April 14, 2014

Fate and Fortune: Unauthorized Acts of the Board Cannot Be Challenged by Non-Owner Third Parties but Can Be Retroactively Cured by the Membership

In a decision that has renewed the faith of condominium law practitioners in our state’s judicial system, the New Jersey Appellate Division recently issued a strongly worded opinion in Port Liberte II Condo. Ass'n v. New Liberty Residential Urban Renewal Co. et. al., 2014 N.J. Super. LEXIS 19 (App. Div. Jan. 21, 2014) (approved for publication on January 31, 2014), that has prevented a grave injustice and allowed unit owners to control their own fates by having the power to validate unauthorized decisions of the board.

In what has been exclaimed as a “big win” for condominium associations and unit owners, the Appellate Division has determined that a condominium board’s decision to file suit without taking a pre-litigation vote, required by the association’s bylaws, can be affirmed at a later time by the membership and cannot be challenged by the defendants. Designed to protect the financial interests of the unit owners, the bylaws cannot be used by defendant developers and contractors to suppress those very same interests. Non-homeowners, therefore, do not have standing to challenge unauthorized or procedurally defective decisions of the board to start suit.

Faced with widespread construction defects in the common elements of its 225-unit community with a price tag in excess of thirty million dollars for repairs, the Port Liberte II Condominium Association filed suit in 2008 against those responsible, the Developer and the contractors that built the development. Several years into the law suit, the defendants sought dismissal of the entire action because the Association had not obtained a community vote to approve the filing of the suit, as required by a provision of the bylaws drafted by the Developer. To rectify that oversight, the Association held two separate votes to ratify the original filing of the suit, the first in October of 2009, which was approved by the community 72 votes to 3, and a second in October of 2011, which was approved by a vote of 65 to 1. Armed with these two examples of overwhelming support in the community for the lawsuit, the Association opposed the defendants’ motions to dismiss the case arguing that the defendants, as outsiders who owned no units in the community, had no standing to enforce the bylaws, and, even if they had such standing, the original filing of the suit was overwhelmingly ratified by the unit owners.

With an opinion that barely filled a single page and devoid of any legal precedent, the trial court allowed the defendants to use the Association’s bylaws, designed to protect the unit owners, as a weapon against them and dismissed the Association’s entire case, and with it the unit owners’ hopes for fixing their community.

The Appellate Division, however, reversed the court’s flawed decision. Specifically, the Appellate Division found that the “trial court misconstrued the bylaws – and disserved the unit owners’ interests – in holding that the owners could not ratify the Association’s action after the lawsuit was filed.” Additionally, the Court held that the defendants had no standing to enforce the voting provision of the bylaws.

Interpreting the Condominium Act and the spirit and purpose of the community’s bylaws, the Court found that the voting provision of the bylaws was intended to protect the unit owners' financial interests by requiring their approval of possibly expensive litigation. The Court, however, then noted that the unit owners in the Port Liberte II community also had “an equally great - if not greater - financial interest in recovering damages to repair the common areas, because otherwise they will have to pay for the repairs themselves through assessments.” The Court then concluded that it would “not enforce a statute or regulation in a manner that would produce an absurd result, contrary to its purpose. Here, it would be absurd to construe [the bylaws] in a way that would strip the owners of a cause of action designed to recoup payment for construction defects, if they are willing to authorize the litigation after it was filed.”

While provisions of the bylaws may provide a process by which a board obtains authorization to file suit i.e. an affirmative vote of the membership, unauthorized actions of the board may be cured through ratification, such as a subsequent vote, and are not deemed null and void. This means that pre-litigation voting requirements included in the bylaws by the developer cannot preclude an informed board from filing suit when time is of the essence and a community vote is impractical. A later vote of the membership ratifying the decision of the board will suffice; and while not technically a “pre-litigation” vote, it will nevertheless, according to the Appellate Division, comply with the spirit and intent of the bylaws and the Condominium Act.

The Court went a step further and found that the defendants, strangers to the relationship between the unit owners and the Association, lacked standing to enforce the voting provision in the bylaws. To that end, the Court observed that “because defendants' interests were adverse to the unit owners, letting them enforce the unit owners' interests would be akin to letting the proverbial fox protect the interests of the chickens.”

Turning its attention to the cases relied on by the judge in support of his decision to dismiss, the Appellate Court had no trouble distinguishing them as lacking any relevance and legal significance. Ascribing error to the trial court’s decision to dismiss the Association’s entire case on a curable procedural hyper-technicality, the Appellate Division reversed and revived the original complaint to proceed on the merits.

Following the court’s dismissal of the Port Liberte II Condominium Association’s suit, word spread quickly through the defense bar about a new avenue to avoid liability for construction defects. The Appellate Division has now spread a new word – Developers and contractors cannot intrude into the affairs of a condominium association and its unit owner members by forcing strict compliance with un-amendable, onerous pre-litigation voting requirements in the bylaws.

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April 10, 2014

Creative Collection Solutions: The Rewards and Challenges of Rent Receivership

Every day condominium associations battle delinquencies and employ creative strategies for collecting unpaid assessments. Sometimes ambitious collection efforts are successful – sometimes not. One aggressive strategy employed by associations is the appointment of a rent receivership for a vacated or abandoned unit owned by a delinquent owner. If successful, a receivership would entitle the association to collect rent for a unit it technically does not own and apply the monies received towards the owed arrearage. While the concept sounds good in theory, it is actually quite difficult to accomplish in practice given the likely upside down mortgage on the property, the inevitable foreclosure proceedings by the bank, and the fact that abandoned units are not occupied by paying tenants.

All those dissuading factors, however, did not stop one association from trying. Faced with over $30,000 of unpaid maintenance dues for two abandoned units, Woodlake at King’s Grant Condominium Association, made an application to the Chancery Court for an appointment of a rent receiver. The Chancery Judge denied the Association’s request finding that the “extraordinary remedy of appointing a rent receiver” was not appropriate under those facts and circumstances. The Association appealed and the Appellate Division issued an unpublished decision on April 1, 2014 affirming the judge’s denial of the Association’s application. See Woodlake at King's Grant Condo. Ass'n v. Coudriet, 2014 N.J. Super. Unpub. LEXIS 714 (App. Div. Unpub. 2014).

Despite recognizing that the Association was seeking the appointment of a receiver so that it could rent out defendants’ vacant units and recoup some of the assessment monies owed by the defendants, the Appellate Court did not find legal support or plaintiff’s arguments persuasive in favor of forcing the defendants to rent their units or for allowing the Association to rent those units to new tenants. Even though the Association’s assessment liens would remain unpaid after a foreclosure sale because the mortgage liens on the units exceeded their fair market value thereby leaving the Association with no remedy, the Appellate Division found no authority in the bylaws or in the Condominium Act for providing the appointment of a rent receiver.

Even if the Association’s governing documents did include an express provision allowing for the appointment of a receiver in case of assessment dues default and unit abandonment, the right to receivership is not guaranteed and still “subject to equitable considerations in the Chancery Division judge’s exercise of discretion.” This means that a Chancery Judge has the discretion to deny an application for receivership even when there exists an express agreement giving the moving party the right to the receivership.

While hinting that “a condominium association has the right to seek appointment of a rent receiver under appropriate circumstances,” it did not find those circumstances existed in Woodlake’s case. Not only was there no express provision in the bylaws giving the Association the right to a rent receiver, but the Association sought to rent out and collect rents from the units “without giving notice to the mortgage lender and affording the lender the opportunity to be heard.” Since a mortgage lender may be entitled to the appointment of a receiver in a foreclosure action “when it appears necessary for the protection of the mortgagee” and the mortgagee’s security interest, the court was understandably reluctant to grant receivership to the Association without the involvement of the mortgage lender.

The court’s decision finds support in the practical considerations that abound in a receivership situation. First, where no rent-paying tenant exists, one must be found, which means the unit must be cleaned, repaired, and appliances updated as necessary. Would the association be able to recoup any costs incurred in making the unit rentable? Second, if there is a foreclosure action by the bank or the Association, negotiating lease durations becomes an issue. What happens if the foreclosure proceedings come to an end during a lease period? And third, if the bank is involved, what happens if it wants a rent receiver for itself or better yet a portion of the rent received by the association? All these questions and more make the process less than straightforward and the judges hesitant about granting such an “extraordinary remedy.”

Although New Jersey courts have appointed receivers under varying and similar circumstances as those presented in Woodlake, there has been no published opinion on point. The Appellate Division’s decision here, albeit unpublished, is the first written decision to explore the balance of the equities involved in an association’s rent receivership application. While it does not explicitly identify the conditions for a successful application, the Woodlake decision does provide associations and practitioners with some key takeaways for increasing their chances of getting a rent receiver: amend the bylaws to provide for the right of receivership and notify the appropriate mortgage lenders when seeking the appointment of a rent receiver.

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June 13, 2013

Are Condominium Unit Owners Unconditionally Obligated to Pay Common Expense Assessments?

The short answer is – Yes! The Condominium Act specifically obligates all unit owners to pay a proportionate share of the common expenses. Even where a unit owner waives the right to use a common element or abandons the unit there is no exemption from liability for common expenses. The Condominium Act, N.J.S.A. 46:8B-1 to -38, provides in pertinent part:

A unit owner, shall by acceptance of title, be conclusively presumed to have agreed to pay his proportionate share of common expenses accruing while he is the owner of a unit. . . . No unit owner may exempt himself from liability for his share of common expenses by waiver of the enjoyment of the right to use any of the common elements or abandonment of his unit or otherwise . . .
[N.J.S.A. 46:8B-17.]

The “or otherwise” language implies that the obligation of unit owners to pay the proportionate share of the common expense is absolute and does not yield to other considerations, such as disputes with the Association. See Holbert v. Great Gorge Vill. S. Condo. Council, 281 N.J. Super. 222 (Ch. Div. 1994) (plaintiff owner was obligated to pay for previously unpaid common expenses, plus interest, despite having brought suit against defendant condominium association for alleged mismanagement of condominium affairs).

Among the powers assigned by law to a condominium association is the authority to assess and collect funds for the payment of common expenses. N.J.S.A. 46:8B-14. The New Jersey Legislature has defined "common expenses" as follows:

[E]xpenses for which the unit owners are proportionately liable, including but not limited to:
(i) all expenses of administration, maintenance, repair and replacement of the common elements;
(ii) expenses agreed upon as common by all unit owners; and
(iii) expenses declared common by provisions of this act or by the master deed or by the by-laws.
[N.J.S.A. 46:8B-3(e).]

“A unit owner's obligation to pay common expenses is unconditional.” Holbert, supra, 281 N.J. Super. at 226 (emphasis added). Failure to pay assessed common expenses automatically gives rise to a lien against the owner's unit in favor of the association. N.J.S.A. 46:8B-17. The lien may be foreclosed following its recordation in the office of the Clerk of the county in which the unit is situated. N.J.S.A. 46:8B-21. The amount of the lien against the unit may lawfully include the unpaid common expenses, interest on the common expenses calculated at the legal rate and, if authorized by the master deed or the by-laws, reasonable attorneys fees. N.J.S.A. 46:8B-17 and -21.

While unit owners have an absolute legal obligation to pay common expense assessments, the same may not be true of other assessments, such as limited common element assessments, emergency assessments, special assessments, capital improvement assessments, etc. The validity of those assessments may be successfully challenged should the internal procedures proscribed by the applicable governing documents not be followed and fully documented by the Board of Directors. It is therefore imperative that a condominium Board be familiar with the oft-overlooked procedural particulars outlined in the master deed and/or by-laws for enacting and levying certain types of assessments.

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November 12, 2012

Recovering Damages Under the Statute of Repose

Under the statute of repose, no action to recover damages for any deficiency in the design, planning, surveying, supervision or construction of an improvement to real property may be brought more than ten (10) years after the performance of “such services and construction.” N.J.S.A. § 2A:14-1.1. Essentially, the statute of repose provides that an injury occurring more than ten years after completion of improvements to real property does not give rise to a cause of action at all.

The New Jersey Supreme Court has held that the ten-year statute of repose for bringing an action against a contractor or an architect begins to run as of “substantial completion” of the real property. Russo Farms v. Vineland Bd. of Educ., 144 N.J. 84, 117 (1996). The Court defined “substantial completion” as the date when construction is sufficiently complete so that an owner can occupy or utilize the building. Therefore, generally when the architect certifies as much to the owner and a Certificate of Occupancy is issued attesting to the building’s fitness for occupancy, the real property is substantially complete and the statute of repose begins to run.

One important concept has evolved from recent developments of case law interpreting the statute of repose: the start date for the ten-year time limit of the statute of repose is not the same for all contractors and design professionals on a particular project; the start date differs depending on a party’s continued involvement with a construction project. See State v. Perini Corp., 425 N.J. Super. 62 (App. Div. 2012). The Perini Court engaged in a lengthy discourse of the relevant case law interpreting New Jersey’s statute of repose from which it derived three guiding principles: First, the trigger date is the date of substantial completion, not completion of every last task of the contractor; Second, separate trigger dates apply to subcontractors that have substantially completed their work, even if the improvement as a whole is not completed and ready for use and a certificate of occupancy has not been issued; Third, the trigger date for any single contractor runs from completion of that contractor’s entire work on the “improvement,” not from discrete tasks. [425 N.J. Super. at 74-75 (internal quotations omitted).] This means that certain contractors, who performed services on a job site early on, can benefit from a repose period that commences earlier than the date of substantial completion.

Thus, while the statute of repose commences as to the developer, general contractor and architect upon substantial completion, the analysis is not the same for each individual contractor who will claim the benefit of the repose period ten years after the date the contractor walked away from the project having rendered all of his services and discharged all of his responsibilities

Finally, it is important to note that the strict limitations of the statute of repose only apply to those claims “arising out of the defective and unsafe condition of an improvement to real property.” N.J.S.A. § 2A:14-1.1. The statute as plainly worded applies to parties whose professional work is functionally related to and integrated with a building plan or design, and which gives rise or contributes to a defective and unsafe condition.

The New Jersey Supreme Court has pointed out that the statute of repose does not provide that all claims against planners, and designers, including surveyors, vanish after the passage of ten years from the performance of services. Rather, the statute of repose includes as a significant limiting qualification the requirement that a condition be both defective and unsafe. This means that in determining which actions fall within the statute, a court must first determine, as a threshold issue, whether the claimed condition is one that can be classified as "defective and unsafe."

An unsafe condition exists when the work created a situation hazardous to the well-being and safety of persons or property coming into contact with the improvement or structure. See, e.g., Newark Beth Israel Medical Center v. Gruzen and Partners, 124 N.J. 357 (1991) (prospect that building an addition to a hospital as designed would render the completed building dangerously susceptible to wind created an unsafe and hazardous condition even though the design flaw did not pose a threat to the building as then presently constructed) Rosenberg v. Town of N. Bergen, 61 N.J. 190, 197-98 (1972) (holding that a negligently paved road created an unsafe condition); Cnty. of Hudson v. Terminal Constr. Corp., 154 N.J. Super. 264, 267 (App. Div. 1977) (holding that negligently installed ceramic tiles that began to crumble and fall created a hazardous condition), certif. denied, 75 N.J. 605 (1978); Salesian Soc'y v. Formigli Corp., 120 N.J. Super. 493, 496 (Law Div.1972) (holding that the leakage of water that damaged the building's support structure created an unsafe condition), aff'd o.b., 124 N.J. Super. 270 (App. Div. 1973); cf. E.A. Williams, supra, 82 N.J. at 170-71 (surveying error, resulting in improper spacing between buildings, did not rise to the level of a dangerous and unsafe condition); N.C. State Ports Auth. v. L. A. Fry Roofing Co., 294 N.C. 73, 86 (1978) (action against contractor for damages from leaky roof was not subject to statute of repose because no unsafe condition was found).

Accordingly, in order for the statute of repose to even apply, defendants will have to show that their work created an unsafe or hazardous condition.

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October 29, 2012

How Transition Affects the Statute of Limitations Analysis

The novel nature of condominium ownership, specifically the transition process, affects the statute of limitations analysis. The Planned Real Estate Development Full Disclosure Act requires that the developer of a condominium staff the board of trustees of an association and control the affairs of the association until seventy-five percent of the units in the development are sold. During that period of control, the developer is under a fiduciary responsibility to the association to act in the best interest of the association and its membership. Pragmatically speaking, however, a developer-controlled association is much different than a homeowner controlled association. Even if certain problems with construction are discovered during developer-control, it cannot be realistically expected that the developer-controlled board would take steps to investigate those defects and litigate, on behalf of the association, if necessary. Therefore, equity and common sense suggest that the earliest the statute of limitations clock could begin to run against an association for construction defect claims is the date of transition, at which time the unit owners take control of the board of trustees for the first time.

To this end, our courts recognize the inherent unfairness in allowing statutes of limitations to run against an association while the developer controls its board. The reason is clear – individual unit owners lack standing to assert claims for faulty construction affecting the common elements prior to transition. Thus, equity cannot support the running of limitation periods against an association that legally cannot assert its rights during the period of developer control.

In New Jersey, the Law Division decision in Terrace Condominium Ass'n v. Midlantic Nat. Bank, 268 N.J. Super. 488 (Law Div. 1993), clearly stands for the proposition that statutes should be tolled when the unit owners of a condominium are not in control of the Board. In Terrace, a condominium association brought an action against a bank that took over construction of the building. At the time the bank took over, some of the units had been sold, but construction was still continuing. Construction was later completed under the bank’s watch, and almost immediately its residents experienced numerous problems with water infiltration into their units. Midlantic, the bank/owner in question, engaged an engineer to document the problems and provide a solution. Most of these repairs were “short-lived or improper repairs to the most significant of the [] problems and generally had the effect of concealing the true causes of the problems.”

Transition occurred and the Association filed suit against Midlantic. Midlantic raised a statute of limitations defense as to several of the building warranty claims. The court found that because the bank had effectuated repairs, the statute of limitations did not run against the unit owners because they relied upon the bank to effectuate the proper repairs while in control of the Association. Additionally, the court found that, notwithstanding the repairs undertaken by Midlantic, the “unit owners had no control of the Association, and should not be bound by the period of time thereto.” This is true “even if each unit owner could have sued the Bank while the Bank was in control of the Association” and that “it may well be that ordinarily the right to make such claims should be tolled or deferred until the unit owners control the association.”

There is also an unpublished decision by the Appellate Division that directly addresses a condominium Association’s ability to control its own destiny. The Appellate Division decision captioned Skyline Condominium Assoc. v. Falkin, No. A-3913-98, A-3860-98, A-3792-98 (App. Div. September 10, 2001), is right on point. In the Skyline opinion, the Appellate Division was faced with the issue of “determining the first date that a plaintiff obtained the enforceable right to institute and maintain an action regarding the controversy” for the purposes of the entire controversy doctrine.

Recognizing the difficulty in running the statute of limitations clock while the individual unit owners are not in control of their association’s board, the Skyline Court concluded that the statute of limitations on an action for construction defects by a condominium association against a sponsor should be tolled until the unit owners control the association.

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October 22, 2012

How the Discovery Rule Affects the Statute of Limitations

In New Jersey, construction defect claims are subject to a six-year statute of limitations, N.J.S.A. 2A:14-1, which is subject to the discovery rule, and a separate ten-year statute of absolute repose, N.J.S.A. 2A:14-1.1, after which potential causes of action no longer exist.

Under New Jersey’s discovery rule, the accrual of a cause of action is deferred until the injured person knows or should know that he has sustained an injury and knows or should know that an injury of which he is aware is attributable to the fault of another person. The discovery rule is an equitable principle by which an accrual of a cause of action is delayed until the injured party discovers, or by the exercise of reasonable diligence and intelligence, should have discovered, that he may have a basis for an actionable claim. Once the injured party knows that it has been injured and that the injury is the fault of another, it has the requisite knowledge for the period of limitations to commence running.

Put simply, for a cause of action to accrue, the injured plaintiff must have knowledge of both injury and fault. Lynch v. Rubacky, 85 N.J. 65, 70 (1981) ("the discovery rule centers upon an injured party's knowledge concerning the origin and existence of his injuries as related to the conduct of another person"). This rule applies to complex construction defect cases involving hidden construction and design defects.

Among the relevant factors in analyzing whether the discovery rule applies are the nature of the injury and the difficulties inherent in discovering it. Vispisiano v. Ashland Chem. Co., 107 N.J. 416, 428 (1987). For example, in a toxic tort case, such as that presented in Vispisiano, diagnosing a plaintiff's injury is but the first step in establishing a chain of causation. Id. at 429. The plaintiff's suspicion that he had been poisoned, after comparing his symptoms to those of a co-worker, was not sufficient to accrue a cause of action, particularly in the face of his doctors' repeatedly rejecting plaintiff's concerns that he had been poisoned while working at a chemical plant. Id. at 436.

Applying the foregoing to the condominium construction defect setting gives rise to the argument that a plaintiff association’s cause of action accrues when it receives an engineer’s report (either during transition or afterwards) that first apprises the association of the defects afflicting its buildings and the suspected causes of those defects. However, it may be the case that the requisite knowledge is obtained at an earlier date when unit owner board members learn of defects.

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January 27, 2012

When Can Individual Association Board Members Be Held Personally Liable For Actions of the Collective Board? Part 5

This blog is the fifth and final installment in a series of posts discussing an individual’s potential liability for the collective decisions made by their board. Be sure to read our previous posts online here.

A Board that acts in reliance upon advice of its experts and legal professionals cannot be held liable for negligence or breach of fiduciary duty if that advice turns out to be wrong. A provision of the New Jersey Nonprofit Corporation Act specifically provides, in relevant part:

Trustees and members of any committee designated by the board shall discharge their duties in good faith and with that degree of diligence, care and skill which ordinary, prudent persons would exercise under similar circumstances in like positions. In discharging their duties, trustees and members of any committee designated by the board shall not be liable if, acting in good faith, they rely on the opinion of counsel for the corporation or upon written reports setting forth financial data concerning the corporation and prepared by an independent public accountant or certified public accountant or firm of accountants or upon financial statements, books of account or reports of the corporation represented to them to be correct by the president, the officer of the corporation having charge of its books of account, or the person presiding at a meeting of the board.

[N.J.S.A. § 15A:6-14 (emphasis added).]


Therefore, a Board is encouraged to seek the advice of counsel; however, as a practical matter, the Board should always use its best business judgment in making informed decisions that affect its association and community.

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January 20, 2012

When Can Individual Association Board Members Be Held Personally Liable For Actions of the Collective Board? Part 4

This blog is the fourth in a series of posts discussing an individual’s potential liability for the collective decisions made by their board. Be sure to read our previous posts online here.

When liability for any of these breaches is imposed on an individual director or trustee, the issue of indemnification arises. In New Jersey, because condominium associations are generally organized as not-for-profit corporations under the Nonprofit Corporation Act, indemnification may be available to an officer of an entity organized under this Act provided that the officer (1) “acted in good faith and in a manner which the [officer] reasonably believed to be in or not opposed to the best interests of the corporation,” and (2) “with respect to an criminal proceeding, the [officer] had no reasonable cause to believe the conduct was unlawful.” N.J.S.A. 15A:3-4(b). If the director can satisfy this standard, he can recover from the association both expenses incurred in the litigation and the amount paid in satisfaction of a judgment rendered against him. Id. However, entitlement to indemnification for a claim for punitive damages will not likely be available because it is generally against public policy to provide indemnification for punitive damages. Johnson & Johnson v. Aetna Cas., 285 N.J. Super. 575 (App. Div. 1995).

