603 N.Y.S.2d 867 | N.Y. App. Div. | 1993
OPINION OF THE COURT
The issue of primary concern on this appeal, and one of first impression in New York, is whether the individual members of the first board of managers of a condominium development, who were appointed by the sponsor prior to the sale of any condominium units, owe fiduciary obligations to the eventual purchasers of those units. We find that such sponsor-appointed board members do owe fiduciary duties to unit owners, and that, accordingly, the Supreme Court correctly denied the appellants’ motion insofar as it sought to dismiss the eighth cause of action to recover damages for breach of those fiduciary duties.
The facts underlying this appeal stem from the development and construction of The Fairways at North Hills Condominium, located in the Incorporated Village of North Hills in Nassau County. The plaintiff is the current board of managers of the condominium. The defendants are the sponsor of the condominium (see, Board of Mgrs. of Fairways at N Hills Condominium v Fairways at N. Hills, 150 AD2d 32, 34), as well as Charles Faulkner, Harvey Auerbach and Steve Auerbach, who constituted the initial board of managers appointed by the sponsor.
On this appeal, initial board members Charles Faulkner, Harvey Auerbach, and Steve Auerbach argue, inter alia, that they owed no fiduciary duty to the condominium and to the unit owners because all of their loyalty was owed to the sponsor that appointed them. In consequence, they insist, they may not be held personally liable for their alleged failure to ascertain the condition of the common areas, failure to correct the deficient construction of the units, failure to determine the cash requirements for the purpose of calculating accurate maintenance expenses, and failure to establish an adequate contingency reserve to offset unforeseen expenses. Nor, they contend, may they be individually called to account for any alleged self-dealing in their failure to address the defective construction of the common areas, and in their failure to increase the contingency reserves at a time when numerous units were still unsold, and when the sponsor therefore remained liable for a considerable proportion of the repair and reconstruction assessment.
We find, contrary to the appellants’ assertions, that a fiduciary duty on the part of the initial board of managers vis-á
The first board of managers of a condominium, synonymous as it often is with the sponsor, and linked with the sponsor’s legitimate pursuit of lawful profits, assumes a dual role. On the one hand, it "is vested with great power over the property interests of unit owners,” (Uniform Condominium Act § 3-103, comment 1 [7 ULA 505]) while at the same time it receives its authority from the profit-motivated sponsor. In consequence, a condominium’s first board of managers is subject to "a great potential for conflicts of interest,” such that "a very high standard of duty” must be imposed upon it to ensure that its members do not gear their decisions to benefit the sponsor at the expense of the association or its members (Uniform Condominium Act § 3-103, comment 1 [7 ULA 505]; Shore Terrace Coop. v Roche, 25 AD2d 666).
The imposition of such a duty is particularly warranted where the sponsor or developer retains essentially total control over the "planned community” for a substantial period of time during its developmental stages—here, for example, according to the offering plan and the by-laws, for the first two years or until 51% of the condominium’s 48 homes were sold, whichever occurred first (see, Natelson, Mending the Social Compact: Expectancy Damages for Common Property Defects in Condominiums and Other Planned Communities, 66 Ore L Rev 109, 116 [1987]; Hyatt and Rhoads, Concepts of Liability in the Development and Administration of Condominium and Home Owners Associations, 12 Wake Forest L Rev 915, 973-
In recognizing that in general a fiduciary duty subsists between a condominium’s initial, sponsor-appointed board of managers and the unit purchasers, we perceive a clear analogy with the board of directors of a cooperative corporation, which, because it is entrusted with the responsibility of protecting its shareholders’ interests, has been found by New York courts to owe shareholders a fiduciary duty (see, Matter of Levandusky v One Fifth Ave. Apt. Corp., 75 NY2d 530, 538; Straus v 345 E. 73 Owners Corp., 181 AD2d 483; Aronson v Crane, 145 AD2d 455, 456; Bernheim v 136 E. 64th St. Corp., 128 AD2d 434; Demas v 325 W. End Ave. Corp., 127 AD2d 476, 478). However, neither New York’s Condominium Act (see, Real Property Law art 9-B) nor New York case law has squarely addressed the issue of whether a condominium’s first board of managers owes the condominium and its unit owners a fiduciary duty.
It is worthy of note that in several other jurisdictions a fiduciary duty has been expressly imposed upon the sponsor-appointed members of condominium managing boards. Some
We therefore conclude that a sponsor-appointed board of managers of a condominium owes a fiduciary duty to the unit purchasers, and that the court properly refused to dismiss the plaintiff’s eighth cause of action because an issue of fact exists as to whether that duty was breached in the instant case. In so ruling, we recognize, in addition to the foregoing considerations, the practical concern that unit owners damaged by the bad-faith depredations of unscrupulous boards may find themselves without any realistic legal recourse in the event that the sponsor’s assets become unavailable or dispersed due to voluntary corporate dissolution or involuntary liquidation by the Attorney-General pursuant to the Martin Act (see, General Business Law art 23-A).
We have considered the appellants’ remaining contentions and find them to be without merit. We note that the plaintiffs’ negligence claims are viable, as there was privity of contract
Ordered that the order is affirmed insofar as appealed from, with costs.