Misused HOA funds

Marcia

You said the developer. Is your HOA under declarant control?

The HOA is self-managed as of 9.17.11 when the president was appointed by the developer. The items in question happened after 9.17.11.

I agree about the commingling of funds. The whole bookkeeping system is fuzzy math. He couuld not produce deposit slips for me when I asked about so-called advances that he made to the HOA.

Marcia:

Even though the association is under the developer's control, the directors and officers still have a fiduciary duty to the association and its members. The question is does either of the above breach that duty?

Payment of association funds to the president's own company is certainly suspicious and cause for further investigation. What did the president's company provide, was it a normal and necessary expense for the association, and was the amount of the expense reasonable for what was provided? Without answers to those basic questions you cannot know whether there was an actual breach of duty.

Using the association funds to pay rent for a resident manager is, unfortunately, within the realm of actions that the association may take. While most of us would not hire a resident manager for an eight-unit condo complex with unsold units, the board may lawfully do so. Under the business judgment rule the courts will not generally interfere with a lawful decision -- even a really bad or really stupid decision -- of a corporation.

The one concern that you could raise is whether the HOA is filing the appropriate tax forms for the resident property manager. You should note, however, that housing for a resident manager is not considered income to the manager.

Upon further thought, though: If the resident manager is performing no work, as evidenced by lack of a paycheck, it may be a breach of fiduciary duty to pay his rent. You may have some problem investigating this as the association can legally withhold employee records, including their compensation.

The so-called president showed me a document that the developer signed saying that he appointed him as president. I question the validity of the document. Not one of the other unit owners were told about this or given a copy back in Oct. 2011. The wierd thing is that we had a developer that I will call Joe. Then the investor who bought all of the properties from Joe is Bob. The document the president showed me was signed by Joe - the developer, not Bob who bought all of the units.

The monies paid to the president's company were supposedly used to pay for the sanding down of his wooden gargage door to be prepped for revarnishing. The monies paid to him from our HOA account were a few days after he was appointed president. To this day - his garage door has never been revarnished and it sits as an eyesore. No other unit owner's garage was sanded down nor was it made available to them.

The monies paid out to his buddy and the supposed property manager were paid to a property where the man was living. I can tell you that no other owner could verify any work this guy did. When I asked to see the selection process and where his buddy was approved by a homeowner's vote, he could not produce anything, but he paid out $1,500 to this guy. No documents were filed for taxes, etc. for him.

The books are cooked. There is no doubt about. My husband said that to him and he just looked at us.

Marcia:

Paying to sand down the garage door from HOA funds is a tough call. If the CC&R's mandate that garage door finishing is an HOA responsibility then your president could make a viable argument that it was a necessary and normal expense.

If HOA funds were used to pay rent for a so-called manager to live off-site, that would be a highly unusual use of HOA funds and most likely a breach of fiduciary duty. The assessments you and the other owners pay are not the personal property of the president or board members. You will likely have to file a lawsuit to get your hands on all the documentation for the money paid to or for the president's buddy as personnel records do not have to be disclosed.

Since you believe that the president's friend is receiving compensation and no tax information is being filed, I would suggest "dropping a dime" and file a complaint with both the IRS and AZ Dept of Revenue.

You are referring to the exclusion where: 1) The housing is provided on the business premises (the employee's place of work); 2) The housing must be provided for the convenience of the employer, and 3) The housing must be a condition of employment. In other words, if the employee has a choice of living on premises or elsewhere, the exclusion does not apply. From the description of your previous employment it sounds like this may have been true in your case. It's not clear to me that this is true in the present case.

As a side note, now that tax season is over, one of my present tasks is reviewing tax returns of people where there is a disagreement between the individual and the IRS about whether or not certain forms of "income" should have been reported.

Could "other members" mean other board members?

Yes.

While Arizona condo association law requires that board meetings be open to the members any time they meet, the board may meet without notice at any time while still under declarant control. This allows the developer/declarant/investor to control the board, meet without notice, and appoint officers. Until control of the association passes to the owners there is not much you may be able to do.

You did raise a new issue that you need to research. When the investor purchased all eight condos, did the developer assign his declarant's rights to the investor?

This is important because normally the developer remains in control until a certain number/percentage of units are sold. In this case, 100% of the units were sold to one buyer. If the declarant's rights were not also transferred to the investor, then the declarant's rights to run the association were terminated. Even though the investor owned a majority of the units for a time, he cannot ignore the requirements for elections and open meetings if he does not hold the declarant's rights.

Go on to the Maricopa County Recorder's website and start searching using the name of the condos, the developer's name (both personal and business), and the investor's name. You need to look for a document with a title something like "Assignment of Declaration" or "Assignment of Declarant's Rights."

The fact that all 8 units were sold may change everything.

This sounds to me like you are still under developer control, or control may have been transferred to an investor as Larry has pointed out. The key is your statement that the the developer appointed the president. When the homeowners are in control, the president, at least indirectly, is appointed by the homeowners. By that I mean it is the homeowners who elect the board, and the board members, who represent the homeowners, elects (or appoints) the president. This does not appear to be what has happened in your case as you have described it.

Larry ~ I looked on the Maricopa County Recorder's website and cannot find anything from the developer to the investor to the president that looks like an assignment of declaration or assgnment of declarant's rights. I opened a lot of documents and saw nothing.

Do you or does anyone know how I should approach the developer, investor, president and board member about the illegal activity with the monies? I've had some people tell me to call the sheriff's office - but, how do I prove that there is criminal activity?

Should I send an email and in hard copy to these individuals alerting them to the fact that they have broken the law and that they need to make restitution?

Thanks!

Arizona law places no limits on how often you may request to see the books but it would seem that at some point it would become excessive and harassment. I have no idea where that point would be.

Aha..another pesrson "looking" to not pay their obligations based on some esoteric reasoning...just what we need more of.

Pay now....dispute later...collect damgaes if correct.

Marcia

Sorry you see it that way.

Not paying ones dues is putting the whole association in jeopardy. Not paying dues is like cutting ones nose off to spite ones face. There are other ways to correct wrongs.

Marcia,

John's point is more practical than you may realize.

Suppose you do decide to withhold your dues and later sue the HOA. The problem is your suit is likely to be dismissed if you can't prove how you were harmed. If you haven't paid any money, you're not out any money, therefore you have not been harmed.

If you pay your dues and later sue claiming your dues have been misused, you have a better chance of winning. Also, the greater the amount lost, the greater the chances for recovery. Your chances of winning a lawsuit improve if you've done everything you are obligated to.

As they say, two wrongs don't make a right.

Verifying how the money is spent is a good thing.

I don't know if this was written to stress that you wanted accountability or that you were threatening to withhold assessments until there was accountability.

When members withhold assessments, the reason why will unlikely ever be considered if it's taken to court. This is because the member has a contractual agreement (the CC&Rs) to pay the Assessments and in return the Association agrees to maintain the commons and perhaps provide specific services. Since the Association will likely continue to maintain the commons and provide the services, a court would see someone who withheld assessment payments as the one's being in breach of the contract.