Property Managers and the Attorney-Client Privilege: Does your Community Association’s Management Agreement cover Communications with the Association’s Counsel?
A successful community association is often dependent upon a cooperative working relationship between the association’s attorney, the board of directors and the property manager. Many condominium and homeowner association boards are dependent on the property management company to run the day to day affairs of the association. Accordingly, property managers are typically integral to the decision making process that is undertaken by boards in legal matters. The board of directors will frequently want to include the property manager in communications with the association’s legal counsel. However, including the property manager in communications with the association’s attorney can potentially waive the attorney-client privilege if the appropriate precautions are not taken. The author of this article is aware of at least two federal court cases, one in Colorado and one in Michigan, in which courts have held that the attorney-client privilege was waived by including the property manager in communications with the association’s legal counsel as appropriate steps were not taken to maintain the privilege. Accordingly, this article will discuss the proper way to preserve the attorney-client privilege when including the property manager in discussions with the community association’s legal counsel.
What is the attorney-client privilege?
Unless modified by statute in a particular jurisdiction, the common law attorney-client privilege keeps communications made by a client to the attorney acting as a legal adviser and made for the purpose of obtaining legal advice confidential, unless waived by the client. See e.g. Taylor v Blue Cross/Blue Shield of Michigan, 205 Mich App 644, 654, 517 NW2d 864, 870 (1994). The client is the holder of the privilege and has the authority to waive the attorney-client privilege. The voluntary disclosure of confidential communications between an attorney and client to a third party would waive the attorney-client privilege.
In the context of a nonprofit corporation, such as a community association, complex issues often arise as to who constitutes a “third party” for the purposes of waiving the attorney client privilege. Some states still subscribe to the “control group” test. Under the control group test, the attorney client privilege only attaches to communications between the community association’s counsel and the “control group”, which is arguably only composed of the association’s directors and officers. See Fassihi v Sommers, Schwartz, 107 Mich App 509, 518; 309 NW2d 645 (1981). However, many jurisdictions have abandoned the “control group” test and adopted an “agency test” in holding that the privilege extends beyond the “control group” to communications between legal counsel and all agents or employees of the corporation that are authorized to act or speak for the corporation regarding the subject matter of the communication. See Hubka v Pennfield Tp, 197 Mich App 117 494 N.W.2d 800, 802 (1992). With respect to claims involving matters under the jurisdiction of federal courts, federal law controls the manner in which the attorney-client privilege can be waived. Federal Courts have held that a community association must make a detailed factual showing that the property manager is the functional equivalent of an employee and that the information sought from the manager would be subject to the attorney-client privilege if the property manager was an employee, before the attorney-client privilege will be extended to non-employees, such as a property manager. Horton v US, 204 FRD 670, 672 (D.Colo.,2002).
How can the attorney-client privilege be preserved?
In Horton v US, 204 FRD 670, 672 (D.Colo.,2002) and in Benkovich v Washington Park Village Condominium Association, Case No. 09-11767 (Eastern District of Michigan Opinion, 12/9/10), the court held that a property manager was a third party to communications and that the inclusion of the property manager in communications that were subject to the attorney-client privilege waived the privilege. In both cases, the court analyzed the management agreement in determining whether the property manager was the “functional equivalent” of an employee. Both district courts concluded that nothing in the management agreement provided authority to the management company to manage or participate in litigation on behalf of the association. Accordingly, the lesson to be learned is that the association’s management agreement should delineate whether the property manager can be included in privileged communications and participate in the association’s legal matters. Specifically, the management agreement should address the following issues:
- Identifying whether the property manager is part of the association’s control group. This is especially important in states that still use the “control group” test.
- Identifying the common types of legal matters that the management company is allowed to participate in, the extent of the management company’s participation in legal matters and whether the management company has any authority to speak or act on behalf of the association in legal matters.
- A provision indicating that the management company must maintain the attorney-client privilege unless the association provides authority to waive the privilege or a court orders disclosure.
While it is possible that state courts using the “control group” or “agency test” may not rely solely on the management agreement in determining whether the management company can be included in privileged discussions, it is clear that in federal court the contents of the management agreement will likely strongly influence a court’s decision as to whether or not a management company can be included in privileged communications between a community association and its attorney. Accordingly, a well drafted management contract is the best way to ensure that the attorney-client privilege is maintained if the association desires to include the management company in communications with counsel.
Kevin Hirzel is a Partner at Cummings, McClorey, Davis & Acho, P.L.C. and runs the community association practice group. He frequently represents Builders, Community Associations, Condominium Associations, Cooperatives, Co-Owners, Developers, Homeowner Associations, Investors, Property Owners and Property Managers throughout the State of Michigan. Cummings, McClorey, Davis & Acho, P.L.C. has Michigan offices in Clinton Township, Grand Rapids, Livonia and Traverse City. Mr. Hirzel can be contacted at (734) 261-2400 or firstname.lastname@example.org. Please view The Michigan Community Association Law Blog at http://www.micondolaw.com for additional resources on Michigan Community Association Law.