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Can management firm use association's resources for other business?

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Question: Our association's management company is small, and the owner runs it out of his house. The company is a limited liability company. The manager says she does not own the business and has been an independent contractor for five years with the LLC as her only employer. This company has several other association accounts that she manages, none of which have an on-site office like we do.

But this manager does most of the work of operating the LLC and management business out of our association's office/clubhouse. The company is operating its entire business out of our association's office, using our resources, office personnel, equipment, telephones, copy machines, paper, toner, faxes, computers, electricity and conference rooms, all at our association's expense.

It also uses our maintenance people to deliver its purchases, load and unload its vehicles, haul its file boxes in and out of the office, move its furniture — all this when maintenance personnel are getting paid to fix things that need repair around our complex. Because of this massive diversion of our workers' time and energy, the real problems here are unattended.

The company does not pay us any rent or reimburse us for supplies or facilities it uses for its other accounts, and the expense is staggering. When this was brought to our board president's attention at a board meeting, he replied, "We are a family." Owners complain they don't see where their dues money goes. How can owners stop management from ripping us off?

Answer: Through the obvious lack of attention to its actions, and board incompetence, this management company appears to have tapped into the ultimate cash cow. A homeowners association is neither a family nor a charity, it is a business — a business that is solely concerned with the best interest of the association and its titleholders. The president has no unilateral authority to authorize the waste of association resources in subsidizing an outside business. This is a breach of duty as a board director. Titleholders own a fractional interest in their vested property and have the ultimate authority for the use and disposition of association resources.

A limited liability company is authorized by Corporations Code 17701.91 et seq., commonly referred to as the California Revised Uniform Limited Liability Company Act, and serves as a hybrid between standard corporations and partnerships. An LLC also serves to limit liability of the principals when sued.

Regardless of the corporate structure of your management company, as a vendor of the association it must be held to certain standards, not the least of which is the preservation of association resources. In addition to posing a liability to the association, it is a misappropriation of space, property, funds and personnel to allow this management company to operate out of the office/clubhouse without some form of compensation.

It is the duty of the board, as fiduciaries of the association, to work out the best deal for the association for the use of those resources. This deal can take the form of payment from the management company to the association or discounted rates for services that it renders to you. Whoever handles the taxes for the association may have a preference.

While an LLC can serve to shield its owners and investors from personal liability, this structure does not absolve the company or its members from liability for impropriety. It is possible that the reason the company lists the manager as an independent contractor is to avoid paying worker's compensation premiums, which may ultimately lead to liability for the association. Worse, if the association has signed a contract agreeing to indemnify the company and the manager, the liability could be even greater. Employee misclassification can also result in steep penalties, and the more closely tied to the management company the association is, the more likely the board will be involved in any resulting investigation or litigation.

It is extremely important that any deal or agreement with the management company for employment and/or the use of association resources is carefully documented to avoid a perception of legal relation down the line.

Owners target "rip-offs" by putting pressure on the board to do its job by way of performing due diligence on hiring practices, supervision of third party vendors, such as this management company, and paying close attention to expenditures. Directors that do not hold up to such scrutiny must be removed from their board positions and replaced.

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 Donie Vanitzian JD, P.O. Box 10490, Marina del Rey, CA 90295 or noexit@mindspring.com.

Copyright © 2014, Los Angeles Times
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