Has the AG Lost Some of its Ability to Prosecute Fraud in Condominium Offerings?August 1, 2018 – Commercial Observer
Historically, the New York State Attorney General has served as the great protector of integrity in condominium offerings. Under the Martin Act, New York’s sweeping anti-fraud law, the Attorney General is charged with investigating suspected wrongdoing in offering plans.
The Martin Act however isn’t reserved for condominium offerings. It also applies to any type of securities fraud committed in the state, including deceitful practices by banks and insurance companies. It’s so powerful, it was even used by former Attorney General Eric Schneiderman to investigate whether ExxonMobil lied to investors about its knowledge of climate change.
In a recent case against a major financial institution, a ruling was issued that limits the Attorney General’s enforcement powers, and there may be unintended consequences for new condominium offerings.
In this case, the state’s highest court determined that actions under the Martin Act are subject to a three-year statute of limitations, even though similar civil actions have a six-year limit. That’s important because the difference between proving fraud under the Martin Act and fraud under common law is substantial. Under the Act, the Attorney General only needs to prove that a misrepresentation occurred in an offering plan, and it has both civil and criminal jurisdiction and can decide which path to choose or it can choose both.
That immense prosecutorial flexibility has been an advantage, because it’s much more difficult to win a common law action for fraud. If a condominium purchaser wants to bring a common law action against a developer, the aggrieved party must prove that a misrepresentation occurred; and prove intent by the perpetrator. To add to the burden, a purchaser also must prove that they were justified in relying on the misrepresentation, and prove that the resulting injury merits financial damages. So a blatant fraud that results in common area walls being painted light gray instead of medium gray might satisfy the first three requirements but not the fourth. That’s quite a steep hill to climb.
Now that the Attorney General’s time to prosecute is effectively cut in half, there’s much less time to investigate and come to a correct decision. This could be felt in several ways, including the investigation of construction defects, many of which aren’t immediately apparent when a unit is sold. Similarly, the amount of time available to investigate defects caused by a purchaser’s improper actions is also shortened. In either case, the public does not benefit when the Attorney General rushes to investigate or prosecute. Adding to the pressure, it is unclear when the Attorney General’s three-year review period begins. Is it when the offering plan is written, when the last amendment is filed, or when the last sale is made? And if it begins when the last sale is made, does it only affect the last sale, or the entire offering?
Construction complaints are also notoriously difficult to resolve, and normally do not involve bad faith. For that reason, the Attorney General at times acts as a mediator between parties. Developers and purchasers have both applauded this process, which has gone largely under the radar, and many industry stakeholders agree the practice needs to be encouraged. But with three years available versus six years, mediation is much more difficult.
Condominium purchasers do have other civil remedies available under contracts or warranties, but the Attorney General remains the great protector of the condominium market. It would be a shame if a legal decision unrelated to condominium offerings forces the Attorney General to conduct a rushed investigation or commence litigation earlier than it would otherwise consider appropriate. The result of a premature enforcement action may only hurt a seller without helping a buyer.