CONO

Council of Neighbors and Organizations

Appendix 8

SAMPLE

Lawsuit Lessons Learned/Tips

Tips for HOAs Considering Lawsuit(s) Arising Out of Construction Defects

If the developer/builder still controls the homeowner association Board, serious conflicts of interest exist if construction defects arise. The developer/builder’s contractors and engineers may be subject to these same conflicts of interest. It is important for concerned homeowners to consider privately seeking legal advice regarding the situation even if they have to pay for such advice out of their own pockets.

If the developer/builder no longer controls the homeowner association Board, begin with a general membership meeting to discuss the construction defects at issue, and to explain in detail the potential problems and expenses associated with the defects.

The Board should consult with qualified and independent construction and/or engineering professionals and experienced legal counsel so as to get a sense of the nature and extent of the problem, the range of costs associated with addressing the problems, the Board and association’s legal rights and obligations, and the pros and cons of instituting a lawsuit versus informal negotiation with the developer/builder or simply funding repairs with association money.

There are various laws which limit the amount of time within which construction defect litigation must be commenced. The association may only have the lesser of two years from the date construction defects were first noticed, or six years from the date of substantial completion of the project, to begin legal proceedings against those believed to be responsible for any problems with the project. If the problem first arose during the fifth or sixth year following substantial completion of the project, the association may only have two years from that date to sue. The date on which the developer/builder turns over control of the homeowner association Board to the unit owners may affect when the limitation period begins to run against the association. In addition, there may be other, even shorter, limitation periods applicable to some or all of the claims the association may have available to it.

If a lawsuit appears to be the most cost-beneficial way to deal with the problem, interview and select competent counsel. This process is discussed more completely below under the heading “Selecting a Law Firm.”

The decision to hire a law firm and institute a lawsuit is one that generally rests solely with the Board. All Board discussions about possible litigation should be expressly designated “confidential” in the minutes and held in executive session so as to preserve various non-disclosure privileges. Often, however, the Board prefers to advise the membership of the anticipated lawsuit, and to disclose the general risks, expenses, uncertainties and delays associated with such a suit, as well as the general risks, expenses, and uncertainties associated with not timely pursuing or forsaking legal action.

Consider holding a non-binding, confidential vote as to the membership’s feelings regarding going forward with a lawsuit. If you have pre-selected a law firm to represent the association if it goes ahead with suit, they likely will be willing to address the membership and answer questions about the case for no additional or special charge.

Remember that, “Anything you say can and will be held against you in a court of law.” Friends, relatives and business associates of some of the potential defendants in a construction defect lawsuit may reside in the development – often the developer will still own some units. As such, care should be taken not to disclose confidential or sensitive matters when communicating with the membership, whether at community meetings or by newsletter. Members who want detailed information about the substance of the lawsuit may need to sign confidentiality and non-disclosure agreements so as to protect the association’s interests.

Make sure the membership understands that the entire association membership may incur a special assessment to pay the expenses of the lawsuit.

Do not underestimate the costs of litigation – they can easily run from $100,000 to $400,000 or $500,000 -- for a typical construction defect lawsuit depending on the nature of the problems, the size of the complex and the course the lawsuit takes once filed. Be wary of lawyers who offer to represent you “on the cheap” – it costs money to develop and present a powerful case in court.

Don’t underestimate to your membership the amount of time it will take to prosecute the lawsuit – it will probably take at least two years and the Board that originally approves the lawsuit will probably not be the Board that is in place at the conclusion of the case.

Explain to your membership that both sides will employ experts to prove or disprove the claims and defenses in the lawsuit. This means that “experts” may be performing destructive or invasive inspections and tests in or on their homes to prove or disprove the claims, and these multiple tests and inspections may be disruptive to homeowners and Board members, and may require leaving some damaged areas visible and unrepaired so as to allow later examination by other experts, the court or the jury. Some homes may be tested or inspected on multiple occasions.

Law firms generally consider affording representation in lawsuits under three modes of payment (other mechanisms of payment may possibly be negotiated):

Contingency. Some law firms will accept a suit on a contingency basis. Often, this sounds like the way to go. The law firm only collects a fee if they collect money by way of settlement or judgment and their share of the amount collected is set at a fixed or sliding scale percentage, often 1/3 of the amount collected, plus reimbursement of expenses advanced by the law firm on behalf of the association. However, a contingency fee can result in surprises to an unsuspecting HOA. During the entire year or two or three that the law firm works on the suit, the lawyer’s fees and the expenses of preparing for trial are advanced by the law firm and are documented. At the conclusion of the case, however, win or lose, the HOA has to repay all expenses the law firm has advanced, whether or not the case produces enough money to repay these expenses. In a short time, these advanced expenses can amount to a large amount of money. While the time spent by the lawyers and their legal assistants working on the case will be covered by the 1/3^rd contingency fee if a recovery is made, if the association does not win, or does not win enough, the association still must reimburse the lawyers for the out of pocket expenses they have advanced on behalf of the association for the lawsuit. Generally, no fee is owed and the association is not charged for the time spent by the lawyers and legal assistants if no recovery is obtained.

