Q&A Should HOA board sue an ex-director who used association funds for a condo upgrade?
Los Angles Times
By: Donie Vanitzian
01 May 2016
Question:
Our association recently elected a new board of directors and
audited the association's financials. It obtained proof that one of the
former board directors used about $35,000 from association funds to
upgrade her condominium. This director still lives here and does not
deny receiving this money but she absolutely refuses to pay it back,
ignoring all invoices from the board. The association's attorney says
"it isn't worth it to sue this board director to get the association's
money back, the association should just write it off." Is this sound
advice? What can we do about this?
Answer:
This attorney's advice is not sound. Writing off such a
significant debt to the association is foolhardy, especially one
created by a director's breach of fiduciary duty. To do so would set a
very bad precedent. To follow that advice and not recoup the
association's funds would also be a breach of the current board's
obligations to the titleholders.
The board's obligation is to safeguard association assets. This means
pursuing claims against third parties for the benefit of the owners who
fund its operations — even if it means recouping money from a past or
present board director. This does not mean the association must file
lawsuits against every debtor or that every claim is worth the
association's resources to prosecute.
A board's duty is to investigate and pursue available options by making
informed and rational decisions, a duty that cannot be delegated. Those
actions may entail obtaining a forensic accounting or other such
investigations.
start
shopping for another attorney
Depending on the amount owed, there may be a significant cost of
litigation in going after the director, which may or may not be
recovered if the association is the prevailing party. Either way, start
shopping for another attorney. Some attorneys take certain types of
cases on a contingency basis, recovering their fees and costs from the
ultimate recovery. Others may offer reduced fees or hybrid fee
arrangements as a means of gaining an introduction to a new client, but
today, too few perform pro bono representation.
The association's attorney should generate an invoice demanding the
board director reimburse the amount owed and detail consequences for
failing to comply. In addition to an attorney-generated invoice, the
director should be presented with an invoice detailing the amount owed
and due date for payment during a board meeting. This act should be
documented in the minutes. That invoice must also be sent every month
with a detailed accounting indicating the amount owed and interest fees
if applicable.
If the association's covenants, conditions and restrictions allow for
assessments to recover damage to the association, then a special
assessment can be imposed on the director. If she continues to refuse
to make payment or ignores the statements, then the association has the
option of filing a lien on her property and ultimately foreclosing.
criminal
charges
Filing a lawsuit is not the only option available. The board could
initiate a foreclosure proceeding. Or it could seek to have criminal
charges brought against the director, which will not cost the
association anything other than its time. Start by filing a police
report with the proof you have obtained from the audit and other
association documentation.
It is never advisable for the board to not take action to recover lost
or stolen association assets. Even when an attorney recommends against
filing a lawsuit, the board must still make it clear by its actions
that it does not condone wanton mismanagement and theft of its
resources — especially by a director.
Zachary Levine, a partner at Wolk
& Levine, a business and
intellectual property law firm, co-wrote this column. Vanitzian is an
arbitrator and mediator.
You have to hand it to that director. She sure is bold. Staying in a
corporation that she admits she stole from takes a lot of nerve. Yet,
it quite likely that she will get away with it.
The problem is that it will give the present directors, and all that come afterwards, ideas.
—editor CondoMadness
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