REAL ESTATE
Q&A

Condo board — and owners — failed their duties by not uncovering alleged embezzlement

Question: Our development has hundreds of condos and an unusually large budget. Our homeowner association was served with a search warrant to review our records and computer data. A forensic audit found evidence of embezzlement by an employee and others. All owners just received notice that a big special assessment has been imposed on each unit and our monthly assessment is being raised by a substantial amount. Was the board negligent? Should insurance cover loss of association funds? Are special assessments and increased monthly dues the only way to handle this situation? What if owners can't afford to pay?

Answer: Assets that this board manages are owned by titleholders and because of that, are included in the board's management of the common interest development.

Negligence is the failure to use such care as a reasonably prudent person would use in similar circumstances. An association board directorship is a position involving "trust;" as such, directors are fiduciaries because they manage other people's assets. Fiduciaries are held to a higher standard of care. As fiduciaries, directors must be prudent in decision-making and understand their actions must minimize titleholder risks and liabilities, not cause harm. Conduct that falls below the standard established by law for the protection of others against unreasonable risk of harm is actionable against the board.

The director's job does not merely consist of conducting monthly board meetings, approving annual budgets, fining homeowners and raising dues. Inherent in every director's position is the duty to oversee and supervise association vendors and employees. This includes diligently overseeing accounts payable and receivable. The board position of treasurer exists for good reason as such supervisory actions are nondelegable. Although not every act of embezzlement or theft is caught, the goal is to minimize unlawful actions that adversely affect titleholders — your board failed that duty.

But for the board's failure to adequately supervise and diligently uncover mismanagement and theft, let alone catch this employee's misconduct, it would not be forced to raise assessments so it can continue to do business.

Substantially raising assessments to this extent places all titleholders at risk, but owners are not without fault. A systematic review of association books and records by every titleholder, or even the denial of requests for documents, may have alerted owners that something was wrong. Owners who sit back and think the board is handling it all have a rude awakening that their "everything's OK" attitude is misplaced. A responsible owner shares the board's responsibilities by acting as a watchdog for association resources and waste. This is accomplished by making regular document demands.

Insurance is not a catchall for the association's ills. Policies are generally written to cover specific property damage or mismanagement, not embezzlement. When owners choose to purchase property in a common interest development, that purchase comes with the understanding that additional assessments may be required to remedy injury to the association.

Although you live in a large development with an unusually large budget, money collected from monthly dues is already spoken for in the budget.

Special assessments typically deal with unexpected costs such as the situation you mention. Owners are mandated to pay special assessments; failure to do so results in liens and foreclosure. Failure to make timely association assessment payments may result in fines and costs related to collections by the board imposed on the titleholder's account. This also leads to liens and foreclosure.

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 or noexit@mindspring.com.

Copyright © 2016, Los Angeles Times
A version of this article appeared in print on March 20, 2016, in the Business section of the Los Angeles Times with the headline "Condo board, owners failed duties - They all should've uncovered alleged theft and now all will have to pay huge special assessment. - ASSOCIATIONS" — Today's paperToday's paper | Subscribe
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