The Liable Sponsor

In Chrysikopoulos v. Soho Greene Associates LLC, the sponsor and the principal of the sponsor of an offering plan to rehab a building for condominium conversion were held liable for damages for construction defects suffered by a purchaser.

In this action for damages and declaratory and injunctive relief relating to the condominium conversion of a historic building in Soho, defendants Soho Greene Associates LLC, Mecox Realty Corp., Alchemy Properties, and Kenneth S. Horn moved for an order under CPLR 3212, granting summary judgment and dismissing the complaint. Chrysikopoulos, the plaintiff, opposed the motion and cross-moved for an order under CPLR 3212 granting partial summary judgment as to liability against these same four defendants.

The following facts were not disputed. Chrysikopoulos was the former owner of condominium unit No. 5A at 20-26 Greene Street. Soho Greene Associates was the sponsor of the offering plan under which the building was converted to condominium ownership. Defendants Mecox and Alchemy were joint managers of Soho Greene, and Alchemy was also the selling agent retained by Soho Greene in connection with the offering of the condominium units. Defendant Horn was a principal of Soho Greene and of Alchemy.

On or about March 19, 1999, the Department of Law accepted for filing the offering plan to convert to condominium ownership the building at 20-26 Greene Street in Manhattan. The offering plan provided that the condominium was to consist of ten luxury residential units on the second through sixth floors, and two commercial units on the ground floor. The offering plan further provided that the sponsor, Soho Greene, intended to convert and fully renovate the units on the second to sixth floors to residential use.

On December 23, 1999, Chrysikopoulos executed a purchase agreement with Soho Greene for the purchase of unit No. 5A priced at $1.4 million. Chrysikopoulos alleged that, under the purchase agreement and offering plan, the sponsor, Soho Greene, was obligated to perform certain renovations to his unit, which included installing wood flooring and two bathrooms, and removing an elevator shaft from the unit.

Chrysikopoulos alleged that, at the time of the closing in April 2000, the renovations called for under the offering plan and the purchase agreement had not been completed. After he moved in, he also alleged that problems with the construction of the building became apparent and persisted up until 2003. These problems included an inoperable intercom system, frequent lack of hot water, low water pressure, and non-functioning heat and air conditioning systems.

Chrysikopoulos further alleged that construction defects specific to his unit also became apparent, and included ceiling leaks, wall cracks, floor buckling and warping, improper installation of bathroom fixtures, improper pitching of shower drains, cracked bathroom tiles, inadequate ventilation for the mechanical room, and lack of venting to the laundry room floor.
According to Chrysikopoulos, the course of dealings between the parties before the closing in April 2000, showed that the sponsor, through its principal, Horn, consistently and repeatedly acknowledged its responsibility to resolve the building-wide problems, as well as those specific to Chrysikopoulos’s unit. In May 2002, Chrysikopoulos began this action against the four defendants, and other defendants including Front Row Enterprises LLC (the general contractor hired by the sponsor to renovate the building), Matthew Adams Properties (the managing agent for the building), Arpad Baksa Architect P.C., Nicholas Tjartjalis Architect P.C. and Nicholas Tjartjalis.
The four primary defendants answered on July 8, 2002. Baksa answered on June 28, 2002. Chrysikopoulos discontinued the action against Matthew Adams Properties and obtained a default judgment concerning Front Row. It was unclear whether the firm, Nicholas Tjartjalis Architect P.C., and Nicholas Tjartjalis, its principal, appeared or answered.

The complaint contained nine causes of action, and referred to the four defendants Soho Greene, Mecox, Alchemy, and Horn, collectively, as “the sponsor”:

(1) Breach of contract by the sponsor. The sponsor breached its obligations under the offering plan and the purchase agreement by failing to properly renovate unit No. 5A, failing to cure the construction defects, and failing to obtain a permanent certificate of occupancy.

(2) Breach of contract by Front Row.

(3) Breach of warranties of fitness and habitability implied in the construction contract, the offering plan, and the purchase agreement, by the sponsor and Front Row.

