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BLACKLISTED
ASSOCIATION SUED
 We previously reported on the the 2021 collapse of a highrise in Surfside, Florida that killed 98 people. The sudden and catastrophic disintegration of the 12-story structure resulted in heightened scrutiny of condo loans by the Federal National Mortgage Association (Fannie Mae).
Fannie Mae Requirements. Fannie Mae insures many of the loans used to purchase condominiums. To protect those loans, it imposed new lender guidelines that require more documentation regarding building inspections, deferred maintenance, and structural safety issues. Condo developments that don't meet their requirements can be blacklisted--meaning lenders will stop funding certain types of loans to buyers of units in the development.
Most, if not all, CC&Rs in California require associations to carry hazard insurance with policy limits of not less than 100% of the full insurable replacement cost of their structures. In March of this year, we reported that Fannie Mae was blacklisting associations that did not carry sufficient insurance to replace structures destroyed in a wildfire.
New Litigation. It was only a matter of time before lawsuits were filed. Earlier this week, one was filed in Los Angeles County. According to the complaint, the owner of a condominium decided to list his condo for sale. After receiving an offer for the full asking price, which he accepted, the homeowner claims he was shocked to learn his association was red flagged by Fannie Mae when his unit fell out of escrow. He could still sell his condo, but at a reduced price. The homeowner sued his association, claiming it purchased inadequate insurance.
OBSERVATION: I suspect we will see more such lawsuits. Whether they are successful or not, only time will tell since associations are not obligated to ensure that members qualify for all forms of lending, especially when financing is still available, as well as all-cash purchases that do not require financing.
Boards are in the difficult position of balancing their obligations against available funds and the impact that high assessments have on members. A decision to temporarily forego some forms of financing rather than levy excessively high assessments that could drive some owners into foreclosure may be the better decision. It's like trying to decide whether to tent or spot treat for termites. Even though tenting is the best form of treatment, spot treatments may be better for residents, and courts defer to the board's decision.
The insurance crisis in California has made insurance coverage for many associations unavailable or incredibly costly. Unfortunately, the problem is not going away any time soon.
BOARDS, MANAGERS, AND
ARTIFICIAL INTELLIGENCE
 Two weeks ago, Shauna Gatlin and I spoke at a regional event on artificial intelligence and how it impacts our industry. We talked about the enormous benefits AI has already brought to community associations, and gave examples.
We also pointed out the dangers. We described how AI sometimes hallucinates--a polite term for fabricating information, i.e., giving false answers and lying about its sources.
Using AI in Court. A case published two weeks ago highlights the perils of relying on AI for legal assistance. A woman filed a complaint alleging employment-related claims against a company. The company denied the allegations and filed a motion for summary judgment, which the trial court granted.
The plaintiff appealed. Her lawyer filed briefs with the Court of Appeal that contained false information. Nearly all the legal quotes in his opening brief and reply brief were made up. The quotations did not appear in any of the cases cited. Additionally, many of the cases did not discuss the topics for which they were cited, and a few cases did not exist at all. Artificial intelligence used by the lawyer fabricated the legal authorities. The plaintiff lost her appeal, and the court levied sanctions on her attorney and reported him to the State Bar. (Noland v. Land of the Free)
Boards & Managers Using AI. Some board members and managers are already using AI to save legal fees. They use it to analyze CC&Rs when advising homeowners about their maintenance responsibilities and restrictions on pets and other issues. They also use it to find solutions to legal problems confronting their associations. Unfortunately, doing so puts directors and managers at risk.
If a board relies on advice generated by AI, or on legal advice from a manager, the directors lose the protections of the Business Judgment Rule, which requires boards to make decisions (i) in good faith, (ii) in the best interests of their association, and (iii) after making reasonable inquiry.
Due Diligence. This third element of the Business Judgment Rule is what will get boards into trouble. As part of their due diligence, boards can rely on the advice of persons they believe to be reliable and competent in the matters being presented. (Corp. Code § 7231) If a board makes a bad decision based on advice from artificial intelligence, and the association is sued, a court would deem the board's actions unreasonable. Legal counsel from AI is not reliable and competent. Losing the third element of the Business Judgment Rule puts directors in legal jeopardy. They could be found negligent and liable for damages.
Practicing Law. Managers giving legal advice generated by AI, which subsequently gets a board sued, would not be indemnified against a first-party claim by the association against the manager. Moreover, the manager would be at risk with the State Bar for practicing law without a license.
RECOMMENDATION: AI might replace lawyers somewhere down the road, but it has not done so yet. AI is smart and getting smarter, but is not reliable when it comes to legal advice. Boards and managers should be careful about how they use artificial intelligence.
HIRING
ATTORNEYS
 We are looking for experienced litigation counsel and for experienced HOA transactional attorneys. If you are interested or know someone who may be a good candidate, you can contact Adrian Adams confidentially by email or by phone at (800) 464-2817.
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DISCLAIMER. Our newsletter provides commentary, not legal advice. Boards needing legal advice should have an attorney review the facts and law for their particular situation. We serve as corporate counsel to California associations.
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