Saturday, December 15, 2012

Homeowner suspects board of misusing money and covering up

When titleholders can't get their association board to explain how $600,000 in emergency funds disappeared or how dues are spent, what action can they take?

By Donie Vanitzian

Republished with permission from copyright holders

December 16, 2012

QUESTION: A new board took over five years ago. Our dues have never been so high. Our reserves, operating funds and bank balances have never been so low. Five years ago we had more than $600,000 cash in the bank for emergency funds. Now we have nothing. The board cannot explain where the money went or where it is going. For fiscal year 2012 we're in the hole for at least $155,000. The board president rejects owner requests for independent audits, stating our annual audit suffices.

Our bimonthly newsletters tell owners what a great job the board is doing. They say they're careful about financial records, annual CPA audits and third-party investment companies, claiming all these "checks and balances" are done on behalf of owners. These reports are general in nature and not believable.

Requests for documents are sabotaged by the manager and discouraged by the board. We believe we're being misled and want an independent audit that uncovers any "deceit" in our board for the last five years. How do we stop this abuse of power?

ANSWER: The powers of association boards are often extensive and unchecked. With power comes the potential for abuse, so it is up to the owners to police their boards' actions.

Civil Code section 1710 defines "deceit" as including suggestions, assertions and suppression of facts. False financial reports or statements and the failure to make book entries or post notices are punishable by law.

Under Corporations Code section 8813, "every director or officer of any corporation is guilty of a crime if such director or officer knowingly concurs in making or publishing, either generally or privately, to members or other persons (1) any materially false report or statement as to the financial condition of the corporation, or (2) any willfully or fraudulently exaggerated report, prospectus, account or statement of operations, financial condition or prospects, or (3) any other paper intended to give, and having a tendency to give, a membership in such corporation a greater or lesser value than it really possesses."

Association directors have a duty to supervise, inspect and investigate all deposits of funds including but not limited to accounts payable and receivable. In addition to any existing laws, the covenants, conditions and restrictions (CC&Rs) along with other association-related governing documents, often dictate the type of fiscal steps a board must take and what will be provided to owners.

If the association already has a reserve fund in place, the board should exercise prudent fiscal management in maintaining the integrity of the reserve account, and, if necessary, levy a special assessment to recover the full amount of the expended funds within the time limits required by Civil Code section 1365.5.

Most CC&Rs include a mandate that the board perform an audit of the association's finances on an annual basis, but nothing specifies the quality or truthfulness of such an audit. For many associations, an audit usually means having a CPA review checkbook and bank statements to ensure they balance, but little else.

The Davis-Stirling Act permits titleholders to review association books, records, financial reports and statements.

Management's interference with owner demands to access books and records could result in a lawsuit against the association. All directors owe a duty of due care and good faith to the association and its titleholders. A breach of those duties could mean that director would be liable to the association for negligence in the performance of his official duties.

Titleholders cannot afford to be complacent in protecting their assets. There are more owners than board directors, and owners have a responsibility to oversee the board's actions by demanding to see books and records on a regular basis.

The late Stephen Glassman, an attorney specializing in corporate and business law, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to P.O. Box 10490, Marina del Rey, CA 90295 or

No comments: