Q&A Condo board—and owners— failed their duties by
not
uncovering alleged embezzlement
Los Angles Times
By: Donie Vanitzian
20 March 2016
Question:
Our development has hundreds of condos and an unusually large
budget. Our homeowner association was served with a search warrant to
review our records and computer data. A forensic audit found evidence
of embezzlement by an employee and others. All owners just received
notice that a big special assessment has been imposed on each unit and
our monthly assessment is being raised by a substantial amount. Was the
board negligent? Should insurance cover loss of association funds? Are
special assessments and increased monthly dues the only way to handle
this situation? What if owners can't afford to pay?
Answer:
Assets that this board manages are owned by titleholders and
because of that, are included in the board's management of the common
interest development.
Negligence is the failure to use such care as a reasonably prudent
person would use in similar circumstances. An association board
directorship is a position involving "trust;" as such, directors are
fiduciaries because they manage other people's assets. Fiduciaries are
held to a higher standard of care. As fiduciaries, directors must be
prudent in decision-making and understand their actions must minimize
titleholder risks and liabilities, not cause harm. Conduct that falls
below the standard established by law for the protection of others
against unreasonable risk of harm is actionable against the board.
The director's job does not merely consist of conducting monthly board
meetings, approving annual budgets, fining homeowners and raising dues.
Inherent in every director's position is the duty to oversee and
supervise association vendors and employees. This includes diligently
overseeing accounts payable and receivable. The board position of
treasurer exists for good reason as such supervisory actions are
nondelegable. Although not every act of embezzlement or theft is
caught, the goal is to minimize unlawful actions that adversely affect
titleholders — your board failed that duty.
But for the board's failure to adequately supervise and diligently
uncover mismanagement and theft, let alone catch this employee's
misconduct, it would not be forced to raise assessments so it can
continue to do business.
Substantially raising assessments to this extent places all
titleholders at risk, but owners are not without fault. A systematic
review of association books and records by every titleholder, or even
the denial of requests for documents, may have alerted owners that
something was wrong. Owners who sit back and think the board is
handling it all have a rude awakening that their "everything's OK"
attitude is misplaced. A responsible owner shares the board's
responsibilities by acting as a watchdog for association resources and
waste. This is accomplished by making regular document demands.
Insurance is not a catchall for the association's ills. Policies are
generally written to cover specific property damage or mismanagement,
not embezzlement. When owners choose to purchase property in a common
interest development, that purchase comes with the understanding that
additional assessments may be required to remedy injury to the
association.
Although you live in a large development with an unusually large
budget, money collected from monthly dues is already spoken for in the
budget.
Special assessments typically deal with unexpected costs such as the
situation you mention. Owners are mandated to pay special assessments;
failure to do so results in liens and foreclosure. Failure to make
timely association assessment payments may result in fines and costs
related to collections by the board imposed on the titleholder's
account. This also leads to liens and foreclosure.
Zachary Levine, a partner at Wolk
& Levine, a business and
intellectual property law firm, co-wrote this column. Vanitzian is an
arbitrator and mediator.
This is a very tough message for all condo directors and owners. I
don't think one in a hundred directors or one in a thousand owners are
aware that they have an active responsibility to discourage fraud to
protect their investments.
I am certain that this level of "interference" would not be welcome by many condo boards and most property managers.
—editor CondoMadness
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