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January 13, 2012

When Can Individual Association Board Members Be Held Personally Liable For Actions of the Collective Board? Part 3

This blog is the third in a series of posts discussing an individual’s potential liability for the collective decisions made by their board. Be sure to read our previous posts online here.

New Jersey courts that have considered the application of the business judgment rule have concluded that the scope of judicial review of condominium association decisions is limited to a two-pronged test: (1) whether an association's action was authorized by statute or its own bylaws and, if so, (2) whether the action was fraudulent, self-dealing or unconscionable. Thanasoulis, supra, 110 N.J. at 655; see also Chin v. Coventry Square Condo, 270 N.J. Super. 323, 328-29, (App. Div. 1994); Siller, supra, 93 N.J. at 382; Papalexiou v. Tower West Condo, 167 N.J. Super. 516, 527 (Ch. Div. 1979).

In Thanasoulis, the New Jersey Supreme Court considered whether a rule adopted by the board of directors of a condominium association increasing the parking fee for tenants of nonresidents owners but not for those of resident owners constituted a breach of the board’s fiduciary duty to the nonresident owners. In a 4-3 decision, the Supreme Court determined that the association was without requisite authority to enact the revised parking fee schedule in such a discriminatory manner, and thus failed to meet even the first prong of the test. The majority held that the association’s regulation was not authorized by either the Condominium Act or the condominium’s master deed. The Court noted that by substituting itself as the lessor of the unit owner’s parking space and thereby severing the owner’s right to the parking space, the association had, in effect, confiscated for its own use the value of the unit owner’s parking space. The Court reject the argument that the regulation was a security measure aimed at the prevention of subletting parking spaces to people not residing in the building since the same end could have been accomplished through other means.

Perhaps the clearest explication of the business judgment rule is contained in Papalexiou v. Tower West Condominium, in which individual unit owners challenged the authority of the board to levy a special emergency assessment upon the membership. In upholding the assessment, the court said:

The refusal to enforce arbitrary and capricious rules promulgated by governing boards of condominiums is simply an application of the "business judgment" rule. This rule requires the presence of fraud or lack of good faith in the conduct of a corporation's internal affairs before the decisions of a board of directors can be questioned. If the corporate directors' conduct is authorized, a showing must be made of fraud, self-dealing or unconscionable conduct to justify judicial review . . . Although directors of a corporation have a fiduciary relationship to the shareholders, they are not expected to be incapable of error. All that is required is that persons in such positions act reasonably and in good faith in carrying out their duties. Courts will not second-guess the actions of directors unless it appears that they are the result of fraud, dishonesty or incompetence.

[Papalexiou, supra, 167 N.J. Super. at 527 (citations omitted) (emphasis added).]

Accordingly, to hold a Board member personally liable, a plaintiff must establish evidence that illustrates self-dealing or a lack of good-faith in carrying out the duties of the Board.

Nevertheless, the business-judgment rule does not apply to shield board members where the action of the association is in violation of the Condominium Act, the association's master deed, or its by-laws. Micheve, L.L.C. v. Wyndham Place at Freehold Condo. Ass'n, 381 N.J. Super. 148, 154 (App. Div. 2005), certif. denied, 186 N.J. 256 (2006). Likewise, where the Board acts without authority derived from its governing documents or statute, it is similarly unprotected by the business judgment rule. See Verna v. Links at Valleybrook Neighborhood Ass'n, 371 N.J. Super. 77, 93 (App. Div. 2004) (Only when a board's actions are authorized and of the type that justify application of the "business judgment" rule, will a court refrain from second-guessing its actions).

Generally, enforcing rules and other constituent document provisions, such as the duty to collect assessments, is an area of special sensitivity for board members and associations, which may be attacked for breach of fiduciary duty for failure of such enforcement as well as for discriminatory enforcement. In Glen v. June, 344 N.J. Super. 371 (App. Div. 2001), the court found that an association had breached its fiduciary duty by depriving an owner of the use of his driveway, a limited common element, and a garage, which was apparently part of his unit. The court concluded that an award of damages would be appropriate for the breach of fiduciary duty. The court also found that an attempt to humiliate the owner by piling snow in his driveway was a breach of fiduciary duty, although it offered no remedy for that incident.

Necessarily, self-dealing must be avoided, corporate opportunity enhanced, and facts which have a bearing on association concerns must be honestly and fully disclosed. The issue of self-dealing was considered in Owners of the Manor Homes of Whittingham v. Whittingham Homeowners Ass'n, Inc., 367 N.J. Super. 314, 323 (App. Div. 2004). There, the allegation was that the Board members breached their fiduciary duties by changing the method of calculating maintenance assessments (i.e. by re-measuring the units) several years after the condominium had been in operation. As a result, the monthly assessments for certain types of residences increased while it decreased for others. Plaintiffs alleged self-dealing, but that was rejected by the court because there was no evidence that the Association or Board benefited by the remeasuring. Moreover, there was an independent business reason for doing the remeasurement, i.e. the source of the developer measurements were unclear and contradicted by architectural drawings. Accordingly, in order for a breach of fiduciary duty claim to pass muster, a plaintiff must come forward with evidence that the Board or an individual Board member received some type of direct benefit from an authorized act of the Board.

Nonetheless, breach of fiduciary duty to “maintain, repair and replace” common area of the condominium could cause a trustee to be liable for the cost of returning the condominium to the position that it would have been in had such maintenance been undertaken. See Berish v. Bornstein, 770 N.E.2d 961 (Mass. 2002), remanded to 21 Mass. L. Rptr. 530 (Mass. Super. 2006) (trustee was also the developer). Notably, however, our research produced no published New Jersey case that considered this issue.

An association’s fiduciary duty will in certain circumstances include the duty to warn owners of a known dangerous condition. See Siddons v. Cook, 382 N.J. Super. 1, 10-11 (App. Div. 2005), where the association knew that faulty dishwasher hoses had flooded several condos but did not notify the unit owners. The court examined the nature of the risk, the interests a notification would protect, and the ease with which the association could notify the owners, in holding that the association breached its duty to warn the unit owners.

Additionally, a director’s breach of fiduciary duty owed to unit owners may expose the director to liability for punitive damages. For instance, in Scott v. Williams, 607 S.W.2d 267 (Tex. Ct. App. 1980), unit owners brought suit against the directors of the association alleging that the directors had controlled the condominium for the their own personal gain and had mismanaged its affairs and misapplied its funds. The trial court enjoined the directors from controlling the affairs of the condominium to maximize their profits, awarded damages for the directors’ failure to repair the common elements of the condominium, and awarded punitive damages. The Texas Appellate Court affirmed the grant of an injunction but reversed and remanded for a new trial that part of the award dealing with damages. The appellate court reversed the damage award on the sole ground that the plaintiffs had no standing to sue on behalf of other unit owners who may have been damaged by the directors’ conduct and who were not joined as plaintiffs in the suit. At no point in its opinion did the Scott court indicate that the punitive damage awards were improper. Even if the Association has obtained directors and officers insurance, policies of this nature do not cover intentional acts.

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January 6, 2012

When Can Individual Association Board Members Be Held Personally Liable For Actions of the Collective Board? Part 2

This blog is the second in a series of posts discussing an individual’s potential liability for the collective decisions made by their board. Be sure to read our previous posts online here.

Since condominium associations are generally organized as non-profit corporations under N.J.S.A. 15A:1-1 et seq., the New Jersey Nonprofit Corporation Act is quite instructive on a Board member’s standard of care:

Trustees and members of any committee designated by the board shall discharge their duties in good faith and with that degree of diligence, care and skill which ordinary, prudent persons would exercise under similar circumstances in like positions.

[N.J.S.A. 15A:6-14.]


Moreover, the overriding scheme of the Condominium Act requires an association to act as a fiduciary and make decisions for the protection of the whole condominium and each of the constituent owners, not to act discriminatorily, arbitrarily, or in bad faith. See Billig v. Buckingham Towers Condo. Ass'n I, Inc., 287 N.J. Super. 551, 563 (App. Div. 1996). Therefore, since a condominium association stands in a fiduciary relationship to the unit owners, that relationship requires that it act consistently with the Condominium Act and its own governing documents and that its actions be free of fraud, self-dealing, or unconscionability. Ibid. Essentially, all that is required is that the Board act reasonably and in good faith using the degree of skill and care an ordinary person would exercise under similar circumstances. Ibid. If a contested act of the association meets each of these tests the courts will not interfere or substitute the court’s judgment for the judgment of the Board. Ibid.; see also Courts at Beachgate v. Bird, 226 N.J. Super. 631 (Ch. Div. 1988) (upholding a board’s enforcement of restrictions on changes in windows where the restrictions were imposed for aesthetic and safety reasons). This protection from judicial scrutiny is commonly known as the “business judgment rule”.

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December 30, 2011

When Can Individual Association Board Members Be Held Personally Liable For Actions of the Collective Board? Part 1

This blog is the first in a series of posts discussing an individual’s potential liability for the collective decisions made by their board. Be sure to check back for future posts.

Like directors of corporations, members of association Boards enjoy various protections for the consequences of their business decisions. Essentially, in order for a Board member to be personally liable for an act of the Board, the Plaintiff would have to prove either (1) that the Board acted without authorization from the association’s governing documents, Condominium Act or other statute; or (2) that an authorized act of the Board was fraudulent, unconscionable or resulted in self-dealing. Generally, as long as a Board member acts in good-faith and makes informed decisions, he will be protected from personal liability by operation of the business judgment rule.

An association is comprised exclusively of the unit owners who, through their individual deeds, automatically become members. In essence, an association is responsible for the governance of the common areas and facilities used by the owners of the condominium units. It is a representative body that acts on behalf of the unit owners. Its powers derive from its by-laws, the master deed, and applicable statutory provisions. An association may enter into contracts, bring suit and be sued. The most significant responsibility of an association is the management and maintenance of the common areas of the condominium complex. See Thanasoulis v. Winston Towers 200 Ass'n, 110 N.J. 650, 656-57 (1988).

The Association's Board of Directors has a fiduciary obligation to its members similar to that of a corporate board to its shareholders. See id. at 657; Siller v. Hartz Mountain Assoc., 93 N.J. 370, 382, cert. denied, 464 U.S. 961 (1983). That obligation includes the duty to preserve and protect the common elements and areas for the benefit of all its members. Kim v. Flagship Condominium Owners Ass'n, 327 N.J. Super. 544, 550 (App. Div. 2000). It is widely accepted that directors of a corporation not only owe a fiduciary duty to shareholders, but also to the corporation itself. See Daloisio v. Peninsula Land Co., 43 N.J. Super. 79, 90-91 (App. Div. 1956) (Directors, when elected to office, become trustees of the entire body of corporate owners. They owe loyalty not only to the majority stockholders, or to the minority, but to all of them, represented by the corporate entity. To disregard the rights of either group, or of the corporation as such, even for a moment, is a violation of their fiduciary obligation).

Accordingly, just like corporate directors have a fiduciary relationship with the corporation and its stockholders, association board members have a fiduciary relationship with the individual unit owners and the association as a whole. See, e.g., Casey v. Brennan, 344 N.J. Super. 83, 108 (App. Div. 2001) aff'd, 173 N.J. 177 (2002) (Corporate directors have a fiduciary relationship with the corporation, and its stockholders); Mulligan v. Panther Valley Prop. Owners Ass'n, 337 N.J. Super. 293, 309 (App. Div. 2001) (The members of the Association's board occupy a fiduciary position vis-a-vis the Association and the membership).

