MADISON CROSSING AT BIRCH HILL CONDOMINIUM ASSOCIATION, INC. et al v. MADISON CROSSING AT BIRCH HILL, LLC

Filing 27

OPINION Filed. Signed by Judge Brian R. Martinotti on 8/24/2018. (km)

NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY
____________________________________
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In Re:
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On Appeal From
:
Bk. Case No. 06-19626
Kara Homes, Inc.
:
____________________________________:
:
MADISON CROSSING AT
:
BIRCH HILL CONDOMINIUM
:
ASSOCIATION, INC.,
:
Civil Action No. 17-3981-BRM
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:
OPINION
Appellant,
:
:
v.
:
:
MADISON CROSSING AT
:
BIRCH HILL, LCC,
:
:
Appellee.
:
____________________________________:
MARTINOTTI, DISTRICT JUDGE
Before the Court is Appellant Madison Crossing at Birch Hill Condominium Association,
Inc.’s (“Appellant” or “Association”) appeal from the United States Bankruptcy Court’s order
denying the Association’s Motion for a determination that its construction defect claims against
Respondent Madison Crossing at Birch Hill, LLC (“Respondent”) are not barred by the Kara
Homes, Inc. confirmed Chapter 11 bankruptcy plan. 1 (ECF No. 6.) 2 Respondent opposed (ECF
No. 13) and the Association replied (ECF No. 20). As a party of interest, the Community
1

Specifically, the Association’s Motion was for a Determination that its Claims are not Barred by
Discharge, Injunction, Release or Orders Entered pursuant to 28 U.S.C. § 1141. (ECF No. 6 at 5.)
Pursuant to this Motion, the Association sought to assert an underlying claim to hold Respondent,
a developer, liable for common element construction defects. (Id. at 2.)
2

All ECF Docket Numbers refer to the District of New Jersey docket unless otherwise stated.

Associations Institution (“CAI”) moved for leave to file a brief as amicus curiae. (ECF No. 10-1.)
The Court granted the motion (ECF No. 18) and CAI filed its amicus brief (ECF No. 10-5). The
Court has jurisdiction over this appeal pursuant to 28 U.S.C. § 158. Pursuant to Federal Rules of
Civil Procedure 78(a), oral arguments were held on February 15, 2018. For the reasons set forth
below, Appellant’s appeal is DENIED and the Order of the Bankruptcy Court is AFFIRMED.
I.

BACKGROUND & PARTIES
A.

Appellant – The Association and the Condominium Unit Owners

The Association is a non-profit corporation comprised of condominium unit owners,
organized as a fifty and older age restricted residential area in Old Bridge, New Jersey. (Appellant
Br. (ECF No. 6) at 8.) The Association is governed by a five-member executive board. (Id.) Unit
owners automatically become members of the Association when they take title of their unit. (Id.
at 8-9.)
B.

Debtor – Kara Homes, Inc. and Horizons at Birch Hill, LLC

Kara Homes, Inc. is the parent company of Horizons at Birch Hill, LLC (“Horizons”).
Horizons is the original developer and sponsor of the residential area’s condominium development
project (the “Development Project”). 3 (Id. at 9-10.) In the early years of the Development Project,
Horizons operated and controlled the Association. (Id. at 10.) On April 26, 2006, the Association’s
executive board was composed of three members—two developer representatives appointed by
Horizons and Frank Ramson, an elected unit owner. (Id.)

3

The Development Project consisted of 228 residential units, a clubhouse, a fitness room, several
special purpose and utility rooms, an outdoor heated swimming pool, bocce courts, private
roadways, common parking areas and driveways, walkways, walking trails, exercise stations and
a gazebo. (ECF No. 6 at 9.)

2

C.

