Condo Boards Have New Weapon to Correct Construction Defects

Construction defects are nothing new to the buyers of New York City condominiums. What is new is that New York State recently revised its century-old rules on what’s known as fraudulent conveyance. The new Uniform Voidable Transactions Act, which went into effect on April 4, 2020, has just produced its first court ruling — and it’s good news for condo boards and unit-owners battling to recoup the cost of fixing construction defects.

In the recent decision, Justice Andrea Masley of the Commercial Division of New York State Supreme Court ruled that the sponsor of the condo conversion at 11 Beach St. in Tribeca must set aside $1.1 million — what’s known as a “pre-judgment attachment” — to satisfy any future awards to the condo board in an ongoing lawsuit over defects in the renovation work. The 11-story building was built in 1900 as offices, and the sponsor, HFZ Capital Group, began the condo conversion in 2014, with prices starting at $5.3 million.

“This decision was very good for us,” says Jeffrey Schwartz, a partner at the law firm Schwartz Sladkus Reich Greenberg Atlas, which is representing the condo board in the ongoing litigation. “Our clients still have to show that they’re entitled to the money, but the purpose of the pre-judgment attachment is to preserve a share of the proceeds from the sale of apartment 3-B. If the sponsor had been allowed to get rid of that apartment, that would have resulted in us not having any money to pursue. That asset would have been gone.”

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In the ruling, the court reiterated the basis for the condo board’s claim that it is entitled to $1.1 million to correct construction defects: “The Board’s forensic architect has explained how the Sponsor violated the Condominium Offering Plan and Purchase Agreements by not complying with the Building Code and other applicable laws, rules, and regulations, and by failing to construct the Building in accordance with the Plans and Specifications and representations in the Offering Plan.”

The board’s forensic architect found a host of defects, including leaky windows, warped floors, broken electrical outlets and faulty HVAC systems. The sponsor had not obtained a certificate of occupancy.   

The court’s decision noted that HFZ Capital had disposed of three of the last four unsold units to insiders, which is one of several criteria for establishing fraud. “In this case,” the court wrote, “the circumstances surrounding Sponsor’s transfers of the Units…suggests Sponsor’s actual intent to hinder, delay, or defraud. This conclusion at this preliminary stage is consistent with the newly enacted Uniform Voidable Transactions Act.”

Jared Paioff, a partner at Schwartz Sladkus who is also working on the case, echoes Schwartz’s approval of the court’s decision. “The new version of the law provides the granting of a pre-judgment attachment,” he says. “I was happy the court was following the new law without having the benefit of much precedent.”