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October 21, 2011

Transition By Condominium Associations: Focus of Engineering Investigation—Fiber Cement Claddings

Transition is often confusing for condominium associations run by Boards populated with unit owners who are not attorneys and who have no prior experience going through the process. Upon transition of control of the condominium association's board of directors from the sponsor-developer to the unit owners, a key responsibility of the Board is to engage the services of an engineer or architect to conduct an inspection of the common elements to determine if there are any deficiencies. One of the most important considerations for the Board in transition is spending the Association's money wisely when it comes to engineering investigations.

This blog is part of a series of articles designed to help condominium associations focus their efforts to investigate the condition of the common elements in a cost effective manner. This article focuses on investigations of buildings clad with fiber cement claddings.

Many condominium buildings are clad with fiber cement claddings that look like overlapping horizontal boards. Some fiber cement claddings are prefabricated panels. Fiber cement is a composite material made of sand, cement and cellulose fibers. It is important to understand how the designers of the buildings intended the fiber cement claddings to be installed. Fiber cement claddings are proprietary products produced by well established manufacturers whose installation instructions are readily available. Fiber cement clapboard siding is intended to be installed over weather resistant barrier (e.g, 15lb felt or Tyvek) and are designed to allow incidental moisture that gets behind the horizontal overlapping panels to drain out of the system. Fiber cement panelized claddings, by contrast, are sometimes installed as a face sealed barrier to water infiltration (whether they were designed this way or not). Like barrier EIFS, these face sealed systems depend entirely upon the face of the panels, flashings and caulk to resist water infiltration. Relying upon perfection of contractors in installing such barrier systems is, in our experience, an invitation to water infiltration problems a few years down the road.

An experienced engineer or architect can look at a building and see deficiencies in the installation of fiber cement overlapping horizontal boards and panels. They normally look for missing or improper flashings, deteriorated or missing sealants and visible evidence of water infiltration inside buildings clad with these systems. Upon completion of visual inspections, experienced engineers typically use pin-type moisture meters (see www.lignomatusa.com for example) to probe the moisture content of the sheathing and framing under the fiber cement claddings. If the probes are inserted into wood and the reading is more than 20%, that typically is viewed as an indication that damage is beginning. If the reading exceeds 30%, that means the sheathing and framing are damaged and must be replaced. If the sheathing and framing are gypsum or oriented strand board ("OSB"), the acceptable level of moisture content in the wood is even lower than it is for plywood.

What the Board needs to understand is that it should focus its investigative efforts and resources on documenting the extent to which water is infiltrating inside the building and damaging sheathing and framing. As fiduciaries and as a matter of good common sense, the Board should be doing this. However, there is a practical reason why this needs to be the focus of the Board's engineering investigations. The sponsor-developer is almost certainly an LLC or corporation with no assets once the last unit is sold. The subcontractors who constructed the common elements are also very likely to be small companies with no assets of any significant value. Therefore, the only way the Association is getting paid for the deficiencies you find in the construction of the common elements is through insurance policies insuring those responsible for the deficient construction. Analysis of those policies is beyond the scope of this article. For purposes of this discussion, what the Board needs to understand is that the insurance will often not cover your claim unless your engineers/architects can show proof of damage to sheathing and framing. You need to understand this and direct your engineers/architects to focus their investigations on finding this damage.

Elevated levels of moisture in the sheathing and framing under the fiber cement claddings can be caused by many conditions. Missing or improper flashings and open sealant joints are among the common and visibly obvious causes of water infiltration. Others that are not visible without invasive inspection are weather-resistant barrier that is lapped backwards (ie, instead of being installed from the bottom up, it is installed from the top down so the water runs behind the paper), failure to properly incorporate the weather resistant barrier into the flashings, and sealing up the bottom of a drainable system so water cannot escape. Instead, it works its way inside the walls. Determination of the causes of the damage should be done by an experienced engineer or architect who carefully documents the test methodology and results with photographs and video. Samples of particularly nasty-looking damaged wood products should be bagged and marked by date, location and the name of the person who took the sample. This is necessary to enable counsel to use this evidence at trial if that becomes necessary.

In hiring experts to do this investigation, we recommend to our clients that they use engineers and architects who have substantial experience testifying at deposition and at trial. Being a litigation expert is very difficult, high pressure work. Errors made by the expert in conducting or documenting the field investigation can be damaging, sometimes fatal, to your case. Why should you pay your hard earned money to train an inexperienced expert how to follow the rigorous procedures needed to document and prove your claims when there are plenty of experts out there who have done this for many years and are already very familiar with what is expected of them by counsel and the courts?

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October 3, 2011

Transition by Condominium Associations – Focus of Engineering Investigation - Part 2

This is part two of a series of posts discussing Transition by Condominium Associations: Focus of Engineering Investigation. You can read the first post online here.

How do engineers find this moisture damage without tearing off all of the brick and cast stone? They use moisture probes, which are inserted through the mortar joints in the brick and cast stone and into the sheathing and framing. These probes measure the amount of moisture inside the sheathing and framing. If the probes are inserted into wood and the reading is more than 20%, that typically is viewed as an indication that damage is beginning. If the reading exceeds 30%, that means the sheathing and framing are damaged and must be replaced. If the sheathing and framing are gypsum or oriented strand board (OSB), the acceptable level of moisture content in the wood is even lower than it is for plywood.

Elevated levels of moisture in the sheathing and framing under the brick and cast stone can be caused by many conditions. Missing or improper flashings, blocked weep holes and open sealant joints are among the common and visibly obvious causes of water infiltration. Others that are not visible without invasive inspection are weather-resistant barrier that is lapped backwards (i.e. instead of being installed from the bottom up, it is installed from the top down so the water runs behind the paper), failure to properly incorporate the weather resistant barrier into the flashings, and clogging of the air cavity behind the brick and cast stone so that the water cannot run down the weather resistant barrier and out. Instead, it works its way inside the walls. Determination of the causes of the damage should be done by an experienced engineer or architect who carefully documents the test methodology and results with photographs and video. Samples of a particularly nasty-looking damaged wood products should be bagged and marked by date, location and the name of the person who took the sample. This is necessary in order to enable counsel to use this evidence at trial if that becomes necessary.

In hiring experts to do this investigation, we recommend to our clients that they use engineers and architects who have substantial experience testifying at depositions and at trial. Being a litigation expert is very difficult, highpressure work. Errors made by the expert in conducting or documenting the field investigation can be damaging, sometimes fatal, to your case. Why should you pay your hard earned money to train an inexperienced expert how to follow the rigorous procedures needed to document and prove your claims when there are plenty of experts out there who have done this for many years and are already very familiar with that is expected of them by counsel and the courts?

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September 28, 2011

Transition by Condominium Associations – Focus of Engineering Investigation

Transition is often times a confusing issue for condominium associations run by Boards populated with unitowners who are not attorneys and who have no prior experience going through the process. Upon transition of control of the condo association board of directors from the sponsor-developer to the unitowners, a key responsibility of the Board is to engage the services of an engineer or architect to conduct an inspection of the common elements and building design to determine if there are any deficiencies. One of the most important considerations for the Board in transition, is spending the Association’s money wisely when it comes to engineering investigations. This is the first in a series of articles designed to help condominium associations focus their efforts to investigate the condition of the common elements in a cost effective manner. This first article focuses on investigations of builds clad with brick and cast stone.

Many condominium buildings are clad with brick and/or cast stone. It is important to understand how the designers of the buildings intended the brick and cast stone systems to be installed. The construction drawings typically have details showing at least the rudiments of the design intent for installation of the brick and cast stone. Brick and cast stone are porus, and therefore, most designers inted for there to be a weather resistant barrier wrapped over the framing sheathing of the building before the brick and cast stone are installed.

That weather resistant barrier is usually 15 pounds felt paper or Tyvek. Typically, there is a 1 or 2 inch air cavity between the weather resistant barrier and the brick or cast stone. This, coupled with the flashings installed at key locations, allows water to drain out of the system through weep holes in the brick and openings at the bottom of the system.

An experienced engineer or architect can look at a building and see deficiencies in the installation of a brick/cast stone system that may lead to water infiltration inside the wall cavity that could damage the sheathing and framing under the masonry cladding. They normally look for missing or blocked weep holes, missing or improper flashings, deteriorated or missing sealants and mortar in joints in the system. Efflorescence (a white deposit on walls caused by salts in the materials leaching out through exposure to water) is a possible indication that water cannot escape through the weeps and flashings and instead is forced to work its way out through the face of the brick or cast stone. If this is true, it is also possible that the water is working its way back inside the building.

What the Board needs to understand is that it should focus its investigative efforts and resources on documenting the extent to which water is infiltrating inside the building and damaging sheathing and framing. As fiduciaries, and as a matter of good common sense, the Board shuld be doing this. However, there is a practical reason why this needs to be the focus of the Board’s engineering investigations.

The sponsor-developer is almost certainly an LLC or corporation with no assets once the last unit is sold. The subcontractors who constructed the common elements are also very likely to be small companies with no assets of any significant value. Therefore, the only way the Association is getting paid for the deficiencies it finds in the construction of the common elements is through insurance policies insuring those responsible for the deficient construction.

Analysis of those policies is beyond the scope of this article. For purposes of this discussion, what the Board needs to understand is that the insurance will often not cover your claim unless you can show proof of damage to sheathing and framing. You need to understand this and direct your engineers/architects to focus their investigation on finding this damage.

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July 16, 2010

Stark & Stark Attorneys Obtain $1,200,000 Settlement for Bergen County Condominium in Construction Defect Case

Stark & Stark attorneys, Mark M. Wiechnik, David J. Byrne and Thomas J. Pryor have obtained a $1.2 million settlement for a condominium located in Bergen County, New Jersey after experiencing roof leaks, window deficiencies and other construction related issues. These problems began shortly after the unit owners were elected to the Board of Directors of the Association.

You can read more on the case here.

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May 14, 2010

Stark & Stark Shareholders Present Seminar at 2010 New Jersey Cooperator Expo

Donald B. Brenner, Chair of Stark & Stark's Construction Litigation Group, presented a seminar at the 2010 New Jersey Cooperator Expo. The expo was held in Secaucus, New Jersey on May 5, 2010. Mr. Brenner presented a seminar entitled, Legal and Legislative Update: Important Decisions, New Laws, and how they Impact Your HOA, Condo. and/or Co-Op, in conjunction with Stark & Stark Community Association Group Co-Chairs, David J. Byrne and A. Christopher Florio.

Mr. Brenner discussed two key Appellate Division decisions published in 2009, both of which relate to the 'economic loss doctrine' and homeowners’ claims against sellers of defective building materials that were incorporated into the construction of their homes (Marrone v. Greer & Polman Constr. Inc., 405 N. J. Super. 288 (App. Div. 2009) & Dean v. Barrett Homes, Inc., 406 N. J. Super. 453 (App. Div. 2009)) Mr. Byrne discussed the United States Fair Housing Act and a recent decision regarding its application to 'companion animals'. Mr. Florio discussed two recent cases involving the fiduciary duties of board members and the business judgment rule.

You can listen to the full presentation online here.

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July 16, 2009

Common Problems Associated With Roofs

Donald B. Brenner, Chair of Stark & Stark’s Construction Litigation group, interviewed Ron Wright, Chief Operating Officer of R.V. Buric Construction Consultants in a four-part video series. In this fourth and final installment, Mr. Brenner and Mr. Wright discuss the common problems associated with roofs. Mr. Brenner and Mr. Wright discuss the different methods used in determining the common problems associated with roofs such as visual investigations, attic ventilation investigations, infrared photography and moisture surveys.

"

Legal Briefs on Construction Litigation: Roofs from Stark & Stark on Vimeo.

