Responding to Litigation Be Discreet, Be Professional, Be Timely

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There’s an old joke about business partners on the outs. The punchline is something like, “my lawyer is bigger than your lawyer!” Punchlines aside, though, who can you sue, when, and for what? In our litigious society, the short answer is nearly anybody, pretty much anytime, and for just about anything, depending on your resources. 

But in shared interest communities, that answer doesn’t really cut it. As a resident of a condo, co-op, or HOA, you’re a member of the association or the corporation that owns the property—so in bringing litigation against the association or corporation, in effect you’re suing yourself. Can you do that? The answer is a qualified yes—and it happens all the time. That said, it’s important to understand the rules and etiquette surrounding lawsuits in this unique context.

Rules, Regulations, & Etiquette

Perhaps the first and most important question in a suit involving a co-op or condo board is: who should be privy to all the specifics of the situation, and who should not? That consideration is applicable to all types of litigation, whether it’s brought by owners, shareholders, outside vendors, or the board itself. 

“Board members, managing agents, and anyone involved should only discuss the relevant details with counsel and insurers,” says Mark Hakim, an attorney with Schwartz Sladkus Reich Greenberg Atlas, a law firm based in Manhattan. “These parties should always refrain from disclosing any details of the litigation with anyone, absent express authorization from their attorney or insurance company.  Regardless of a shareholder or unit owner’s right to certain information, the granular details may have to remain confidential while the action is pending.”  

“Certainly, disclosing the existence of the action is permissible—and even necessary in, for example, the financial statements of the building where required,” Hakim continues. “Advising that a litigation exists and it is being handled by the insurance company would be acceptable and even appropriate, but I tend to advise boards that they should presume that no one is to be advised of the specifics, absent written instructions by our office, or the insurance company. The last thing any association or corporation would want is to inadvertently and in good faith prejudice the action and place the building, or even the board member, at risk.”

According to Ellen Shapiro, partner at Allcock & Marcus, a law firm located in Braintree, Massachusetts, “Board members can and should discuss the suit with their attorney, manager, and amongst themselves, but not with others. However, boards should never be [pressured] into doing something they feel is wrong with respect to the lawsuit. Nobody likes to be involved in litigation, and so unfortunately, sometimes there’s a tendency to placate the complaining individual. That’s not the best route to take—but that decision belongs to the board as the representative of the association. Should the suit be communicated to the owners? No, not until it reaches the point of litigation. Litigation is expensive, and [therefore] often doesn’t happen. But when it does come to pass, and once the litigation happens, I firmly believe that owners should be advised [about the litigation itself], but not about the specifics.”

Steven Mlenak, a partner with Greenbaum Rowe Smith & Davis, a law firm located in Roseland, New Jersey agrees. “Board members should discuss the confidentiality of facts surrounding a lawsuit with the association’s counsel,” he says. “Board members owe a duty of confidentiality to the association, and the underlying litigation strategy in defense of a lawsuit must always be kept confidential. However, the existence of a lawsuit does need to be disclosed to the association membership. Often, the association’s counsel will be asked to provide an opinion consistent with ABA standards with respect to the potential damages to the association and likelihood of success for inclusion in the association’s annual audit.”

Insurance & Insurers in Legal Actions

Hakim cautions that “insurance is the bane of every building’s existence, regardless of litigation these days. Given the amount of claims across the country, whether it’s from a natural disaster like a hurricane, or even something similar to what transpired at the Surfside condominium [in Florida, which collapsed in 2021 after decades of structural neglect, killing nearly 100 people], premiums are up.  Insurance companies are dropping coverage, or altering it in such a way that buildings are out in the market trying to get comparable coverage. Litigations can certainly adversely affect coverage. Even notice of potential issues, without the actual commencement of a suit, may sadly have adverse effects on a building’s coverage.”

When responding to a lawsuit, the first thing that an association should do is put their insurance carrier on notice of the action. “Most Directors and Officers (D&O) policies require notification to the carrier within a certain period, or else a claim can—and will—be denied,” says Mlenak. Like all insurers, D&O insurers are extremely cognizant of claims and the costs associated with those claims.  Repeated claims against a board’s D&O policy may result in higher premium costs. “The greater the number of claims and amount of money spent by a carrier to defend an association,” cautions Mlenak, “[the greater the] impact on the association’s ability to secure affordable coverage going forward.”

Shapiro recommends that association boards try to resolve these matters pre-suit, regardless of who the potential litigation is coming from; resident, vendor, etc.  “You never want to have a reputation of being litigious,” she says. “If the owners and the board of an association are constantly battling, the association”—and by extension, the community—“will develop a reputation.” And that will likely put off prospective buyers, as well as raising premiums, Shapiro adds.

Is Ongoing Litigation Public Knowledge?

Of obvious concern to both co-op and condominium owners is the possible effect ongoing litigation could have on their ability to sell their shares or units. Tight as the housing market may be, no buyer wants to walk into a hornets’ nest of litigation with possible financial consequences.  

Shapiro notes that litigation of this type “is hard to hide, not hard to find. It might show up on Fannie Mae affidavits, or on searches. It depends on the purchase and sale agreement.”

“Generally,” says Hakim, “a purchaser’s attorney will submit a questionnaire to the property’s managing agent with a specific question as to whether there is or is not any litigation. The managing agent’s response will dictate the follow-up questions.  More and more, I am seeing attorneys perform searches to see if there are lawsuits against the building, board, or seller. It is prudent to do so, as the information is important to the purchaser’s decision to pursue the unit.”

Mlenak adds that “many mortgage lenders will request a statement from the association regarding both actual and threatened litigation. Also, most associations disclose this information in their annual audits, which sellers typically make available to prospective buyers.” So, in fact, litigation is often noted in the public realm.

The Smart Path

Unlike in many instances and situations, our sources in all markets indicate that there is no substantive difference in law between co-op and condo properties relative to lawsuits. It should be noted, though, that in some states (New Jersey, for example), state law requires a level of mandatory arbitration of disputes before suits are brought.

Regardless of the type of community in question, boards should try everything reasonable to avoid litigation for many reasons—costs, insurance, building morale, to name a few. While a building is a business, it’s also home to the people who own units within it. Good communication, attentiveness, and responsiveness by boards and managing agents, rather than ignoring complaints and issues in the hopes that they’ll resolve themselves, often can reduce the likelihood of a lawsuit. “I often see shareholders who just want communication and answers,” says Hakim. “Ignoring a problem only leads to more problems. If there is a problem, I recommend a board get in front of it—let the affected residents know of the issue, how it is being handled, the potential remedies and potential time, and follow up regularly. Leave no space for a resident to fill in on their own.”

To keep ahead of problems, Mlenak recommends that “associations should routinely consult with their counsel regarding their actions and keep up on current laws governing their association. Managers should encourage their board members to take voluntary training courses for board members through the Community Associations Institute (CAI) or other organizations and should have their counsel provide board member ethics seminars at least once per year for board members.”

In the final analysis, lawsuits aren’t good for anyone (except maybe the lawyers—another old joke). They are time-consuming, expensive, and can damage the reputation of a community. As board members, do your best to resolve disputes peaceably and in a timely manner. But, always do what’s best for the community.  That’s a board’s first and foremost responsibility.

A J Sidransky is a staff writer/reporter for CooperatorNews, and a published novelist. He may be reached at alan@yrinc.com. 

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