(4) Negligence by the sponsor and Front Row, asserting that the renovations to unit No. 5A were performed or were caused to be performed in a negligent and careless manner, and that the sponsor and Front Row were further negligent in allowing the construction defects to remain uncured, resulting in additional damage to unit No. 5A.

(5 and 6) Negligence by the architects Tjartjalis and Baksa.

(7) Breach of fiduciary duty, waste, and mismanagement by the sponsor.

(8) Violation of the General Business Law Section 350 by the sponsor, who engaged in false advertising concerning the sale of the condominium units.

(9) Declaratory and injunctive relief, requiring the sponsor to make the necessary renovations and repairs to plaintiff’s unit.

Defendants Soho Greene, Mecox, Alchemy, and Horn were now moving for a summary judgment, dismissing the complaint against them. Meanwhile, the plaintiff, Chrysikopoulos, was cross-moving for a partial summary judgment concerning liability against these same four defendants.

The defendants’ motion was determined as follows. With respect to first and third causes of action, the defendants argued that the plaintiff’s acceptance of unit No. 5A “As Is” and his acceptance of the deed at the closing, discharged the sponsor from all obligations under the purchase agreement except for those expressly stated to survive or to be performed subsequent to delivery of the deed. The court concluded that this argument is without merit, as it directly contradicted the clear and express terms of the parties’ purchase agreement. Specifically, paragraph 4(B) of the purchase agreement stated as follows: “Purchaser’s payment of the Balance and acceptance of a deed to the unit shall constitute Purchaser’s recognition that sponsor has satisfactorily performed all of those obligations stated in the Offering Plan and this Agreement to be performed by sponsor prior to closing. However, nothing herein contained shall excuse sponsor from performing those obligations (if any) expressly stated herein or in the Plan to be performed subsequent to the closing...”

Paragraph 9 likewise stated: “Acceptance of the Deed will evidence Purchaser’s recognition that sponsor has performed all of its obligations under this Agreement and the Plan, except such as may expressly be stated to survive delivery of the deed or except such as may be required under the Plan or by operation of law to be performed by sponsor subsequent to closing. The foregoing applies only to the Purchaser. Purchaser’s acceptance of the Deed shall not relieve sponsor from any liability for representations made in the Plan.”

Although Paragraph 20 stated that the unit was sold “as is,” that statement was qualified as follows: “The unit is sold ‘As Is’ on the date of this Purchase Agreement subject only to reasonable wear and tear and to Seller’s obligation under the Plan to maintain the unit prior to Closing and make the alterations and improvements described in the Plan... The issuance of a final Certificate of Occupancy for the Building shall be deemed presumptive evidence that the Building and the unit have been fully rehabilitated in accordance with the Plan. However, nothing herein contained shall excuse sponsor from its obligation to correct any defects in construction in accordance with the conditions set forth in the Plan in the section entitled ‘Rights and Obligations of sponsor’... The alteration of the Building and the unit and the correction of any defects in alteration to the extent required under the Plan are the sole responsibility of the sponsor... However, Purchaser acknowledges and agrees that sponsor will not be liable for, and will have no obligation to correct, certain variations from the Plan as indicated in the Plan and will only be responsible to correct any construction defects to the extent, and on the terms and condition, set forth in the Plan.”

Paragraph 21 was entitled “Final Inspection of unit,” and obligated the purchaser “to pay the entire Balance of the Purchase Price, without provision for escrow, notwithstanding sponsor’s obligation to complete or correct the construction items noted on Purchaser’s Inspection Report. However, nothing herein shall relieve sponsor of its obligations as set forth in the ‘Rights and Obligations of sponsor [in the Offering Plan].’”

Thus, under the clear and unambiguous language of these provisions in the parties’ purchase agreement, the sponsor’s obligation to complete the construction work required by the Offering Plan, survived the closing, and continued until completion. This conclusion was further supported by the sponsor’s conduct after the closing, as shown by the uncontroverted correspondence from May 2000 through June 2001, between the plaintiff, defendant Horn as the principal of the sponsor, and counsel for the condominium. These numerous letters and other documents made clear that, at no time after the closing, did the sponsor ever deny its responsibility to complete the construction and cure the defects, but instead remained in contact with Chrysikopoulos and the condominium association, and consistently acknowledged affirmatively that it intended to complete the work in the building and in Chrysikopoulos’s unit. For these reasons, the court held that the first and third causes of action should stand.

