Reducing Legal Risk

(00:00) Speaker: It's time for AMG's 2023 Community Leaders Series Podcast Edition. Over the last three decades, AMG has worked to make the role of community leaders more effective and less of a headache. Seminar topics are a response to what our Executive Board members have requested. And now here's your host, the President of AMG, Dacy Cavicchia.

(00:23) Dacy Cavicchia: Welcome to AMG's 2023 Community Leader Series Podcast Edition. I'm Dacy Cavicchia, President of AMG and your host for this special episode on Reducing Legal Risk - When Should You Contact Your Legal Counsel? I'm pleased to introduce Elliot Engstrom as our special guest today. Welcome, Elliot.

(00:43) Elliot Engstrom: Hi, Dacy.

(00:44) Dacy Cavicchia: Elliot's an attorney with Sellers, Ayres, Dortch, and Lyons. His practice focuses on helping communities effectively plan for tomorrow, while managing the challenges and opportunities of today. Prior to joining Sellers, Ayres, Elliott was on the faculty of the Elon University School of Law and was an attorney for Cleveland County, North Carolina, where he advised over 20 operational departments and numerous community boards on a wide range of issues, including land use, board procedures, legislation, contracts, economic development, and law enforcement. In 2017, he successfully completed the EA Morris Fellowship for Emerging Leaders and was awarded the Sunshine Award for Advocacy by the Carolina Open Government Coalition. He was also selected for the American Enterprise Institute Leadership Network in 2021. Elliot I'm so excited to discuss this. I know we talked about this a little bit at the CAI North Carolina Annual Meeting. This is a great topic for not only our board members, but our community managers and homeowners as well, because it's such a sensitive subject. So, the first thing I want to go over with you is when should board members seek legal counsel?

(02:04) Elliot Engstrom: I think there's kind of two answers to this question. One is what is the subject matter that gives rise to the need to consult counsel? And then there's also, at what stage when those things come up, should you consult legal counsel? So, the very general answer to when you should consult legal counsel is when owners’ rights or money is involved. What that usually looks like is a dispute about how the governing documents apply to a particular owner, how a rule applies to a particular owner, often insurance disputes, water leaks come in in a condominium setting. It can be how is the money supposed to be spent, who gets the residue, those kinds of things. That being the subject matter, I think an equally or even more important question, a more important question of the answer of when should board members seek legal counsel is that board members should not wait until a situation like that goes haywire to call in counsel. And I tell people that can sound self-serving because you're the lawyer and you're saying that we should call the lawyers early on. And completely honest, Dacy, if I were on this podcast and I was saying I want to give legal advice that results in me making more money by spinning up more legal fees, what I would tell HOAs is, let everything go haywire and then call your attorneys, because that is when attorneys end up spending a lot of time on something that ends up costing a lot of money. If you're an HOA board member or a manager and you have a situation involving owners’ rights, money, dispute over documents, insurance claims, or you have something that looks like it could turn into a dispute, I highly recommend calling your attorney on the front end, getting guidance on how should we manage this, and that can really result in keeping things from going off the rails, ultimately saving you money, meaning that the association has to consult with its attorneys less in the long run.

(03:50) Dacy Cavicchia: Those are great points because after it's already gone sideways, you can't put the cat back in the bag. Yeah. So, if you can get ahead of it, as opposed to waiting till you're having the dispute already. So, you, as an example, water intrusion or insurance claims in a condominium or something like that, when you know these things happen, if you reach out to your legal counsel in advance, is this something that should be covered? Who's responsible for what? How do the proceeds of the insurance claim go? Then you're not waiting for a lawsuit to happen on the back end that could cost thousands and thousands of dollars. Exactly right. Those are great points. Thank you, Elliot. We will now take an AMG Community Leader Series newsbreak. We'll be right back.

(04:40) Speaker: And now it's time for your HOA Solutions Today Newsbreak.

