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Homeowners won't help director stand up to board corruption

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Question: A majority of homeowners were instrumental in getting me elected to the board in order to correct problems created by management and certain directors. Determined to change things, these owners were going to meetings, voicing their opinions and complaints right up to the night I got elected. After my election, none of these owners attended board meetings anymore.

On close inspection of books and records there's been indescribable waste, fraud and corruption with ongoing directors complicit with management. I have no power, no vote but my own. One director is not enough to clean up this nightmare. I'm up against a very arrogant, out-of-control management company and four complicit directors. Owners tell me, "Thank goodness you're on the board," but nothing I say makes them show up and support me.

Alone, I can't stop management from wasting association money on their personal agendas, diverting association funds for their personal use, giving away association property, intentionally creating problems for homeowners or from contriving false accounting to cover unauthorized expenditures. What can I do to wake up these homeowners?

Answer: When owners finally grasp that they are funding these illicit activities, and their assets are at risk, they may be motivated to attend board meetings.

Management companies are independent contractors that work for the association, and the board owes a duty to the owners to adequately supervise vendors, employees and all entities that work for it, including management, according to Corporations Code section 7231(a).

Like any third-party vendor, the management company answers to the board of directors responsible for hiring it. If a company is performing poorly or, worse, committing fraud and mismanaging association operations, the company should be terminated and potentially pursued for reimbursement of any funds that were handled improperly. While litigation may not be required, under Civil Code section 1368.3, the association is empowered to enforce its rights and to protect the owners.

Under Corporations Code section 8215, any directors, employees or agents of a corporation who make false or deceptive entries in corporate records are liable for all damages that result.

Depending on the gravity of the corruption, a lawsuit against management and the four directors may be appropriate. If the association has a written agreement with management, the statute of limitations could run four years from discovery of the prohibited behavior. Unlike a written contract, oral contracts only have two-year statutes of limitations. So if there is no written agreement, the time frame to take official action is much shorter.

Once the other directors realize that owners are aware of their activities, including the failure to discipline management, directors could be at a significant risk for personal liability to the owners for a breach of their obligations to the association.

Explain to owners that the board's failure to take appropriate action requires voting four directors off the board. If owners fail to take action against the board, consider filing a complaint against the directors for mismanagement and breach of duties. Under Corporations Code section 8216, any member, director or officer of an association that is not complying with proper record-keeping requirements can also make a complaint to the attorney general. In response, the attorney general may send a notice of complaint to the association and, if the association's answer is not satisfactory, or there is no answer, the attorney general may bring suit against the association on behalf of the state.

Zachary Levine, partner at Wolk & Levine, a business and intellectual property law firm, 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.

Copyright © 2014, Los Angeles Times
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