What Can Be Done If Board Breaks Rules?
QUESTION: Our condominium association has 200 units with pools, tennis courts and other amenities. Our annual budget is about $1,000,000 and we have about $1,000,000 in our reserve funds for future repair and replacement of major components of the complex.
In a recent board election, the campaign was a nasty one. Negative stories about the previous board appeared on the front page of a local newspaper. Owners of multiple units were taken to lunch by the proxy gatherers, and lawsuits were threatened against the opposition.
The new controlling majority, three of the five board members, were elected through a well-organized proxy collection effort. They include an attorney, a wealthy real estate investor and another person who always votes with the attorney and the investor.
After the election, the new board fired the management company that had performed well for five years. The new management company appears to do whatever the majority wants, even though it is in violation of the association’s legal documents or state law.
Your column has warned against many of the actions that the board has taken. For example, reserve funds are being withdrawn with only one board member’s signature and without any board discussion. In the last four months, our reserve funds have been depleted by $100,000 even though no reserve expenditures have been discussed or approved at a board meeting.
Our association’s declaration of covenants, conditions and restrictions (CC&Rs;) requires accrual accounting methods for our financial records. The new management company switched to cash accounting methods and changed the chart of accounts. We are now six months into the contract year and the management company has not been able to produce a single financial report in time for review at the monthly board meeting. They blame the prior management company’s lack of proper records.
Without any board discussion, the law firm that was handling our foreclosure procedures for delinquent assessments has been dismissed. The association now uses a non-judicial procedure for foreclosures.
Please answer the following questions: Does the association’s board have an obligation to comply with the legal documents? Does a manager with the Professional Community Association Manager designation have an obligation to comply with the law? When professional “wheeler-dealers” take control of the board, what can an owner do? What protection is available other than expensive legal action?
ANSWER: The board of directors has almost all of the power and authority in a community association. That is why the election of directors is so important. The owners should be very careful to elect people who are known to be fair, honest, competent and loyal to the common good.
Once elected, the board has an obligation to comply with state laws and enforce the governing documents of the association. Accurate financial records must be supplied to the board so that they can review actual expenditures and income and compare the association’s current financial status with the budget. State law requires that the board review accounting records and bank statements at least every three months. For an association of 200 units, this should be done at each monthly board meeting.
Accrual accounting provides a more complete picture of the association’s finances since it shows accounts payable as soon as the obligation is incurred and income is accounted for as soon as it is billed. Cash accounting, on the other hand, does not take into account any unpaid bills that may be accumulating without the board’s knowledge. In my opinion, accrual accounting is better, especially for a large association such as yours. That is probably why your association’s CC&Rs; require the accrual method. However, some management companies do not provide accrual accounting. These companies say that, as long as the annual review or audit is performed using accrual accounting methods, they are in compliance with the state law.
Board meeting minutes must be kept of any and all important board decisions, especially firing attorneys, changing assessment collection procedures and approving reserve expenditures. If these decisions are being made in between board meetings, California Corporations Code, Section 7211(b), gives specific procedures: “Any action required or permitted to be taken by the board may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the board.” In other words, all board members must not only participate in the decision, they must all agree.
Regarding your manager’s failure to provide timely financial reports, this is a serious problem. The change in management companies should not delay the printing of financial reports. The reports do not have to balance with the prior management company’s records. The new management company starts with the current status of the assessment billings, accounts payable and the current bank balances to prepare their reports.
After a management change, an audit should be conducted by a licensed accountant who is experienced in community association accounting. The audit will clear up any discrepancies in the accounting records.
Your manager’s Professional Community Association Manager (PCAM) designation means that he or she exhibits a professional level of education and experience and that the person has agreed to abide by a professional code of ethics. In my opinion, the manager is causing or allowing the association to be in breach of the law and he or she is in breach of the PCAM professional ethics if financial reports are not being provided on time and reserve funds are being used without proper signatures and without documentation in the board meeting minutes.
The PCAM Code of Professional Ethics requires that the PCAM accept only those contracts that he or she can perform with professional competence. A complete copy of the ethics code can be obtained from your local chapter of the Community Associations Institute. A written complaint about the performance of a PCAM can be sent to Barbara Byrd-Lawler, executive vice president, at the national CAI office, 1630 Duke St., Alexandria, Va. 22314.
California Civil Code, Section 1365.5(b), states that the withdrawal of reserve funds requires two signatures, either two board members should sign or it is permissible to have an officer who is not a member of the board and a board member as the signers. The manager should be aware of this law and, in my opinion, he or she should inform the board in writing if reserve funds are not being handled properly.
In your letter, you have accused some of your board members of being wheeler-dealers, but you and the other owners have elected them and you are the only ones who can remove them from power. Unless there is criminal action, there is no state agency that oversees the operation of community associations after the original developer has completed the project and turned it over to the owners.
You may want to talk with an attorney who specializes in community association law. If the election was unfair, or if you can prove that deception or proxy fraud was involved, you can petition the superior court to review the voting records and possibly the election will be set aside. Your petition must be filed within 11 months of the election.
If a majority of the owners are now displeased with the board, the owners can petition the board for a recall election. I do not recommend board recall because bickering and resentment last a long time after the battle is either won or lost. Even if a board recall is successful, it is almost always detrimental to the association in the long run. You can decide if the board’s illegal action is serious enough to attempt to unseat them.
