Disclosure of Lawsuits
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DISCLOSURE OF LAWSUITS

Currently there is no statutory duty to report litigation to the membership. Over the years California has enacted extensive disclosure requirements for homeowners associations. To date, the legislature has not required HOAs to give members notice of litigation other than intended litigation against developers for construction defects (Civ. Code §6150.)

Escrows & Audits. Boards do not have a duty to volunteer information about litigation when units/lots go into escrow. Although sellers have an obligation to provide relevant information to buyers, associations have no duty to volunteer such information. (Kovich v. Paseo Del Mar.) Even so, most associations disclose litigation matters when asked. Moreover, any litigation that could have an unfavorable outcome for an association is disclosed in its annual financial statement to the membership pursuant to Accounting Standards Codification Section 450 ("ASC 450"-Contingencies), which was previously known as FASB Statement No. 5, Accounting for Contingencies.

Reserve Borrowing. Litigation disclosures also take place when an association transfers reserve funds to pay for litigation. Such disclosures to the membership occur "in the next available mailing." (Civ. Code §5520.)

Case Law. The courts have noted, however, that boards have a general duty to disclose facts that materially affect the rights and interests of members. (Ostayan v. Nordhoff Townhomes.) Whether a particular piece of litigation should be disclosed to the membership will depend on the facts surrounding the case and its potential impact on the membership.

Litigation Privilege. Reporting lawsuits to the membership is protected by the litigation privilege--a type of immunity given to statements in connection with litigation. Civil Code §47(b) and Code of Civil Procedure §425.16 are construed broadly to protect a litigants' access to the courts without the fear of being harassed by derivative tort actions. Thus, a board's communication to the membership about litigation is immune from tort liability provided it has some relation to the judicial proceedings. (See Healy v. Tuscany Hills.)

Recommendation: Unless there is a reason to temporarily withhold information, boards should disclose the existence of litigation involving the association. When I refer to litigation, I don't mean small claims actions. Such actions are by their nature small with limited, if any, impact on the association. Even so, these are routinely reported to the membership by many associations.

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.

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