Answer: The association begins to unravel these board violations by telling owners the truth. Whether blame will be borne by the association as a whole or by its prior directors individually may have to be determined by an independent third party.
Filing bankruptcy in an effort to discharge association debts, such as those likely to arise from these potential lawsuits, is not permitted. Because associations have a continuous source of funding from homeowner assessments, courts have ruled that associations can file bankruptcy reorganization petitions only under Chapter 11. Under a reorganization plan the association would have to repay some — if not all — of the outstanding debt owed to its homeowners. Titleholders would have to file claims and, if objected to, prove the validity of those claims, but it would cost the association significant funds to file that reorganization petition and defend against those claims.
The present board now has two obligations: to unravel what happened and prevent these circumstances from recurring. It also should determine whether the board was in collusion with the property manager or whether the prior board members acted alone.
If the property manager counseled or approved such acts, firing that property manager is appropriate. If the manager's actions ultimately cost the association money in having to make refunds, consider filing a claim against the manager's insurance policy. If the association's attorneys also advised and approved those acts, they should be reported to the State Bar for counseling violations of law, a breach of their ethical obligations.
There is no choice but to issue refunds immediately. The association should ask the owners involved what the best course of action for repayment would be and work to accomplish that end.
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 firstname.lastname@example.org.