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July 14, 2009

Common Problems Associated With Decks and Balconies

Donald B. Brenner, Chair of Stark & Stark’s Construction Litigation group, interviewed Ron Wright, Chief Operating Officer of R.V. Buric Construction Consultants in a four-part video series. In this third installment, Mr. Brenner and Mr. Wright discuss the common problems associated with decks and balconies in construction projects. Mr. Brenner and Mr. Wright discuss the most common types of decks used, the most common problems associated with decks including flashing and back-pitching, and a discussion on the structural failures associated with concrete decks which are used in high/mid-rise buildings.

Legal Briefs on Construction Litigation: Decks and Balconies from Stark & Stark on Vimeo.

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July 9, 2009

Exterior Insulation Finish Systems

Donald B. Brenner, Chair of Stark & Stark’s Construction Litigation group, interviewed Ron Wright, Chief Operating Officer of R.V. Buric Construction Consultants in a four-part video series. In this second installment, Mr. Brenner and Mr. Wright discuss exterior insulation finish systems (EIFS). Mr. Brenner and Mr. Wright cover topics related to EIFS including, what is EIFS, how do EIFS work, what are the different types of EIFS used, and what are the common problems associated with EIFS?

Legal Briefs on Construction Litigation: Exterior Insulation Finish Systems from Stark & Stark on Vimeo.

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July 6, 2009

Transition Analysis for Condominium Associations

Donald B. Brenner, Chair of Stark & Stark’s Construction Litigation group, interviewed Ron Wright, Chief Operating Officer of R.V. Buric Construction Consultants in a four-part video series. In this first installment, Mr. Brenner and Mr. Wright discuss transition analysis for condominium associations and how building forensic investigations are conducted. The interview includes a discussion on what is included in a building forensic investigation, including the evaluation of common elements of a building, when field investigations should be conducted, when to conduct a moisture reading survey and what elements are included in a forensic investigation’s final report.

Legal Briefs on Construction Litigation: Transition Analysis for Condominium Associations from Stark & Stark on Vimeo.

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June 12, 2009

Stark & Stark Shareholder Presents Seminar on Transition, Building Defects and Alternative Dispute Resolution

Donald B. Brenner, Shareholder and Chair of Stark & Stark's Construction Litigation Group, presented materials related to minimizing acrimony and conflict while preserving an Association's rights with respect to construction defects and/or repairs, in conjunction with David J. Byrne, Esquire, during a seminar entitled "Managing Costs and Risks in Challenging and Uncertain Economic Times". The presentation was held at the Meadowlands Exposition Center in Secaucus, New Jersey on Wednesday, May 13, 2009.

Mr. Brenner focused his presentation on transition, building defects, alternative dispute resolution and how associations should review insurance policies for recovery and/or possible settlement prior to litigation.

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July 2, 2008

Municipalities Cannot Require Builders to Provide Common Open Spaces

The New Jersey Appellate Division ruled this month in two companion cases, New Jersey Shore Builders Association v. Township of Jackson, A-5805-06 (June 23, 2008) and Builders’ League of South Jersey v. Egg Harbor Township, A-1563-07 (June 23, 2008), that municipalities cannot require as a condition of approval that builders and developers provide on-site recreation areas or facilities, or common open space, outside the context of planned unit developments. The Court also held that municipalities cannot require payment of monies to built such facilities off-site in lieu of providing them on-site. The Court found that ordinances requiring such conditions of development approvals were not authorized under the Municipal Land Use Law (MLUL). Through this ruling, the Court has ended a longstanding practice of municipalities to exact these types of conditions from developers, and, for developers who have in the past been made to remit payments in lieu of providing on-site recreation areas, facilities, or common open space, the decision may open a floodgate of demands for reimbursement of those payments.


Ordinances in two municipalities, Egg Harbor Township, Atlantic County and Jackson Township, Ocean County, were the subject of the attack. Both ordinances compelled developers seeking approvals to set aside a certain amount of acreage on-site for use as public open space and/or recreational facilities such as tot lots, tennis and basketball courts, and baseball, soccer and football playing fields. Both townships’ ordinances also provided for payments in lieu of providing those facilities on-site for use in constructing such facilities off-site.


The Appellate Division found that both ordinances were not permitted under the MLUL did not permit the recreational open space exactions required by the ordinances. The Court rejected the Townships’ arguments that the MLUL should be read expansively to implicitly authorize the imposition of open space and recreation exactions. The Court held instead that the MLUL contains explicit language specifically limiting municipalities’ powers in that regard. The Appellate Court held that while providing public open space and recreation facilities is an important goal of New Jersey land use law under the MLUL, it is a goal that can only be accomplished within the strict and specific limits of the MLUL. Municipalities cannot require developers to provide common open space and recreation facilities on-site as a condition of development approval, or require payments in lieu thereof, outside the context of planned unit developments.

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March 4, 2008

Condo Association Equitably Estopped from Consumer Fraud Act Relief When Its Conduct Resulted in the Violation

After a condominium association president declined a contractor’s request to execute a written change order and directed the contractor to proceed with the additional work, the association was barred from seeking relief under the Consumer Fraud Act (“CFA”) (N.J.S.A. 56:8-1 to -167) provisions requiring that all modifications to contracts for home improvements be in writing. B & H Securities, Inc., v. CKC Condominium Ass’n, Inc., 2008 WL 508082 (App. Div., February 27, 2008).

Defendant Association hired Plaintiff contractor to complete installation of a fire alarm system in its building that had been begun, but not completed, by a prior contractor. After Plaintiff inspected the premises, its engineer, Charles Hamburger, briefly inspected a portion of the building and estimated the time and expense necessary to complete the project. The parties entered into a time-and-materials contract for completion of the fire alarm system , which was necessary for the building to pass a municipal fire inspection.

Upon beginning its work, Plaintiff discovered that the existing installation was the wrong size and violated applicable building and fire protection codes. Accordingly, Hamburger informed the Association’s president, Robert Lyon, of the existing substandard work, informed him that additional time and materials would be necessary to make the system compliant, and suggested that the parties prepare and execute a change order. Defendant’s president declined, protesting insufficient time and the pressure to complete the installation. Plaintiff then completed the work, including making the existing portions code compliant.

Defendant paid only a portion of Plaintiff’s invoices, and Plaintiff sued to collect the balance due. The trial court found Hamburger’s testimony more credible than that of Lyons, and questioned whether a change order was even necessary when the contract clearly contemplated that Plaintiff was to complete the job to allow Defendant’s building to pass municipal inspections, and did not specify a date or time certain for completion nor set the cost. The judge found that Plaintiff had performed the contract by installing a system that satisfied the municipal inspectors and that Defendant had breached by failing to pay the full amount due.

The trial court rejected Defendant’s contention that Plaintiff had violated the CFA by failing to provide a written modification to the contract. He judge concluded that Defendant was equitably estopped from seeking sanctions under the CFA, based on Lyon’s response to Plaintiff’s request for a written change order.

The Appellate Division affirmed, holding that, even if a change order were required, Defendant was equitably estopped from asserting a CFA defense where its conduct led the Plaintiff to change its position to its detriment. In reaching its opinion, the appellate court relied on Joe D’Egidio Landscaping, Inc., v. Apicella, 337 N.J. Super. 252, 256-57 (App. Div. 2001), in which the court held that a homeowner who declined a written contract for driveway paving, based on his personal relationship with the contractor, was equitably estopped from invoking the CFA to render his agreement with the contractor unenforceable. “[O]ne who induces the alleged wrongdoing should not benefit as a result of it.” Id. at 257.

Rejecting the condominium association’s arguments, the appellate judges found no meaningful distinction between B & H Securities and Joe D’Egidio Landscaping.

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October 8, 2007

Appellate Division Enforces Terms of Association’s Insurance Policy

In an unpublished decision, the Appellate Division recently enforced an insurer’s duty to indemnify and defend a condominium association for damages resulting from an occurrence during the policy period even though they were not discovered until after the policy had expired. Steinbauer v. East Coast Acquisitions, LLC, 2007 WL 2593007 (App. Div. September 11, 2007).

In March 2003, Ramapo Ridge Condominium Association Phase II (“the association”) discovered that a pipe had burst and flooded an abandoned unit. After the municipality declared the unit unsafe, Sirius American Insurance Co. (“Sirius”), which insured the association under a property damage and general liability policy effective from July 2002 through July 2003, undertook to repair and remediate the damaged unit, which was thereafter acquired by East Coast Acquisitions (“East Coast”) at a foreclosure sale. After additional repairs and upgrades, East Coast conveyed the unit to the plaintiff in July 2004. When plaintiff’s plumber entered a common area crawl space to install a dryer vent line, he discovered mold. Ultimately, in November 2004, plaintiff sued East Coast and the association, among others.

The association demanded defense and indemnification from Sirius. All parties agreed that the damages were caused by the 2003 flooding. Nonetheless, Sirius declined coverage, arguing that its indemnification was only triggered if the property damage occurred during the policy term and the third party sued during the policy term. It relied on the following policy language:

COVERAGE E [-] LIABILITY TO OTHERS
A. We pay for the benefit of the insureds, up to the applicable limit(s) of liability (See Part II D) shown in the Declarations, those sums that insureds become legally liable to pay as damages because of bodily injury or property damage insured here.
Such bodily injury or property damage must:
• Occur during the policy term, and
• Be caused by an occurrence that takes place within the applicable coverage territory: See General Conditions 6.

. . .

Occurrence
Occurrence means an accident, including continuous or repeated exposure to substantially the same general harmful conditions.

. . .

Property Damage
Property damage means the following, caused by a covered occurrence:
• Direct physical injury to tangible property, including loss of use of such property (the loss of use is deemed to occur at the time of such direct physical injury).
• Loss of use of tangible property that is not physically injured: all such loss of use is deemed to occur at the time of the occurrence causing the loss.

The court rejected Sirius’s argument. Because the occurrence (the flooding) occurred within the policy period, the court held Sirius liable for all resultant damages, even remediation of the crawl space mold that was not discovered until after the end of the policy period.

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January 4, 2007

The Importance of Experts

Another important consideration is whether the association is going to be willing to hire and pay for the qualified experts necessary to win the case. You can have a great case, but if you have the wrong expert, it can quickly turn into a disaster. The best way to avoid this problem is for counsel to give the client a thorough and honest estimate of what the case will cost and what the timing of the case will likely be. What does counsel base this assessment on?

Many lawyers file suit based upon transition engineering reports. These reports are often perfunctory, and were done just to give the association a general idea of what issues might be of concern. Many explicitly state that no invasive testing was done and that additional investigations are needed.

We like to get as much engineering work done as possible before the complaint is filed, so that we have a good understanding of the strengths of the case. For that reason, we prefer to hire experts who we will rely upon at trial to do a thorough investigation of whatever defects have been identified or are suspected. These investigations involve extensive test cuts and as many photos as are needed to properly document conditions. They can take weeks to complete and can result in extensive reports that cost tens of thousands of dollars or more. Counsel has to use good judgment on a case-by-case basis to guide the client as to what level of engineering work is needed or appropriate before the complaint is filed.. Generally, the more complex the issues, the more detailed the investigation will have to be. For example, if the case involves roof claims on 45 buildings, a decision has to be made as to whether you are going to have your experts test all 45 buildings or try to test just a representative sample. If you have issues relating to deficient installation of fire suppression systems because the wrong anti-freeze was put into the CPVC pipes, causing damage from environmental stress cracks, a careful analysis will need to be mdeas to what type of experts you need. Depensding upon your proofs, if you do not havw busrt pipes yet, you may needd to hire an expert who is a chemist and hwo can tetsify about environmental stress cracks and how they can or will cause consequential damage in the near future. The list of possible examples is limitless. The pijnt is that close consultation between the clients, counsel and the experts is obviously needed in making this judgment.

