Recent Court Decision Brings Transparency ,,,and Potential Liability

A recent decision in New York State Appellate Court may bring relief to condominium owners involved in lawsuits with developers over construction defects.  It also may bring increased transparency to the often-opaque world of real estate investment, and increased liability to those who back the developers changing our skyline.

The case, known among attorneys as ‘Be@William,’ involves a 113-unit residential condo at 90 William Street, located in the Financial District. In addition to the condominium units, the property also contains two commercial units. It was completed in 2008 and had a sell-out of nearly $100 million. As early as 2010, residents and board began noticing and complaining about shoddy construction and related defects - they filed suit over the problems in 2013. The original court decision in that case ruled against the condominium and in favor of the developer, holding that in order to recoup funds from an investor or investors for shoddy construction, a condo board needed to prove a connection to those investors. The new appellate decision reverses that ruling.

Investment Structure & Liability - Peeling Back the Layers

Among the more esoteric components involved in the development and sale of condominiums (in New York or elsewhere) are the careful ownership structures that legions of attorneys have developed over the years to protect investors from liability - especially after units have been sold. To attract investors, developers - who normally don’t have the funds to build their project just lying around near at hand - offer those investors protection from worry. In very simplified terms, the developer assumes liability on behalf of the investors. While this financing structure is intended to protect investors who are not a part of the development team, it is also used (perfectly legally) to protect invested funds from individuals and entities related to the developer, or even the developer himself, protected by corporate veils. 

Such was the case here. The investors included the wife of the developer and a company owned by the developer, Louis Greco.

"Developers frequently operate through a legal entity that may have no assets by the time a board sues for construction defects,” says Jared Paioff, a partner with Schwartz Sladkus Reich Greenberg Atlas. This decision allows boards to claw back profits that were distributed to investors by the developer. Boards may now follow the profit that was already distributed, regaining that money to correct construction defects that should have been corrected by the developer. Investors are not technically liable for the construction defects of the developer, but they are liable for the distributions profit they received up to the amount of the developer’s liability."

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Comments

  • Smart investors invest through business entities, typically shell companies. How do you claw back money from an investors’ shell company? Does this ruling allow for that or does it only apply to individuals with no business entity protecting them?