Kerusa Co. LLC v. W10Z-515 Real Estate Ltd. Partnership

In Kerusa Co. LLC v W10Z/515 Real Estate Ltd. Partnership (12 NY3d 236, 906 N.E.2d 1049, 879 N.Y.S.2d 17 (2009), the plaintiff buyer (who was also a plaintiff in Kramer) alleged that the sponsor defendants failed to disclose various construction and design defects in the offering plan amendments, and represented therein that there were no material changes of fact affecting the condominium property or the offering. The Court of Appeals found that plaintiff's fraud claim relied on purported omissions from the disclosures required by the Martin Act and the Attorney General's implementing regulations. In such regard, the Court noted that "the Appellate Division seems to have been of the view that a private party may bring an action for fraud grounded solely in alleged omissions from Martin Act disclosures so long as the elements of common-law fraud . . . are pleaded with particularity." Id. at 242. The Court further noted that "to accept Kerusa's pleading as valid would invite a backdoor private cause of action to enforce the Martin Act in contradiction to our holding in CPC Intl. that no private right to enforce that statute exists." Id. at 245. Accordingly, the Court of Appeals reversed the Appellate Division's ruling, which had granted plaintiff's mo-tion to amend the complaint to add a common-law fraud claim. In doing so, however, the Court explained that the "Martin Act dramatically altered the common-law rule" because under common law, "New York adhered to the doctrine of caveat emptor and imposed no duty on the seller or the seller's agent to disclose any information concerning the premises . . . unless there was some conduct. . . constituting active concealment" i.e., "that the seller or the seller's agents thwarted the plaintiff's efforts to fulfill . . . responsibilities fixed by the doctrine of caveat emptor" Id. at 244-245. However., "in order to avoid transforming every potential latent construction defect case into a claim for common-law fraud on account of alleged omissions in Martin Act disclosures" the complaint must support active concealment unrelated to alleged omissions from Martin Act disclosures (for example, that drywall was painted over, or taped up, to cover or prevent discovery of water damages, or, that wall or bricks were put up to hide leaking pipes or holes in foundation. Id. at 246. The Court of Appeals further noted that because Kerusa turned on the nondisclosure of information required by the Martin Act, as plaintiff alleged "no specific misrepresentation" other cases, which turned on the dis-closure of deliberately false information, were distinguishable. Id. at 240, 246. Thus, the Court of Appeals did not foreclose a private party from bringing a common-law fraud claim for an alleged violation of the Martin Act based on an affirmative misrepresentation (as opposed to mere non-disclosure), as long as the requisite elements are fully pled. Nor did the Court foreclose a private party from bringing a claim based on fraudulent concealment, as long as the requisite elements are fully pled. The sponsor stated in amendments to the offering plan that there were no "material changes of facts or cir-cumstances affecting the property or the offering." (Id. at 245). The plaintiff claimed that despite the sponsor's knowledge of major defects that arose during construction, the sponsor did not disclose the construction and design defects in the offering plan amendments. (Id. at 245). The Court of Appeals held that "a purchaser of a condominium apartment may not bring a claim for com-mon-law fraud against the building's sponsor when the fraud is predicated solely on alleged material omis-sions from the offering plan amendments mandated by the Martin Act (General Business Law art 23-A) and the Attorney General's implementing regulations (13 NYCRR part 20)." (Id. at 239.) Kerusa's fraud claim was "too intertwined" with the Martin Act's disclosure requirements to be sustained. (Id. at 241.)