Q&A: Managers can prepare HOA budgets but the buck stops with the board

QUESTION: My neighbor, who’s a board member, recently handed me a copy of a solicitation letter from an HOA trade group given to him at a management conference.

The letter encourages managers responsible for drafting association operating budgets to include donations to the group as an “incidental” educational expense of just several dollars per unit. It also encourages association managers to be persistent and to use board meetings to promote its group’s agenda.

My neighbor explained that because the line-item budgeted per unit is nominal, he and the other directors just gloss over it and approve the spending plan as presented. He said the board rarely investigates any budget items because they trust the manager’s word that the numbers are appropriate. But he also noted that once the donation is applied to each homeowner the total figure is substantial.

Owners I spoke to about this do not want any part of our operating money going to a lobbying group. It looks to me that management is intentionally interfering with the board’s business by injecting its trade group’s cause into my association’s budget!

Is this ethical and how do owners stop it?

ANSWER: It’s unethical for the manager to take any action that benefits themselves or their interests, especially at a cost to the association. In carrying out their responsibilities and advising the board, managers have a duty to act in good faith. As managers are in a position of trust, they must refrain from trying to slip anything past directors, let alone misrepresent a budget line-item for lobbying as an “educational” expense.

Indeed, managers are specifically allowed to prepare budgets under Corporations Code 7210 unless the association’s governing documents have more stringent requirements and prevent the board from delegating that task. However, the association board retains liability for the end result. This applies even if the board brings in a specialist, such as a certified public accountant.

Some, but not all, statutory fiduciary duties for board directors are spelled out in Civil Code section 5500. On at least a quarterly basis, the board shall review:

* a current reconciliation of the association’s operating and reserve accounts

* the current year’s actual reserve revenues and expenses compared to the current year’s budget

* the latest account statements prepared by the financial institutions where the association has its operating and reserve accounts

* an income and expense statement for the association’s operating and reserve accounts

Civil Code section 5305 also requires that a CPA reviews the association’s finances if its gross income exceeds $75,000.

Although courts often give deference to board decisions, it is generally improper to use association resources for any activity or purpose that does not directly benefit the titleholders. When the board fails to supervise a manager and allows waste and misuse of association funds, it is a breach of trust and the duties imposed on board directors by virtue of their elected positions.

For the board to defend itself from a manager improperly diverting association funds, it must prove that it complied with the statutory mandate under Civil Code section 5500, acted reasonably under the circumstances and consistently paid attention to association finances while properly supervising the manager’s actions.

Directors should waste no time in requesting an independent audit of its budget and financial records as part of its due diligence in investigating the manager’s potential misconduct — whether or not governing documents explicitly call for an audit in such circumstances.

Titleholders also should take part in protecting their assets by requesting and reviewing the budget, expenditures, documents and records on a regular basis. If something doesn’t add up, then it is up to the owners to raise the alarm with the board.

Whether or not the board decides an audit is warranted, it appears the manager should be terminated and the management company should compensate the association.

Zachary Levine, a partner at Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian, JD, P.O. Box 10490, Marina del Rey, CA 90295 ornoexit@mindspring.com