by Tyler P. Berding, Esq. and Sandra M. Bonato, Esq.
A new community association experiences some leaks. Management tells the board about an attorney who will provide a free seminar on the fiduciary duty of board members in the face of construction problems. The board accepts the offer. So far, so good.
The attorney arrives and asks that the "seminar" be held in executive session with just members of the board. The attorney proceeds to tell the board members that they could face personal liability if they fail to thoroughly investigate construction defects throughout the project and bring suit against the developer. The attorney "advises" the board that they should hire him and his consultants. The attorney pulls out a fee agreement for himself and his consultants and urges the anxious board to sign it on the spot.
The developer offers to fix the problems, but the attorney won't permit it. The attorney fails to file the necessary statutory notices required by Title 7 of the California Civil Code. The board tries to cancel the agreement for legal services, but is again "advised" by the attorney that they could be held personally liable if they don't follow his instructions. At a board meeting a motion is made to discharge counsel and the consultants. The attorney tells the board it cannot discharge him or his consultants, again "advising" that they could be personally liable if they were to do that.
What theme does this story present? An over-reaching attorney, who uses the lure of a "free seminar" to get access to the directors of a community association and, once in the door, threatens the board with personal liability if they don't immediately hire him and his consultants to investigate and pursue a construction defect claim. This scenario is not fiction. It is apparently happening with alarming frequency in the current over-heated market for construction defect legal work. Let's analyze it.
First, there is nothing wrong with "free seminars" by lawyers . . . if their primary purpose is to educate. Our firm holds them, and we regularly participate in seminars held by several different trade groups. Other firms like ours do also. Does participating in seminars also serve a marketing purpose? Sure it does, but the information is not presented as an excuse to get in the door and deliver a high-pressure sales pitch. The information is offered in a neutral environment, and the attendees can take or leave the advice as they wish.
Second, under certain, very narrow circumstances, a board member might be held personally liable for failing to carry out his or her fiduciary responsibilities. But those circumstances certainly do not include rejecting the attorney's demand that he or his consultants be hired on the spot.
What should a board of directors do when confronted with construction-related issues and when early attempts by the developer fail to fix the problems? Here are some guidelines:
1. Consult the association's general counsel first.
Most associations have general counsel that the board consults for a wide variety of issues. This attorney and his or her firm may or may not handle construction claims, but he or she certainly can advise the association on the proper steps to take to investigate them and to present them to the builder or can recommend someone who can. Also, if a board of directors is ever concerned about their own responsibility in making decisions, the association's general counsel is the best place to seek answers and guidance.
2. Make a warranty claim.
For small matters, under the guidance of your general counsel, make a claim to the developer under the builder's warranty. If that fails, or if the problem is pervasive, go to step 3.
3. Seek the advice of an independent expert.
Management or your general counsel can offer referrals to consultants who can investigate the problems independent of the developer. An independent consultant will advise the board on the cause of the problem and suggest a means of repair.
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