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December 26, 2006

Financial Implications of Construction Law: Insurance

We have all heard Cuba Gooding in Jerry Maguire screaming the phrase "Show me the money!" The developer is often a shell with no assets. It may even be bankrupt. The subcontractors often are unknown or, if known, may operate out of the back of a pick-up truck and have no tangible assets. The design professionals typically have no substantial assets either. The manufacturer of defective building products may be out of business, bankrupt or have liens against its assets in favor of a commercial lender. Faced with such scenarios, plaintiffs are often in despair about how they are going to recover millions of dollars in damages for defective materials or deficient workmanship. They are especially concerned about laying out enormous sums for legal and expert fees and costs, with no idea where the money is going to come from to pay their damages. One of the most important things counsel does is show the client where the money is going to come from. The answer is—insurance.

Builders, their subcontractors and design professionals usually have commercial general liability (“CGL”) insurance policies that pay for property damage when there is an occurrence as defined under the policy. The property damage cannot be damage to the workmanship or materials provided by the particular contractor who did the work in question. Thus, if the roofer was negligent in applying terra cotta roof tiles over sheathing applied by the framing contractor and the tiles get damaged, that is not property damage covered under the roofer's CGL, because it is damage to the materials and workmanship of the roofer.

However, if the deficient installation of the roof tiles allowed water to penetrate the roof tiles and damage the sheathing underneath that was installed by someone else (i.e., the framing contractor), then that is property damage covered under the roofer's CGL. This is known as consequential property damage. It does not matter whether the contractor is still in business, is bankrupt, a dead-beat, or ran off to Fiji and cannot be found. As long as there was a CGL in place when the deficient work was done and the insurance company is still in business, then there is coverage—and a pocket to pay for the damages. In fact, if the contractor cannot be found, the plaintiff can often get the court to allow the plaintiff to serve the carrier for the absent defendant with the complaint and force the carrier to defend, and ultimately pay damages for, the absent contractor. Obviously, this is a gross over-simplification of an extremely complex analysis and the exclusions and other language of the policies will have to be carefully evaluated by experienced counsel before any conclusions about coverage can be reached.. Nevertheless, counsel should be mindful of the availability of insurance coverage as an avenue of recourse for clients who have been badly hurt by deficient workmanship and/or defective building products.

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December 22, 2006

The Importance of Clear Communication with the Client

One other way that counsel can add value for the client is by helping the association’s board of directors inform the unitowners about the litigation. This takes a lot of pressure off the board and allows the community to see and hear from the attorneys who are handling the case a first-hand report on the progress of the litigation. Counsel must be mindful that these open public meetings may not be covered by the attorney-client privilege. Therefore, considerable care has to be given to making sure that nothing is disclosed in these meetings that could be construed as waiver of the privilege. Handled skillfully, a public meeting at which counsel and /or experts give a top-quality presentation about the case and answer questions can be an opportunity for the board to galvanize public support for the case. This can be particularly important where a special assessment is being contemplated to pay for the litigation.

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December 20, 2006

Selection of Experts

A lot of careful thought has to be given to what claims are worth fighting about, because the association will likely have scarce resources available to it. Much of the value that counsel brings to this process is counsel's experience and judgment and counsel's relationships with experts who are particularly skilled in disciplines that are responsive to the needs of the association.

Counsel also adds value to the process by making sure that the association does not take unrealistic positions regarding the claims that it makes. This means keeping client expectations within line of what we think we can probably get through litigation or mediation of each claim. It helps to have considerable experience when you are trying to give advice to a client about what their reasonable expectations should be regarding the amount that the association can realistically expect to recover from the litigation. This is one of counsel’s most important responsibilities because the decision of the client regarding how much to spend on the case and what to settle the case for are dependent upon counsel’s advice. Myriad factors need to be considered in making this critically important evaluation. Are there statute of limitations or statute of repose issues? If so, how much of a concern are they? How good are plaintiff’s experts? How strong are plaintiff’s proofs on liability and damages–especially consequential damages as is discussed in detail below? Can the proofs be understood by the jury? Do the defendants have any chance of dismissing all or part of plaintiff’s case on pre-trial motions? How long will trial take and does the client have the money to fund the case through trial? If not, is counsel willing to advance the costs and expert fees and take a piece of the recovery? Do the defendants have any assets? How much insurance coverage is there? What coverage issues are there and how can the plaintiff overcome them?

Counsel has to see and anticipate issues well in advance to prevent a client from spending huge sums of money taking discovery and then having claims unexpectedly dismissed before trial. For example, suppose you have a construction defect case involving a defective exterior cladding that was negligently applied by the applicator. The building was substantially completed in 1993 and the product was applied in 1992. The developer did not immediately sell all of the units. Instead, the developer rented out the majority of the units in the building. Eventually, in 2005, 12 years after substantial completion of the building, the developer sold off the last units needed to trigger transition of control of the association’s board of directors. The unitowner-controlled board hired experts who discovered severe water penetration through the defective cladding caused mold and other massive damage to the structural framing of the building. You sue the developer, all subcontractors, design professionals involved in selecting the material and the manufacturer and distributor of the material.

This case is a mine-field of complex issues. Counsel will have to evaluate how the statutes of repose and limitations will impact the handling of this case. If the defendants can prove that the developer-controlled board of directors of the association knew about the water penetration and failed to file suit beyond the statute of limitations, then it is possible that the unitowner-controlled association could have all of its claims against all subcontractors, design professionals, the manufacturer and distributor dismissed. This would leave the association with a remedy only against the developer and general contractor on the theory that during the period when they were in control of the board of directors of the association, they had a fiduciary duty to bring these claims against all possible defendants. Having failed to do so, they should be stopped from asserting the statutes as a defense.

Counsel have to be sensitive to these kinds of issues because community associations and other kinds of clients are simply not going to be sophisticated enough to understand that they even exist–let alone how to evaluate and deal with how they impact the association’s reasonable expectations for the value of the case, how much the association should be willing to invest in attorney’s fees, expert fees and other costs in order to get a fair return on their money.

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December 18, 2006

Dealing with Transition Issues: The Value of Counsel

Stark & Stark's Construction Litigation Group has a lot of experience dealing with what are known as "transition" issues. This relates to the process by which control over the common elements of a condominium is turned over from the developer to the unit owners. Not all states have the “transition” process and requirements vary among those that do. For example, in New Jersey, the transition process is triggered by the sale of at least 75 percent of the units in the condominium. The transition process is very complex and results in much litigation, because of the divergent interests of the developer on the one hand, and consumers represented by their condominium association on the other. The developer has typically sold out—or is close to selling out—the project and has already gotten its money out of the development. It is looking to wind down, get its bonds released and get out of the project quickly, so it can move on to the next deal. The condominium association has usually just hired its own independent engineers and property manager to do an objective evaluation of the condition of the common elements and finances of the association.

Most of the time, the unit owners who now control the Board of Directors of the association have no experience with construction and are just getting familiar with the construction issues at the same time that the developer is heading for the door. Normally, by the time the association finds out about design and construction deficiencies and defects, the developer is long gone and there are no more units left to be sold. The developer is typically a shell company set up as a corporation or limited liability company that has no assets and no real interest in doing repairs. Sometimes the developer entity is owned by a reputable builder that may have some interest in protecting its name and reputation, and therefore may be willing to at least discuss doing some repairs. Unfortunately, for practical business reasons addressed below, the developer is almost never willing to spend what is required to fix what is wrong to the satisfaction of the association. That means that the association has no choice other than to litigate or special assess the unit owners hundreds of thousands or millions of dollars to effectuate repairs. We counsel associations on how to deal with these issues.

The association is usually in a big hole. It has neither the money nor the experienced leadership to handle the complex process of hiring qualified experts to advise it on the technical construction and financial issues it is confronted with. Counsel therefore has to assist the Board of Directors of the association by recommending competent engineers and/or architects who can give the association reliable, unbiased reports on the condition of the common elements. Counsel also has to recommend to the association accounting experts who can advise the association on various financial issues including, but not limited to, how much money the developer may owe the association for: (a) unpaid monthly maintenance fees that the developer should have paid for developer-owned units prior to their sale; or (b) for benefits derived by the developer-owned units from common elements that the association had to pay to maintain.

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November 3, 2006

Living Next Door To Your Condo's Builder?

The front page of Sunday's New York Times Real Estate section headlined the dubious proposition that, if a builder chooses to live in one of his own condominiums, the condo would "most likely work for the buyer" since "the developer's eye is on every detail." (Vivian S. Toy, "If It Seduces the Builder . . ., New York Times, Real Estate, Section 11, p. 1 (October 29, 2006).) Our experience suggests that there are better ways to evaluate the quality of a potential condominium purchase than the builder's decision to buy a unit himself.

Attention to detail has not been apparent in an ocean-front community that we represent, even though approximately one in three initial sales was to a principal of the developer, a subcontractor, or a party with financial connections to the developer. From our point of view, another factor that Toy identified is much more important to a developer's decision to purchase a unit in a condominium he or she has built: the opportunity to "get first choice, sometimes at a substantial discount." Speculating that his unit might sell for $6 million, one developer reflected to Toy that he paid "more than it cost to build and less than market value." Often a developer's purchase price is less than the unit cost to build, with the difference made up by skimping on construction and materials elsewhere in the development.

The advantage of first choice is especially apparent when certain units boast extraordinary advantages, such as ocean frontage or a magnificent view. The developers that Toy profiled selected such units as a "penthouse with sweeping city views" and a Brooklyn waterfront unit with "views of eight different bridges." Non-developer unit owners in one of our client communities were surprised to discover that what had appeared to be common green space above the beach in the plans and models was actually the back yards of the beach front units, which were, for the most part, owned by the developer and his associates. Prospective condo buyers need to look carefully at both the prospectus and what is actually being built to ensure that apparent amenities are not disproportionately allocated to the builder and his cronies, with other unit owners footing the bill through inflated purchase prices or maintenance fees.

Builder's options are enhanced by early choice and limited only by constraints imposed by one's business partners, reported Toy. The profiled developers incorporated into their units additional space and custom features, such lap pools, rooftop party spaces, and casitas for the grandchildren, without the necessity of approval from condo associations that were not yet formed. Toy does not acknowledge that condo associations might reasonably frown on upgrades that have the capacity to increase the association's insurance or maintenance costs, to pose a threat of water leakage, or to overtax the building's structure.

Focusing on the congenial developers interviewed for her story, Toy extolls the advantages of unit owner/developers who can "hurry the contractor[s] along," resolve plumbing and electricity issues as they occur, and make sure "the lobby's going to be clean." The author seems not to have encountered the overextended builders and developers that we construction litigators too often see: cutting corners on construction, rushing closings in hopes of quieting the creditors, and ignoring unanticipated (and unbudgeted) defects and deficiencies because adequate funding simply isn't there. The importance of keeping the lobby clean fades when the builder is desperately trying to pay the dry wall contractor enough to keep him on the job until the last units are finished. As the real estate market cools, more builders and developers will find themselves shortchanging construction quality and customer service in order to satisfy unanticipated carrying charges.

"Having a developer living on site should also assure buyers that the typical problems that come up as any development is being completed will be dealt with quickly," Toy gushes. The unacknowledged assumption underlying Toy's premise is its dependence on the builder/developer's self-interest being concurrent with that of other unit owners. Conflicts of interest between the developer and other unit owners quickly emerge when construction goes bad or the money runs out. In short, the fact that the builder has been "seduced" by his latest project offers no assurance that purchasing a unit will work for an unrelated buyer.

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November 1, 2006

UCIOA – A Wolf In Sheep’s Clothing – Part 2

This is part 2 of Randy Sawyer's 16 Part series on UCIOA. You can read Part1 here.

