It's Not Me, Claims the Sponsor. But What If It Is, Under a Different Name?
April 18, 2014 — The condo board at 550 Grand Street in Williamsburg, Brooklyn, had a problem unrelated to hirsute hipsters, organic kale smoothies and double-wide strollers. It's a common problem with new construction and even in renovated pre-war apartment buildings, such as this four-story, 1920 walkup converted circa 2009 from three units to six. But what makes this case unusual, and possibly instructive to other new boards who may be facing sponsor shenanigans, this board successfully argued that just because the sponsor used different corporate names doesn't mean any of those entities can evade responsibility.
The building's six apartments and one commercial space were sold under a condominium offering plan submitted by sponsor 550 Grand LLC to the Attorney General's office on July 11, 2008. The sponsor said in the offering plan that he would renovate the building substantially and that he had applied for a J-51 tax abatement. The offering plan warranted, as offering plans do, that the construction work, "including materials, equipment and fixtures," were installed in accordance with the offering plan and the architect's report.
One suspects the offering plan and the architect's report didn't state the building would suffer from substantial design and construction defects, inadequate and negligent workmanship, missing or defective materials and gross deviations from the architect's report. It didn't say — though the condo board did — that the defects included "water intrusion, mold infestation, foundation cracking, floor buckling, fire-safety issues [and] bulging and saturation in load-bearing walls."
Burst Pipe, Bad Roof
Among other mishaps, a pipe burst in January 2011, and there was a partial collapse of the drainage system and a light well (an open shaft that allows light to reach internal windows) in June 2012, as well as a roof failure in May 2013. The condo board hired consultants who discovered significant construction deficiencies, substandard conditions, and instances of property damage, either resulting from design defects or from incomplete or inadequate workmanship. Oh, and no one applied for the J-51 tax abatement, either.
The board sued in August 2013, asserting breach warranties, negligent construction / supervision, fraud / misrepresentation and other charges, and named, among others, sponsor 550 Grand LLC; the sponsor's managing partner and general manager, Schlegel LLC; the sponsor's members, Michael T. Schlegel and Cynthia A. Schlegel; and EcoRise Development, of which Michael T. Schlegel is president and a founding partner. Also in the crosshairs were contractor Eco-Build Construction (formerly L-Line Enterprises), and Timothy Phillips, its principal and founding member; and the architectural and engineering company Ghattas Engineering (formerly Duke + Ghattas Associates).
The Schlegels contended that Schlegel LLC didn't belong in the case since, they said, that entity was only mentioned in a draft of the condominium declaration because of a typographical error by the sponsor's attorney. They pointed out that a final condominium declaration, as filed with the Office of the City Register, correctly named 550 Grand Street LLC as the sponsor, and that the operating agreement for Schlegel LLC restricted its activities to other properties not involving this building.
Opposition Research
Here's where good research by the board paid off. As board member Alana Blahoski testified in an affidavit, Schlegel LLC was part of the Schlegels' corporate empire and the condominium's bank records reflected that Michael Schlegel had transferred funds to and from various other accounts of his and those of his wife and of Schlegel LLC. She even cited a specific money transfer — transaction number and all! — between the condominium and Schlegel LLC.
Although Judge David I. Schmidt of Kings County Supreme Court accepted the Schlegels' explanation about Schlegel LLC inadvertently being called the as the sponsor in the draft condominium declaration, he also noted that Michael Schlegel did nothing to rebut Blahoski's contention. The Schlegels' attorney downplayed the affidavit as ambiguous and unsupported, among other things, but the judge was unconvinced. While he did dismiss the board's claims against Schlegel LLC and EcoRise Development, he said the board could file and serve an amended complaint within 20 days.
In the end — there was a lot more involved in the case, believe us — the court ruled on April 4, 2014, that the sponsor could be tried for deceptive acts and practices, breach of contract and violation of General Business Law Sections 349 and 350, and that the contractor would have to stand trial as well. The architect walked away unscathed.
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