2007 Kara Homes, Inc. Bankruptcy Proceeding

On October 5, 2006, Horizons and its parent company, Kara Homes, Inc., filed for Chapter
11 bankruptcy proceedings. (Id. at 9-10.) The Association was one of Horizons largest unsecured
creditors. (Resp’t Br. (ECF No. 13) at 7.) On February 21, 2007, the Chief Restructuring Officer
in connection with the bankruptcy advised Horizons by letter to appoint two unit owners to
temporarily occupy the developer’s seats on the Association’s executive board. 4 (ECF No. 6 at
10.)
On February 7, 2007, the Association retained counsel. (ECF No. 13 at 8.) Through counsel
and its three member unit owner-controlled executive board, the Association participated in the
bankruptcy proceeding. (Id. at 9.) In May 2007, the Association hired the Falcon Group, an
engineering firm, to perform a non-invasive inspection of several units. (Id.) The engineering firm
noted findings of water damage and advised the Association “if there are reports of interior leaks,
the Falcon Group would recommend further inspections; roof flashing, waterproofing, and
ventilation and arch top window leak testing.” (Id. at 10.)
On September 24, 2007, in an order pursuant to 11 U.S.C. § 363, the Bankruptcy Court
authorized the sale of the Development Project from Horizons to Respondent, the successor
developer, free and clear of all liens and claims (“Sale Order”). 5 (ECF No. 6 at 11; ECF No. 13 at
11.) On September 26, 2007, the Bankruptcy Court confirmed the Kara Homes, Inc. Chapter 11

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The letter specified: “The appointment of any Owners to the Developer positions on a Board is
made with the express understanding that such appointment is temporary, and any such
appointment may be revoked at any time, with or without cause, upon written notice.” (ECF No.
6 at 10.)

5

The Sale Order discharge of any and all claims related to the property, including “product
liability, defective workmanship, alter-ego, environmental, successor liability, tax and other
liabilities, causes of action and claims . . . whether arising prior to, on, or subsequent to the Petition
Date.” (ECF No. 13 at 13.)

3

bankruptcy plan. (ECF No. 6 at 11.) On September 29, 2007, the Association’s unit
owner-controlled executive board sent a memorandum to the other members of the Association,
stating, in relevant part: “[Respondent] is not subject to or for any liability of [Kara Homes, Inc.]
regarding the closed homes. Those matters must be handled through the HOA Board and warranty
company as we have been doing.” (ECF No. 13 at 14.)
D.

Respondent – The Successor Developer

Respondent is the successor developer and sponsor of the Development Project following
Horizons’ confirmed bankruptcy. (Id. at 12.) Respondent took title of one hundred fully or partially
constructed units. 6 (Id. at 10-11.) On January 31, 2008, Respondent removed the two temporary
unit owners from the Association’s executive board and appointed two developer representatives.
(Id. at 12.) By December 31, 2008, construction of 173 units was completed. (Id. at 11.) By
December 31, 2010, Respondent scheduled for construction an additional fifty-five units to be
completed. (Id. at 12.)
E.

2013 Transition Period of the Association’s Executive Board

The “transition period” refers to when the developer begins to surrender majority control
of the Association’s executive board to unit owners elected by the Association’s members as units
in the condominium development project are sold. (Id. at 12-13.) Under the Planned Real Estate
Development Full Disclosure Act (“PREDFDA”) and the New Jersey Condominium Act:
When unit owners other than the developer own 25% or more of the
units in a condominium that will be operated ultimately by an
association, the unit owners other than the developer shall be
entitled to elect not less than 25% of the members of the governing
board or other form of administration of the association. Unit
6

According to the Association, prior to the 2007 Kara Homes, Inc. confirmed bankruptcy plan,
Horizons had sold seventy-three units to individual owners. (ECF No. 6 at 10.) There is a minor
deviation according to Respondent, however, claiming seventy-four units had been sold and closed
with forty-five units under contract and 109 units remained unsold. (ECF No. 13 at 6-7.)

4

owners other than the developer shall be entitled to elect not less
than 40% of the members of the governing board or other form of
administration upon conveyance of 50% of the units in a
condominium. Unit owners other than the developer shall be entitled
to elect all of the members of the governing board or other form of
administration upon the conveyance of 75% of the units in a
condominium. However, when some of the units of a condominium
have been conveyed to purchasers and none of the others are being
constructed or offered for sale by the developer in the ordinary
course of business, the unit owners other than the developer shall be
entitled to elect all of the members of the governing board . . . .
N.J.S.A. § 46:8B-12(a).
On January 13, 2011, after Respondent sold 50% of the units, the Association’s executive
board expanded to five total members, two elected unit owners and three appointed developer
representatives. (ECF No. 6 at 14.) On June 20, 2013, after Respondent sold 75% of the units, an
election was held to pass four board member seats and majority control of the Association’s
executive board to the unit owners. (Id.) A developer representative was appointed to the fifth seat.
(Id.) Following the transition, the Association sought to investigate the condominium building’s
exterior cladding and roofing system, among other component parts. (Id.) A preliminary
investigation revealed signs of improper design and common element construction defects. (Id.)
F.