With respect to the fourth cause of action for negligence, defendants asserted that the sponsor did not perform any renovations to the plaintiff’s unit “which have been, since the time of the purchase, reported by the Board of Managers to the sponsor as having been defective.” It was unclear to the court what the defendants meant by this assertion. As determined above, the sponsor’s obligation to perform the renovation work continued after the closing. Moreover, in the court’s view, the record revealed sufficient facts, which were unrefuted, to support the plaintiff’s claim that the renovation and construction work was negligently performed.

As to the seventh cause of action for breach of fiduciary duty, waste and mismanagement, defendants argued that “in or about June 2000, the condominium board took over full and complete control of the premises, even installing its own management team, and that it was solely the responsibility of the board, not the sponsor, to identify and repair any defects.”

This argument was without merit, said the court, in view of the clear and express provisions in the purchase agreement and the Offering Plan as to the sponsor’s continuing obligations. Although it was not disputed that the condominium owners elected a board of managers, and discharged the sponsor’s management sometime in 2000, the defendants pointed out that there was no contractual language in the offering plan, the purchase agreement, or the rules governing the condominium board, that would relieve the sponsor of its obligations under the offering plan and the purchase agreement.

Concerning the eighth cause of action for false advertising based on General Business Law Section 350, the court said that the defendants correctly asserted that the New York State Department of Law had exclusive jurisdiction to prosecute sponsors who violate the disclosure requirements of the Martin Act. Thus, the eighth cause was dismissed.

The ninth cause of action for injunctive and declaratory relief, requiring defendants to make the necessary renovations and repairs, was also dismissed. As it was undisputed that plaintiff no longer owned unit No. 5A, the court said that he lacked standing to seek declaratory and injunctive relief with respect to repairing or renovating these premises.

The final issue raised in the defendants’ motion was whether the complaint should be dismissed as to the individual defendant, Kenneth S. Horn. Horn argued that he bore no personal liability to the plaintiff, since his involvement in the underlying transaction was limited to his position as the president or principal of the sponsor, Soho Greene Associates LLC, or the manager, Alchemy.

The court held that this argument was without merit, as the certification of the offering plan demonstrated that Horn executed the certification in his individual capacity, as well as his capacity as the “managing member” of the sponsor. The certification provided for two separate signature lines, and Horn signed his name on each of these lines. Under the first signature line, “Kenneth S. Horn, Managing Member” is typewritten, and under the second signature line, only “Kenneth S. Horn” is typewritten. Where as here, the certification of the offering plan, was signed by Horn in his individual capacity, the court said that he knowingly and intentionally advanced the obligations of the offering plan and, as such, could be held personally liable.

Turning to the plaintiff’s cross-motion, the court concluded that plaintiff Chrysikopoulos was entitled to partial summary judgment on the issue of liability, against defendants Soho Greene, Mecox, Alchemy, and Horn. Based on plaintiff’s affidavit and the supporting documents, which included copies of the offering plan, the purchase agreement, numerous correspondence among the plaintiff, defendant, and counsel for the condominium, and reports from two separate engineers, the plaintiff had established liability as a matter of law against the defendant sponsor, the entities related to the sponsor, and the defendant Horn, the personal signatory on the certification of the offering plan.

As discussed above, under the clear and unambiguous terms of the purchase agreement and the offering plan, the court concluded that the sponsor was obligated to renovate the building and plaintiff’s unit, and defendants had failed to establish the existence of a triable issue of material fact as to their liability under these agreements. A trial was necessary, however, to determine the nature and extent of damages, specifically the extent to which the sponsor failed to comply with its obligations to renovate the building and plaintiff’s unit under the terms of the offering plan and the purchase agreement.