Board gambled and lost; now bill hangs over owners’ heads

Question: Our association sued an insurance company and lost. Our board president sent out a notice saying the judge ordered the association to pay a multimillion-dollar judgment plus the insurance company’s attorney fees. The notice says that no homeowner is being held responsible; it is the association that is responsible. What does that mean to me? We owners didn’t vote to sue the insurance company, and we don’t know how to get copies of the lawsuit. Can we sue our board directors for initiating the lawsuit? How do we do this? If I sell my condo, what happens to this obligation?

Answer: Although the buck ultimately stops with the board because its members made the decision to sue the insurance company, their legal advisors may not be entirely off the hook.

Even though your board president says in the notice that no one homeowner is responsible for the lawsuit, all homeowners are liable for the final judgment. Owning a deed-restricted residence in a common-interest development means each titleholder must pay a proportionate share of that judgment whether they can afford it or not.

An attorney stands in a fiduciary relationship with his clients. By virtue of placing confidence in that attorney, the board entrusts him or her to provide accurate and reliable advice. Before undertaking this legal action, association attorneys had a duty to provide the board with a written evaluation of risks, benefits and costs, including the possibility that the association might lose and be liable for damages and attorney’s fees. If those risks were as substantial as the judgment indicates, all titleholders should have been consulted before the lawsuit was initiated.

At a minimum, in performing its due diligence, the board should have investigated the advising attorney’s competence. It might have discovered facts to alert them to the possibility that the advice was questionable. In cases where the potential liability is great, a second and third opinion may be necessary.

Once the association suffers an injury of this magnitude, and presuming the advice given appears to have been erroneous, the board should investigate claims for possible professional negligence. The statute of limitation for commencing an action against an attorney for wrongful professional acts or omissions is detailed in California Code of Civil Procedure Section 340.6.

Although the association may attempt to obtain a loan using common property as collateral to satisfy the final judgment, all titleholders bear the ultimate responsibility to repay the loan and to satisfy the judgment.

If the judgment is recorded against the association and its property, a title search would uncover the multimillion-dollar liability. Any association lawsuit and/or judgment would probably affect sales in your project as the unit seller must disclose existing lawsuits, unsatisfied judgments, association loans and pending assessments to potential buyers. The seller’s obligation to pay any assessment may depend on when it is levied.

Bankruptcy is not available to a California common-interest homeowners association.

As part of their asset protection planning, deed-restricted titleholders should consult with their insurance company or broker to ensure their individual homeowners insurance policy contains “loss assessment” coverage. Depending on the terms and limits of this extended individual coverage, certain unexpected or emergency assessments may be paid by the insurer.

Unless a case has been ordered sealed, all documents filed with the court are public records. Many courthouses have computers the public can use without charge to obtain case numbers. Use those numbers to access the court file and obtain document copies.

Nothing prevents individual owners from suing individual board directors for repayment of their share of the judgment -- especially if the board breached its fiduciary duty by bringing the lawsuit.

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Send questions to noexit@mindspring.com.