Section 87, subsection (b)

Subsection (b) of UCIOA’s Section 87 contains the initial process of the “alternative dispute” procedure imposed upon Associations by the bill. The language is as follows:

§87(b) - Within 30 days of the receipt of the notice from the association, the declarant or its agent may send a written request to investigate the association's claim, which shall be referred to as the "declarant's reply." The declarant's reply shall include a stipulation by the declarant that all statutes of limitation applicable to any claim by the association against the declarant shall be tolled for 180 days or such shorter period of time as set forth in the cancellation notice delivered pursuant to subsection c. of this section. The tolling of the statutes of limitation shall be effective as of the date of the declarant's reply. If the declarant fails to send the declarant's reply within 30 days or fails to stipulate to the required tolling of all applicable statutes of limitation, then the association may institute an action without satisfying any other condition of this section.

Under this subsection, once the developer, called the “declarant,” has received the Association’s notice of a claim for some construction defect in the community, it has the ability to force the Association into the alternative dispute procedures outlined in Section 87 simply by sending a written request to investigate the Association’s claims (called the “declarant’s reply”), so long as the reply includes a stipulation that all applicable statutes of limitations are tolled for 180 days from the date of the reply. The tolling of applicable statutes of limitation was obviously included to create the impression that participation in the process would not jeopardize the Association’s ability to file a lawsuit in the event the process failed. The 180 day time period, however, is wholly inadequate. Anyone who is involved on a regular basis in construction defect claims arising in a community property setting knows that 180 days is far too short a time period to accomplish anything of substance. The statute should have been written to toll the applicable statutes of limitation for the entire life of the alternative dispute procedures that an Association must follow under Section 87.

The 180 time period is one of many examples in the statute that (apparently intentionally) force things to happen quickly before an Association can get its ducks in a row. The old adage “haste makes waste” comes to mind.

Moreover, the tolling provided in the statute only applies to claims against the developer. It does not apply to subcontractors, design professionals, product manufacturers and other potential defendants against whom the Association may have claims. The applicable statute of limitations for these claims would continue to run and could easily run out as to those parties while the Association waits for the alternative dispute procedures required under UCIOA to conclude. Since UCIOA does not require the Sponsor/Developer to disclose to the Association the identities of the various subcontractors, manufacturers, product distributors, design professionals and others involved in the construction of the project who may be liable for defects, the process required by UCIOA is actually very prejudicial to the Association because there is nothing stopping the Sponsor from refusing to disclose the identities of these various parties while the precious time the Association has to pursue those claims runs out during the time it takes for the mandatory procedures under UCIOA to run their course.

If you are interested in more information on this topic or have any questions, please call John Randy Sawyer, Esq. at (609) 895-7349, or email him at jsawyer@stark-stark.com

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October 23, 2006

Water Damage From Above

Your home inspector probably advised you that it's good sense to prevent possible water damage by turning off the water to your second home when you're not in residence. But if you neglect to do so and your defective toilet floods the condominium unit downstairs, New Jersey courts may not hold you liable for the damage to your neighbor's home. In an unpublished decision, the Appellate Division declined to find that residents of multiple dwelling units had a legal duty to turn off the water when they were going to be away for more than a day. Coyne v. Price, A-3291-05T5 (App. Div. September 14, 2006).

Mr. and Mrs. Coyne lived downstairs from Mr. and Mrs. Price in a condominium "down the shore." While the Prices were at their primary home, their condo's toilet failed, flooding the Coyne's home. Although the Prices had typically turned off the water to their washing machine, they had never considered the possibility that other leakage might occur and had never turned off the water to the unit as a whole, although a turn-off valve was located in the ceiling of their unit.

Although the Coyne's insurance paid for most of the damage, they brought suit in small claims court, seeking to recover the $1000 deductible that they were forced to pay. After the trial judge ruled in the Coyne's favor, finding that the Prices should have foreseen the possibility of leakage, the Prices appealed the judgment.

Defining negligence as "conduct that creates an undue risk of harm to others," the Appellate Division found that foreseeability alone did not give rise to a legal duty but must be evaluated along with reasonableness, public policy, fairness and common sense. Because the Prices had no reason to believe that their toilet would leak in their absence, held the court, the Prices' failure to turn off the water to their unit was reasonable. Accordingly, the court declined to create a new legal duty.

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October 23, 2006

UCIOA – A Wolf In Sheep's Clothing – Part 1

On February 23, 2006, the Uniform Common Interest Ownership Act (UCIOA) was voted out of the Housing Committee in the Assembly and sent to the Assembly floor for a full vote. The bill, known as A-798, is a sweeping bill that for the first time in New Jersey history would enact one law governing issues affecting all community associations in the State, including condominiums, homeowners, and cooperatives. On March 2, 2006, the bill was passed by the New Jersey Assembly by a vote of 55-14, with 6 abstentions. That same day, the bill was received by the Senate and referred to the Senate Community and Urban Affairs Committee. The bill has not yet come out of consideration by the Senate Community and Urban Affairs Committee.

UCIOA has been touted by its supporters as a “first of its kind” that will help protect the rights of homeowners living within a community association, while also helping community associations operate more efficiently. The bill will purportedly consolidate various laws applicable to New Jersey's common interest communities, will provide numerous protections for owners in such communities, and will clarify the powers of community association boards. According to one of the bill’s primary sponsors, Assembly-member Wilfredo Caraballo:

“This bill . . . establishes a consistent set of board powers and limitations that will apply to all associations, thereby ending confusion over the rights of boards. Some of the issues addressed are the ability to borrow money, grant easements over the common property, and adopt rules and regulations governing certain types of negative behavior. Unit owners will benefit from this new-found clarity that addresses the powers and limitations of the homeowner association boards that are elected.

Sounds great, right? So what’s the problem? The problem is that those who live in planned communities, or are considering purchasing a home within such a community in New Jersey, should look past the rhetoric and examine the motivations behind the supporters of the bill. When one considers that organizations such as the New Jersey Association of Home Builders, large developers that build condominium and other community developments in New Jersey, and law firms that represent large developers, are all lining up to sing UCIOA’s praises, a prudent mind should question whether the bill is, in reality, a wolf in sheep’s clothing.

Stark & Stark’s Construction Litigation Department has carefully analyzed UCIOA in light of our experience handling construction litigation cases on behalf of condominium and homeowner associations throughout the State of New Jersey. Contained deep within UCIOA’s pages are two sections, Sections 87 and 88, that greatly restrict a community association’s ability, in fact its very right, to avail itself of the court system of our State to sue the builder of the community for damage caused by construction defects. What follows in this blog and several to come is a line by line analysis of Sections 87 and 88 of UCIOA with our thoughts on the vagaries of the language itself and the overall restrictive effect of these sections of the bill:

Section 87, intro paragraph

The first paragraph of UCIOA’s Section 87 establishes the requirement that the Association go through a lengthy and cumbersome “dispute resolution process,” before filing “any form” of construction defects litigation, with the following language:

§87. (New section) Except for applications for emergent relief, prior to the commencement of any form of construction defects litigation on behalf of an association against a declarant or any members of the executive board appointed by the declarant, the following alternative dispute procedure shall be followed:”

Right out of the gate Section 87 takes away an Association’s choice to file litigation against a developer for “any form of construction defects litigation” without first jumping through the hoop of an alternative dispute procedure. The language used in this intro paragraph, moreover, is apparently intentionally drafted to be as broad as possible. Specifically, the term “any form of construction defects litigation” is not defined and amounts to a significant ambiguity in the statute. Considerable litigation is sure to occur over exactly what types of claims fall within this language. Litigation community associations cannot afford. Obvious cases involving defectively constructed roofs, water penetrating through improperly installed exterior cladding, etc., may clearly fall within the category of “any form of construction defects litigation.” What is not so clear, however, is whether cases involving, for example, a breach of warranty for windows that do not meet required specifications, product liability claims for damage caused by faulty construction components such as defective pipes, roof shingles, etc., or design claims arising from improper structural designs or roof designs, also fall within the category of “any form of construction defects litigation.” Are these types of claims “construction defects” claims, or are they design defect claims, product defect claims, or something else?

If claims such as design defect claims and product defect claims are not “construction defect” claims, what happens in a case that involves both (1) claims that fall within the statute’s category of “any form of construction defects litigation,” and (2) claims that do not fall within that category? Must the Association pay for two separate, ongoing, adversarial procedures – one alternative dispute resolution procedure against the developer under UCIOA and a separate litigation against design professionals and product manufacturers in state court? The statute also makes no reference whatsoever to claims against subcontractors who worked for the developer when the community was built. Would an Association have to file a separate lawsuit against subcontractors while going through the alternative dispute resolution process with the developer outlined in UCIOA?

The expense of these approaches would likely be prohibitive to most Associations. The question is, was this intentional?

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October 16, 2006

Case Study - Water Intrusion

STARK & STARK CASE STUDY

CASE NAME:
“ABC” Condominium Association v. Lookout Builders, LLC, et. al., BER-L-10051-02.*

*In order to preserve our client’s interests in confidentiality, we have used the fictitious designation “ABC” Condominium Association

STARK & STARK’S CLIENT:
ABC Condominium Association

CASE TYPE:
Construction defect litigation

CASE FACTS:
The ABC Condominium is a forty-two unit, six story condominium building located in Hackensack, New Jersey. The exterior of the condominium building was clad with brick facing on the first story with the balance of the structure clad with an Exterior Insulation and Finish System (“EIFS”) manufactured by Senergy. The building has a front plaza finished with brick pavers and planters and a garage/parking area below the building. The roof on the building is a flat style, EPDM roof system.

The ABC Condominium Association is a non-profit corporation comprised of the owners of the condominium units that was established to provide the management, administration and maintenance of the Common Elements of the Association and to promote the health, safety and welfare of the unit owners of the Association.

Construction of the ABC Condominium began in 1988/89 and was completed sometime in late 1991, early 1992. The Sponsor of the condominium was Lookout Builders, LLC. After the construction of the condominium was completed, Lookout Builders controlled the building through majority ownership of units within the building up until approximately May, 2001, when Lookout sold all the remaining units it owned and turned control of the Board of Trustees of the Association over to the independent unit owners via a process known as transition.

The condominium experienced significant water intrusion problems almost from the date of its completion. Unit owners suffered from water leaks through sub-standard windows and in ceiling areas throughout the building. The front plaza area of the condominium, due to improper waterproofing, allowed water to penetrate into the underground garage area, causing significant water damage. Despite multiple complaints from unit owners from 1991 up to 2001, the water intrusion problems were never properly addressed.

After control of the Board of Trustees of the Association was turned over the independent unit owners in 2001, the Board retained Stark & Stark. Shortly thereafter, several engineering firms were brought in to investigate and diagnose the water intrusion problems with the building. Those studies revealed multiple construction defects and damages in the building including improperly installed EIFS cladding, defective windows that were leaking water into the exterior walls, improper waterproofing of the front plaza and associated retaining walls, high levels of water intrusion into and behind the EIFS cladding causing damage to the gypsum sheathing on the building, high levels of mold growth inside the walls of the building, improper installation of aspects of the EPDM roof, as well as other problems.

THE LAWSUIT:
Stark & Stark’s Construction Litigation Department filed suit on behalf of the ABC Condominium Association in December of 2002. The suit was filed to pursue damages against responsible parties for the cost of correcting all damages to the building and all construction defects.

The defendants in the suit included Lookout Builders, LLC, the Sponsor, Impact Realty Associates, a management company, Senergy, the manufacturer of the EIFS, E.Robinson Group, the distributor of the EIFS, Dorwin Manufacturing, the manufacturer of windows used in the building, J.P. Patti Roofing, a roofing contractor, Concrete Construction Company, a contractor that performed caulking and maintenance work on the building, and several individuals who were appointed by the Sponsor to be Trustees for the Association from 1991 to 2000.

THE RESULT:
Stark & Stark’s Construction Litigation Department settled the lawsuit on behalf of the ABC Condominium Association for a total recovery of $1,645,000.00. The recovery will be used by the Association to correct the damage to the building.

