Sponsor Down Payments

May a purchaser recover a down payment in connection with the purchase of a newly constructed condominium apartment, when the apartment was not built as promised? That was the issue in The Plaza PH2001 LLC v. Plaza Residential Owner LP.

In 2007, while The Plaza Hotel was being renovated and converted into condominium ownership, plaintiff, The Plaza PH2001 LLC, entered into agreements to purchase two penthouse apartments; one for $31 million and another for $1.535 million. The larger apartment was to be used as the residence of the principals of plaintiff, and the second was to be used by household staff. Plaintiff deposited down payments of $6.2 million for the larger apartment and $307,000 for the smaller apartment.

The penthouse was an addition to the existing structure of the hotel. It was under construction at the time plaintiff signed the purchase agreements. The selling agent apparently showed plaintiff floor plans, a large interactive “mock-up” of the apartment, and a virtual tour on the computer before purchaser signed the purchase agreements.

Plaintiff alleged that it had no access to the units during construction and did not see the larger apartment until May 2008. Plaintiff then refused to close on either apartment. In November 2008, it sued Plaza Residential Owner LP, CPS 1 Realty LP, El-Ad Properties NY LLC, Stribling Marketing Associates LLC, and Kramer Levin Naftalis & Frankel LLP (sponsor, selling agent, and escrow agent). The plaintiff began a second action against the same defendants – other than the escrow agent – in 2010.

In the 2008 action, plaintiff asserted breach of contract against the sponsor; that it was entitled to attorneys’ fees because of the breach; that the sponsor and selling agent engaged in fraud; and that the down payments should be released to plaintiff.

Factually, plaintiff claimed that the larger unit had not been constructed in accordance with plans and specifications filed with the Department of Buildings; did not comport with the unit as depicted in the model that had been shown to plaintiff before purchase; and did not meet the representations made by sponsor as to the size of the rooms, the height of the ceilings, and the number and sizes of the windows.

Specifically, plaintiff alleged that there were material and substantial changes because the unit did not have floor-to-ceiling windows in the living room so that the view of Central Park was obstructed; an unsightly gutter was constructed outside the living room and breakfast nook, which had never been disclosed and materially impeded the view of the park; the breakfast area had only two windows while the floor plans showed four; the slope of the skylights in the living room and breakfast nook were steeper than originally shown (thereby reducing the ceiling heights); columns were constructed in the living room that were larger than promised; and the scale of the rooms was smaller than promised.

In the 2008 suit, the defendants moved to dismiss the complaint in its entirety. Alternatively, they moved to dismiss the complaint as to the smaller apartment, about which plaintiff made no claims. Defendant sponsor also asked that the down payments be delivered to it and that it receive an award of attorneys’ fees.

In support of their motion, defendants referred to the “no representation” provision of the purchase agreements. It stated: “Purchaser acknowledges that Purchaser has not relied on any architect’s plans, sales plans, selling brochures, advertisements, representations, warranties, statements or estimates of any nature whatsoever whether written or oral, made by the Sponsor, Selling Agent or otherwise, including, but not limited to, any relating to the description or physical condition of the Property, the Building or the Unit, or the size or the dimensions of the Unit or the rooms therein contained or any other physical characteristics thereof... except as herein or in the Plan specifically represented; Purchaser has relied solely on his or her own judgment and investigation in deciding to enter into this Agreement and purchase the Unit. No person has been authorized to make any representations on behalf of the Sponsor. No oral representations or statements shall be considered a part of this Agreement. Purchaser agrees (a) to purchase the Unit, without offset or any claim against, or liability of, Sponsor, whether or not any layout or dimension of the Unit or any part thereof, or of the Common Elements, as shown on the Floor Plans on file in the Sponsor’s office and [to be] filed in the City Register’s Office is accurate or correct, and (b) that Purchaser shall not be relieved of any of Purchaser’s obligations hereunder by reason on any immaterial or insubstantial inaccuracy or error. The provisions of this Article 20 shall survive the closing of title or the termination of this Agreement...”

In the 2008 action, the court determined that this language related specifically to plaintiff’s complaints and that it established a complete defense as a matter of law. Specifically, the court determined that plaintiff had no right to rescission, which arose only from changes that were “material,” and the pleadings failed to describe any changes that would have met this burden. Accordingly, the court concluded that the down payments should be paid to the sponsor and that the sponsor could recover its legal fees, as spelled out in the purchase agreements.

