Retaining a law firm simply because it has represented the association for many years is not sound business judgment. Boards should conduct annual reviews of their lawyers' performance.
QUESTION: As a board director I began questioning the actions of our association attorney and his law firm several years ago after expenditures to the firm were so outrageous and decisions so bad by its lawyers they culminated in our spending more on attorneys fees than the case was worth or settled for. Most owners just wanted the board to apologize, but our lawyers wanted lawsuits. Other owners were involuntarily sucked into our association's litigation vortex. They were innocent victims subjected to the firm's moneymaking machine, and allegations against owners were so outrageous most are unprintable outside of a lawsuit as they would constitute libel. The attorney and his firm have engaged in activities with our manager that are a conflict and duplicitous.
My research reveals this attorney and his firm have been sued or are currently being sued by other associations over conflict-of-interest issues in not revealing their clients included the association's management company. There were lawsuits from several other associations alleging such things as legal malpractice, deceit and concealment, unfair business practices and breach of fiduciary duty. Aside from ongoing lawsuits, judgments were against the same lawyers and firm.
I presented this information at a board meeting and our president said since this attorney and his firm have been with our association for over 30 years he saw no problem with this firm and no reason to look for other counsel. What should our board do about this situation?
ANSWER: The president has just one vote: He does not have the authority to make board decisions on his own. The facts described are disturbing yet all too common. In retaining counsel for the association, the board has a legal duty to exercise its sound business judgment. This duty includes making "reasonable inquiry" into the issues presented for decision, according to Corporations Code section 7231(a). Retaining a particular law firm simply because that firm has represented the association for 30 years is not sound business judgment: To the contrary, it amounts to a refusal to conduct a reasonable inquiry.
The many successful lawsuits brought against the lawyer and firm should prompt the board to investigate its own dealings with them.
Boards should conduct annual reviews of their lawyers' performance that includes considering what work the firm has done, what fees it has charged and what it has accomplished.
There are no hard-and-fast rules about what fees would be reasonable and what results would be expected to have been accomplished. Comparisons with previous years are helpful, and common sense plays a role — particularly in evaluating litigation costs that exceed the cost of available settlement.
In preparation for such a review, circulate all the information about the firm that you have assembled to make certain that every board director has considered it. Ensure that the board meeting minutes mention the documents submitted and the fact that you submitted them — just to protect yourself, since a board member's duties become a little more difficult, and more urgent, when the majority of the board votes against him or her.
The board might consider establishing a legal review committee, which would consider communications from the firm and vote before the firm is authorized to spend association money in excess of set amounts.
Boards must realize that the length of time this firm has served the association is only one relevant factor in deciding whether to continue retaining it. Trust is something that builds over time, but it can also be betrayed. Rather than just hold the course, boards should adopt a policy of "trust but verify."
The fact that other associations have successfully sued this firm is definitely disturbing. If the firm is the target of many successful suits for what appear to be flagrant breaches of fiduciary and professional duty, the State Bar should take some action against the lawyers involved. Board directors and titleholders can lodge complaints against the association's attorneys at the State Bar at http://www.calbar.ca.gov.
The conflict of interest arising from the fact that the firm also represents the management company is unquestionably a cause for concern. Most conflicts can be waived, but only after full disclosure to the parties that must waive them.
The board needs to send the firm a letter demanding a formal written response to its concerns regarding the adverse judgments and conflict of interest.
It appears that the loyalty the firm is supposed to feel toward the association may have gotten replaced with a desire to make the president happy. This makes it easy for the firm to forget its ethical duties toward the owners and instead focus on getting the president to approve all its actions while having the association pay its fees. Board directors like you, who keep their eyes open and feel no loyalty toward the firm, are ultimately the most important guardians of titleholder interests.
Rafael Chodos, an attorney specializing in business law and author of "The Law of Fiduciary Duties" co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to P.O. Box 10490, Marina del Rey, CA 90295, or noexit@mindspring.com.
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