Bd. of Managers of the 165 E. 62nd St. Condo. v. Churchill E 62nd LLC

• Docket Number: Index No. 656401/2022,Mot. Seq. Nos. 001-002
• Decision Date: 25 May 2023
• Citation: 2023 NY Slip Op 31828 (U)
• Parties: BOARD OF MANAGERS OF THE 165 E. 62ND STREET CONDOMINIUM, Plaintiff, v. CHURCHILL E 62ND LLC, JUSTIN EHRLICH, SORABH MAHESHWARI, COUNTRYWIDE BUILDERS INC., "JOHN DOE" Nos. 1 through 10, and "JANE DOE" Nos. 1 through 10, said names being fictitious and unknown to plaintiff but intending to be the recipients of any voidable transfers made by CHURCHILL E 62ND LLC, JUSTIN EHLRICH or SORABH MAHESHWARI, Defendants.
• Court: New York Supreme Court

1

2023 NY Slip Op 31828(U)

BOARD OF MANAGERS OF THE 165 E. 62ND STREET CONDOMINIUM, Plaintiff, v. CHURCHILL E 62ND LLC, JUSTIN EHRLICH, SORABH MAHESHWARI, COUNTRYWIDE BUILDERS INC., "JOHN DOE" Nos. 1 through 10, and "JANE DOE" Nos. 1 through 10, said names being fictitious and unknown to plaintiff but intending to be the recipients of any voidable transfers made by CHURCHILL E 62ND LLC, JUSTIN EHLRICH or SORABH MAHESHWARI, Defendants.

Index No. 656401/2022, Mot. Seq. Nos. 001-002

Supreme Court, New York County

May 25, 2023

Unpublished Opinion

DECISION AND ORDER

HON NANCY M. BANNON J.

In this action, inter alia, to recover damages for breach of contract and fraud in the inducement, defendantsChurchill E62nd LLC, Justin Ehrlich, and Sorabh Maheshwari jointly move for dismissal of the second and the fifth causes of action in the complaint, pursuant to CPLR 3211andCPLR 3016 (b), and for dismissal of the complaint in its entirety insofar as asserted against Ehrlich and Maheshwari, pursuant to Limited Liability Company Law §§ 609and610(Motion SequenceNo. 001).The plaintiff opposes the motion and moves pursuant to CPLR 3215 for the entry of a default judgment against defendantCountrywide Builders Inc.(Motion SequenceNo. 002).Countrywide Builders Inc. opposes plaintiffs motion.

I.BACKGROUND

PlaintiffBoard of Managers of the 165 E. 62nd Street Condominium (the Condo) commenced this action to recover damages arising from the allegedly defective conversion/construction of a building into a 7-story residential condominium located at 165 East 62nd Street, New York, New York ("the Building").The defendants in this action include Churchill E62nd LLC the sponsor of the condominium development ("the Sponsor"), and the Sponsor's principals, Justin Ehrlich and Sorabh Maheshwari(together "the Sponsor's Principals"), as well as the general contractor, Countrywide Builders Inc.("the Contractor").

According to the complaint, the Sponsor breached its obligations under the Condominium Offering Plan ("the Offering Plan") incorporated by reference in the purchase agreements for each unit, by failing to construct the Building and individual units in accordance with the promises and representations made in the Offering Plan.Using the Offering Plan as a promotional tool, the Sponsor began marketing individual condominium units for sale and entering into purchase agreements starting in or around July 2019.It continued selling units throughout the Building's construction and thereafter, with the first closing on the sale of a unit occurring on or about February 24, 2021.

In the Offering Plan and other marketing materials, as well as through communications with prospective purchasers, the Sponsor represented that the Building and the individual condominium units would be "of a premier luxury caliber and constructed with the highest quality of materials and workmanship and in accordance with all applicable government codes, rules, regulations and the representations in the architect's Description of Property and Building Condition"(Complaintat ¶ 27).The plaintiff maintains that these representations were false, inasmuch as "multiple promised and/or code-required Building components and features are missing and many of the components and features that are installed suffer from material defects, exhibit poor workmanship and shoddy construction practices, or are contrary to what Sponsor depicted the Building and its units to be"(id.at ¶ 28).

In addition, pursuant to the Offering Plan, the Sponsor agreed to correct all latent and non-latent defects.Despite receiving timely, written notice of all defects, it has failed to repair or correct many outstanding issues.

The Sponsor also failed to obtain

"a permanent (final) Certificate of Occupancy ('PCO') for the Building or comply with its obligation [under the Offering Plan] to continuously renew the temporary Certificate of Occupancy ("TCO") for the Building until a PCO is issued. . . .Moreover, upon information and belief, Sponsor has not complied with its obligations to escrow with its attorneys an amount sufficient to ensure that a PCO is obtained, as required by the Offering Plan"

(id.at ¶ 31).