2014 State Litigation

On April 21, 2014, the Association filed a complaint in the Superior Court of New Jersey
against Horizons, the original developer, and Respondent, the successor developer. (Id. at 15.) The
Association sought to hold the developers liable for the condominium’s construction defects. (Id.)
However, because construction and sale of the units at the time the complaint was filed was
ongoing, the Association entered into a twenty-four-month tolling agreement with Respondent to
temporarily dismiss its construction defect claims against Respondent, without prejudice. (Id.) On

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October 14, 2014, the Association filed its first amended complaint, removing Respondent from
the state action. (Id.)
G.

Association’s Motion in Bankruptcy Court

On September 3, 2015, the Association moved for a determination that its construction
defect claims are not barred by the 2007 Kara Homes, Inc. confirmed Chapter 11 bankruptcy plan.
(Id. at 16.) The Association sought to hold Respondent liable for the condominium building’s
common element construction defects. (Id.) On November 2, 2015, a hearing was held before the
Honorable Michael B. Kaplan, U.S.B.J., supplemental responses by the Association were filed on
November 16, 2015, and a second hearing was held on December 10, 2015. (Id. at 16-17.)
On January 19, 2016, the Bankruptcy Court entered a preliminary opinion on the
Association’s Motion (the “Preliminary Opinion”). The Preliminary Opinion held, in relevant part:
[T]he Court cannot determine whether any Board member,
particularly [a unit owner] who was a board member during most, if
not all, of the relevant pre-confirmation time period, discovered any
of the construction defects prior to confirmation. On this record, the
Court does not believe it has sufficient information to make such a
determination, as there is currently a lack of specificity regarding
these defects.
(Id. at 17-18.)
On March 7, 2016, Judge Kaplan held a conference call on the record to clarify the
Preliminary Opinion, stating, in relevant part:
Now for the reasons this Court has explained previously, because
this Court must apply Frenville, the Association had no claim in this
case, at the time of the sale, unless it could be established that the
Association had discovered the defect, or should have discovered
the defect. And that was going to be the point for continuing
discovery. And that’s why we set up a process in which the parties
either agree that they would not undertake continuing discovery or
limit the discovery.

6

(Id. at 21.) In light of the Preliminary Opinion, both Parties continued with additional limited
discovery 7 to establish whether the Association’s claims accrued prior to the 2007 Kara Homes,
Inc. Chapter 11 bankruptcy plan and “whether any of the Board members were aware of the
construction defects prior to confirmation.” (ECF No. 13 at 16; Appellant’s Reply Br. (ECF No.
20) at 21.)
H.

Bankruptcy Court’s Final Ruling on the Association’s Motion

On April 27, 2017, the Bankruptcy Court entered its final ruling on the motion, finding:
[T]he fact that the Association’s statute of limitations may have been
tolled until after the 2013 board transition when it became wholly
unit-owned has no bearing on when the Association’s claim first
accrued. The relevant inquiry for accrual purposes is still focused on
when the Association knew or should have known of the injury. . . .
Based on the evidence presented . . . the Association was aware of
the injury, i.e., the construction defects prior to September 26, 2007
[the date of the Confirmation Plan].
(ECF No. 6 at 23.) On May 16, 2017, the order denying the Association’s Motion was entered. (Id.
at 24.) On May 30, 2017, the Association filed an appeal with this Court. (Id.)
II.

THE CAI’S AMICUS BRIEF
The CAI is a national organization with 35,000 members, aiming to educate and advocate

for the 342,000 community associations across America. (CAI’s Br. as Amicus Curiae (ECF No.
10) at 2.) The CAI takes the position the Bankruptcy Court erred in finding the Association’s
construction defect claims accrued after the Chief Restructuring Officer appointed two unit owners
to occupy the Debtor’s board seats temporarily. (Id. at 3.)

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Depositions were taken of former board members Frank Ramson, Josepha Silverstein, and Alan
Ross, and of president of the management company for the Development Project since 2005,
Michael Pesce. (ECF No. 6 at 22.)

