Disclosing Information about Litigation to Association Members

A common issue that is addressed in homeowners associations concerns the duty of an association’s board of directors to disclose information about existing and threatened lawsuits that involve the association to members of the association. Some treat information concerning lawsuits as “confidential” information that members are not entitled to, and other associations believe that lawsuits involving the association constitute material information that all homeowners are entitled to be aware of. When it comes to the disclosure of information concerning litigation to association members, there are some basic considerations that the association’s directors should be aware of.

Transparency has its Limitations

When it comes to the disclosure of information about threatened or actual litigation that involves the association, the information that is given to association members should limited and come from the board of directors and not from individual directors or other association employees or management personnel. If the existence of a lawsuit is being disclosed, providing members with knowledge of the case and the nature of the claims being made is informative and provides the members with enough information for them to research the public records concerning the case to learn more about on their own. It is also appropriate for the board to provide the members with periodic updates about the status of the case.

Preserving the “Attorney-Client” Privilege

The law protects confidential communications that take place between lawyers and their clients and affords them a privilege against disclosure. Thus, when a homeowners association is represented by legal counsel in connection with a particular matter, discussions with the lawyer by board members about the matter are protected as privileged communications. The disclosure of information that is privileged has the effect of breaking the privilege and making the information that would have otherwise remained confidential subject to discovery by the other parties to the litigation and public disclosure. This could provide the other parties involved in the dispute with an unfair advantage and have a material effect on the outcome of the case and could ultimately have serious ramifications for the association and its members.

Disclosures In Connection with the Sale of Property

It is relatively common for state statutes to impose mandatory disclosure obligations on homeowners associations and/or the sellers of properties that are part of a common interest development that is controlled by a homeowners association. These laws typically require written disclosures to potential buyers of information about the association that includes pending litigation and the impact it may have on the financial condition of the association.

Disclosures in Connection with Financial Statements and Audits

Homeowners associations are required by law to prepare periodic financial statements that accurately reflect the financial condition of the association. Accounting standards that must be followed in connection with the preparation of such statements require the disclosure of the nature of pending lawsuits along with the cost and a statement of the financial impact of the case on the association.

Homeowners Don’t Like Surprises

Frequently, association directors take positions concerning pending or threatened litigation that is not in the best interests of the association and create additional problems for the association that could have been avoided. For example, the non-disclosure of information about a matter involving litigation because the board believed the matter lacked merit, or a decision not to tender a matter to the association’s insurance carrier because the directors believed there was little risk of losing and they did not want to have the association’s insurance costs increased as a result of the claim. In the real world, many different things can happen in connection with litigation and the financial impact on the association can be very profound. Cases that were believed to be “slam dunks” have been lost and costs that were expected to be minimal can become exorbitant thereby resulting in the need for special assessments on the homeowners to deal with the financial ramifications. Controversies within homeowners associations over the manner in which litigation is handled are commonplace and compound the cost to the association of dealing with the problem. Recognizing these facts, it is a good practice for association boards to keep members apprised of what is going on by providing them with information about litigation that was filed, how the association is dealing with it, what the risks and benefits are for the association, and the impact that the matter may have on the association and its members.

Conclusion

The information that should be provided to association members concerning litigation should be controlled and should never include the association’s litigation strategy or other information pertaining to the case that would be protected by the attorney-client privilege. Such information should always be addressed by the association’s directors in executive session board meetings that are not open to the non-director members of the association. Information concerning litigation that is open to public access can be provided to association members who request it, but association directors should not comment on the case or provide information that they would never want the other side to learn about. Because of the sensitivity of the information and the possible negative impact on the association, association boards should always obtain guidance from the legal counsel before providing members with more than basic general information about a litigation matter.