Condominiums: Suing Accountants and Other Professionals

By Alvin Arnold

Do individual condominium unit owners have the right to sue the sponsor, managing agent and accountant to recover damages for a variety of alleged wrongs? A New York appellate court held that certain claims could go to trial. (Caprer v. Nussbaum, 2006 WL 2963128 (N.Y.A.D. 2d Dept))

Richard and Erica Nussbaum lived in a rental building that was converted to a condominium. The Nussbaums became members of the condominium's board of managers and also owned the corporate managing agent. An outside firm rendered accounting services. This lawsuit was brought by several unit owners who alleged wrongdoing by the board, its managing agent and accountant. The defendants moved for summary judgment. The trial court granted summary judgment in most respects, allowing to stand only a cause of action alleging breach of contract by the sponsor and a cause of action alleging breach of fiduciary duty by the Nussbaums and board members. The plaintiffs appealed.

The appellate court said the appeal raised significant issues of first impression with respect to the relationship between condo unit owners on the one hand and the sponsor and other parties involved in the conversion on the other. The three specific issues before the court were as follows:

• Does a unit owner have standing to sue to recover damages for a wrong to the condominium, either individually or derivatively on behalf of the condominium?
• Does the managing agent or its accountant owe a fiduciary duty to the unit owners?
• Can a unit owner bring an action against the condo accountant for professional negligence?

The court first ruled that the owner of an individual condominium unit is without standing to assert a claim for damages to the common interest. Said the court, "Since any recovery in such an action by an individual unit owner would necessarily be limited to the owner's individual fractional interest, allowing such individual suits would likely lead to duplicative, piecemeal litigation of the issues." Such suits also would engender potential conflicts with similar suits initiated by the condominium board of managers.

The court, however, ruled that a unit owner can bring a derivative action on behalf of the condominium. The court said there is "practical logic" in permitting unit owners to sue derivatively. Condominiums essentially operate in the same manner as cooperatives despite their different legal structures, and the fiduciary responsibility of board members of a condominium is governed by the same legal standard as the responsibility of a corporate director of a cooperative. Since the owner of shares in a cooperative can bring a derivative action in New York, the owners of condominium units should have the same right.

The court noted that even if derivative action is not permitted by statute (as it is in New York for cooperatives), such action also has a basis in the common law as an equitable proceeding. The court said that those jurisdictions that have considered the issue have recognized the unit owner's right to bring such action. In particular, the Florida courts have held that in the absence of statutory authority, derivative actions can be permitted in the court's discretion.

The plaintiffs also allege the defendants breached their fiduciary duties to the unit owners. The court dismissed the claim against the sponsor because no fiduciary relationship exists between sponsor and condominium. The trial court also dismissed the action against the managing agent and accountants because neither owes a fiduciary duty to the unit owners.

As a general rule, accountants are not fiduciaries as to their clients, except where the accountants are directly involved in managing the clients' investments. Since such involvement is not alleged here, the accountants are not subject to breach of fiduciary duty claims. However, when it is alleged, as here, that the accountants had full knowledge of the misuse of funds and were indispensable to the board members in their efforts to conceal the misuse of funds, the accountants can be held liable for aiding and abetting the breach of fiduciary duty by the board members.

The trial court dismissed the causes of action relating to the professional liability of the accountants because of the absence of privity of contract between the accountants and the unit owners. This issue is of first impression in New York. The appellate court ruled that because accountants stand in a relationship with respect to the unit owners that is sufficiently close to privity, a unit owner can bring an action individually against the accountants for negligence.

Alvin Arnold is the editor of the Monitor. He can be reached at (212) 885-8235.

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Alvin L. Arnold at (212) 885-8235.