Case Law Summaries

O’Loughlin v. National Community Bank

• Opinion Date: March 29, 2001
• Real Property Law
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CONDOMINIUMS; DEVELOPERS; SUCCESSORS—A lender that takes over a condominium project, as a successor developer, but does no substantive construction work is not liable to a pre-takeover unit buyer who was aware of a defect prior to the takeover.

A bank accepted a deed in lieu of foreclosure from a condominium developer. It caused the Public Offering Statement to be amended to state that it had become the sponsor of the condominium project. The remaining unsold units (and one unit that had been recaptured by the original sponsor) were sold at auction. After the sale, the association and a number of individual unit owners, who had serious building defects, sued the bank. The bank was required by governmental authorities to hire a contractor to make substantial repairs in order to remedy code violations to secure a certificate of occupancy for the units sold at auction. The association settled its claims with the bank, but three pre-auction unit buyers continued to seek damages resulting from water infiltration into their respective condominium units. Although the action was eventually dismissed for procedural reasons, the Appellate Division reviewed several interlocutory holdings of the lower court. The unit owners had argued before the lower court that the lender was liable to them as a developer under PREDFDA. That act defines a developer as “any person who disposes or offers to dispose of any lot, parcel, unit, or interest in a planned real estate development.” The same statute expressly governs developers as well as any person who “directly or indirectly” controls the developer, for “disposing of real property subject to [ ] act.” On the other hand, under New Jersey case law, the provisions of PREDFDA “have been held not to apply to a successor of a developer when both the violator and the victim are knowledgeable of the violation.” Thus, according to the Court “the Bank, as successor to the Developer, [could not] be liable to the individual [pre-auction unit owners] who purchased their units and were knowledgeable of the water infiltration problems prior to the time that the Bank had acquired title, unless the Bank directly or indirectly controlled the Developer.” In this case, the Bank did not do any measurable amount of the construction work. By contrast, “the Bank was simply a mortgage lender at the time the construction of the building was completed and the individual plaintiffs occupied their respective units.” There was no evidence to indicate that the bank had either direct or indirect control over the developer at the time that the complaining unit owners were prospective buyers, acquired title or became owners of their respective units. In sum, “[o]ther than to take adequate steps to protect the collateral against which it lent money, the Bank was not in direct or indirect control of the Developer so as to trigger liability pursuant to the provisions of PREDFDA.” Similarly, the Court rejected unit owners’ argument that the Bank was liable for consumer fraud damages. The unit owners in question had purchased their units before the Bank took over the property. Under the Consumer Fraud Act, alleged unlawful practices must be “in connection with the sale or advertisement of any space ... real estate, or with the subsequent performance of such person as aforesaid… .” Here, the Bank was at most a “remote supplier,” and there was no privity of contract between the unit owners in question and the Bank because the unit owners purchased their units directly from the Bank’s customer, the original developer.

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