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The CAI articulates three principles as they relate to this appeal. First, the CAI cites to the
statutory transition process under the New Jersey Condominium Act and PREDFDA. (Id. at 4.)
Specifically, the CAI argues that, under the New Jersey Condominium Act, the transition period
does not occur until 75% of the units are sold. (Id. at 5-6.) PREDFDA promulgates a similar
provision and adds a developer may surrender control of the executive board before 75% of the
units are sold if the unit owners consent to the transfer through a majority vote. (Id. at 6.)
Accordingly, the transition period occurs when: (1) a developer sells 75% of the condominium
units and the unit owners elect members of the association to assume control; or (2) the owners
agree to assume control prior to the 75% sale of the condominium units through a majority vote.
(Id. at 4.)
Second, the CAI contends, under New Jersey law, claims by a condominium association
do not accrue until transition occurs. (Id. at 7.) Therefore, the “right to institute and maintain a
suit” does not accrue until control of the association’s executive board passes from the developer
to the unit owners. (Id. at 7-8.) Following transition, condominium associations are afforded a sixyear statute of limitation to raise its construction defect claims. (Id. at 4.) According to the CAI,
whether the unit owners knew or should have known of the construction defects prior to transition
is immaterial because even if they had the requisite knowledge, the unit owners could not assert
their claims while the developer retained control of the Association. (Id. at 10-11.)
Here, the CAI argues the Association did not have the right to institute and maintain a suit
even when the Chief Restructuring Officer replaced the developer representatives from the
executive board with two unit owners because the Association’s members did not elect the unit
owners. (Id. at 9.) According to the CAI, the Chief Restructuring Officer’s actions could not have

8

triggered transition because no vote was held for the unit owners to consent for control of the board
to be transferred away from the developers. (Id.)
The CAI also “warns” of several implications in assuming transition occurred when the
Chief Restructuring Officer temporarily appointed two unit owners to the Association’s executive
board. (Id. at 10.) If the Association raised its claim against the Debtor through its three member
executive board, once the successor developer took charge of the Development Project and, thus
control over the Association, the successor developer could dismiss the action and bar the
Association from raising their claim again. (Id.)
Third, the CAI explains how condominium associations differ from typical corporations.
(Id. at 11.) According to CAI, a condominium association is comprised of two separate and distinct
lives; the first controlled by the developers and the second controlled by unit owner elected board
members. Conversely, the Bankruptcy Court held the discovery rule—when the Association knew
or should have known of the construction defects—governs accrual of the cause of action, the CAI
contends accrual and commencement of the statute of limitation do not occur until a unit owner
majority elected board takes control of the Association. (Id. at 11-12.) The primary right to pursue
a condominium’s common element defect claim lies with the Association. (Id. at 12.) Hence, the
unit owners were not authorized to pursue their claim until they controlled the Association. (Id.)
Accordingly, the CAI contends the Bankruptcy Court erred in holding the cause of action accrued
while the Association remained in control of the developers. (Id. at 15.)
III.

APPELLATE JURISDICTION
Pursuant to Title 28 of the United States Code, Section 158(a), “[t]he district courts of the

United States shall have jurisdiction to hear appeals” from “final judgments, orders, and decrees”
of a bankruptcy court. 28 U.S.C. § 158(a)(1). The Bankruptcy Court’s Order Denying a

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Determination that Claims are not Barred by Discharge, Injunction, Release or Orders Entered is
a final order for purposes of an appeal. In re Nickels Midway Pier, LLC, 255 F. App’x 633, 636
n.4 (3d Cir. 2007).
IV.

LEGAL STANDARD
“The proper standard of review to be applied by a district court when reviewing a ruling of

a bankruptcy court is determined by the nature of the issues presented on appeal.” In re Beers, No.
09-1666, 2009 WL 4282270, *3 (D.N.J. Nov. 30, 2009) (quoting Baron & Budd, P.C. v.
Unsecured Asbestos Claimants Comm., 321 B.R. 147, 157 (D.N.J. 2005)). A district court reviews
“the bankruptcy court’s legal determinations de novo, its factual findings for clear error and its
exercise of discretion for abuse thereof.” In re United Healthcare Sys., Inc., 396 F.3d 247, 249 (3d
Cir. 2005) (quoting Interface Group-Nevada v. TWA (In re TWA), 145 F.3d 124, 130-31 (3d Cir.
1998)).
Here, the Association raises the three following issues on appeal:
(1) whether the Bankruptcy Court erred in ruling that Association
had the authority and capacity to initiate an action under applicable
state law prior to the state law transition period which did not occur
until 2013 and, therefore, its claims accrued before the 2007
confirmation of the Debtor’s plan and was discharged;
(2) whether the Bankruptcy Court erred in failing to determine that
the applicable statute of limitations did not begin to run until the
transition period commenced in 2013;
(3) whether the Bankruptcy Court erred in ruling that the
Association had knowledge of the construction defects prior to 2007
so that the Association’s cause of action accrued prior to the
confirmation of Debtor’s plan and, therefore, the Association’s
successor liability claims are barred.
(ECF No. 6 at 7.) To address these issues, the Court must examine the following.

