Be wary of potential conflicts of interest. They can lead you down the path of moral and financial ruin.
Homeowners frequently approach the association attorney for legal advice on a dispute they’re having with the board. At other times, board members themselves will seek the lawyer’s opinion when worried about their individual liability for an action or when board members are facing a recall.
In both situations, association attorneys should remind the individuals that the attorney works for one entity only—the community association. Although the board members hire the association attorney and govern the community, they are not the clients. Neither are the individual homeowners, even though they contribute to the attorney’s fees via their assessments.
If the attorney were to represent the individual interests of board members or individual homeowners, he or she would be violating the American Bar Association (ABA) rules of professional conduct, which prohibit a lawyer from representing a client “if the representation involves a concurrent conflict of interest.” That attorney also might be violating state ethics rules.
A conflict of interest exists when an outside influence affects one’s ability to make independent and impartial decisions or when an individual’s allegiance is divided between separate entities with conflicting interests. While the ABA rules allow a lot of wiggle room, attorneys should try to avoid even the appearance of impropriety in representing association clients whose interests may conflict now or in the future.
Even when no conflict is readily apparent, the board and attorney should be cautious. While it may appear there is no potential for a conflict of interest, a conflict may arise later that requires the attorney to withdraw from the case. This places the attorney and the board in bad positions. The attorney is no longer able to represent a longstanding client and risks losing the association altogether to the attorney who takes over. The board loses the institutional knowledge that a long-time attorney can provide.
It’s critical that association attorneys and board members understand their respective roles to maintain good communication, prevent misunderstandings and ensure smooth association operations. Even more important, board members need to be able to recognize potential conflicts that could skew the attorney’s advice and ultimately harm the community.
Who’s the client?
Board members. Individual board member interests may diverge from the association’s interests when those board members are being recalled. Should the association attorney advise individual board members on how to defend themselves? No. The attorney’s advice should be given to the board on behalf of the association as a whole regardless if one or all the board members are being challenged. The attorney has a responsibility to the corporate entity no matter who is on the board. Therefore, the attorney should advise the association board on the proper recall procedure, methodology and process. The association attorney should ask the individual board members to retain separate counsel to advise them on their individual rights.
Managers. A more subtle, but equally valid, issue is the business relationship between the association attorney and manager. Managers often recommend one or two preferred attorneys to their association clients. Will, or can, an attorney adequately represent the interests of the association when his or her bread is buttered, in effect, by the manager? The ABA rules prohibit an attorney from representing a client if he or she has a personal or financial interest that could conflict. Therefore, if the association’s interests are at odds with the manager’s, the attorney must always put the association’s interests first. He or she shouldn’t allow the desire to obtain further business from the manager to interfere in any way with his or her judgment in representing the association’s best interests. CAI’s Professional Manager Code of Ethics also requires managers to disclose in writing to the association any actual, potential or perceived conflict of interest and requires managers to avoid any perception of favoritism or impropriety.
Ethics aside, the association attorney also has a legal and fiduciary duty to represent the association’s interests. When a board asks an attorney to review the management company’s contract, the attorney must give an un?biased review even if his or her practice relies on the company’s referrals.
What should an attorney do if a board disagrees with the management company over the terms of a contract he or she reviewed? Advise the board to get another attorney to handle the dispute. In fact, an attorney should let the board know upfront that he or she cannot represent either party if a dispute arises between the two, a warning that should make the association wary.
Another troublesome conflict arises if the manager’s collection procedures aren’t adequate to prevent delinquencies. If the attorney is paid to collect those delinquencies, he or she might be reluctant to notify the board of the problem and risk alienating the manager.
Before hiring an attorney, the board should ask whether the attorney is willing to sue the management company if an issue arises. The board should also ask how many association clients were referred by the management company.
Developers. Many attorneys represent a developer from the beginning of the project until the association is turned over to an a homeowner-controlled board, without regard to the conflict that such dual representation presents.
During the time the developer-designated board controls the association, the attorney represents the developer as well as the association, yet they have very different and often opposing interests. For one thing, the developer’s goal is to keep costs down and make a profit. However, the developer-controlled board also has a fiduciary duty to safeguard the interests of the association, as does the attorney. Those competing interests often collide.
Any attorney who represents an association in development may be open to a conflict-of-interest charge just because he or she represents a developer-controlled board. But if the attorney didn’t prepare the governing documents for the developer, there may be no actual conflict of interest, even though he or she worked for the developer on other projects.
In any event, the attorney should not advise the board on any issues concerning the developer’s operation. For example, a fee agreement should specify the attorney appointed by the developer-controlled board is being retained for the limited purpose of collecting assessments or enforcing bylaws and is not in any way involved in advising the association on any issues related to the developer. That way, when the homeowners take control, they are less likely to claim the attorney didn’t properly represent the association’s interests. Before control is turned over, the homeowners should retain an independent attorney to protect their interests and, if necessary, take legal action.
Home buyers. Association members may ask the association’s attorney to represent them when buying or selling a home. Before doing so, the attorney should let the association and the member know in writing that, if any disputes develop, he or she will not be able to represent one or both of them.
However, even then the attorney may be prohibited from representing the association in a collections case against that particular homeowner if the attorney obtained any confidential information during the real estate transaction. For example, if the attorney learned where the member works or banks and used that information to collect assessments for the association, the attorney would clearly violate the ABA ethics rules.
Insurance providers. In insurance cases, conflicts develop when an attorney paid by the association’s insurance carrier represents the association as well as the individual board members in a claim brought against the association. Some board members may be personally responsible for the acts or omissions that caused the lawsuit in the first place. And, the association’s insurance carrier may choose to avoid the cost of retaining two attorneys.
What if the association itself has a cross-complaint against one or more of the individual board members who have been sued? The attorney should bow out and not represent individual board members. Perhaps the best option is for each board member to be represented separately even if all parties are protected under the same insurance policy and even if the documents include an indemnification clause.
Although the association’s attorney is paid by the insurance carrier, the attorney owes his or her fiduciary duty to the association. But an attorney retained by the carrier is beholden to that carrier for past and future business and takes direction from the carrier even though the attorney represents the association.
Sometimes the association has veto power over a settlement or resolution. But in some cases the insurance carrier’s appointed attorney may go against the best interests of the association to bene?fit the insurance company. The association should consider hiring another attorney to oversee the activities of the insurance carrier’s attorney to ensure the association’s interests are protected.
If board members can recognize potential conflicts, they will be better prepared to ask the right questions of their attorneys and make informed decisions that protect the association. Attorneys should be upfront with their association clients and disclose any potential conflicts. Ethical attorneys beget ethical boards, which results in better association governance for all.
By Robert M. Meisner, The Meisner Law Group, P.C.
This article appeared in the September/October 2009 issue of Common Ground, published by Community Associations Institute. Reprinted with permission.