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Good Legal Advice or Confidence Game? You Decide

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.

  4. Interview several law firms.

    If your consultant advises that the construction problem has not been properly repaired by the developer, its time to seek the advice of attorneys specializing in such issues. This might or might not be your general counsel, but whatever you do, don't hire the first attorney who walks through the door. Interview one or two firms. Ask them questions. Get recommendations from clients who have worked with them in the past. Compare fee arrangements, understand your choices, and select what fits your association best (not what suits the attorney).

  5. Ask the following questions of prospective counsel:
    • Which attorney will represent the association?

      The answer to this may seem obvious, but it's not. Some attorneys who contact associations looking for defect cases do not litigate the cases themselves. They are essentially brokers who will sign up a client, make arrangements with experts, and then broker the package to another law firm. These “brokers” have minimal offices, do not actively practice law, and take a percentage of the recovery.

    • Will the association get a choice of consultants?

      An attorney who will not give the association the opportunity to review the bids of several consultants or who tries to dissuade the board from interviewing alternate consultants probably has a relationship with one consultant that will not necessarily benefit the association.

    • Does the attorney offer a selection among several fee arrangements?

      Many brokers and other construction defect specialty firms will only offer a contingency fee arrangement, i.e., where the attorney is paid a percentage of the recovery. This may be immediately attractive to a board concerned about expenses – attorneys' fees for a big case are no small matter. But in some cases, other fee plans may be very beneficial to an association. Hourly fee plans can often result in substantially lower attorneys' fees overall. Bank loans or blended arrangements (part contingency, part hourly) can also ease the impact on an association's budget. The point is, don't accept the only fee arrangement that is offered. Ask to see optional plans.

  6. Don't sign any agreement on the attorney's first visit.

    Take the time to review what is being offered. Ask your general counsel to review any agreements or, if general counsel has the experience to handle your case as you would like to see it managed, have an independent attorney review the agreement. Be suspicious of any attorney (or any other vendor for that matter) who threatens liability and tries to get the board to “sign up” on the spot. You generally wouldn't buy a car that way, or hire a contractor on his first visit, so why hire a law firm that way? Understand your responsibilities, don't be driven by them.

With a little care and consideration, the con artists can be separated from the legitimate law firms. Litigation is expensive and time-consuming, but so is dealing with construction defects. Take the time to interview and select among several well-recommended law firms so you are comfortable with your choice. Don't let someone's confidence game stampede you into a bad decision.

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