Paying back homeowners who were wrongly charged for repairs

Question: I’m new to the board. In reviewing files and contracts as a director, I’ve found a number of CC&R and bylaw violations committed by recent and current board directors. These illegalities involve association-related plumbing and maintenance repairs that, according to our governing documents, clearly were the association’s obligation to pay. Directors made up their own rules, in concert with the manager, and intentionally forced owners to pay for repairs that were the association’s obligation. Owners are now learning of this trickery. I fear the association will become so inundated with lawsuits and special assessments that we will end up in bankruptcy. How does the association begin to unravel these board violations? If the board is forced to admit past violations, does it send owners apology letters and reimbursement checks?

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.

Regardless of who bears that burden, the current association and/or board has to consider it a duty to reimburse homeowners for charges they never should have paid. Certainly, when owners learn what has been going on, lawsuits are likely to follow. Because those lawsuits would be seeking to enforce the governing documents, it is also likely that the association would have to pay the owners’ attorney fees if it loses.

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 noexit@mindspring.com.