(04:45) Newsbreak: Congress is currently reviewing the proposed Disaster Assistance Fairness Act, which seeks to address disparities in Federal Emergency Management Agency, FEMA, recovery assistance provided after natural disasters. The bill aims to extend FEMA aid to HOAs, co-ops, and condos offering essential support like roof repairs and debris removal, similar to what single family homeowners currently receive. Presently shared interest communities often don't qualify for federal disaster aid, hindering their ability to rebuild homes and communities. The bill, known as H.R. 3777, proposes amending the Robert T. Stafford Disaster Relief Act to include critical common elements of community associations under FEMA's Federal Assistance Individuals in Household program. Additionally, H.R. 3777 would make HOAs and cooperatives eligible for FEMA's assistance and debris removal after major disasters. The bill has garnered support from national organizations advocating for multifamily homeowners and boards. According to Thomas B. Skiba, CEO of Community Associations Institute, this act will provide crucial access to FEMA's recovery resources, enabling condominiums and cooperative buildings to be restored to habitable conditions after various natural disasters.

(06:02) Dacy Cavicchia: All right. We're back. I'm Dacy Cavicchia. I'm here with Elliot Engstrom discussing ways to reduce legal risk and when to contact your legal counsel. Elliot, the next thing I think would be a great topic for our board members is, what is the board members’ scope of authority? I know we talked about this again a bit at the CAI North Carolina Conference and you had some great information on that. What would you say is the board members’ scope of authority?

(06:30) Elliot Engstrom: So, the board member scope of authority and this, by the way, goes for HOAs, it goes for business corporations, it goes for government corporations, the primary job of a board member is always going to be financial oversight. That's your first primary job. You're approving the budget. You're overseeing the budget. The problem that we sometimes get into, in the risk management context, is that board members will try to take on roles that are beyond what a board member should be doing. And so, what do I mean by that? What I mean is, board members going out and taking pictures of people's houses to see if they're in violation, going in their backyard and seeing what's going on, board members on their own, emailing community members and saying, I think you're in violation and I'm going to come after you for this or that. The board member’s authority in the risk management context in a you know granted this is in a manager managed community is to be telling your manager here are our enforcement priorities, the manager comes to the board with here are the violations that we think we are aware of, and then as a board, review those violations. It's important to remember that the board is the authority over the association. Individual board members are not. Individual board members, they may have certain capacities as officers and things like that, but individual board members are just people who live in the association usually. And why that's important is because without getting too hyper technical, there are some statutes in North Carolina that provide immunities and defenses for volunteer board members of nonprofit corporations, and HOAs are nonprofit corporations. But that's as long as you stay within your role as a board member. And so, if you're a plaintiff's attorney and you're suing an HOA and you want to go after the board members, your first argument is going to be you stepped out of your role as a board member. And therefore, when you brought your camera into my backyard and took pictures of my pool because you thought it wasn't in compliance and you happened to take pictures of my kids too, that wasn’t within your role as board member. So, it's important for board members to stay within their role as board members, which is oversight, relying on your attorneys and other professionals and making decisions, and general policy and decision making. The answer can be a little bit different in self-managed communities. But and just without going too far down that road, and the self-managed community, which you would have, is the board would say we as a board delegate to Bob, the role to go around and look for violations. That's very different than Bob being on the board and saying, and I woke up today and I felt like walking around the neighborhood and seeing who's in violation. Right? Those are two very different things. So, remember, the board is the authority. You are a board member, and you want to stay within that role to protect yourself and to protect the association.

(09:12) Dacy Cavicchia: We had a situation a while back where we had a board member who would take the delinquency report and go pound on people's doors where they posted it at the pool, and we had to reel that back in. You know, you are acting beyond your authority, and they can get in so much trouble violating the Fair Debt Collection Act and then invasion of privacy, those kinds of things where they feel, well, I'm on the board of directors, I should be able to address any homeowner in any in any way. So, your points are very, very well taken.

(09:47) Elliot Engstrom: One other thing I'd like to add about the role of board members is I think there's an opportunity for a lot of HOAs to when they have new board members come on to the board, have a very brief introduction with the legal counsel for the association. I'm talking 20 minutes. And part of that introduction is legal counsel saying, welcome to the HOA board, here is your role. HOA board members are volunteers, many times with jobs, they are busy. They're not going to go into Chapter 55 A and 47 F and 47 C and say, what's my role as a board member? Right? But it's kind of what I was talking about before with getting out in front of things. If you can have your legal counsel, briefly say, hey guys, you're on the board, here's what you can do, here's what not to do. You might be able to get out in front of a problem before it happens.

(10:28) Dacy Cavicchia: That's fantastic advice. Um, with that, we have another AMG Community Leader Series newsbreak.

(10:36) Speaker: And here's another HOA Solutions Today newsbreak.

