NOTICE OF LAWSUITS IN AN HOA – WHAT MUST BE DISCLOSED

Sometimes owners get suspicious or concerned and think the board is hiding something from them. Here is an email from an owner that does not believe threats of lawsuits should be kept a secret. Here is what he has to say:

 

“My question is about board behavior as regards threatened lawsuits. Ours seems to think that is confidential. I disagree, material matters must be disclosed to those that it affects, and a threatened lawsuit is material to our ownership.  … [The Board] quoted a section from the ethics policy on Adams Kessler, where it says:

‘legal disputes in which the association is or may be involved–directors may not discuss such matters with persons not on the board without the prior approval of the association’s general counsel. Failure to follow these restrictions could constitute a breach of the attorney-client privilege and result in the loss of confidential information.’

… Clearly this does not mean correspondence received by the association that threatens litigation should be kept secret. Perhaps discussions between the board and the association attorney would be privileged but not litigation or threats of litigation. Those are *not* privileged.

I think matters of substance- threats of lawsuits against the association would qualify as substantive, that could affect owners’ rights and property value must be disclosed to HOA members, and I read that in another place on that site.

There is caselaw on that too. Ostayan v. Nordoff

Secrecy by the board is usually a bad idea in the case of litigation or threatened litigation.

That sample ethics policy from Adams Kessler, which one of our board members quoted to me verbatim seems to be encouraging secrecy, whereas full disclosure of lawsuit threats serve to inform those owners who are financially involved.

So Beth, now that I got that out. What do you think?”

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Here is some information that might help, and it reflects what I think:

Existing legal dispute/ lawyer involved: First of all it might help to know wny  a pending lawsuit or any legal dispute in which a lawyer is involved or should be should not be disclosed by a board member to owners. Disclosure of discussions with the lawyer or about the claim – which includes questions of the board, strategies, etc., deserves confidentiality – it is a “privilege” of the association. If a board member unwittingly breaks the “privilege” then whomever is suing or has filed a legal claim against the association could gain an unfair advantage they would have the ability to access all of the confidential information  and all communications between the board and attorney. Giving the other party in a lawsuit or legal dispute all of the information the board or attorney has could seriously harm the association and that includes all owners in it.

Letter of Threat of a Lawsuit: If the association receives a threat of litigation that does not automatically mean there is a material threat that needs to be disclosed. The reasons are many: (1) the threat may be baseless, (2) there may be insurance coverage available such that there is not a direct material  financial threat, (3) the litigation may be a small claims complaint.

Before the board provides Notice of Litigation to the members, the duty to seek legal advice is probably higher on the spectrum of responsibility than blabbing too much about it to the members. Sometimes it will create an unnecessary panic. Sometimes it will jeopardize the association’s chances of prevailing.  On the other hand, I am an advocate of transparency to the extent it is not going to harm the association.  If a board does disclose a lawsuit the safest bet is to provide the owners with the court number and information on the filing, perhaps even outline the claims, and tell the owners the board will provide periodic updates if it feels there is any material risk to owners and then get reasoned legal advice as to where to take it from there. There  is public information with the courts, and providing at least that much information gives the owners the information they need to do the research of the public record if they wish.

Additionally, on an ongoing situation like a construction defect lawsuit where there are material risks and disclosures to potential buyers are necessary, many attorneys recommend providing owners with periodic updates on the pending litigation so they have something that explains what is going on in generic enough terms that the association will not be harmed, and provides sellers with the information to pass on to potential buyers. Usually some means of control is put into place in this circumstance, or words of caution, because this information is not suited for general distribution to the public.

I have to say also that sometimes attorneys take on cases that involve litigation for an association and the board sends out no notices to owners (although in some cases it should). Sometimes because the board is lead to believe that it will be able to recover attorneys fees from the other party to pay the association’s attorney and everything will be peachy in th end without alarming the owners.

Well, sometimes the Association does not prevail, or does get some relief but not including an order to collect attorneys fees from the owner, or gets the order for reimbursement of fees and then the owner who loses declares bankruptcy or can’t pay – and then the board is caught in the position of refusing to pay the attorney or going to the members to collect a special assessment to pay the lawyer – sometimes even the lawyer fees on the other side if the association loses! And these kinds of situations are real dicey. If the boards had kept owners apprised all along of the realities, what was filed, what the association is doing about it, what the risks and benefits are, and how it might have impact on the members of the association, the board would not be as likely to end up in an untenable position.

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