Many Associations have just completed their election season and find that a person or persons newly elected to the Board are involved in a case being defended or prosecuted by the Association. Now what? Clearly, a conflict of interest exists but participation in a lawsuit against the Association is not one of the factors that makes you ineligible to sit on the Board. Therefore, the person(s) can take their seat on the Board so long as every other aspect of the election process was valid. The Board however still needs to take measures to ensure that the strategy and legal opinions obtained from counsel on behalf of the Association continue to be privileged. This can be accomplished in a few ways. One option is for the person(s) with the conflict to recuse themselves from participating in any meeting/vote regarding the lawsuit. Their fiduciary duty to the Association would be fulfilled but what if that means there is no quorum of the Board to make a decision? Also, they would have to know of the meeting in order to recuse themselves and this would tip them off that something was up? The better alternative is to have an open Board meeting for the sole purpose of creating a committee of members of the Board who do not have the conflict of interest. This meeting would be open to all members of the Board and the Association. The persons with the conflict should be allowed to vote on the issue and their fiduciary duty should dictate that they vote in favor of such a committee. During this meeting the Board should also vest all powers necessary to allow settlement or resolution through appeal in the committee. Otherwise, if the committee continually had to return to the Board for more authority, the person(s) with the conflict would be able to deduce what was going on and the creation of the committee would be for naught.
If the Association is one in which the majority of the Board makes up the person(s) with the conflict, there will not be enough disinterested Board members to create a committee which could handle the litigation. The option then is to have non-board members partake in the committee. In this instance, the Board should decide how many additional persons are needed. My recommendation would be if you have a 5 person Board with 3 persons having a conflict, that you add 3 additional non-board members to the committee. The most diplomatic way to do this would be to have an open Board meeting for the purpose of the creating the committee but advising on the notice that the Board will seek 3 volunteers to sit on the committee from the non-Board members. During the meeting, the Board would explain the purpose of the committee, the fiduciary duty to the Association and the requirement that the privileges afforded a litigation be preserved despite any friendship with the person(s) having the conflict. For obvious reasons, relatives of the persons with the conflict should not be allowed to sit on the committee. Should only 3 volunteers seek to be part of the committee, nothing else is necessary. Should however more than 3 volunteers seek to be part of the committee, the Board should vote on each one until the 3 spots have been filled. Another option would be to have the members vote on the volunteers.
Please note, if your governing documents provide another procedure for setting up a committee (such as landscaping, architectural, etc.) you may want to follow that procedure all together. Similarly, if the governing documents require that you have a litigation committee, then you need follow that procedure, always ensuring that the person(s) with the conflict do not sit on the committee. Regardless of how this committee is seated, the first thing to do is set a closed meeting with counsel. This will permit the attorney to meet the persons she will be dealing with during the litigation. Additionally, the attorney will be able to explain the duties of the committee as they pertain to the Association in terms of the suit and bring the committee up to speed on what is going on in the case. The attorney will also be able to get an understanding of what the committee wants in terms of resolution (i.e., settlement or trial). One last thing, when creating the committee, it should be clear that the committee is created solely for the purpose of the case at hand and all that goes with it (counterclaims, third party claims, etc.) and that it dissolves immediately once the case is resolved. Again, if your governing documents create a method for dissolving a committee, the Association should follow those procedures.Board MembersConflict of InterestDefendFiduciary DutyGoverning DocumentsPrivilege