(10:40) Newsbreak: North Carolina's Orphan Roads issue has long been brewing under the radar, but the state's rapid population growth is shedding light on this problem. Orphan Roads, lacking clear owners and not maintained by municipalities, exist in subdivisions with homeowners’ associations or road maintenance agreements, causing confusion and financial burdens for homeowners. The lack of road turnover to cities or counties results in roads not meeting required standards, making them ineligible for state takeover. Many potential homebuyers are now aware of the situation, as the North Carolina Real Estate Commission's disclosure forms do not include this information. The North Carolina Department of Transportation imposes density requirements and specific conditions for road maintenance, disqualifying many Orphan Roads for meeting this criteria. Consequently, hundreds of miles of rural roads and streets across the state are left unattended and unclaimed, earning the moniker, Orphan Roads. Notably North Carolina, is one of five states where most, notably North Carolina, is one of five states where most non city local governments do not have their own road departments, worsening the challenges of addressing the Orphan Roads issue. As the state's population continues to grow, the urgency to find a solution to this problem escalates.

(11:54) Dacy Cavicchia: Welcome back, folks. I'm Dacy Cavicchia here discussing ways to reduce legal risk and when to contact your legal counsel with attorney Elliot Engstrom. So, one of the big things that we are concerned about in the industry is when would a board member or a manager be practicing law? There are cases out there where someone in their innocence thinks that, oh, I was taught this in this class, so therefore I must be allowed to do that, or when a board member is practicing law. So, let's talk about that a little bit.

(12:34) Elliot Engstrom: The most common situation that I see arise where I worry that a manager or a board member is practicing law is when they are drafting policies, drafting amendments to governing documents, drafting anything that is a legal instrument that could be filed with a registrar or something like that. And especially with the policies, people can think, well, that's not legal work for, they imagine lawyers go to court and argue and write contracts and stuff, and this is just a policy, but in many cases that often constitutes the practice of law. Also interpreting the governing statutes, interpreting the rules governing the community. And these things also can be considered the practice of law by the North Carolina State Bar. If you practice law and you were not a lawyer, one, it’s a misdemeanor, and two, the State Bar can come after you, even though you're not a lawyer. One important thing that I try to make sure boards and managers understand is that, so attorneys do have special training. We do have special skills that we've accumulated by passing the Bar and going to law school and things like that. So, you should be relying on your attorneys because attorneys are professionals who do legal work. There are those board members and managers out there who have been in the HOA world for like 30 years and who really do know this stuff pretty well and probably could answer questions about 47 F and 55 A and 47 C and governing documents pretty well. So, I'm not necessarily saying you don't understand law necessarily. I'm saying you are putting yourself at risk by practicing law because if it goes haywire, I mean, one, it's wrong, it's a crime, don’t do it. And number two, if you do something that is the practice of law and it ends up going wrong and it blows back on you, that's a big old can of worms. Right? And the last thing with that is that if you instead of trying to sort of practice law when you shouldn't, if you do rely on your legal counsel, there is a provision in the North Carolina Nonprofit Corporation Act that said board members are entitled to rely on the opinions of attorneys, accountants and other professionals that they reasonably believe to be discussing matters within those professionals’ professional competency. So, this isn't laid out in the statute. But what that means is if your attorney gives you a reasonable opinion and you rely on it and that ends up not being exactly right, you still have a level of protection because you are relying on an attorney that was practicing law legally in the state of North Carolina. So, if you're amending governing documents, if you need interpretation of statutes, if you're amending policies, call in your legal counsel. Don't just try to do it on your own. Whether you're a board member or a manager, it can you know, it's wrong to do it, it's a compliance issue, and then also, it can get you into a lot of trouble.

(15:19) Dacy Cavicchia: Yeah, we have a lot of cases out there right now where boards or managers are trying to quote, unquote, save the community money by drafting these documents. And I just want to make sure that we're correct on the point. They can initially draft it and send it to the attorney for correction, for blessing, for those kinds of things. They can't do it on their own and then publish it. They have to have their legal counsel look at that to make sure what they’re understanding is correct. Or would you say they shouldn't even do that?

