The unit owners at a D.C. condominium are asking for $7.4 million in damages in a lawsuit against two financial institutions, two development companies and a real estate firm they say failed to correct construction defects in their building.
The case is significant because it raises the question of what a lender is required to do when it takes over an uncompleted project and finishes it.
The suit contends that the two lenders for the Hastings Condominium -- National Bank of Washington and Standard Federal Savings and Loan Association -- must complete repairs and other work required of the original developer when they foreclosed on loans on the property, completed construction and sold the units, according to James C. Brincefield Jr., attorney for the Hastings Condominium Association.
"We don't believe the D.C. condo law says that," said Kathleen W. Collins, executive vice president and general counsel for the National Bank of Washington.
Several D.C. real estate attorneys said, in effect, it's anybody's guess. The city's condominium law "is really not specific with respect to the rights and obligations" of a person or company that takes over from the first developer, said attorney C. William Tayler. He said he believes that the Hastings suit is the first to raise the question in the District and thus "there is no clear-cut precedent."
Although this is a "gray area" of D.C. law, "if someone looks, smells and tastes like a developer and wants to reap the benefits of a developer, they ought to have the responsibilities of a developer," said attorney Benny Kass.
District government policy is that when a lender or anyone else buys condo units through foreclosure or other types of sale the buyer must assume the obligations of the original developer, according to an official in the D.C. condominium and conversions office. Lenders generally resist, however, and the city lacks authority under the statute to take them to court. Often, D.C. officials may not know a foreclosure has taken place until a lawsuit has been filed, he said. City officials did not know of the Hastings case until they were contacted by a reporter.
The suit was filed in federal, rather than D.C., court because of a recent court ruling that sales of condominium units to investors may constitute a securities sale, according to Brincefield. As a result, the lawsuit said, the defendants violated several sections of the Securities Act of 1933.
Other defendants in the lawsuit are Certified Construction Corp. of Gaithersburg; Dennis Kosineski Inc., a Rockville real estate firm; and Connecticut and Albemarle Associates, headed by Bethesda builder Alan S. Landau.
Spokespeople for the bank and Standard Federal said they will file a motion to dismiss the suit Monday, and would not comment on the allegations. Certified Construction is a wholly owned subsidiary of Standard Federal.
Landau said he has "no business in this lawsuit whatsover" because his company, Connecticut and Albemarle Associates, "signed all our rights" to the property over to the financial institutions. The company, created to develop the Hastings, no longer exists, he said.
Dennis Kosineski said he was employed as an individual by Certified Construction, and that his company never had any connection with the Hastings. "I didn't deceive, lie, or tell anybody anything that wasn't true," he said.
The Hastings, at the corner of Connecticut and Albemarle streets in Northwest Washington, was about 85 percent complete when the bank and Standard Federal foreclosed and took over after Landau's company, the original developer, defaulted on loans, according to court documents. The institutions hired Certified Construction Corp., a Gaithersburg company, to continue the work and Dennis Kosineski Inc., a real estate firm, to sell the units, the documents said.
Landau said there was no default or foreclosure at the Hastings. A bank official and correspondence between the bank's attorney and city officials, however, said a foreclosure did take place.
The work never was completely finished, and construction defects, including problems with the building's roof and exterior, and with balconies and fireplaces in individual units, have plagued unit owners in the last three years, according to the court papers.
"The major problem is that there is a lot of water leaking from the roof around the fireplaces," soaking floors, walls and carpets and causing major damage in many units, said association President Jean Bowling. If one owner has a fire in a fireplace, smoke billows out in units above and below, she added.
In addition to failing to correct defects, the defendants violated federal and D.C. law governing sales practices when they sold the building's 56 units in 1983, according to the suit, which was filed in U.S. District Court here. The two lenders and Kosineski gave prospective buyers three versions of a "false and misleading" public offering statement, the suit charges.
The lenders also sold units to buyers who would not normally qualify for financing necessary for such a purchase, the lawsuit said.
Sky-high interest rates in 1983 were forcing developers and real estate brokers to come up with creative ways to qualify people for loans. Sellers of the Hastings units offered negative amortization loans, in which the monthly payments are kept low but do not cover the full cost of the interest rate payments. The amount not paid is added to the mortgage, so that the borrowers' debt rises over time.
An average of $20,000 per unit has been added to the mortgages of Hastings residents, Bowling said. The result has been at least three foreclosures with more pending, and a lowering in the value of the other units in the building, Brincefield said.