Ignoring Accountant and Legal Advice

Started by RebeccaB3 • 23 replies • 1945 views

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RebeccaB3 (South Carolina)
Posts: 16

Posted:

Good morning,

I have been a board member for 2 years in my HOA which became member controlled in 2008. I am the Treasurer and there are 6 additional board members.

One board member has a clear conflict of interest. I'll call him "Joe" for purposes of this posting. Joe is the Declarant with 29 undeveloped lots, the builder for all homes in the community and an owner as an individual of 1 lot. Last year when preparing our 2011 compilation report, the Accountant identified serious issues with conflict of interest, assessments for lots that had been transferred/sold several times for which the Declarant was claiming an exemption from paying dues and with improper transfers of property, among other things. The Accountant required a legal opinion which the board refused (I was a dissenting vote). I became the Treasurer in 2013 and have been working with the Accountant on 2012 reports. The same issues are in play as we try to get our 2012 compilation report completed. The majority of the board (again I dissent) wants to ignore the issue and get a new Accountant. They don't understand that the same issue will be there regardless of the accountant.

I was not comfortable with this decision and went to the HOA attorney and asked him to prepare a fee estimate to address this issue. When I took his preliminary advice and fee estimate to the board for approval, I was again voted down and the information from the attorney was shared with Joe against my advice and now our attorney has terminated his representation of our HOA because of the failure to follow his advice.

I believe I need to resign from the board; however, I feel that without my presence on the board, the situation will continue to be "swept under the rug" and the community will suffer. It feels like the proverbial "between a rock and a hard place."

What can I do to protect myself from liability in this situation? I do not want to be held liable for the actions of the other board members when I so strongly disagree with the path they are taking. Is it acceptable for me to present this to the entire membership so they are aware? Any and all advice is welcomed.

Thank you.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Do not take this the wrong way, but you had no rights to go to the lawyer without board approval to do so. I don't think the board is trying to sweep this under the rug. Simply it cost money to get legal advice all of which comes out of the HOA budget. Constantly consulting a lawyer on every little thing can nickel and dime a HOA to bankruptsy.

From what you are posting about the situation is that the original developer/HOA member still has some unsold lots available. They are not paying dues on those lots. Which can happen and does not mean conflict of interest. It does not sound like he/she is voting NOT to have them pay the dues. That would be a conflict. However, due to some math/taxes/laws I am not clear 100% about, the developer can get away with not paying the dues on unsold lots depending on the situation. We have an excellent Tax guy here that can delve more into those details if he decides to post.

I think your expectations exceed your reality. The board has to decide to go seek legal advice since it comes out of everyone's pocket. The vote they are making is to not pursue this expense. That is within their right to do and maybe they understand it may not be needed. Not all decisions have to be lawyer syphoned... This one may be one of those situations if you understand it.

Former HOA President

JonD1
Posts: 2,350

Posted:

Just what was the lawyer's advice that the Board decided not to follow?

And I have to wonder leading up to the vote what explanation or resoning did the other majoriy of Board members give to explain their positions?

Leaving the Board might be the worst move.

JohnC46 (South Carolina)
Posts: 14,265

Posted:

In the two SC HOA's I have been a member of, the Declarant did not have to pay HOA dues on undeveloped/platted lots. Dues commenced when a home was built and sold (closed on).

In one HOA the declarant did sell some lots to a developer. Our BOD saw a potential to collect dues. Our attorney said a case might could be made ($$$$$$$) as the new person was not the original Declarant. Our attorney made a few calls and got back to us. He said the new developer would not pay and was ready to legally fight the issue. We decided that since the homes would be built and sold within 6 months that potential legal cost could outweigh the collected dues. We dropped the idea.

RebeccaB3 (South Carolina)
Posts: 16

Posted:

To clarify, no legal costs were incurred as this was a request for a fee proposal and the attorney offered the advice with his proposal. I don't think this overstepped bounds as it was something the Accountant requested to do our financials. Basically, the Accountant said no legal opinion so I will not do your reports.

The lots in question have been sold and then reacquired several times. Of the 29 lots, 17 were sold and then later reacquired by the Declarant. This is where the issue of paying dues comes in. Also, "Joe" has been a board member since 2008 and has voted on budgets, expenses and many other issues where he should have recused himself because of a conflict of interest.

RebeccaB3 (South Carolina)
Posts: 16

Posted:

Here are a few of the issues identified by the attorney:

Usually, covenant provisions provide that once lots are sold by a developer that rights granted or reserved to the developer cease. I believe it highly unlikely that the covenants will support Joe's position, that by "re- acquiring" title to certain lots that such would permit the Developer to be exempt from dues payments.