(15:59) Elliot Engstrom: When I read the letter of the law, I would say that there's at least an argument that they shouldn't even do that. That being said, I understand that that is the practice often throughout the state is that and not even just a nonprofit world. In other places, people will put something together and then say, send it to the attorney and look at it. And, you know, I'm not the North Carolina State Bar, but I would think that that probably is going to be looked at much more leniently than someone just drafting a document and saying, we don't need an attorney. When you have the attorney look at it and weigh in, you said you take a company sending stuff to legal. Right? That's essentially what that is. And one of the things I think that is important to add to this conversation is there are board members out there who are attorneys, right, and who are accountants and who are tax professionals. And I've seen those board members get pressured sometimes by their boards into saying we're going to save some money. You're just going to do all our legal work. Right. And I don't think that's fair to those board members, for one, because they are volunteer board members. And number two, arguably, you're establishing an attorney client relationship between a board member and the association. That is messy. You don't want to do that. And so, I don't think it's fair to the board members and I don't think it's the right thing to do in terms of maintaining the right flow of the attorney client relationship between the attorneys and the board.

(17:15) Dacy Cavicchia: Right. Great points. Thank you so much, Elliot. We'll take one final newsbreak.

(17:19) Speaker: And now our final HOA Solutions Today newsbreak.

(17:24) Newsbreak: In a groundbreaking development an HOA in Green Valley, Arizona, has secured its place in history by becoming the first local homeowners’ association to achieve certification as a Firewise USA site. The momentous feat was initiated by a dedicated group of residents who were already familiar with the Firewise program through their volunteer work with the GVFD, that's the Green Valley Fire Department. Becoming a Firewise USA site is no small task. It requires immense dedication, meticulous planning, and relentless effort from a committed team of volunteers within the community. Becoming a Firewise USA site requires a significant effort and strategic planning by a committed group of volunteers within each community. An HOA must first complete a comprehensive wildfire risk assessment of their community with the guidance of a local wildfire expert. The community must then formulate a meticulous three-year action plan that prioritizes crucial steps to reduce the risk of ignition to homes. After becoming certified, each neighbor is expected to annually dedicate at least one volunteer hour per dwelling unit to wildfire risk reduction and is required to complete educational and risk reduction actions outlined in the three-year plan. With this commendable achievement, the Green Valley HOA joins a select group of approximately 125 Firewise Communities in Arizona, with about 20 of them located in southern Arizona. With more communities and homeowners’ associations showing interest in the Firewise Program, the state's landscape is witnessing a remarkable transformation in wildfire preparedness and prevention. Green Valley's pioneering achievement sets a shining example instilling hope for a safer and more resilient Arizona in the face of the future of wildfire challenges.

(19:08) Dacy Cavicchia: We're back, everyone, and as we close, I think it's important to remember three key takeaways. We began with when should a board member seek legal counsel? And you discussed subject matter, owners’ rights, or money being involved. Those are definitely times that the board should seek legal counsel. A second item is scope of authority. And you were talking a little bit about oversight and relying on the experts. A great, great point that I want to reemphasize is when a new board member comes on or you have an entire new board as a whole, after a developer transition, you should meet with your legal counsel so that they can discuss with the board, what their scope of authority is to stop problems down the line. And when is it practicing law? That was our third topic. And we were talking about it's practicing law if you're dealing with policies or interpretation, you always need to rely on your professionals. And when you're relying on your professionals, you have additional coverage. Is there anything else that you think would be a great takeaway for our board members?

(20:31) Elliot Engstrom: I think one thing, one thing we've talked about is working with legal counsel on things that you send and say, please review this and comment and stuff like that. And just, you know, just a bonus tidbit for if you want to look behind the curtain and see how attorneys do this stuff, to be completely honest with you, nine times out of ten, I can draft a policy or an amendment or a governing document faster from scratch, than I can review something that an association has put together on their own. I think they think sometimes we're going to do all the work and to get the attorney to give it a checkmark and we're going to save some time and money. But redlining a policy that has been put together by people who are not attorneys can be very cumbersome. And oftentimes if it's the kind of thing I've done before, just doing it from scratch is going to be a lot more efficient. And so, if you're thinking about going that route of saying we're going to put it together and send it to the attorney, check with the attorney first and just ask them what's the most efficient way to do this? I highly recommend doing that because you may be surprised that sometimes it's more efficient to just say, attorney, go do it.

(21:30) Dacy Cavicchia: That is a great point. It does take so much longer to correct a red line than to draft it from the start. So that is fantastic. Thank you everyone for tuning into our episode and a special thank you to Elliot Engstrom for speaking with us about how to reduce legal risk and when to contact your legal counsel.