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First, the Court must determine whether accrual of the Association’s claim was triggered
prior to the 2007 confirmed bankruptcy plan. In reviewing the Bankruptcy Court’s legal
determination, a plenary standard of review applies. See In re Handel, 570 F.3d 140, 141 (3d Cir.
2009); Tourscher v. McCullough, 184 F.3d 236, 240 (3d Cir. 1999). Second, the Court must
determine whether the Association knew or should have known of the construction defects prior
to the 2007 confirmed bankruptcy plan. In reviewing the Bankruptcy Court’s factual
determination, a clearly erroneous standard of review applies. In re United Healthcare Sys., Inc.,
396 F.3d at 249. Finally, the Court must determine whether the Association had the authority and
capacity to initiate a state law action before the 2013 transition period. Again, in reviewing the
Bankruptcy Court’s legal determination, a plenary standard of review applies. See In re Handel,
570 F.3d at 141; Commander v. LoGuidice (In re LoGiudice), No. 13-2612, 2013 WL 6528810, at
*2 (D.N.J. Dec. 12, 2013). The Court addresses each in turn.
V.

DECISION
A.

Whether the Bankruptcy Court Erred in Ruling the Successor Liability
Claims Are Barred Because the Association Knew of the Construction Defect
Prior to the Debtor’s Confirmation Plan and Failing to Determine that the
Applicable Statute of Limitations Did Not Begin to Run Until the Transition
Period Commenced in 2013.

The Association argues the six-year statute of limitations did not begin to run until
transition occurred. (ECF No. 6 at 33.) Specifically, the Association argues “the construction
defect claims of the Association only accrued when transition commenced in 2013.” (Id.) Further,
the Association argues the Bankruptcy Court erred in ruling the Association had the requisite
knowledge of the construction defects prior to the 2007 confirmed bankruptcy plan. (Id. at 45.)
Respondent argues the Association knew or should have known of the construction defect claims
prior to the 2007 confirmed bankruptcy plan, and therefore the Association’s claims accrued prior
to confirmation and were properly discharged by the Bankruptcy Court. (ECF No. 13 at 33, 39.)
11

Under New Jersey law, two statutes stand as a statutory bar to when a cause of action may
be brought in a construction defect case: 1) the statute of repose; and 2) the accrual statute of
limitation. Palisades at Fort Lee Condo. Ass’n, Inc. v. 100 Old Palisade, LLC, 230 N.J. 427, 45354 (2017). With respect to the statute of repose, N.J.S.A. § 2A:14-1.1(a), a plaintiff maintains a
ten-year limitations period from the date of a project’s substantial completion to bring a
construction defects claim. Id. at 453; see also Town of Kearny v. Brandt, 214 N.J. 76, 93 (2013).
The legislative intent behind the statute of repose was to provide certainty to when exposure of a
defendant’s liability would conclude. Palisades, 230 N.J. at 453. Indeed, the ten-year repose statute
sets the outer limit for a plaintiff to file a construction defects claim. Id. By way of example, the
New Jersey Supreme Court explained: “[if] a construction-defect action accrues eight years after
a project’s substantial completion, a plaintiff will only have two years to file a claim before it is
barred by the repose statute.” Id.
Under the accrual statute of limitation, a plaintiff maintains a six-year limitations period
from the date the cause of action accrued to bring a construction defects claim. N.J.S.A. § 2A:14-1.
To determine when accrual of a cause of action occurred, a court must apply the discovery rule.
Palisades, 230 N.J. at 447-48. Specifically, “accrual occurs when a plaintiff knows or, through the
exercise of reasonable diligence, should know of the basis for a cause of action against an
identifiable defendant.” Id. at 447. Moreover, accrual of the six-year statute of limitations does not
reset with every change in ownership of the property. Id. at 450. Rather, “[i]f the building’s owner
knew or reasonably should have known of construction defects at the time of the sale of property,
the purchaser takes title subject to the original owner’s right—and any limitation on that right—to
file a claim.” Id. at 449-50. In other words, a cause of action “accrues when someone in the chain

