Can a Mgt. Co. be held legally responsible

Our Association has been sued multiple times with one of the issues being the Assocation Board transferring money from reserves to general budget without following the guidelines as set forth in the Davis Sterling Act. The Board and Management Company were advised to discontinue this practice by the owner who sued as an agreement to drop the lawsuits. The owner approached me and informed me our Association Board has done this process again and again failed to follow guidelines of the Davis Sterling Act. This time they transferred almost 20% of the Reserves into General Budget and spent it on property repairs versus paying for the property repairs directly from the reserve account.

In addition to the potential legal issue here for the Board is there any responsbility of the Management Company to inform the Board that it cannot transfer money from reserves to general budget because it violates the Davis Sterling Act guidelines since the Board did not hold any meeting regarding the transfer or notify the stakeholders. See California Civil Code: Civil Code §1365.5 Section C(2)

How would one do this logistically? Our reserve fund is a savings account. Our general budget is a checking account. I cant write checks out of the savings account, so the only way to do it would be to transfer it to the general fund, then write the checks.

Of course I would go through all the other things that need to happen before using reserve funds, but I don't see another way to do it logistically.

I sense that the description of the problem needs some refinement. Transferring funds from the reserve account to pay for repairs is what the BOD is supposed to be doing, since repairs are legitimate reserve expenditures. That doesn't require member approval, typically. But the BOD can't take any action without a meeting, so I'm not clear on how this is happening.

Are you sure you aren't talking about the practice of "borrowing" from the reserves and temporarily transferring those funds to the general operating fund to meet cashflow requirements? That's a different set of conditions with specific reporting requirements, including notifying the homeowners in advance of the meeting at which the BOD intends to decide the issue.

On the subject of the management company's liability, read the small print in the contract. If it's like every one of them that I've read, there's a disclaimer in there somewhere that says they aren't responsible for anything they do or fail to do. However, it's normally the obligation, under the terms of the contract, for the management company to exercise due diligence in making such recommendations to the Association as would customarily be within their field of expertise. And of the Association feels that the management company isn't serving its needs, there are other options out there.

Rob

David,

According to your statement, "This time they transferred almost 20% of the Reserves into General Budget and spent it on property repairs versus paying for the property repairs directly from the reserve account.", they followed the proper procedure. Reserve Accounts are for the repair and/or replacement of assets of the Association.

What California Civil Code: Civil Code §1365.5 Section C(2)speaks to is when an Association takes monies out of the reserve account to pay for the water bill, pool service, landscaping, etc. What the Davis-Stirling Act is saying is that the Board must provide notice of intent and a repayment schedule to the members in Open Session.

That's a good point, Janet. The Association elects a BOD, and the BOD serves the membership by properly maintaining both the physical and administrative infrastructure. The governing documents provide (or should provide) an unambiguous set of guidelines for virtually all decisions the Board needs to make in the performance of its duties. Only occasionally should the BOD need guidance from the homeowners (in the form of a vote), from the Association legal counsel, or from the PM.

The manager (or management company) serves the Association at the direction of the BOD - within reason. I personally feel that a good PM is familiar with the governing documents, keeps abreast of changes in the law as it pertains to the HOA, and is proactive in heading problems off before they become disasters. But ultimately, it is the BOD who are charged with doing the right thing in a timely manner. And to do that requires devoting time to studying the governing documents and the civil code that provides the foundation of common interest developments.

This morning, I decided to read our entire set of documents, from beginning to end, just as a refresher:

Articles of Incorporation
Bylaws
CC&R's
Rules and Regulations
Reserve Study

I can categorically state that there are Board members in my HOA who have never read any of them all the way through. i suspect that it's a pretty common problem, judging from many of the posts here. It leads to chaos.

Rob