Before you flip open your wallet, ask for invoices

Question: Our board wants more money to pay bills but doesn’t show us invoices. Owners voted and passed a $1,500-per-unit special assessment to cover increased insurance costs, legal expenses, pool hut replacement and a termite maintenance contract. The owners do not know how much each of those items will cost, and there are no itemized bills substantiating the cost for each item. Must owners blindly pay this assessment without substantiation?

Question: Our homeowner association was sued bigtime and our insurance company paid for the association’s defense. Raising legal fees further, some directors voted that only they would liaison with the defense lawyers. Some directors were sued individually. In addition to the insurance attorneys, several more lawyers were hired that only these same directors could access.

A new board wants to collect a $2,000-per-unit special assessment to pay attorneys’ fees, but they aren’t showing us invoices to substantiate the fees, and they’re not showing which directors caused fees to be billed. How can I get the board to be truthful about this special assessment, and shouldn’t the directors who caused the attorney bills pay their attorneys out of their own pockets?

Answer: Lumping a bunch of items together, adding a dollar amount and then slapping a “special-assessment” label on it doesn’t legitimize the assessment. Before voting on an assessment, owners need to demand proof why the money is needed and details as to its application. A special assessment means the money will be used for a specific item and/or specific reason.

In the first question, the board must indicate how much of the $1,500 would be spent on each item and how any overpayments would be returned.

Under Civil Code Section 1366.1, “An association shall not impose or collect an assessment or fee that exceeds the amount necessary to defray the costs for which it is levied.” If the association spends that specially assessed money on other projects or items without titleholder vote, that spending violates the Davis-Stirling Act.

In the second question, it appears there has not yet been a vote by the homeowners approving a $2,000-per-unit special assessment. In the absence of such a vote, a board of directors may unilaterally approve a special assessment predicated on 5% of the current published pro forma budget.

The board must provide the invoices substantiating the $2,000 assessment. Attorney-client retainer agreements and other such invoices, estimates and the checks used to pay them are not privileged and must be disclosed to owners on request pursuant to Civil Code Section 1365.2. Whether the assessment is legitimate, titleholders have the right to review association records to see how the money was spent. Titleholders are not excused from performing their own due diligence and should require the board to substantiate its spending before any special assessment vote.

Improper spending or allocation of association funds can create personal liability on the part of board members for reimbursement to the association. Legal expenses are not generic; they are specific. Neither boards nor directors are absolved from performing their due diligence even during litigation. Those duties include scrutinizing attorney-client retainer agreements, contracts and billings.

They must look for, investigate and reject misapplied charges, double billings and items that are inconsistent with the contract or that are generally questionable.

The board should investigate and reject charges when the individual directors use attorneys for personal needs and then seek reimbursement when such directors incur personal charges paid by the association. Merely because the association is sent an invoice does not mean it should be paid without verifying the charges.

Send questions to P.O. Box 11843, Marina del Rey, CA 90295, or e-mail noexit@mindspring.com.