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Developer Guilty of Consumer Fraud

Posted on Author By Francis J. McGovern, Jr., Esquire

In Etelson v. Shore Club Urban Renewal LLC, a Hudson County jury found that the developer, the LeFrak Organization, Inc., Newport Associates Development Company and James LeFrak violated the Consumer Fraud Act and Planned Real Estate Development Full Disclosure Act (“PREDFA”) in their advertising and marketing of a luxury high rise riverfront condominium in Jersey City (Shore Complex, North and South Towers). The jury found that the developer and its marketing materials misled purchasers of condominium units by advertising breathtaking and panoramic views of the water and Manhattan skyline when the developer knew those views would be blocked in the near future.

The jury relied upon several key facts in order to find the Developer liable for consumer fraud.  The developer’s marketing materials included a painting of the Shore Complex showing a smaller 11- 12 story building to be constructed across the street and northeast, between the Shore Complex and the Hudson River.  The developer’s sales brochure and website did not show any buildings located between the shore Complex and the Hudson River. There were some drawings that showed a smaller building to be constructed in the future.  In addition, to the Developer’s marketing materials, the developer’s sales staff told potential purchasers that a smaller building (12-15 story) might be constructed on the nearby parcel. All the while the Developer was constructing a larger building that would block the view of the river and the Manhattan skyline.

The unit owners testified that they purchased these units for the views of the river and the Manhattan skyline. The unit owners also testified that they would not have purchased the units if they were informed that a taller building was going to be constructed across the street blocking their views.

The jury awarded the unit owners $1,253,420 in damages representing the reduction in value of their units without the views. Because the jury found that the developer violated the Consumer Fraud Act, the plaintiffs were awarded treble damages, plus their costs and attorneys fees for a total damage award of $4,817,638.12.  The developer appealed and the Appellate Division affirmed the jury verdict and found that it was supported by the evidence.

The evidence at trial showed that while actively marketing the Shore Complex, the developer had submitted plans to the City planning board seeking approval for a 31 story rental apartment building tower to be constructed which would block the Shore Complex unit owners’ views of the river and the Manhattan skyline. The developer did not change its marketing material and did not disclose this to potential purchasers. Instead the developer continued to market the units by advertising spectacular views knowing that they would not last for long.

The jury found that the developer had misrepresented the views and failed to disclose their plan to develop the taller 31 story tower that would block the views. None of the developer’s sales agents told prospective purchasers that a taller building would be constructed between the Shore Complex and the Hudson River.  The Developer’s sales staff was not told about the plans to construct a 31 story tower.  They assured potential purchasers that the building to be constructed in the future would not block views for anyone residing on the 15th floor or higher.  Interestingly, the Developer’s sales staff testified that if they had known of plans to construct a 31 story tower between the Shore Complex and the river, they would have disclosed this to potential purchasers.

At trial, the developer argued that it did not mislead the purchasers because there were disclaimers on the marketing material and in the Public Offering Statement. The Appellate Court noted that these disclaimers were not dispositive on the issue of misrepresentation and indicated that the developer would still be liable if the jury found that there were misrepresentations or omissions that induced a purchaser to buy a unit.

This case is significant to Associations who are in the process of transition, the transfer of control from the developer to the Association and the identification and resolution of construction defects and financial defects.  The court affirmed that a developer can be liable to individuals for consumer fraud in the marketing and advertising of the condominium. The court also noted the significance of marketing materials, advertisements and conversations that were not part of the sales contract or the POS.

Woodlake at King’s Grant v. Coudriet and Mesy

Posted on Author By Francis J. McGovern, Jr., Esquire

fmcgovern@theassociationlawyers.com

Woodlake at King’s Grant Condominium Association, Inc. v. Coudriet and Mesy.  What it Means and What Associations Should Do Going Forward

It’s common knowledge that Burlington County Chancery Judge Karen L. Suter has not been receptive to Associations’ applications for appointment of rent receivers.  This has been true even when a unit is abandoned, vacant and worth less than the balance of the mortgage.  Nevertheless, we believe that Judge Suter and New Jersey’s other Chancery Judges will, in the proper circumstances, continue to grant Associations’ applications for appointment of rent receivers.

In Woodlake at King’s Grant v. Coudriet and Mesy (decided April 1, 2014), New Jersey’s Appellate Division reviewed two of Judge Suter’s decisions denying Woodlake’s motions for appointment of rent receivers where the units were abandoned, vacant and apparently worth less than the balance of the mortgage.  The Appellate Division upheld Judge Suter’s denials.

We did not participate in the Woodlake case.  However, we do not believe that Judge Suter has anything against associations nor do we believe that the Woodlake decision should inhibit Chancery Judges from granting Association’s future rent receiver applications.

