QUESTION: Our association has no legal representation and the board relies solely on our management company for legal advice. Is that legal?
ANSWER: Managers are often quite knowledgeable when it comes to the law, which makes them invaluable to associations. Their experience and knowledge gives them the ability to spot problems and sound warnings when boards stray into areas of risk. But, managers can only raise red flags; they cannot give legal advice.
Practice of Law Defined. California has an expansive standard for defining the practice of law. It does so to protect citizens from the damage and wrongs committed by unlicensed practitioners. California broadly defines the "practice of law" as dispensing legal advice or service, even if the advice or service does not relate to any matter pending before a court. (Mickel v. Murphy (1957) 147 Cal.App.2d 718, 721.) California's Office of the Attorney General deems the unlicensed practice of law as a form of fraud and those engaged in it can be criminally prosecuted. Business and Professions Code §6126(a) was amended in 2003 to stiffen the penalties for those who dispense legal advice without a license:
Any person . . . practicing law who is not an active member of the State Bar . . . is guilty of a misdemeanor punishable by up to one year in a county jail or by a fine of up to one thousand dollars ($1,000), or by both that fine and imprisonment.
California does not yet have case law involving CID managers. Florida, however, has spoken to the issue. The Florida Supreme Court determined that the following actions by association managers are examples of the unlicensed practice of law:
- Determining unit owners’ voting rights,
- Drafting proxies,
- Determining use restrictions, including restrictions on leasing of units,
- Determining whether membership in a master or recreational facilities association is mandatory and, if so, what fees are be charged per unit type,
- Preparing and filing liens against owners for delinquent assessments,
- Advising boards regarding the timing, method and type of notice required for association corporate action,
- Advising boards what vote is required to take association action,
- Advising boards how to or whether they can reject a sale or exercise a right of first refusal, and
- Advising boards how the statutes pertain to them or what actions would violate the law or the governing documents. (See Supreme Court opinion.)
Many managers engage in the practice of law without realizing it. Based on the guidelines established by the Florida Supreme Court, following are examples of what a California court would likely deem the unlicensed practice of law by community association managers:
1. Advising boards about rights, duties and liabilities. That includes but is not limited to:
- Proper handling of recall elections,
- Voting rights and requirements in election disputes,
- Borrowing from reserves,
- Emergency assessments,
- Proper collection procedures,
- Interpreting the Davis-Stirling Act,
- ADA compliance issues,
- Interpretation of contract provisions,
- Disputed maintenance and repair issues,
- Disputed water damage and mold issues, and
- Settlement issues.
2. Preparing documents that alter rights, duties and liabilities. Managers and management companies can prepare documents that are incidental to the regular course of their business. Anything beyond that must be prepared by legal counsel. That includes but is not limited to:
- Amendments to CC&Rs, Bylaws, and Articles of Incorporation,
- Contracts and contract provisions (People v. Merchants Protective Corp 189 Cal. 531 (Cal. 1922).),
- Collection policies,
- Election rules,
- Rules enforcement policies,
- Settlement agreements, and
- Hold harmless and indemnity agreements.
Paralegals. Not even paralegals, who are trained in the law and work under the supervision of a lawyer are allowed to practice law. As provided for Business & Professions Code §6450(b), a paralegal cannot do any of the following:
- Provide legal advice,
- Represent a client in court,
- Select, explain, draft, or recommend the use of any legal document to or for any person other than the attorney who directs and supervises the paralegal, and
- Engage in conduct that constitutes the unlawful practice of law.
No Insurance Protection. Because the unlicensed practice of law is a crime, insurance will not protect a manager from prosecution for such activity. As provided for in Civil Code §2773, "An agreement to indemnify a person against an act thereafter to be done, is void, if the act be known by such person at the time of doing it to be unlawful." For example, if you intentionally set your house on fire, don't expect your insurance company to pay for it. The same applies to dispensing legal advice. If a manager dispenses legal advice and the association is damaged as a result--an insurance company owes no coverage or defense for acts or damage arising out of any illegal act committed by or at the direction of an insured. (20th Century Ins. Co. v. Stewart (1998) 63 Cal.App.4th 1333.)
No Indemnity Protection. The statute cited above also affects management agreements. An indemnity provision in a management contract will not protect a manager from fines and jail time nor will it protect him from lawsuits by third parties or from the association when it comes to the unlicensed practice of law.
Violation of the BJR. The hourly rates for HOA lawyers typically range from $175 to $350, whereas legal advice from a manager is free. It is understandable that boards would try to save money by seeking free legal counsel from their managers. However, doing so exposes directors to significant risk. By statute, directors are protected from personal liability for errors in judgment if they follow the Business Judgment Rule, which requires that decisions by directors be:
- In good faith,
- In a manner which the director believes to be in the best interests of the corporation, and
- With such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. (Corp. Code §7231(c).)
If a board relies on legal counsel from a manager and things go awry, directors will have difficulty convincing a jury that seeking legal advice from a manager was prudent.
Recommendation: Managers often have enough training to recognize when boards stray into areas of legal peril. When that happens, they should alert directors to the danger and advise them to seek legal counsel. Boards should not put themselves and their managers at risk by pressing their managers for legal advice. It's not fair to the manager and potentially costly to the association and its directors. When asked for legal advice, a manager should always recommend the board seek legal counsel. Doing so protects both the manager and the board.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.