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of ownership knows or reasonably should know of an actionable claim against an identifiable
party.” Id. at 450.
Significantly, for the purposes of this bankruptcy appeal, discharge of the Association’s
claims are determined by the accrual test articulated in Avellino v. M. Frenville Co. (In re Frenville
Co.), 744 F.2d 332 (3d Cir. 1984). The Kara Homes, Inc. bankruptcy was confirmed in 2007,
before JELD-WEN, Inc. v. Van Brunt (In re Grossman) and Wright v. Owen Corning (In re Owens
Corning), were decided in 2010 and 2012, respectively. 607 F.3d 114 (3d Cir. 2010); 679 F.3d 101
(3d Cir. 2012). Consequently, the Association is not afforded the requisite due process under
Grossman and Wright. Wright, 679 F.3d at 109. Rather, the Frenville accrual test applies to
determine whether the Association’s “right to payment” arises pre-petition, and therefore is
discharged. In re Frenville, 744 F.2d at 337-38. Under Frenville, a claim exists when a “right to
payment” arises under state law. Id. at 337. Because a construction defects claim begins to accrue
at the time the cause of action arises, the Association’s claim begins to accrue at the time the “right
to payment” arises. Therefore, to determine when the Association’s claim began to accrue, the
relevant inquiry is whether the Association knew or should have known of the construction defects
prior to confirmation. If the Association’s claim accrued, and therefore arose, pre-petition, then
the claim is discharged under the bankruptcy code. Id. at 337-38.
Here, the Bankruptcy Court correctly ruled the Association’s claims accrued before the
2007 confirmed bankruptcy plan, and therefore the Association’s construction defects claim is
discharged. As an initial matter, the Association misinterprets the holding in Palisades, arguing
the New Jersey Supreme Court held “claims against the contractors begins to run six years from
the later of either substantial completion of the contractor’s work or when the ‘owner’ knows or
should have known of the existence of the claim.” (ECF No. 20 at 23.) Rather, the New Jersey

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Supreme Court held the statute of repose—triggered by substantial completion—and the accrual
statute of limitations—triggered by the discovery rule—serve as two distinct statutory bars against
bringing a claim. See Palisades, 230 N.J. at 453 (“We cannot end our analysis without noting the
distinction between an accrual statute of limitation and a stature of repose. . . . As discussed, an
accrual statute generally has no certain end date, given that the trigger of the limitations period
may depend on when a plaintiff discovers the basis for his cause of action. In contrast, a repose
statute has fixed beginning and ending dates, thus providing certainty to defendants when their
exposure to liability concludes.”). 8
The court finds the Bankruptcy Court’s legal findings were correctly reached and applied.
First, the Bankruptcy Court correctly determined the date of accrual triggers the statute of
limitations to run. (Tr. of Hr’g (Bankr. ECF No. 5563) (April 27, 2017) Tr. 6:11-13, In re Kara
Homes, Inc., No. 06-19626, (Bankr. D.N.J. April 27, 2017)); see also Palisades, 230 N.J. at 442
(“Accrual of an action is the trigger that commences the statute-of-limitations clock.”). Second,
the Bankruptcy Court correctly determined the discovery rule applies in the context of construction
defect claims. (Bankr. ECF No. 5563 at Tr. 5:15-22); see also Palisades, 230 N.J. at 448 (“[T]he
discovery rule applies to property-tort lawsuits arising from construction defects.”). Third, the
Bankruptcy Court correctly applied the discovery rule, finding “the Association’s claim is deemed
to have accrued when the Association knew or should have known of its injury.” (Bankr. ECF No.

8

Even assuming the Association is correct “that the [s]ubject [d]evelopment was not substantially
completed until after the conclusion of the chapter 11 case” (ECF No. 20 at 33), because the accrual
statute of limitations applies the discovery rule, a determination that the plaintiff knew or should
have known of the defects triggers the cause of action to start. Palisades, 230 N.J. at 443 (“The
trigger point for the start of a cause of action under an accrual statute is when ‘the facts presented
would alert a reasonable person, exercising ordinary diligence, that he or she was injured due to
the fault of another.’” (citation omitted)). Thus, “[a]ccrual of an action is the trigger that
commences the statute-of-limitations clock.” Id. at 442.