If you would like more information, contact John Randy Sawyer, Esq., at (609) 895-7349, or jsawyer@stark-stark.com.

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September 22, 2006

Transition, Privilege and the Association's Documents

In any civil litigation, the parties are entitled to make their adversaries produce documents upon request, and this can be a huge undertaking for a Condominium or Homeowners Association of any significant size. Your files, and your managing agent's files, may contain a great deal more than meeting minutes. There are contracts with vendors, your Public Offering Statement, Bylaws, Master Deed, insurance policies (sometimes going back many years), correspondence with members, your attorneys, accountants and consultants. There are lots of bills, vendor bills, utility bills, legal bills, cancelled checks, ledgers, budgets, forecasts. Also, the definition of "documents" includes electronic documents, meaning emails, instant messages, and other forms of written communication. In short, there are probably thousands upon thousands of documents you are saving, and all of these will likely need to be numbered, copied and produced in a litigation. Think about your document retention policy, and try to imagine the expense of dealing with all of this paper. Try to think if it is useful to you. Is it potentially harmful to you?

In New Jersey, as in most states, certain types of documents are subject to privileges, meaning that they need not be produced in litigation, even if they are requested. Generally speaking, any documents that are confidential communications (letters, emails, etc.) between the Association and its attorneys is subject to the Attorney-Client privilege, and should not be disclosed. Of course that privilege is waived if the documents are not kept confidential. If the Board shares a letter from its attorney with a vendor, or the builder, or a municipal official, the privilege is lost. Be careful with these documents. Another privilege which you should be aware of is the Work-Product privilege. This covers documents created by a party or a party's attorney or agent, which are prepared in anticipation of (and during) litigation. Your attorneys will act appropriately to protect their own work product. It is up to the Association to protect its work product. We recommend that, as soon as the Association reasonably anticipates that litigation may occur, all documents that contain discussions of the transition process, negotiations with the builder and otherwise should be kept separate from the Associations regular files. The Association should be careful who sees these documents. You should consider labeling such documents as "Confidential: Work-Product Privileged". You may also want to send carbon copies of everything to your attorneys, in order to bring the documents under the Attorney Client Privilege as well. We can give you more specific advice on how to protect your privileged documents, and how to minimize the burden of dealing with all of your documents if and when you get into litigation with your builder.

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July 10, 2006

Exterior insulation and finish system ("EIFS")

Exterior insulation and finish system ("EIFS") has been around since the 1970's. The older systems are known as "barrier" EIFS because they are designed to be face-sealed barriers to water penetration and do not incorporate any secondary drainage mechanism. Thus, any moisture that gets behind the barrier EIFS may be trapped inside the walls and can cause serious damage to sheathing, framing and other building components. In about 1997, EIFS manufacturers introduced drainage EIFS that incorporated a secondary drainage mechanism behind the EIFS. That would allow incidental moisture that gets behind the EIFS to drain out without harming sheathing and framing.

The drainable EIF systems were intended to stem the tide of a significant wave of litigation against EIFS manufacturers seeking recompense for damages caused by barrier EIFS. The manufacturer's installation specifications and details generally have to be strictly complied with. Unfortunately, while the drainable EIF systems should work in theory, in practice, they are exceptionally difficult--if not impossible-- to install. In our experience, drainable EIFS is typically misapplied in the field and winds up functioning as a barrier system. This, in turn, often causes severe damage to sheathing, framing and other building components, including mold.

Stark & Stark is handling many cases for condominium associations involving claims that drainable EIFS was not installed in accordance with manufacturer's installation specifications, details and the building code. Three of these involve claims worth in excess of $6 million. One particular claim demonstrates the severe damages that can occur when the manufacturer's installation specifications and details are not strictly complied with.

We are handling a complex case in which the decks on numerous condominium buildings were designed to be constructed using parallam beams. The beams were not wolmanized because it was assumed that the drainable EIFS would keep water away from the parallam beams. Unfortunately, the EIFS applicator failed to comply with the manufacturer's specifications and details requiring that the deck/wall interface be properly flashed and have a half-inch joint with backer rod and sealant. In addition, there was supposed to be a drainage mechanism in the bottom of the EIFS cladding on the face of the EIFS clad beams that was not installed. As a result, water accumulated inside the EIFS that drenched the non-wolmanized parallam beams, essentially damaging them beyond repair. Moreover, cracks and other openings developed between the decks and the EIFS clad walls further damaging the sheathing and framing of the walls and the non-wolmanized parallam beams.

The Association's engineers issued a warning to the association that no one should use their decks in the affected units. An emergency repair costing over $1 million was done to replace all of the damaged beams, to rebuild the decks and to reclad the decks with a functioning exterior cladding. The buildings have been extensively inspected and massive failures to install the EIFS have been documented in all of the buildings. Additional testing proved that there is an enormous amount of moisture inside most of the walls of all of the buildings. The damages are massive.

The point is that drainable EIFS is a product that has to be very carefully applied in strict compliance with manufacturer's specifications and details if it is to have any chance of working as intended. In our experience, this is almost never done. Applicators are poorly trained and general contractors do not know what the manufacturer's installation specifications and details are. As a result, the general contractors pay the applicators without realizing that the job has been badly done and that they are all going to be open to massive claims a few years later when moisture penetration produces severe damage.

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July 9, 2006

Structural Failure of Concrete Balconies

Stark & Stark recently handled a construction litigation case for a Condominium Association which owned 5 large buildings. The Association was concerned about a large number of upper -floor balconies which were noticeably bowing in the middle. We brought in an experienced structural engineer who conducted an extensive examination of the balconies.

Our discovery in the case and our expert's investigation showed that the balconies were concrete filigree slabs beneath a cast- in- place concrete topping slab. That means that the filigree slabs were fabricated off-site and shipped to the condominium. They were lowered into place by a crane, supported by heavy scaffolding and attached to the concrete walls with rebar and steel framing. Once they were lowered into place, the topping slab of concrete was poured over the entire filigree slab. (The filigree slab itself had been fabricated off-site in a steel frame that had a 4 inch lip to accommodate the poured topping slab added at the site).

In deposition testimony, the contractor who had installed the filigree slabs and poured the topping slab admitted that he had "cracked the scaffolding" for 2 hours only 2 days after the topping slab was poured. In other words, he had released the scaffolding for 2 hours and let the balconies settle before re-installing half of the scaffolding. Although the contractor testified that he was told to do this by his consulting engineer, the contractor never joined the consulting engineer as a party. The American Concrete Institute required that concrete cure for 28 days before the scaffolding was released. As a result of the wrongful release of the scaffolding, the balconies suffered structural failure because some of the rebar separated from the framing of the buildings. That caused the center of the balconies to "droop." There was also consequential damage because the balconies were attached to buildings clad with exterior insulation and finish system. As the balconies pulled away from the exterior walls, they caused compression folds and cracks in the EIFS which allowed water to penetrate into the sheathing and framing.

The Association sued the general contractor and the concrete subcontractor for negligence, breach of contract and violation of the NJ Consumer Fraud Act. The Association settled the claim in a confidential settlement in the high six-figures.

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May 25, 2006

Improper Installation of Roofing Materials in Condominiums

The application of roofing materials over sheathing and framing is the subject of much litigation in New Jersey. In most cases, the subcontractors doing the application of the roofing materials simply fail to follow manufacturer's installation specifications and details. The general contractors fail to detect the deficiencies in the installation of the roofing materials, thereby contributing to the damages suffered by the condominium associations that ultimately wind up owning the buildings once transition of control of the common elements of the Association takes place. Irrespective of whether the subcontractor is ultimately liable to the general contractor/developer, it is the general contractor/developer who is liable to the condominium association in the first instance. The association can also make claims against the general contractor/developer. It makes no difference if the general contractor/developer or the subcontractor are insolvent or even bankrupt (or have simply disappeared). The insurance policies of both the general contractor/developer and the subcontractor(s) will all be on the line to pay or the damages suffered by the association.

In a recent case handled by Stark & Stark, a mid-sized condominium had multiple buildings finished with concrete, Mediterranean-style roof tiles. The roof tiles were installed by a subcontractor who did the work without following the manufacturer's installation specifications. The general contractor/developer did not even have the manufacturer's installation specifications and details. As a result, the subcontractor installed the tiles on battens that were not weeped or pressure-treated. The general contractor did not notice the error because it did not have the manufacturer's specifications and because the general contractor/developer thought it was appropriate to inspect the roofs from the ground (despite the fact that the roofs were over 30 feet off the ground). The fabric paper was also lapped backwards and numerous roof and kick-out flashings were missing. Since the tiles covered the roof paper and the battens and the general contractor/developer was unfamiliar with kick-out flashings, the deficiencies went undetected for years. Finally, after years of leaks, the Association hired experienced engineers to open the roofs and determine the cause of the problem. In ensuing litigation, the Association recovered millions of dollars for the roof and related problems with the exterior insulation and finish system on the buildings.

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May 22, 2006

Environmental Factors Must Be Considered In The Design of Fire Suppression Systems

As a follow up to an earlier post, fire suppression systems must be carefully designed and installed in order to deal with environmental factors that may affect the viability of those systems. In one recent case that Stark & Stark is handling, a renowned fire suppression system expert designed a fire suppression system for a condominium that is located on the Jersey Shore. The sprinkler heads are not salt-air rated. This is a clear violation of NFPA 13, section 3-2.6(17) which requires that such heads be salt-air rated. Since the heads and fittings are not corrosion-resistant, the heads and the escutcheon plates that cover the heads are rusting. As a result, all of the hundreds of exterior sprinkler system heads and escutcheons now need to be replaced at enormous cost.

In this same case, the engineer designed a second fire suppression system for a different mid-rise building in the same condominium located on the Jersey Shore. The system was not designed to use any anti-freeze. The CPVC pipes ran up the inside of an exterior wall that was uninsulated. The pipes connected to metal pipes that were connected through an outside wall onto dozens of balconies where exterior sprinkler heads were installed. The sub-freezing winter temperatures have wreaked havoc with this system. The water inside the CPVC pipes froze and the pipes cracked. Once the weather warmed up and the temperature rose above freezing, the water inside the CPVC pipes slowly leaked out units and the below were flooded. Because the leaks occurred slowly, the alarm system for the fire suppression system did not trigger. The damage continued undetected for weeks because these units are not generally occupied in the winter months. The damage to the building and the interiors of the affected units was severe. The system had to be converted to an anti-freeze system at a cost in excess of $500,000, not including the enormous damage done to the sheathing, framing , sheetrock and interiors of many units flooded when these pipes froze, burst and then thawed.

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May 18, 2006

Fire Suppression Systems Improperly Filled With Glycol Results in Liability

Many fire suppression systems used in condominiums are designed for use with a mix of water and anti-freeze. It is critical that the correct anti-freeze be used to fill the system. The National Fire Protection Association (NFPA) Code governs fire suppression systems and prohibits the use of glycols as anti-freeze in listed fire suppression sprinklers and fittings. NFPA section A-4-5.2 requires that only glycerin anti-freeze be used in such systems. Manufacturers of the pipes used in such systems also require that only glycerin be used because some glycols--such as ethylene glycol--can cause chemical breakdown of the pipes. Over time, microscopic cracks will begin to develop inside the pipes that will eventually lead to leaks or catastrophic failures.

Some engineers will opine that even though the use of glycols is banned by the NFPA, a 50% glycol solution can be used because the plastic pipes are chemically rated to handle the stresses caused by use of glycols. However, you should have an experienced engineer check with the manufacturer of the pipes in any such system and with the manufacturer of the other components in such a system because they will likely void their warranties if glycols are used rather than glycerin.

Recently, the Summer Hill Condominium Association in Delran settled a case for $4.5 million in which glycols were used in fire suppression systems that were designed to be filled with a 50% glycerin solution.

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