Q&A: ‘Churn and burn’ schemes can defraud HOAs when boards don’t pay attention

Question: I was finally able to do a walk-through with our association’s gardener after our property manager was let go. I was shocked to learn that several beautiful mature trees were removed from our common areas without approval from the board. He was also systematically replacing flowers and other vegetation, with the turnover of plants throughout the complex reaching a fever pitch that cost us tens of thousands of dollars.

When the gardener was pressed for answers, he said he was directed to do so by the former manager and even threatened to leave if we prevented him from ripping out plants and putting in new ones. Another board director later told me she found out that an individual board member was working with the manager to have the gardener perform the work and was getting a $500 kickback for each tree that was felled. It’s outrageous. Can we be compensated for our trees? Have you ever heard of such graft?

Answer: This may be hard to believe, but this type of graft is so common that it has a name: “churn and burn.” And whether it is conducted by an individual board member, a manager or both plotting together, it typically occurs when the board is not paying attention, allowing theft to occur right under its nose.

The quickest way to stop these needless expenses is for your board directors to do what they were elected to do as fiduciaries — that is, act in good faith and oversee association operations. Practically speaking, the board should have current schedules showing the dates and times for upcoming vendor activities. For the purpose of oversight, at least one director should be present at those scheduled events.

Even though the association has a manager, the board is obligated to provide all its vendors with clear and concise job instructions. Part of those instructions should include the association’s hierarchy of supervision for all employees and vendors. Just like the gardener, the manager should not have taken direction from one board director alone — especially when such instruction may compromise the association’s best interests in keeping irreplaceable mature trees. Vendor work must be approved by the entire board.

If the former manager and board director instructed the gardener to perform the unnecessary work, the gardener may not be personally responsible for the wasted money spent on replanting vegetation and for the felling of trees. Without express procedures providing vendors with detailed job descriptions, the gardener could reasonably rely on any board member’s directions. Of course, this does not exempt the manager and board director from reimbursing the association for the cost of performing unnecessary planting and replanting.

The board needs to question the gardener, former manager and the complicit board director to determine the exact source of this landscaping scheme. Next, the board should make a demand for all of the money wasted on these projects. Once that issue is resolved, discuss the alleged $500 per tree kickback your board director received. If it is true, he must disgorge his ill-gotten gains.

Boards of directors that experience problems as you describe are vulnerable because they are sloppy. And they are wasting the scarce resources of the association, funded by the homeowners. There is no substitute for using common sense and good judgment. The graft stops when the current board admits its mistake, stops the blame game and resolves the problem so it does not happen again.

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.