Plaintiffs in construction defect case are often presented with a frustrating paradox. Their claims for liability are clear. There is usually little dispute that failure to follow the building code or industry standards caused their damages. Conversely, the ability to collect for that liability is murky. The defendants in many cases are single purposes entities, which were established for the sole purpose of developing the project and which hold no assets once the project is complete. Without the ability to liquidate a judgment, a judgment is worthless and a plaintiff is afforded no redress.
One way attorneys attempt to address this problem is bringing an action against the individual principals, or owners, of the entity that developed the project under a theory of “piercing the corporate veil.” Typically, the individual shareholders, partners, or members of a corporate entity cannot be held personally liable for wrongdoing committed by the corporate entity. However, in certain circumstance courts will “pierce the corporate veil” and hold an individual liable for corporate harms to prevent fraud, illegality, or injustice.
Pennsylvania courts has indicated a willingness to hold individual owners of single purpose entities personally liable in construction defect cases. Masterpiece Homes
Recently, the Pennsylvania Superior Court issued a published opinion that should give plaintiffs seeking to litigate claims against single purpose entities hope and owners of those entities pause. In Sereda v. Center City Acquisitions, LLC, the Superior Court affirmed a trial court that held the owner of a single purpose entity personally liable for damages arising out of a defective construction of a home in Center City Philadelphia.
According to the opinion, Noah Ostroff was the “president, acting officer, and sole shareholder” of defendant Center City Acquisitions, LLC. The LLC was the developer of a newly built home located in Philadelphia. The LLC entered into an agreement of sale with the LLC to purchase the home. During a pre-settlement walk through, the plaintiffs notice gaps in the hard wood floors. The gaps were placed on a punch list which the defendant LLC agreed to resolve. The agreement also contained a “builder’s warranty.” Under the warranty, if the plaintiffs gave notice to the defendant of defects covered by the warranty, the defendants agreed to repair or replace the defective work.
Shortly after settlement, the plaintiffs emailed Ostroff and notified him that the issue with the floors had not been resolved. Ostroff stated that the issue would resolve itself over time as the floor became acclimated. After a year, the issue was still present and Ostroff visited the property to observe the condition. Ostroff instructed his contractor to replace some flooring. But, the issue persisted. The parties then tried to negotiate a resolution. The plaintiffs wanted their floors replaced and Ostroff was only willing to sand the floors and fill the gaps or provide a $2500 credit.