HOA boards are wild card in litigation game, author says

Article Courtesy of The Las Vegas Review-Journal

By John L. Smith

Published July 27, 2012

Forgive Evan McKenzie for feeling a senseof deja vu. He has seen homeowners association scandals such as the one currently playing out in Southern Nevada before.

Many times, in fact.

McKenzie, a foremost authority on the history and politics of homeowners associations, is an associate professor of political science at the University of Illinois at Chicago and the author of "Privatopia: Homeowner Associations and the Rise of Residential Private Government." He lectures on the Law of Common Interest Communities at John Marshall Law School and has decades of legal experience as a plaintiff and defense attorney on the issue.

The rapid rise of construction defect litigation in Southern Nevada was no accident, he said. It echoes similar legal action that soared in Southern California, Florida, Texas and anywhere there's been a boom in residential development.

It's also no accident that many of the attorney players and legal strategies are the same.

"Step one was, there was this enormous growth in construction," McKenzie said. "Then these attorneys began to swarm in from all over, especially Southern California."

Lawyers with experience in arguing the nuances of everything from roof construction to soil compaction followed the litigation work to Southern Nevada.

"What happens when you have a tremendous amount of residential construction, it outpaces the ability of building inspectors to do their job," he said. "They can't keep up. It's impossible. The inspectors simply can't be everywhere at once. Every place in the country where there's been very rapid growth in housing stock, there's shoddy construction."

McKenzie has been monitoring developments in the Southern Nevada HOA scandal through the Review-Journal's coverage, has lectured on the subject at UNLV and maintains contacts inside Nevada's homeowners' rights movement.

"I know a bunch of attorneys from Southern California who started practicing in Las Vegas," McKenzie said. "The business is very, very lucrative for both the defense and the plaintiff side. They were looking around for other places to go. Eventually, they started going to Las Vegas. Eventually, there were too many lawyers chasing too many condominium complexes and subdivisions. Basically, you only have one case per complex."

Just as there were only so many residential developments, McKenzie observes, there were also so many strong construction defect cases.

"Eventually, the attorneys start coming up with cases that really aren't good cases," he said. "They tried to build cases where the defects were really not serious enough to warrant suing the developer. It has happened not just in Las Vegas, but in a number of places."

For McKenzie, HOA boards are the wild card in the litigation game. Well-informed boards exist, but they aren't common. More often, the boards are populated with well-meaning folks with an interest in their neighborhood and enough time on their hands to serve. Although some attend seminars in board membership, precious few are trained in the law.

That makes them relatively easy to manipulate for unscrupulous attorneys out to land lucrative litigation. Although board members who follow standard practices and take the advice of experts are shielded from liability, if they decide not to sue against the advice of counsel they are told they might be on the hook.

"The lawyers get in and they say, 'Tell them you have defects in construction, and that the statute of limitations is running,' " he said. " 'If you don't file a lawsuit and the statute runs, then you could get sued for breach of fiduciary duty. We're advising you to do it. If you're wrong, you may be liable.' "

Out of an abundance of caution, and often a sense of intimidation, HOA boards are counseled to take no chances: Sue before the statute runs, or live with the potential consequences. McKenzie said such decision-making knowledge is, understandably, beyond the capability of most boards.

And that opens the door to scandals such as the one that has been generating convictions in a federal court near you.