Examples of expenses:

Paying expert witnesses, photocopies, travel, hotel meeting rooms, long distance phone calls, professional investigative services, process servers, travel expenses for witnesses, courier deliveries, postage, conducting tests of construction defects, parking, costs for a mediator, use of consultants, deposition transcript expenses, exhibit preparation expenses, etc.

As the case drags on and expenses become large, your options include continuing with the case until settlement or court judgment, or to terminate the case and pay the expenses. If the case is terminated before settlement or judgment, the association likely will need to impose a special assessment on every homeowner in the association to repay expenses. As the amount of advanced expenses becomes larger and larger over time, the Board and the members may become more stressed and more inclined to settle, perhaps for far less than the case is worth. The Board needs to take care to ensure that the natural pressures to settle do not overcome a reasoned analysis of the strengths and weaknesses of the case, your attorneys’ analysis of the settlement value of your case, and the long-term ramifications of accepting an unreasonably low settlement offer. In one case, an association seeking to recover $3 million of legitimate repairs ended up settling for $300,000, or about ten cents on the dollar. Such a significant discount cannot be justified simply on the basis that people in the community or the Board members are anxious about or will be inconvenienced by the lawsuit. Furthermore, as trial approaches, the pressure to settle grows, especially since the chances of the case being “continued” by the judge to another date for scheduling reasons almost always exist. Generally, both sides would prefer a reasonable settlement than to deal with the uncertainty and cost of a trial because the outcome of any particular trial can be difficult to predict.

Pay-As-You-Go (Hourly Rate). You can choose to retain a law firm and pay their attorneys and legal assistants’ fees and litigation expenses “as you go,” on an hourly basis (typically ranging from $150-$300 an hour for lawyers) and the association will receive all of the money recovered by the association by settlement or judgment. Such attorney fees and litigation costs can quickly run into hundred of thousands of dollars, and most associations are not able to carry these kinds of fees and expenses. The advantage is that the entire recovery belongs to the association and, in the event the case is lost, there are no additional costs to pass on to the membership. This course will not be open to most associations due to cash-flow and assessment limitations.

Flat Rate. In a “flat rate” case, the law firm agrees to provide all its legal services for one, lump sum, typically paid in advance. Again, this method of payment usually is not available to most associations due to cash-flow and assessment limitations.

Pro-Bono. In a “pro bono” case, the lawyer or law firm agrees to take the case for free to perform a civic betterment. Many lawyers voluntarily agree to do some free civic betterment cases. It is unlikely that associations will find a lawyer willing to take a case on a pro-bono basis, but it is not impossible.

Selecting a Law Firm

A homeowner association must become an educated consumer in choosing a lawyer. Do not accept, without confirmation, a lawyer's self-serving description of what he or she has accomplished in the past. Be wary of unrealistic suggestions of what the association might be able to obtain through litigation.

Absent exceptional circumstances, such as the potential running of a statute of limitations or other deadline, no lawyer should rush a homeowner’s association to the courthouse steps and into a lawsuit. If the association has not already tried to work things out with its builder-developer, a lawyer should always recommend that the association, sometimes with the lawyer's assistance, try to work things out informally. If possible, and if it will not prejudice your legal rights, give the builder-developer the chance to do the right thing before you get involved in expensive and lengthy litigation.

Because recent changes in the law (the Construction Defect Action Reform Acts of 2001 and 2003) now require homeowners, homeowner associations and builders/developers and other construction professionals to engage in a mandatory “Notice of Claim” process before a construction defect suit is filed, consultation with a knowledgeable lawyer concerning an association’s obligations under this new law is advisable. These new laws may require the incurrence of a significant amount of money up front and before suit is filed inventorying the construction defects.

The lawyer should be experienced in dealing with the kinds of problems the association faces. The association should find out the names of cases that your attorney has actually tried to a Colorado jury, and who he or she represented in those lawsuits. Many people assume that simply because a lawyer says he or she is a "trial" attorney this means that the lawyer has significant trial experience.

Be careful of lawyers who tout the "exceptional" settlements they have obtained. Most consumers do not have enough facts or experience to judge whether a particular dollar-amount settlement was a good or bad result, even when the settlement is in the hundreds of thousands or millions of dollars. Sometimes a lawyer may tout a large judgment he obtained, but not disclose that the judgment remains unpaid because of a failure by the lawyer to properly investigate the availability of insurance coverage or the financial capabilities of the defendant.

A lawyer should be willing and able to provide you with references. Some lawyers ingratiate themselves with certain associations or trade organizations (such as consumer and homeowner association groups or property management associations) by making substantial monetary contributions to those groups. References by such organizations may be a useful tool, but they should not be the association’s only tool. Another good source for references is a local attorney who has worked with or against the lawyer you are considering hiring, as well as former clients of the prospective lawyer. In addition, because many construction defect cases involve complex insurance coverage issues, it is appropriate that your attorney have an excellent working familiarity with these issues. Attorneys most knowledgeable in their field often publish books and articles in that field.

