Management Company Liability

Below is an article that was recently published in the Dallas/ Ft. Worth Community Associations Institute Chapter magazine, Community Contact, Spring, 2014, which addresses potential liability faced by management companies and protection strategies to minimize risk.

Sole Survivor of Manager Island: the Reality of Management Company Liability

By Julie E. Blend, Esq.

When it comes to litigation, most plaintiffs’ attorneys tend to sue anyone and everyone connected to the underlying facts of a lawsuit. This means for community association litigation, the finger is often pointed at the management company. With lawsuits on the rise, property managers should be aware of what lurks in the liability minefield. The following is a general discussion of common claims, and is not intended to cover all possible bases of liability.

Suits by Third Parties

Many third party lawsuits against management companies involve common law tort claims for negligence, gross negligence or fraud. Negligence involves a breach of duty of care that holds the management company to the standard of care that an ordinary manager would exercise. Mere negligence will not support an award of punitive damages, as Texas requires gross negligence, fraud or malice to support such a finding. Defamation claims for libel and slander, harassment, and invasion of privacy are possible claims a manager may face that can support punitive damages. Plaintiffs have obtained large punitive damage awards against community association managers. Just ask the Bevills, a Hawaiian couple that sued the Ke Nani Kai Condominium Association, its resident manager and others, for claims including gross negligence and intentional infliction of emotional distress. The jury returned a verdict of $190,000 in punitive damages against the manager alone, and over $ 3,000,000 combined against the other defendants. Although the appellate court set aside the entire verdict on procedural grounds, a new trial has been scheduled.

Premises liability (negligence) suits are frequently brought against management companies, including slip and falls, dog attacks, and criminal acts.   In Texas, liability is based upon the right to control or maintain the property, and varies depending on the plaintiff’s status as an invitee, licensee, or trespasser. An invitee enters the property with the possessor’s knowledge and for their mutual benefit, and includes owners, tenants, employees, contractors, the mailman, policemen responding to a call, and utility company personnel. An invitee must prove (1) their status as invitee; (2) the defendant was the owner or possessor of the property; (3) a condition of the property posed a reasonable risk of harm; (4) that the defendant knew or should have known of; (5) the defendant failed to both adequately warn of the condition and failed to make the condition safe; and that such failures were a breach of duty of ordinary care that (6) proximately caused injury. A licensee is a person who comes on the property with the consent of the owner or possessor of the property. A licensee can include guests of owners, volunteer firefighters, and off-duty employees. A licensee has the additional burden to prove that the defendant knew of the dangerous condition and the licensee did not know of it, and a trespasser must prove that the defendant acted willfully or with gross negligence.

Many statutes present potential liability for management companies as well. Liability can be based on discrimination laws under the Fair Housing Act, the Civil Rights Act, and similar state statutes. Fair housing is one of the largest exposures to management companies. Protected classes under fair housing laws include race, color, national origin, age, gender, religion, handicap, and familial status. Familial status is one of the most overlooked protected classes. Familial status protection includes families that have children under the age of 18. Recently a management company in Edina, Minnesota paid over $ 40,000 along with the condominium association it managed to settle a HUD investigation of familial status discrimination. Although the association argued that it was age-restricted, fifty-five plus age restrictions are only appropriate if the association has met federal qualifications, such as routinely verifying residents’ ages. Owners must be treated the same and the management company must know what to do when a reasonable modification or accommodation is requested.   For example, if a disability is known or apparent, the owner must not be requested to provide proof of disability. Work with an attorney to assure compliance and avoid statutory damages and penalties.

Last year the 11th Circuit Court of Appeals held that property management companies are exempt from liability under the Federal Fair Debt Collection Practices Act (“FDCPA”) if collection efforts are merely “incidental to a bona fide fiduciary obligation.”   See Harris v. Liberty Community Management, Inc., 728 F.3d 1298 (11th Cir. 2012).   If assessment collection is the primary role of the management company, however, then the exemption would not apply. While Texas falls within the jurisdiction of the 5th Circuit Court of Appeals, the Harris case is persuasive and consistent with other appellate court decisions. The United States Bankruptcy Code does not provide a similar exemption for property managers, who must remain vigilant in avoiding violation of the automatic stay.   Upon filing a bankruptcy petition, debtors are afforded automatic stay protection and all collection efforts must cease. The stay is effective until discharge takes place, dismissal of the bankruptcy proceeding occurs, or unless the bankruptcy court grants a motion to lift the automatic stay with regard to a specific debt. Even though the debtor is required to pay post-petition assessments, avoid liability by consulting an attorney for the best course of action.

Suits by an Association

Although not pleasant to think about, associations have sued their management company. The most common claims asserted by an association include breach of contract and the tort of breach of fiduciary duty. Other possible tort claims include negligence, gross negligence and fraud.   While a breach of contract claim can support an award of attorneys’ fees, a tort claim cannot. An intentional tort claim, however, can support an award of punitive damages, whereas a contract claim cannot. It is possible to allege contract and tort claims in the same lawsuit, in what the law recognizes as “contort.” Courts will look to the source of the duty that gives rise to the injury and the nature of the injury suffered in determining whether a claim is characterized as breach of contract, tort, or both.

