By Paul Fletcher
Virginia Lawyers Weekly
Even though a bank tried to limit its liability by setting up a shell corporation to develop a condominium project, the bank is liable to unit owners for structural defects, an Alexandria Circuit Court judge has ruled. The verdict: $610,646.50 for plaintiffs.
While the plaintiffs’ attorney said that developers normally set up holding companies to handle development and sale of a condo project, this case marks the first time a court has pierced the veil of the shell corporation and held a foreclosing lender responsible for defects.
The case is Board of Directors of the Port Royal Condominium Unit Owners’ Association v. CrossLand Savings FSB (VLW 91-H-272). It was written by Judge Alfred D. Swersky.
James C. Brincefield Jr., counsel for plaintiffs, said that lenders and developers of condominium projects frequently create separate corporate entities in the development of a condo project.
These entities typically take title to the property, complete any needed construction and sell the units, he said. The corporations typically have no assets other than the units, and are created to serve as “a statutory declarant” — that is, the party responsible for the units, including any liability for problem sunder the Condominium Act.
This set-up allows the real party in interest, either the lender or developer, to operate without risk through the nominal declarant corporation, Brincefield noted. The lender might own the corporate stock, control a board of directors or pin control through contractual relationships, he added.
In the case, the bank created a shell corporation, designating it the declarant on the project. The project suffered through numerous problems, including trouble with roofs and the swimming pool. The condo association sued for breach of contract and breach of statutory warranties under the Condominium Act.
The lender denied liability on the ground that the shell company was the declarant and therefore responsible.
Swersky rejected that argument, finding for the condo association. “There is no doubt from the Plaintiff’s evidence that (the corporation] was a wholly owned subsidiary of [the bank] formed for the express purpose of taking title to the unsold condominium units and disposing of them. There is nothing improper per se in the use of a subsidiary or a ‘service corporation’ by a lender and while it may be that such action is required on their part, the use of such a subsidiary or service corporation must be proper.”
The use in this case was not proper, the judge said. “[The corporation] had no life of its own. Its officers and directors were the officers, directors and employees of [the lender], some of whom did not even know they had been named as officers and directors of (the. subsidiary]. (The corporation] maintained no bank accounts, no separate office, had no employees, had no assets other than bare legal title to the unsold condominium units. All actions taken with regard to this project were taken by (the bank] directly. Perhaps most telling in this regard is the testimony … that [the bank], in foreclosing, intended to take title to the units in the name of [the corporation] and to dispose of them applying whatever proceeds could be garnered to the loan.
“The actions of [the bank] far exceed the actions of a mortgagee in possession acting solely to protect its loans,” he wrote.
Swersky awarded the plaintiffs judgment for $610,646.50. Additionally, he awarded pre-judgment interest that will total just under $100,000, Brincefield said.
Alexandria Circuit Court Judge Alfred D. Swersky has awarded $610,646.50 in damages to the Port Royal Condominium Unit Owners Association’s board of directors to pay for repairs needed to correct defects in the building’s roof and swimming pool.
With interest assessed from the time repairs began, the Alexandria condominium association will get nearly $800,000, according to its attorney, James C. Brincefield.
The owners sued CrossLand Savings Federal Savings Bank and Royal Street Sales Corp. because of physical defects that CrossLand failed to correct after it took over the property, Brincefield said.
CrossLand completed the condominium project after the original owner ran out of money, and set up the sales corporation to market the units. Swersky ruled that CrossLand’s use of Royal Street Sales was improper, in part because “all funds derived from the sale of the units were transmitted to CrossLand directly with no intervention by the sales company.”