(21:49) Elliot Engstrom: Thanks for having me, Dacy. I hope to come back soon.

(21:51) Dacy Cavicchia: Thank you. I'm Dacy Cavicchia, your host for this special episode of AMG Community Leaders Series 2023 Podcast Edition. If you'd like to explore more of our podcast episodes or additional 2023 CLS content, please visit HOACommunityLeaders.com.

(22:11) Speaker: Thanks for listening to 2023 AMG's Community Leaders Series Podcast Edition. To find more information on this episode, please visit HOACommunityLeaders.com. This podcast is a production of BG Ad Group.

(22:25) Speaker: All rights reserved.

• When should a board or member seek legal counsel? Whenever subject matter, owners’ rights, or money is involved.

• Board members must know and adhere to their scope of authority.

• Whenever you're dealing with policies or interpretation, you always need to rely on the expertise of your professionals.

Proposed Bill Would Extend FEMA Aid to Condos, Co-ops, & HOAs

Congress is currently reviewing the proposed Disaster Assistance Fairness Act, which seeks to address disparities in Federal Emergency Management Agency (FEMA) recovery assistance provided after natural disasters. The bill aims to extend FEMA aid to HOAs, co-ops, and condos, offering essential support like roof repairs and debris removal, similar to what single-family homeowners currently receive. Presently, shared interest communities often do not qualify for federal disaster aid, hindering their ability to rebuild homes and communities. The bill, known as H.R. 3777, proposes amending the Robert T. Stafford Disaster Relief Act to include critical common elements of community associations under FEMA's Federal Assistance to Individuals and Households Program. Additionally, H.R. 3777 would make HOAs and cooperatives eligible for FEMA's assistance in debris removal after major disasters. The bill has garnered support from national organizations advocating for multifamily homeowners and boards. According to Thomas M. Skiba, CEO of the Community Associations Institute, this act will provide crucial access to FEMA's recovery resources, enabling condominium and cooperative buildings to be restored to habitable conditions after various natural disasters.

Who will adopt North Carolina’s abandoned roads?

North Carolina’s orphan roads issue has long been brewing under the radar, but the state's rapid population growth is shedding light on this problem. Orphan roads, lacking clear owners and not maintained by municipalities, exist in subdivisions with homeowners' associations or road maintenance agreements, causing confusion and financial burdens for homeowners. The lack of road turnover to cities or counties results in roads not meeting required standards, making them ineligible for state takeover. Many potential homebuyers are now aware of this situation, as the North Carolina Real Estate Commission's disclosure forms do not include this information. The North Carolina Department of Transportation imposes density requirements and specific conditions for road maintenance, disqualifying many orphan roads from meeting these criteria. Consequently, hundreds of miles of rural roads and streets across the state are left unattended and unclaimed, earning the moniker "orphan roads." Notably, North Carolina is one of five states where most non-city local governments do not have their own road departments, worsening the challenges of addressing the orphan roads issue. As the state's population continues to grow, the urgency to find solutions to this problem escalates.

HOA becomes first Firewise USA site in Green Valley

In a groundbreaking development, an HOA in Green Valley, AZ, has secured its place in history by becoming the very first local homeowners association to achieve certification as a Firewise USA site. The momentous feat was initiated by a dedicated group of residents who were already familiar with the Firewise program through their volunteer work with the GVFD (Green Valley Fire Department). Becoming a Firewise USA site is no small task; it requires immense dedication, meticulous planning, and relentless effort from a committed team of volunteers within the community. Becoming a Firewise USA site requires significant effort and strategic planning by a committed group of volunteers within each community. An HOA must first complete a comprehensive wildfire risk assessment of their community with the guidance of a local wildfire expert. The community must then formulate a meticulous three-year action plan that prioritizes crucial steps to reduce the risk of ignition to homes. After becoming certified, each neighbor is expected to annually dedicate at least one volunteer hour per dwelling unit to wildfire risk reduction and is required to complete educational and risk reduction actions outlined in the three-year plan. With this commendable achievement, the Green Valley HOA joins a select group of approximately 125 Firewise communities in Arizona, with about 20 of them located in Southern Arizona. With more communities and homeowners’ associations showing interest in the Firewise program, the state's landscape is witnessing a remarkable transformation in wildfire preparedness and prevention. Green Valley's pioneering achievement sets a shining example, instilling hope for a safer and more resilient Arizona in the face of future wildfire challenges.