A management company generally owes a fiduciary duty to the association it manages and, therefore, can be subject to fiduciary liability. Based upon the language of the management contract, however, the management company might be able to argue that a fiduciary duty does not exist, or that certain fiduciary duties are limited. Texas public policy favors freedom of contract and duties owed by an agent to its principal may be modified by agreement unless the law provides otherwise.   A management company in Tennessee was successful in arguing no fiduciary relationship existed because the parties were merely in an arm’s length business transaction and the management company did not exercise control over the association. See Condominium Management Associates Inc. v. Fairway Village Owner’s Association, 2010 WL 424592 (Tenn. App. 2010). The language of the management agreement is essential to the determination of the existence and scope of the fiduciary duty. In most traditional cases, a fiduciary duty will exist.

Professional negligence claims are becoming more prevalent and management companies are not exempt.   As more states adopt manager license or certification legislation, the standard of professional care expected of management companies will likely become more definitive. Additionally, every state has an unfair business practices statute that can subject management companies to liability for deceptive acts.   The Texas Deceptive Trade Practices Act (“DTPA”) provides for recovery of treble damages and attorneys’ fees. Courts will compare the alleged violation to the language of the statute, which prohibits misrepresentations, deception, causing confusion, and failure to give notice when required. Although the DTPA provides an exemption for professional services that a management company should argue in defense to a claim, it does not apply in all circumstances.

If the association/management company relationship becomes adverse, the best course of action usually is to part ways amicably without litigation. Management companies tempted to sue an association should think through the decision thoroughly before jumping the gun. The adage “the best defense is a good offense” holds true for litigation. Oftentimes plaintiffs forget that the filing of a lawsuit opens the door to counterclaims. Once a counterclaim is on file, the plaintiff no longer has the opportunity to drop the lawsuit on its own decision. The consequence can be a messy, prolonged lawsuit.

Protections: Risk Management, Insurance and Well-Drafted Contracts

A risk management plan is essential to avoiding liability. Management companies should provide managers with thorough knowledge of potential liability exposures.   One of the best protections against liability is written policies and procedures communicated to every employee. For example, employees should have written guidance and training that equips them with knowledge of how to recognize and handle a fair housing issue. CAI offers many educational programs and publications to assist the management company in risk management.

Insurance is an absolute must. It cannot be emphasized enough that the management company needs its own coverage, over and above what is provided by an association’s insurance. The management contract should require the association’s insurance company to add the management company as an additional named insured, and the managing agent rider to the association’s fidelity bond should extend coverage to the management company. Even beyond this, however, the management company needs its own coverage. In addition to an errors and omissions policy, at a minimum the manager should have general liability, crime and employment practices coverage. Consult an insurance expert that specializes in community associations to develop an insurance plan, and understand its exclusions. Most E & O policies contain fraud or malice exclusions. Unless exclusions apply, an E & O policy may cover punitive damages, which Texas law allows in certain contexts. Many states do not allow coverage for punitive damages as against public policy.

A well-drafted contract is also essential for protection of the management company. Three important clauses to reduce liability include an indemnification provision, a limitation of liability provision, and a termination clause. A liquidated damages clause may also act as an incentive to prevent a party’s breach of the agreement, and helpful provisions in reducing costs of potential litigation are a choice of law and venue clause, and a waiver of the right to a jury trial. Describe the services of the manager in detail so there is no room for ambiguity. Always have an attorney review your management contract to ensure its enforceability.

Every management contract should include an indemnification by the association, including an indemnification for negligence.   An indemnity for a party’s own negligence must meet the requirements of the express negligence doctrine, which requires that the indemnity give fair notice to the indemnifying party, and appear conspicuously in the contract. A limitation of liability clause can expressly limit the management company’s exposure to a certain dollar amount that is usually connected to a percentage of the management fee. Courts will uphold a limitation of liability clause that does not violate public policy (when there is not a substantial disparity in bargaining power between the parties). A termination clause that sets forth the length of the term of the contract and the grounds for termination provides a clear exit for both parties. If early termination occurs, a liquidated damages provision will provide protection. Courts will enforce a liquidated damages clause when the injury caused by the prospective breach is incapable or difficult of estimation, and the amount of liquidated damages set forth in the contract is a reasonable forecast of just compensation to the injured party. If the liquidated damages clause does not meet these two requirements, then it is an unenforceable penalty.

Risk management alone, while helpful, is not enough. Neither are insurance or an excellent contract alone enough. These steps must co-exist together to maximize protection for the management company. By taking preventative measures and staying informed of legal trends, management companies can be confident that they are as adequately protected as possible from liability.



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