Association Leaders — This is One Story You Cannot Afford to Ignore

 

I’ve been really busy the last few days, but did not see anyone in the real estate media world — even bloggers like me — pick up on this extraordinary story:

Three members of the Greater Las Vegas Association of Realtors on Tuesday sued the trade association, its board of directors and its immediate past chief executive, Irene Vogel, alleging misappropriation of funds.

I’m baffled why the real estate media is not all over this story. Inman? RISMedia? AGBeat? Where you guys at?

So um, I guess I’ll take a few minutes to press this here Big Red Button to sound the alarm.

If you are involved with Associations in any official capacity — serve on the Board or as an Executive Officer — this is a story you cannot afford to ignore. Call your general counsel right now. Make sure your D&O insurance coverage is up to date, and consider increasing the limits.

Why?

Look Who’s Suing

Before we get into this, let me make clear a couple of things. First, I have no personal knowledge about the lawsuit or any of the participants. I haven’t read the complaint or the GLVAR’s answer, if any. Second, while I am an attorney, I’m not your attorney, nor do I specialize in Association law. So go call your attorney, who does. This is not legal advice, etc. etc. but a blogger’s perspective on news.

Having said that, if you read the above news report from the Las Vegas Journal Review too quickly, you’ll miss one of the most important parts:

The lawsuit, filed in Clark County District Court, requests that the court order the association to open its audit and employment contracts for inspection by its nearly 11,000 members. Attorney Matthew Callister of Callister & Associates, who along with Mitchell Bisson is representing the three Realtors, said the GLVAR has denied the plaintiffs’ requests to see financial records and audits.

The complaint seeks class action status on behalf of the association’s current and past members, dating back 10 years. The plaintiffs are also seeking damages in excess of $10,000. [Emphasis added]

Two things are interesting here.

First is the identity of the law firm involved in this case: Callister & Associates. I don’t know them, but a routine look at its website makes it pretty clear what kind of a firm it is, starting with the fact that the URL is “neonlawyers.com”.

This video tells me a something about the lead attorney, Matt Callister:

Whatever else you might think of these kinds of plaintiff’s attorneys, Callister strikes me as the kind of media-savvy lawyer who knows how to manipulate public opinion to suit his needs. Plus, he looks a lot like a long-haired Tim Roth.

Second important fact is that the lawsuit is seeking class action status, going back 10 years. o.O

It so happens that Callister & Associates appears to specialize in class action lawsuits. On its website, Callister lists class action suits against Bank of America, against Bravo Pro, and Direct Title.

What does that fact tell us? Well, one thing it tells me is that Callister & Associates probably does not work on retainer. Many of the class action plaintiff’s attorneys take on these kinds of cases on contingency basis, because they can reap significant financial rewards if the case settles or if there is a favorable judgment. Contingency fees can be as high as 40% of the total recovery. There is even a phenomenon of investors backing these kinds of high-risk, high-reward lawsuits, because of the potential for outsized money judgments.

Like many such speculative ventures, litigators who specialize in class action contingency lawsuits have to do a risk-reward analysis. How likely are they to prevail? How large could the damage award be? How expensive could it be to pursue the litigation? How much time would it take before there is either a settlement or a trial and judgment?

For most of these kinds of lawyers, it’s a business decision whether to pursue this kind of litigation or not. Clearly, Callister & Associates has chosen to pursue this one because they think they will make a bundle.

In this case, it looks to me like the three plaintiffs are claiming $10,000 in damages from the “misappropriation of funds”, or about $3,300 each. And they are seeking class action status for every single member of GLVAR over the last ten years. GLVAR has 11,000 members today, but I suspect there were rather more than that during the pre-2007 Bubble Years. If we tentatively say we’re looking at a class of 20,000 plaintiffs, that’s a $66 million lawsuit. If Callister & Associates is looking at 30% contingency fees, they stand to make $20 million if they win it all.

It Gets Worse

Believe it or not, it gets worse from here.

One of the most important strategies for plaintiff’s lawyers is to sue, and then get into discovery to see what else they might be able to dig up. If they find anything problematic while digging through the records of the defendant, emails, board minutes, depositions of witnesses, and so on, they can always amend the complaint to claim additional wrongdoing and more damages.

