Board Fiduciary Responsbility

Started by RobertS31 • 5 replies • 1711 views

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RobertS31 (Delaware)
Posts: 12

Posted:

Our BOD recently made large expenditures on Capital Improvements to the sum of over $8000.00 without attempting to obtain or receive approval from the Homeowners.The money was spent on a well and an irrigation system which is not required nor necessary. We currently have 53 homes in the association with a yearly maintenance dues of $200.00 each totaling $10,600 dollars a year.Our yearly maintenance costs average about $9000.00 yearly for lawn maintenance,utilities,insurance and snow removal.Currently we have approx $4000.00 dollars in a reserve fund for future road maintenance and dry pond sediment removal.Our By-Laws state that our HOA is a Maintenance HOA and the "duties of the board is to provide maintenance".There is a provision in the By-Laws that allows for a special assessment for capital improvements but requires an approval of at least 66.6% of the homeowners to do so.The BOD did not hold a special meeting nor did they communicate with the homeowners regarding this expenditure and defended their action by stating the irrigation system was a maintenance issue not a capital improvement issue and does not require approval.They subsequently sent out a letter to all homeowners requesting an increase in on yearly dues because they felt we were becoming underfunded.My feeling is the BOD failed it's fiduciary responsibility to the homeowners. In Delaware, HOA's are governed by corporate law and I believe what they did is illegal and irresponsible.Do we have any legal recourse to sue the BOD members personally to recoup our miss-spent dues money?

GlenL (Ohio)
Posts: 5,491

Posted:

You can sue anybody for practically anything, winning your case is another matter. You would have to pay for an attorney to file the lawsuit while the HOA or it's insurance would defend the Board, unless deliberate malfeasance on their part is proven. And while you may recoup some of your attorney fees if you should win; so could they and you could end up paying if you loose. You have the burden of proof while they have the business judgment rule on their side.

Business Judgment Rule:

Even though officers and directors are fiduciaries, they can make poor decisions that result in damage or loss, but still avoid personal liability if they performed their duties:

1. In good faith,

2. In a manner which the director believes to be in the best interests of the corporation, and

3. With such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.

Studies show that 5 out of 4 people have problems with fractions

RogerB (Colorado)
Posts: 5,067

Posted:

Robert, when you state "the expenditure on the well and irrigation system was not necessary" I presume that is your opinion and not that of the Board. Otherwise, why would they do it? I would forget about a law suit and support the increase in assessment to increase the underfunded reserves.

RobertS31 (Delaware)
Posts: 12

Posted:

Thanks for your comments.
The Board members who made these expenditures were voted out by over 75% of the homeowners once it was discovered that one of the board members had a conflict of interest in this matter.I won't get into the details describing the conflict but it was determined that he/they profited by their actions. I agree we should not spend whats left of our reserve fund on a law suit we probably can't win, I guess I was just venting and am really looking for advise on how to prevent this from happening again.I'm currently a new member of the newly elected board and would like to insure that this can never happen again. If possible can someone provide me with a legal binding statement or paragraph we can add to our existing By-Laws to restrict future Boards from making large expenditures on Capital Improvements without first obtaining permission from the association members. We currently have a provision in our By-Laws restricting Special Assessments for Capital Improvements unless approved by 67% of the association members but they went around this provision by calling it a maintenance requirement. A special general meeting is scheduled for late September and I am hoping to propose and ratify a By-Law amendment at that time. As far as increasing our budget to replenish our wasted funds, I doubt we can obtain a quorum to increase our yearly assessment because most homeowners are afraid this could happen again.
Thanks again

SusanW1 (Michigan)
Posts: 5,202

Posted:

Some bylaws have an expenditure cap in them, eg. any expenditure over X amount would require HOA approval.

RogerB (Colorado)
Posts: 5,067

Posted:

Robert,
Require the members to ratify the annual operating budget and the annual reserve budget. Require a duly called members meeting for any large expenditure not in an approved budget with approval of 2/3 vote of the members present and voting with a quorum present prior prior to commiting to the expenditure.

Also, require at least 3 bids on major expenditures.

Conflict of Interest-
If any action taken by the Board would financially benefit a director or a member of their family or parents or siblings, that director shall declare a conflict of interest for that issue. The director shall not participate in discussion nor influence other Board members in any manner and shall not vote on that issue. This shall not be construed to invalidate any provision of the Declaration, or other documents that more strictly defines conflicts of interest or contains further limits on participation by a director who may have a conflict of interest. Any conflict entered into in violation of this section shall be void and unenforceable.

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