Q&A: Who will investigate management firm fraud, obstructionist directors?
Question: As new board treasurer, I’ve meticulously read our association’s books and bank statements and found proof of multiple fraudulent transactions. I discovered transactions that never took place at our bank and evidence of embezzlement. This has been going on since we hired the present management company five years ago. There are duplicate checks to vendors. There are reimbursements for duplicate receipts and personal items, groceries, liquor, medications — all purchased on the homeowner association’s credit card that’s meant only for office and maintenance supplies purchases. Three checks each for $20,000 written from our reserve account went straight into the management company owner’s personal bank account. One check for $50,000 written from the reserve account was later deposited in our operating account, then transferred to the owner’s personal bank account. Ten days later the management company settled a lawsuit against it for $50,000.
The company consists of three people: the owner, his wife and an independent contractor as manager. The manager told me that all money collected from our association is first deposited in the owner’s personal bank account, then disbursed to the homeowner association’s account as needed to pay bills. As board director, I took my findings to the bank, which said it can do nothing unless all directors sign off on any action requested. The other directors are obstructionists, completely uncooperative in working with me. They impede and sabotage my document requests from management and the manager, so I took my evidence to the police and city district attorney. Both entities told me to “take it up with the board.” I told them, I AM a director. They said: “We don’t get involved in homeowner association disputes.” Where can I take my evidence to have management and the board investigated?
Answer: Many financial institutions and law enforcement agencies are quick to classify such problems as “civil matters,” which means little or no assistance is available until a lawsuit is filed — sometimes not even then.
Association board directors act as fiduciaries because they handle money belonging to the titleholders. Directors are duty bound to act in good faith and with loyalty to those they serve. This requires directors to act on an informed basis and refrain from obstructing other directors from performing their duties.
As agent for the association and its titleholders, so serious is each director’s duty of loyalty that “most acts by an agent in breach of his fiduciary duties constitutes constructive fraud,” and a “careless misstatement may [also] constitute constructive fraud even though there is no fraudulent intent,” according to Assilzadeh vs. California Federal Bank, an important real estate case from 2000.
Hiring a manager or management company does not absolve directors from their fiduciary duties to the titleholders. Instead, it heightens the board’s duties to manage and supervise these vendors.
Laundering association money through the management company owner’s personal bank account should have been caught early on and stopped.
Urge the other directors to independently investigate your findings and obtain a forensic audit. The manner in which the company has structured the depository scheme may make it difficult to quickly regain control of the association’s finances. The board needs to take control of association bank accounts away from management. Had the board been doing its job, this would not have happened.
Owners are not entirely without responsibility. Business and Professions Code section 11018.1(c) states: “The purchaser of an interest in a common-interest development should contemplate active participation in the affairs of the association. S/he should be willing to serve on the board of directors.… In short, ‘they’ in a common interest development is ‘you.’” Guarding the spending of titleholder money starts by owners making systematic demands to view and copy books, records and invoices, then questioning irregularities and improper expenditures at an open meeting. Afterward, owners should put pressure on lazy directors for answers, demanding logical, verifiable responses. If answers are not forthcoming, owners should pressure directors to take action or face personal liability.
You may have to act unilaterally if the other directors continue to obstruct your efforts and remain uncooperative. Firing management without obtaining all association books, records, computers, computer files, electronic communications and passwords, for example, will cause more problems. For the time being, isolating management from the association’s business while neutralizing their involvement in operations is more practical. Once you regain control of the association’s finances, and your suspicions are verified, initiate an action against management for recovery and damages at the same time they are terminated.
When the allegations are proved, if management is indemnified, notify the carrier of these transgressions and seek a settlement. If necessary, file a civil action against the company and the individual manager for breach of contract, professional negligence, theft and embezzlement. If this matter proceeds to litigation take evidence obtained in discovery to the authorities and again try to initiate a criminal investigation.
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.
