Funding Defect Litigation
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FUNDING DEFECT LITIGATION

Construction defect litigation legal fees and costs can be significant and must be factored into the decision to litigate.

COST TO LITIGATE

1.  Experts. Depending on the size of the association and the number of defects, the cost to investigate and document the claim can be substantial.

2.  Attorneys' Fees. In addition to experts' fees, the cost to litigate the case can be significant. Depending on the number of defects and how aggressively the developer defends against the lawsuit, the legal fees can range from moderate to substantial.

a.  Hourly. The association pays as it goes. Usually most advantageous because the association keeps a larger share of the settlement (or award is the association prevails at trial). However, this may not be economically feasible for some associations.

b.  Contingency. Association pays expert fees and costs but no up-front legal fees. Law firm agrees to take a percentage of the recovery. The percentage is fully negotiable.

c.  Modified Contingency. Combination of lower hourly rate and lower contingency pay-out at the end.

FUNDING

1.  Assessments. Special assessments are usually the least desirable method for funding the litigation because of the opposition by the membership. However, if the membership approves, it nets the largest return because you avoid interest payments to lenders. Without membership approval, the Board may do the following:

a.  Regular Assessments. Raise regular assessments up to 20% per year

b.  Special Assessments. Special assess the membership up to 5% per year.

2.  Borrowing from Reserves. If the association has sufficient funds, the board may borrow from reserves to fund the litigation. As with any loan, it must be repaid.

3.  Borrowing from a Lender. Borrowing funds from a lender usually requires approval by the membership. The associations CC&Rs or Bylaws may have guidelines for borrowing. Lenders will usually approve a line of credit up to a certain amount. The money is released as the Board withdraws as needed to fund the investigation and litigation. As collateral, banks usually require an assignment of the association's assessment collection rights, together with current accounts receivables and any settlement proceeds resulting from the litigation.

4.  Borrowing from the Membership. It is possible to float a bond and borrow the money from the membership.

5.  Borrowing from the Attorney. If the law firm is willing to take the matter on contingency, it may or may not agree to cover court costs and experts, which can range form $20,000 to $200,000 (or more).

6.  Combination of the Above. Association's may use any combination of the above to fund the litigation.

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

Adams Stirling PLC