In Woodlake the Appellate Court noted that “The Association has not demonstrated that defendants have an affirmative obligation to rent their respective units…”; “[the Association has not demonstrated]…any authority…to rent those units to new tenants”; “Nor have we been presented with any indication that defendants misappropriated rents”; “[The Association has not provided] any other agreement between the parties [that] provide[s] for the appointment of a rent receiver” and “…the Condominium Act does not expressly authorize such relief…”.  However, nothing in that laundry list is determinative of whether or not a rent receiver should be appointed on an Association’s application when a unit is vacant and abandoned.  At issue is the Court’s power, not the association’s power.  Chancery courts have the inherent power to prevent waste, mitigate fire risk, mitigate vandalism risk and prevent squatting.

The decision is left to the broad discretion of the Chancery Judge.  Arguably, the County Chancery Judge has the broadest powers of any judge in the judicial system (the late Judge Alexander Lehrer once said “Mr. McGovern, in this courtroom, I am king.”  He then offered to trace the history of the Chancery Court’s equitable powers back to the kings of England).  Chancery Judges have the power to grant equitable relief – a power broader and more flexible than Law Division Judges.

Chancery Judges ask themselves: “Does this seem right?”, “If I deny the requested relief, will the applicant be irreparably harmed?”, “If I grant the requested relief will another party or, worse yet, someone who has not had the opportunity to be heard, suffer greater harm than the applicant?”

Beyond the laundry list noted above, the Woodlake Appellate Court discussed rent receivers in the context of cases involving banks attempting to have rent receivers appointed against mortgagors.  Early in my legal career I represented banks and was involved in a number of hotly contested cases involving a bank’s right to rents.

The Woodlake Appellate Court did not plumb the distinctions between rent receiver applications in the bank-mortgagor context and rent receiver applications in the association-abandoned unit context.  In the bank-mortgagor context, typically the bank has lent money to the mortgagor to purchase the property (perhaps an apartment building, office building etc.).  If the mortgagor defaults, the bank attempts to collect the rents via a rent receiver so that its loan may be repaid.

Courts look at such relief as extraordinary for a number of reasons, for example: the right to collect rents and proceeds generally follows ownership and possession rather than lienholder status, appointing a rent receiver may put the mortgagor out of business if the mortgagor’s business is real estate investment and appointing a rent receiver may put the mortgagor out of an operating business if the mortgagor’s business is a (or the only) tenant in the financed real estate.  Courts also consider whether the lender is “adequately protected” by the value of the property.  Judges ask: Is there an “equity cushion” such that the value of the property exceeds the mortgage sufficiently to protect the bank’s loan amount plus amounts, such as taxes, insurance, security etc., that the bank may have to continue to advance.

The reasons judges are cautious in appointing rent receivers in the bank-mortgagor context do not however apply in the association-debtor context where the unit has been abandoned and is vacant.  In the association-debtor context, where the unit has been abandoned and is vacant, waste/fire/vandalism/squatters and possible impacts on third parties are the primary concerns – the debtor has already walked away from the unit.

Waste/fire/vandalism/squatter issues weigh heavily in favor of granting an association’s request for appointment of a rent receiver.  However the “possible impact on third parties” prong could still be problematic.  In Woodlake the mortgage company was apparently not a party to the suit or on notice of the rent receiver motion.  Further, it also seemed that the mortgage company may have been proceeding expeditiously with its foreclosure and was close to completing the foreclosure process.  Although speculation, these two facts alone appear sufficient to support Judge Suter’s denial of the rent receiver application and the Appellate Division’s affirmation of Judge Suter’s decision.

Judge Suter, having been New Jersey’s Chief of Banking and Insurance Operations from 1998 to 2000 and Commissioner of New Jersey’s Department of Banking and Insurance from 2000 to 2001 is aware of the fact that banks, via their security instruments, often take an interest in rents and proceeds.  Therefore, she may feel that, even though the association is a junior lien holder and cannot foreclose the bank’s interest, in the context of a rent receiver motion, the bank is entitled to be a party to the action or, at a minimum, is entitled to have notice of the rent receiver application. Further, Judge Suter may also feel that, in cases where bank foreclosure is imminent, the administrative detriment to the bank of putting a tenant in the unit outweighs the brief benefit to the association.

In any case, we feel that Woodlake did not contribute meaningfully to the body of case law addressing rent receiver applications.  Rather, it reaffirmed the power that Judge Suter and the other Chancery Judges already had and have exercised regularly throughout the recent economic slump.  Whether or not a rent receiver is appointed with respect to an abandoned and vacant association unit depends on the facts.

It appears that, going forward, the bank should be put on notice of any association rent receiver application and that an Association should think twice before applying for a rent receiver where a bank is diligently pursuing its foreclosure action and completion of the foreclosure is imminent.  Associations should still however look to rent receiver applications as a valuable collection tool and not forget that banks may also be liable as mortgagees in possession.