A key sentence in the article above for me from this standpoint is this: “GLVAR has denied the plaintiffs’ requests to see financial records and audits.”

Well, now that there’s a lawsuit in place, I’m fairly certain that the plaintiffs will seek to have the court issue a subpoena for those records, as well as all emails, communications, minutes of board meetings, etc. etc.

Where things get awfully funky here is that if the plaintiffs and their very savvy class-action lawyers find evidence of board inaction or board malfeasance, each and every board member who has ever served on the GLVAR board for the last ten years is facing the possibility of personal liability.

The American Bar Association has published this document on liability issues for directors of nonprofits. It’s old, but I’m sure your Association’s legal counsel has up to date information on the circumstances under which a director can be held personally liable. You might check out this easy-to-read guide on duties of nonprofit directors.

A couple of paragraphs from that guide:

Keeping informed (and making reasonable inquiries when appropriate) is a key to meeting a director’s duty of care. It may be prudent to consider the following activities
as essential in that endeavor:

  • Regularly attend board meetings.
  • Assure that the directors receive adequate information before taking appropriate board action (e.g., by requesting materials and asking questions).
  • Review the materials provided in connection with board meetings, particularly those used in reference to any contemplated board action.
  • Be familiar with the organization, its legal structure, governing documents (e.g., articles of incorporation, bylaws), exempt purposes (as represented in its governing documents, exemption applications and marketing materials), activities, and key stakeholders (including, but not limited to, staff).
  • Be familiar with general laws applicable to the organization (including those covered in the following Section B).

Exercising independent judgment is another key to meeting a director’s duty of care. Voting with the majority without independent judgment about whether such action is in the corporation’s best interest may be a breach of the duty. Caution must also be given to simply voting with a director who has purported expertise in an area relevant to the decision. While it may be prudent to give such expert’s viewpoint strong weight, a director should consider other views before making an independent decision regarding the board action.

If Callister & Associates can show to the court examples of conflicts of interest (and I’d be worried when board members are often brokers and agents whose dues pay for the Association) or breach of the fiduciary duty of care (the minutes had better show lively discussion by board members), then there is a non-trivial possibility that the court would allow for suits against the individual board members, at least to find out if any of them behaved improperly.

While these are not particularly high bars to clear, the issue with litigation is that (a) you have to hire lawyers to defend you, and (b) you have to have some evidence. Therefore, I sincerely hope that GLVAR has some really good, detailed minutes showing each and every director exercising due care, reviewing documents, and so on.

Götterdämmerung

Finally, what concerns me is what I know about the plaintiff’s bar.

If Callister & Associates wins a significant judgment in the GLVAR case, or in the alternative, they win a substantial settlement, I think that opens the floodgates across the country for other class action plaintiff’s lawyers to smell blood and come running. The local Associations are easy prey, in a sense, since they likely lack the resources to fight well-funded class action law firms. (There are usually limits to D&O liability insurance, after all.)

The only sure way to discourage a feeding frenzy is to defeat the plaintiff’s lawyers, or at the very least, make it very expensive and very time consuming. Because these kinds of lawsuits are business decisions at their core, the Associations have to change the financial calculus in going after them.

That means hiring the best litigation counsel money can buy, and committing to a real legal fight. The X factor in that, of course, is the actual conduct of the executive officers and the board of directors of Associations. If the EO’s and Directors kept good clean records showing procedures for handling any possible conflicts of interest, as well as evidence that each Director took due care in making his decision, and there aren’t any obvious gotcha’s (e.g., some smoking-gun type of email), there’s a good chance to dissuade the class action attorneys from swarming.

But if those records are lacking, or if there’s some documentary evidence of carelessness or a conflict of interest… well… hold on to your hats, cause you’re gonna be going on a ride.

If you have ever served on the board of a local Association, do not, do not, do not ignore what’s going on in Las Vegas. Call the Association’s general counsel and ask if you have any reason to be concerned. Ask about the D&O insurance. Go back through your records of your service on the board and make sure you have solid evidence of your active engagement. Follow legal advice from competent counsel on what you may need to do to protect yourself.

And above all, pray that GLVAR mounts a very strong defense against this lawsuit, and against Callister & Associates. Because in this case, what happens in Vegas will definitely not stay in Vegas.