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In re Kara Homes, Inc.

United States District Court, D. New Jersey

August 24, 2018

In Re Kara Homes, Inc.
v.
MADISON CROSSING AT BIRCH HILL, LCC, Appellee. MADISON CROSSING AT BIRCH HILL CONDOMINIUM ASSOCIATION, INC., Appellant,

          OPINION

          HON. BRIAN R. MARTINOTTI United States 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 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.)

         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 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 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 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”). ...


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