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5563 at Tr. 5:21-22.) Significantly, in reaching these legal conclusions, the Bankruptcy Court
correctly determined if the Association’s claims accrued prior to the 2007 confirmed bankruptcy
plan, then the Association’s claim must be discharged under the bankruptcy code. (Bankr. ECF
No. 5563 at Tr. 6:7-11); see also In re Frenville, 744 F.2d at 337-38.
Furthermore, the Association has not shown that the Bankruptcy Court’s factual findings
were clearly erroneous. See Marks v. Strubble, 347 F. Supp. 2d 136, 149 (D.N.J. 2004) (finding
the burden of showing that a ruling is “clearly erroneous or contrary to law rests with the party
filing the appeal”). Rather, the evidence in the record supports the Bankruptcy Court’s
determination that the Association knew or should have known of its construction defect action
prior to the 2007 confirmed bankruptcy plan. Indeed, the Bankruptcy Court relied on several
findings before reaching its conclusion. Specifically, Bankruptcy Court based its conclusion on
the following factual findings: (1) numerous e-mails recovered revealing discussions with
residents regarding construction, design or material defects related to water infiltration; (2) e-mails
from Mr. Ramson, a board member of the Association, acknowledging malfunctioning gutters; (3)
deposition testimony from Mr. Ramson conceding that leaks were caused by defective
workmanship and defective construction; (4) reports from several residence of water infiltration
issues; and (5) existing water damages and design flaws reported by an engineer company to the
Association. (Bankr. ECF No. 5563 at Tr. 7:22-9:22.)
Based on those findings, the Bankruptcy Court determined that the Association knew or
should have known of the construction defects prior to confirmation. J.P. Fyfe, Inc. v. Bradco
Supply Corp., 891 F.2d 66, 69 (3d Cir. 1989) (finding a bankruptcy court’s factual findings are
given conclusive effects unless they are deemed “clearly erroneous”). Therefore, the Bankruptcy
Court’s factual findings were not clearly erroneous. Accordingly, the Bankruptcy Court correctly

15

ruled the Association’s construction defects claim accrued prior to the 2007 confirmed bankruptcy
plan because the Association knew or should have known of the underlying claim, and therefore
was properly discharged. 9
B. Whether the Bankruptcy Court Erred in Ruling the Association had the
Authority and Capacity to Initiate a State Law Action Before the Transition
Period, and, therefore, the Association’s Claims Were Discharged Because
Accrual Began Before the Debtor’s Confirmation Plan.
The Association argues the Bankruptcy Court erred in ruling the Association had the
authority and capacity to initiate its state law action prior to the 2007 confirmation of the Kara
Homes, Inc. Chapter 11 bankruptcy plan. (ECF No. 6 at 25.) Specifically, the Association argues
it could not maintain a construction defect claim against the developers until transition passed
control of the Association’s governing board from the developers to the unit owners. (Id. at 26.)
Respondent, however, argues the Association maintained fair opportunity to protect its own
interests during the bankruptcy proceeding. (ECF No. 13 at 22-23.) Specifically, Respondent
argues because Association participated in the bankruptcy proceeding through counsel, it could
have “preserved [it’s] claims in the language of the Sale Order,” but failed to do so. (Id. at 27-28,
32.) Additionally, Respondent argues transition, under certain circumstances, could occur during
pendency of the bankruptcy proceeding. (Id.)
Under the New Jersey Condominium Act, N.J.S.A. § 46:8B-1 et seq., a condominium
association can, on behalf of the condominium unit owners, file suit against a developer for

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Further, because accrual began prior to the confirmed bankruptcy, whether the six-year statute of
limitation expired is irrelevant. The Bankruptcy Court did not dismiss the Association’s
construction defects claim because the claims were barred by the statute of limitations, but rather
discharged the claims under the confirmed chapter 11 Kara Homes, Inc. bankruptcy plan. (Bankr.
ECF No. 5563 at Tr. 2:19-24). Indeed, the Bankruptcy Court discharged the Association’s claims
because successor liability claims—having accrued prior to confirmation—were barred by the free
and clear Sale Order. (Id.)

