negligence against the sponsor. With respect to Kerusa's cause of action for fraud related to the offering plan amendments,*fn2 the court stated generally that the Martin Act "does not preclude a private party from prosecuting an otherwise valid common-law fraud claim in connection with the sale of securities whenever the alleged fraudulent conduct is such that the Attorney General would be authorized to bring an action against the defendant under the Martin Act" (Kramer v W10Z/515 Real Estate Ltd. Partnership, 44 AD3d 457, 458 [1st Dept 2007])*fn3. In essence, the Appellate Division seems to have been of the view that a private party may bring an action for fraud grounded solely in alleged omissions from Martin Act disclosures so long as the elements of common-law fraud (a false representation here, that there were no omissions; in relation to a material fact; scienter; reliance; and injury) are pleaded with particularity. Finally, the court conclusorily rejected the sponsor defendants' objection that Kerusa had not alleged active concealment as simply "without merit" (id. at 460).

While this appeal was pending in the Appellate Division, Supreme Court granted sponsor defendants' motion for summary judgment to dismiss the remaining causes of action in Kerusa's first amended complaint. After the Appellate Division's decision, however, the parties stipulated to re-open the action to allow Kerusa to make its common-law fraud and gross negligence claims against the sponsor defendants.*fn4

Meanwhile, the sponsor defendants filed a motion for reargument or, alternatively, for permission to appeal so much of the Appellate Division's order as allowed Kerusa to amend its first amended complaint to replead common-law fraud. On April 24, 2008, the Appellate Division entered an order denying reargument, but granting the motion for leave to appeal and certifying the following question to us: "Was ...


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