Chapter 18 REPRESENTING COMMON INTEREST COMMUNITIES

• Jurisdiction: North Carolina

18 REPRESENTING COMMON INTEREST COMMUNITIES

§ 18.01. In General

Managing common interest communities can be a challenge under any circumstance, but legally representing homeowners associations and condominium associations can be particularly complicated where the client is a group of members, directed by a board and oftentimes managed by a property management company. There are a number of different moving parts to an attorney representing an association, chief among them determining and making it clear who the client is and who the client is not. While this seems like a relatively fundamental exercise, it can be more complicated than it seems because of all the individuals involved in associations. Further, while the association is incorporated at the outset of the development, the developer retains control over the association for a period of time sufficient to sell a number of lots or units so that an independent board of directors can take over.¹ As a result, conflicts can arise in situations where attorneys represent the developer and then continue to represent the association after the developer has completely turned over control to an independent board. In addition, since associations are comprised of lawyers, judges and others in the judicial profession, personal interests can operate to potentially prevent lawyers and others from otherwise representing a client or presiding over a case.²

Representing homeowners associations and condominium associations can also raise issues for lawyers when they represent owners or members of the association and the association itself. In some cases, this is perfectly acceptable; however, in others, this may put the lawyer in an unacceptable position, making the dual representation unethical. However, it is both impractical and prohibitively expensive for the association to allow the entire membership direct access to the association's lawyer. As a result, rank and file members should not have free reign to the association's attorney for advice on matters not overseen or sanctioned by the board. There are a number of ethical rules that govern lawyers and ethics opinions that deal with specific issues for homeowners associations and condominium associations, which should be consulted when representing the association. The Rules of Professional Conduct governing lawyers in North Carolina (RPC or "the Rules") are comprehensive and provide guidance in most situations a lawyer may find herself in during representation of an association. While there are only two ethical opinions from the State Bar relating to homeowners association representation, most other Rules and comments to those Rules from the State Bar are applicable to associations to the same extent they are other businesses represented by counsel. Accordingly, they should be consulted frequently by the practitioner representing associations in transactional as well as litigation matters.

§ 18.02. Initial Representation of the Developer

Representing the developer typically involves the preparation and recordation of the association's initial legal documents such as the articles of incorporation, bylaws and declaration. Subsequent annexations of land into the declaration are also generally the province of the developer's counsel.³ Since the developer is the board for all practical purposes during much of the declarant control period, association governance issues are generally minimal in the beginning of the development.⁴ For instance, there are few proxy, ballot or quorum issues where one entity has voting control of the association for all measures that come before the membership or board. As the developer gradually cedes control of the board, however, the developer's counsel begins to take on more of a role of association counsel rather than just the developer's counsel. At this point, more and more corporate governance and voting issues start to arise and member's start to have more of a say in the direction of the association. This is not to say, however, that the developer has carte blanche to do what it wants with the association during the period of declarant control and it is the attorney for the developer that should help the developer to understand this. During declarant control, for example, it is important that the attorney for the developer counsel the developer that it has unique fiduciary duties with respect to the association. As the entity in control of the association, it must exercise such control in a manner that is not likely to cause obvious damage or unnecessary expenses or problems for the association in the future.⁵

§ 18.03. Representation of the Association

§ 18.03.01. In General

Once the transition period is over and power has been substantially transferred to an independent board of directors, the attorney's role is more clear, but no less difficult. Usually, representing the homeowners association or condominium association involves a slightly wider range of activities than representing just the developer. Whereas the developer's counsel is generally focused on setting up the initial legal documents for the association and subsequent annexations, the association's counsel deals with a spectrum of issues that change from year to year based on the composite of the board and membership including interpreting the original legal documents for the community, collecting assessments for the association, enforcing covenants, advising on corporate governance issues such as proxies, quorum requirements and the like and preparing and recording amendments to the association's legal documents. During such representation, however, there are a variety of circumstances that can give rise to conflicts that the attorney should be aware of and attempt to avoid.

For instance, the Rules governing lawyers in North Carolina provide that a lawyer cannot represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if: (a) the representation of one client will be directly adverse to another client, or (b) the representation of one or more clients may be materially limited by the lawyer's responsibilities to another client, a former client or a third person, or by a personal interest of the lawyer.⁶ Concurrent conflicts of interest can arise from the lawyer's responsibilities to another client, a former client or a third person, or from the lawyer's own interests.⁷ In the context of homeowners associations and condominium associations, conflicts of interest can very readily arise in situations involving the developer. Many developers, for example, set up single-asset entities to develop a subdivision or condominium project. When the development is complete, the company is dissolved (usually an LLC). However, many times it is the same owner(s) behind the LLCs that are set up to develop other subdivisions or condominiums. A lawyer generally should not think that just because he has not represented the specific single asset entity vehicle, does not mean that a conflict cannot otherwise exist.

Some courts have held that if the lawyer or law firm has represented any related companies or individuals, this can be sufficient for disqualification purposes. In Board of Managers of Eleventh St. Loftominium Ass'n v. Wabash Loftominium, L.L.C., 376 Ill. App. 3d 185, 876 N.E.2d 65 (2007), for instance, a condominium association filed lawsuits against developers and associated individuals, alleging that they turned over unrepaired common elements and inadequate capital reserves. The plaintiff's attorney moved to a new law firm that actually had represented affiliated individuals and companies associated with the original development entity of the condominium.⁸ The trial court and the appellate court found that disqualification was proper, even though technically the new firm the plaintiff's attorney joined had never represented the LLC in question in the lawsuit. The appellate court found that there was a sufficient connection between the individuals and companies the law firm had represented and the defendant development companies in the present lawsuit:

The record shows that although Arnstein has literally never represented defendant Wabash Loftominium, LLC, defendant Galleria Residential, LLC, or the individual defendants as individuals, Arnstein has been representing corporations that are related to the corporate defendants and are run by substantially the same management group consisting of the individual defendants. The plaintiffs contend the "same management group" exception is not relevant here because "defendants have not even identified any of the officers and directors Wabash, let alone demonstrated that they are the same as those of any other entity." This contention is factually inaccurate, however, as the record demonstrates that all of the individual defendants were and are officers of A.P. Loftominium Consultants, Inc., which is the member-manager of defendant Wabash, and that both corporations are affiliated with Ambelos. Defendant Steven E. Gouletas is president of A.P. Loftominium Consultants, Inc., and vice president of Ambelos. Defendant Anthony R. DiBenedetto is the secretary of A.P. Loftominium Consultants, Inc., and secretary of Ambelos. Defendant James Schwark is treasurer of A.P. Loftominium Consultants, Inc., and treasurer of Ambelos. Defendant Nicholas S. Gouletas is the sole shareholder of Ambelos, and Ambelos indirectly owns 100% of defendant Wabash and A.P. Loftominium. The record also shows Arnstein has represented this management group between 1999 and 2005 in at least 60 different matters, involving the services of 15 billing professionals, and generating $175,388.30 in fees.⁹

Therefore, a lawyer should carefully consider all the main ownership interests of a LLC formed to develop a particular planned community or condominium in deciding whether a conflict may exist in any given circumstance.

In North Carolina, the Rules do not...