In 2010, plaintiff brought a new action against the sponsor and its selling agent. This time, plaintiff asserted 11 causes of action, including: a declaratory judgment for a right of rescission; specific performance against sponsor; breach of contract; fraud/fraudulent concealment; conspiracy to commit fraud; negligent misrepresentation; breach of the implied covenant of good faith and fair dealing; deceptive trade practices under the Martin Act; and failure to file a statement of record under the Interstate Land Sales Full Disclosure Act.

As in the 2008 complaint, plaintiff asserted that the larger penthouse apartment was not what was promised to plaintiff and that, as such, it was entitled to have its down payment returned. Plaintiff also claimed that the sponsor made material changes to the offering plan without informing plaintiff and that, had plaintiff known of these changes, it would have rescinded its offers to purchase.

Defendants moved to dismiss the complaint and sought attorneys’ fees under the purchase agreements. The court discussed that, in connection with such a motion, dismissal was appropriate only where the documentary evidence submitted conclusively established a defense to the claims as a matter of law.

Defendants argued that the complaint should have been dismissed because it related to the same transaction as the 2008 action claims. Plaintiff argued that the 2008 decision was issued “without prejudice” and that the new complaint cured any purported defects that caused the court to dismiss the 2008 action.

The court explained the concept of “res judicata” – literally, “the thing has been judged.” It explained that New York law requires that once a claim has been brought to a conclusion, all other claims arising out of the same transaction are barred, even if based on different theories or if the plaintiff is seeking a different remedy. Indeed, New York law requires that a claim be barred even if the claims involved materially different elements of proof and even if the claims would have called for different measures of liability or different kinds of relief.

Given these principles, the court concluded that res judicata barred plaintiff’s complaint in the 2010 action. The court explained that the judge who decided the 2008 action rendered a final and comprehensive decision in which she stated that the no-representation language contained in the purchase agreement established a complete defense as a matter of law. The 2008 action decision also stated that there were no “material” changes that would have allowed plaintiff to rescind the purchase agreement.

Even though plaintiff added causes of action in 2010 that were not litigated in the 2008 action, they all arose from the same transaction or series of transactions and were or could have been litigation in the 2008 action. Accordingly, the court found that plaintiff had a full and fair opportunity to litigate its claims in the 2008 action. As a result, the complaint was dismissed and defendants were entitled to recover attorneys’ fees according to the purchase agreement.

Comment: The lower courts have not always been consistent in their interpretation of no-representation clauses similar to the one at issue in this case. Here, plaintiff was shown a mock-up and a virtual computer rendering of the apartment. Yet, because this was done before plaintiff entered into its purchase agreements, and because the purchase agreements contained the “no representation” language, the court determined that plaintiff had no right to rely on the mock-up. Had the mock-up been made an exhibit to the contract, or had the terms of the contract included the specific representations plaintiff claimed the sponsor had made, we believe the decision might have been different.

In addition, plaintiff failed to allege all potential causes of action in the 2008 action. Because of the legal principle of “res judicata,” plaintiff could not take a second bite of the apple and relitigate the same facts through different causes of action. Indeed, the claims plaintiff made in the second action included alleged violations of the Martin Act and the Interstate Land Sales Full Disclosure Act, neither of which had been argued in the 2008 action. However, because the factual basis of these claims had been litigated and fully and finally decided, the court refused to consider them in the 2010 action. We do not know how the court would have considered these specific claims had they been brought in the 2008 action.

We understand that the decision from the 2008 action has been appealed to the appellate division. We will wait to see whether that court agrees with the lower court that the no-representation language in the purchase agreements precludes plaintiff from maintaining an action for a return of the down payments. Further, if the 2010 decision is similarly appealed, we await the appellate court’s advice on whether any of the new claim can survive notwithstanding the decision in the 2008 case.

This case cautions buyers. If purchasing an apartment that is not yet built, and if you are purchasing because of representations made concerning the layout, size, number of windows, number of skylights, etc. – make sure it is in writing and is attached and incorporated into the purchase agreement. It is also a caution to all litigants that all claims be asserted at the time of the initial action so that they are not precluded by the doctrine of res judicata.

Attorneys:
For Plaintiffs: Morrison Cohen LLP
For Defendants: Kramer Levin Naftalis & Frankel LLP