What to do if money is missing from reserve fund

Question: I am the new treasurer of our homeowner association board. I’ve discovered that during the last four years more than $100,000 has been removed from the association’s reserve account to pay for things other than reserve-related items. At the last meeting I informed the board about Civil Code Section 1365.5 and made a motion to repay the $100,000 to the reserves from our operating account. None of the other board directors would second my motion.

I’ve also learned that some board directors have been building up operating account funds for capital improvements without having a special assessment. I think their actions are interfering with replacing the reserve account money.

Are the other directors’ actions a breach of their duties? How do I get the board to comply with the law and return $100,000 to the reserves?

Answer: Returning the $100,000 to the association’s reserve account may be a somewhat cumbersome process, but it is not impossible to accomplish.

A “fiduciary” is a person to whom property or power is entrusted for the benefit of another. In that sense, board directors are fiduciaries and their duties should not be taken lightly, as they are in positions of trust and manage all the association’s finances. Titleholders rely on the board’s integrity and entrust it with their property and money. When board directors use association funds for purposes other than those allowed by law, they all are parties to a breach of their fiduciary duty owed to the titleholders.

Directors who opt or vote for the use of reserve funds for purposes other than those for which the moneys were collected are breaking the law. However, there appears to be no immediately ascertainable penalty for doing so, an oversight the Legislature has yet to rectify. That does not mean the lawbreakers are off the hook. Directors whose personal actions go against the best interests of titleholders may still be subject to prosecution.

One way to try to keep directors accountable is for titleholders to consistently demand production of pertinent association documents, attend every board meeting and speak up during the open forum. If the board continues to evade its responsibilities, you can try to garner support from other owners by raising your association-related issues in a mailer to all titleholders.

If the board doesn’t produce the documents a homeowner seeks, Small Claims Court can provide a remedy. The court must award the homeowner $500 in damages if it finds that the board’s refusal to provide the documents was unreasonable.

Missing funds could be deemed a theft. If you can prove cash is missing, you could consider filing a police report.

Keep trying to obtain a board decision to return the reserve funds in accordance with the law. Failing that internal mandate, a civil lawsuit may be the main avenue to pursue to get your association and the board to comply with the law. Keep track of the whereabouts of your board directors, as it may be necessary to subpoena them as witnesses. If a favorable judgment is obtained, you may be able to recover your attorney’s fees. The board’s failure to comply with that judgment could result in the individual board members’ being held in contempt.

Send questions to Box 10490, Marina del Rey, CA 90295 or e-mail noexit @mindspring.com.