You should interview more than one lawyer, no matter how impressed you may be with the first lawyer you meet or how highly recommended that lawyer may be. You should discuss what is expected of you as a client, how expensive, stressful and time-consuming any proposed litigation may be, and what fee arrangements are available. Any lawyer who avoids discussing the risks, uncertainties, delays and expense of a lawsuit is avoiding the realities of modern litigation. Be wary of fancy “dog and pony” shows that are all glitz and no substance.

While lawyers are allowed to advance litigation costs on behalf of clients, and law firms frequently do so, any lawyer who suggests that the homeowner association has no legal obligation to repay those costs to his or her firm may be violating Colorado's professional responsibility code for attorneys in saying so. Any lawyer who suggests that you not interview other lawyers, or who suggests that if you do so he or she may not be able to provide you legal services due to the delay, is suspect.

Explore alternative fee arrangements with your attorney and choose the one that best fits your needs.

In the end, you should satisfy yourself that your lawyer is smart, experienced, understanding, respected in the profession, and ethical, and that you are comfortable putting your trust in that person's hands.

Trial Preparation

Generally speaking, the plaintiff association and the defendant developer, builder, subcontractors and engineers will employ various strategies to strengthen their respective cases. These strategies may include the following:

Deposing Board Members. You should expect that most or all of the past and present Board members will be deposed at great inconvenience and expense. You will be questioned about when you knew about the defects, what actions you took, what was done to mitigate the defects and how much you know about construction.

Deposing the Membership. Many or all of the membership likely will be deposed at additional inconvenience and expense. This process serves to build anxiety and cause the membership to start pressing to settle for reasons that have little to do with the merits of the association’s claims. Should the case go to court, the depositions can be used to “impeach” the testimony of the various witnesses if they significantly change their testimony at trial.

Subpoenas. Both sides will subpoena witnesses to appear in court during the trial. This is done before the trial starts to assure the witnesses will be available during the trial and sometimes is done to increase the pressure for settlement. When your membership starts receiving subpoenas, they will become alarmed and the pressure for a settlement will grow. Again, such pressure may have nothing to do with the merits of the association’s claims.

Trial Exhibits. The association’s law firm may need to build mock-ups of parts of the homes and create expensive animated or “blow-up” presentations. These exhibit expenses often are necessary to allow jurors to understand complicated construction concepts (like “flashing”) and should be considered for any complicated case. Most of the jurors will not have an in-depth understanding of construction techniques.

Trial

Most worthwhile settlements do not occur much sooner than the start of trial because defendants and their insurance companies are well aware of the emotional and financial stresses and inconveniences placed on homeowner Boards and their membership by such trials. They count on these stresses to cause the Board to capitulate to irrational concerns and to settle at any price rather than on the basis of the merits of the case. The Board must be prepared to try the case to conclusion if no fair settlement offer is made, yet also be ready to thoroughly and intelligently analyze settlement offers made on the first or second day of trial. Generally, homeowner associations have their greatest settlement leverage once trial begins. One or more Board members likely will need to be in attendance every day of the trial, as well as a representative showing by homeowners.

Settlement negotiations are most difficult if the defense senses that the Board members or the association membership is divided on settlement. It is essential that, as trial approaches, the Board and its homeowners present a united public front. The Board MUST be prepared to try any case in which a fair settlement offer is not extended, unless your lawyers advise that you accept a settlement for other reasons, i.e., the lead defendants are insolvent, uninsured and/or bankrupt. If the defense is given reason to believe that the Board and the membership is weak or divided, you will find it difficult, if not impossible, to obtain a reasonable settlement offer. Filing a lawsuit and then “counting on” a later settlement to make the expense, uncertainty and inconvenience of a trial go away is unwise.

Settlement

Generally, our legal system does not allow a prevailing party to recover a significant part of its attorney fees and litigation costs from the other side, no matter how badly the other side acted or how unreasonable they (or their insurers) may be when it comes to settlement. Frequently, even the best settlement offer is not enough to pay for all needed repairs and to pay for all the association’s attorney fees (whether payable on a percentage or hourly rate basis) and litigation expenses. Thus, the association may need to consider “netting,” after payment of its attorney fees and litigation expenses, less than the full cost of repair as determined by its own professionals; or, the association may need to consider alternative, less expensive, repair methods that may involve greater risk of failure down the line or a shorter “useful life” in the field; or, the association may need to consider prioritizing its repair needs by cost, or by health and safety considerations. These kinds of choices are difficult but, in most cases, necessary to make.

A good law firm will aggressively and creatively seek every dollar available under the law to compensate the association for its past and future losses and, where the law permits, to monetarily punish builders, developers and others who act in bad faith so as to deter such conduct in the future.

Emotion, fear and not dealing well with inconvenience are the association’s greatest obstacles to obtaining a fair settlement.

Intelligent and objective analysis, competent and aggressive legal representation, and patience are an association’s greatest assets to obtaining a fair settlement.

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