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common element defects. Siller v. Hartz Mountain Ass’n, 93 N.J. 370, 377 cert. denied, 464 U.S.
961 (1983); see also N.J.S.A. § 46:8B-16(a) (“An association . . . may assert tort claims concerning
the common elements and facilities of the development as if the claims were asserted directly by
the unit owners individually.”). Initially, the developer controls the condominium association
“until a specific point in time when the developer relinquishes control to the unit owners.” Port
Liberte Homeowners Ass’n v. Sordoni Const. Co., 393 N.J. Super. 492, 502 cert. denied, 192 N.J.
480 (2007); Siller, 93 N.J. at 376. When seventy-five percent of the condominium units are sold,
the unit owners are entitled to elect all of the members to the association’s governing board,
effectively transferring control of the association to the unit owners. N.J.S.A. § 46:8B-12.1a.
Likewise, under the PREDFDA, N.J.S.A. § 45:22A-21 et seq., the developer must organize
an association to manage the common elements and facilities of the condominium development.
N.J.S.A. § 45:22A-43. The developer surrenders control of the association’s governing board after
seventy-five percent of the condominium units are conveyed to the unit owners. N.J.S.A § 45:22A47. “The unique relationship between a condominium association and a developer, created by
statute, allows an association to step into the developer’s shoes when control is passed to the
association.” Port Liberte Homeowners Ass’n, 393 N.J. Super. at 503.
Here, the Association contends, without control of the governing board, it lacked the
authority and capacity to assert its construction defect claim. (ECF No. 6 at 37-38.) Although
several cases support the Association’s argument, see, e.g., Terrace Condominium v. Midlantic
National Bank, 268 N.J. Super 488, 503 (Law Div. 1993) (holding the association’s right to
institute and maintain suit does not arise until owners control the association); Skyline Condo.
Ass’n v. Falkin, 2001 WL 37066787, at *14-16 (App. Div. Sept. 10, 2001) (finding the unit owners
were “prevented from litigating their claim through the Association for several years because by

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statute the developer controlled the Association”), in light of the bankruptcy proceeding and facts
of this case, the Bankruptcy Court properly found the Association had the authority and capacity
to initiate a state law action.
Indeed, in Poblette v. Towne of Historic Smithville-Comm. Ass’n, the New Jersey Appellate
Court faced and ruled on a similar issue. 355 N.J. Super. 55 (App. Div. 2002). The court found
“after a developer has gone bankrupt, but absent any evidence that a ‘formal transition’ from the
developer to the Association as to the duty to maintain the common facilities of the development
transition of those duties, as a matter of law, [has] taken place.” Id. at 65. In Poblette, following a
heavy storm that flooded areas in the development and caused water damage to the property,
residents filed a claim against the association for failing to maintain the detention basin that was
part of the drainage system. Id. at 60. The association, in turn, filed a suit against the developer,
claiming the developer owned the land at the time of the flooding, and therefore, was responsible
for the damages. Id. The court reasoned, however, upon the developer’s bankruptcy, a “de facto
transfer” of the rights and obligations under the easement provisions to maintain community
facilities occurred and the association was liable for the damages. Id. at 66; See also One Hudson
Park Condo. Ass’n v. Tarragon Corp. (“Court finds that a transition should be given effect upon
the filing of the [d]efendant’s bankruptcy petition or alternatively upon the sale of the final unit in
the building, and that all rights and duties related to the storage bins as Limited Common Elements,
including their assignment and collection of the accompanying fee, have transferred to the
Association.”).
Further, in light of the facts in this case, the Court is not persuaded the Association lacked
the authority and capacity to protect its own interest. Indeed, during the bankruptcy proceeding’s
pendency, the Association retained its own counsel and hired an engineering firm to perform non-

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invasive inspections of several units. (ECF No. 13 at 8-9.) Moreover, the Association participated
in the bankruptcy proceeding, filed objection to Kara Homes, Inc. Master Disclosure Statement
and to the Global Agreement entered into by the Debtor and a secured creditor. (Id. at 9-10.)
Although the Court acknowledges the Association’s governing board comprised of unit owners
was only temporary until a new developer bought the rights to the Development Project, during
that temporary period, the Association did in fact have de facto transfer in control with the
authority and capacity to protect their interests. Accordingly, the Bankruptcy Court correctly ruled
the Association had the authority and capacity to initiate a state law action.
VI.

CONCLUSION
For the reasons set forth above, Appellant’s appeal is DENIED. (ECF No. 6.) An

appropriate order will follow.

Date: August ____, 2018

/s/ Brian R. Martinotti___________
HON. BRIAN R. MARTINOTTI
UNITED STATES DISTRICT JUDGE

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