Furthermore at the time the Sponsor began closing on the sale of individual condominium units, it was indebted to a private lender, and obligated under its loan agreement to pay substantially all the sales proceeds to the lender until the debt was satisfied.At some point, the Sponsor closed on a sufficient number of condominium units so as to repay the lender in full.After paying the lender in full, the Sponsor closed on the remainder of the units.As the Sponsor completed these additional closings, it retained little, if any, of the sales proceeds, instead distributing those proceeds pro rata to Sponsor investors, and/or members or affiliates of Sponsor, including, but not limited to the Sponsor's Principals, and John Doe and Jane Doedefendants, in accordance with their equity interests in the Sponsor ("the Equity Distributions").The plaintiff maintains that these Equity Distributions rendered the Sponsor insolvent and were made with the intent to defraud and without fair consideration, prioritizing the Sponsor's investors, members, and affiliates over the Sponsor's creditors, which include the Condo and the individual condominium unit owners.

With respect to the Contractor, the complaint alleges that the Condo is the successor-in-interest to the Sponsor's construction contracts with the Contractor and that the Contractor breached its obligation under those contracts by, among other things, negligently and improperly performing the construction work and failing to ensure that it was performed in accordance with the construction plans and specifications.

In the complaint, the Condo asserts five causes of action.The first cause of action seeks damages for breach of contract against the Sponsor.The second cause of action seeks damages for fraud in the inducement against the Sponsor and the Sponsor's Principals (together "the Sponsor Defendants").The third and fourth causes of action seek damages, respectively, for breach of contract and negligence against the Contractor.The fifth cause of action alleging voidable transfers, seeks to set aside the Equity Distributions as fraudulent, or recover damages, under the Debtor and Creditor Law, as well as attorney's fees.

The Sponsor Defendants now jointly move, pre-answer, for dismissal of the second cause of action for fraud in the inducement and the fifth cause of action for voidable transfers pursuant to CPLR 3211andCPLR 3016 (b), and for dismissal of the complaint in its entirety insofar as asserted against the Sponsor's Principals pursuant to Limited Liability Company Law §§ 609and610(Motion SequenceNo. 001).The Condo opposes the motion and moves for the entry of a default judgment against the Contractor on the ground that the Contractor has failed to appear or answer the complaint (Motion SequenceNo. 002).The Contractor opposes the Condo's motion.The motions are decided as follows.

IL DISCUSSION

A.The Sponsor Defendants' Motion to Dismiss(Seq. No. 001)

1.Fraud in the Inducement (Second Cause of Action)

The Sponsor Defendants argue that the second cause of action for fraud in the inducement must be dismissed pursuant to CPLR 3211 (a)(7) as preempted by the Martin Act.

They also contend that the fraud claim is duplicative of the breach of contract claim and fails to assert allegations with the specificity required by CPLR 3016 (b).

On a motion to dismiss under CPLR 3211 (a)(7), the facts alleged are presumed to be true and the plaintiff is accorded "every favorable inference, unless the allegations actually constitute legal conclusions or are inherently incredible or unequivocally contradicted by documentary evidence"(Landmark Ventures, Inc. vInSightec, Ltd.,179 A.D.3d 493, 494[1st Dept2020]).Where a cause of action is based upon fraud, "the circumstances constituting the wrong [must] be stated in detail"(CPLR 3016 [b]).

Pursuant to the Martin Act, the Attorney General is authorized "to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other securities within or from New York State"(Kerusa Co. LLC v W10Z/515 Real Estate Ltd. Partnership, 12 N.Y.3d 236, 243[2009])."The Martin Act makes it illegal for a person to make or take part in a public offering of securities consisting of participation interests in real estate unless an offering statement is fded with the Attorney General(General Business Law § 352-e [1][a])[,] details the numerous items of information that an offering statement must include," and "authorizes the Attorney General to enforce its provisions and implementing regulations"(id. at 243-244).

It is well-settled that the Martin Act preempts common-law fraud claims that are "predicated solely on a violation of the Martin Act or its implementing regulations and would not exist but for the statute"(Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Mgmt. Inc.,18 N.Y.3d 341, 341[2011]).As such, fraud claims predicated solely on allegations that a defendantomitted to disclose information in an offering plan required under the Martin Act are preempted, but claims based upon allegations of affirmative misrepresentations in the offering plan, rather than omissions, are not precluded (seeBoard of Mgrs. of the Latitude Riverdale Condominium v 3585 Owner, LLC, 199 A.D.3d 441, 442[1st Dept2021];Board of Mgr s. of the Walton Condominium v 264 H2O Borrower, LLC, 180 A.D.3d 622[1st Dept2020];Board of Mgrs. of the S. Star v WSA Equities, LLC, 140 A.D.3d 405, 405[1st Dept2016]).

Here the fraud cause of action is predicated on allegations...