I do completely agree with your accountant in one regard, though, which is that if the Board were to continue on the path as it previously was on and simply write off the assessments w/o obtaining a legal opinion that liability could flow from that decision.

Regarding the conflict of interest issue, every board member owes a duty of loyalty to the corporation. Thus, anytime a developer appointed board member makes a decision which results in a financial benefit to the developer to the detriment of the corporation, such board member breaches his fiduciary duty to the corporation. Your Board must be certain that Joe properly recused himself from every financial decision made by the Board where his company was involved. Be certain, though and be advised that there have been a # of case decisions across the country which have held developer appointed board members personally liable for decisions made regarding the developer's responsibility for payment of assessments.

In short, I believe your accountant's advise was prudent. To properly discharge your fiduciary responsibilities the Board should engage legal counsel and obtain a legal opinion as to the Association's legal rights regarding these multi faceted covenant issues.

SteveM9 (Massachusetts)
Posts: 3,699

Posted:

Quote:

Posted By MelissaP1 on 09/12/2013 6:14 AM
Do not take this the wrong way, but you had no rights to go to the lawyer without board approval to do so.

If the individual is willing to pay, or its a free estimate, she is within her right to do whatever she wants. Its a free country.

That said..... Typically people pay reduced dues or do not pay dues on undeveloped lots no matter who the owner is. As they are using no services nor roads, etc.

Resigning will be the worst thing you can do. You as a homeowner will have to live with every bad decision they make without input and sometimes not even knowing what is going on.

SteveM9 (Massachusetts)
Posts: 3,699

Posted:

Quote:

Regarding the conflict of interest issue, every board member owes a duty of loyalty to the corporation. Thus, anytime a developer appointed board member makes a decision which results in a financial benefit to the developer to the detriment of the corporation, such board member breaches his fiduciary duty to the corporation.

Wouldn't completing the development be in the interest of the association?
Has it been turned over to the association or is it still under developer control?

MelissaP1 (Alabama)
Posts: 13,836

Posted:

To clarify... You can go to an attorney on your own dime and time. You can not when it involves the HOA attorney. The HOA attorney is NOT for individuals of the HOA. they represent ALL the members of the HOA. That is done through the board who decides to ask and pay for advice. The money of which comes out of ALL the pockets of the owners.

Hence, why the board has to agree to seek legal advice before a rogue board or individual does.

I do not see the conflict nor the issue of unsold lots. The change of hands can be typical if the developer is a LLC. It is not worth pursuing, suing, or quiting over.

Former HOA President

RebeccaB3 (South Carolina)
Posts: 16

Posted:

To SteveM9: our By Laws treat everyone equally regardless of whether the lot is developed or undeveloped.

To JohnC46: Our By Laws state that once control is given to the members which occurred in 2008, the developer can choose to pay assessments by cash, funding a budget deficit or by "in-kind" services. The issue is that the developer worked to ensure that there was no budget deficit and did not contribute cash or in-kind services. That is the issue that raises breach of fiduciary duty.

The issue is not whether we will sue the developer for $$ but rather whether the board could be liable for breaching its fiduciary responsibility to obtain professional legal advice. Once we receive that advice, we can choose a course of action which may be to do nothing. Both our Accountant and our Attorney feel that there has been a breach of fiduciary duty. Is it right to ignore that advice?

KevinK7 (Florida)
Posts: 1,343

Posted:

I think it would incorrect to label these properties declarent owned because they happened to re-acquire them. Once those properties changed hands they ceased the protections once held under the developer and are now properties that just happen to be owned by the developer instead.

The developer bought back into the neighborhood meaning they then became subject to those very documents they created.

It is like stocks. Imagine owning a private stock in a different class before going public and then selling before the IPO. If you choose to buy stocks afterwards your stocks will be just like anyone elses.

I say make the developer pay and push this. Those are a lot of lots to exempt and you are setting up a horrible precedent. What if the developer took control of more? The other residents would be screwed.

DaveD3 (Michigan)
Posts: 796

Posted:

Quote:

Posted By RebeccaB3 on 09/12/2013 7:55 AM
To SteveM9: our By Laws treat everyone equally regardless of whether the lot is developed or undeveloped.

To JohnC46: Our By Laws state that once control is given to the members which occurred in 2008, the developer can choose to pay assessments by cash, funding a budget deficit or by "in-kind" services. The issue is that the developer worked to ensure that there was no budget deficit and did not contribute cash or in-kind services. That is the issue that raises breach of fiduciary duty.

The issue is not whether we will sue the developer for $$ but rather whether the board could be liable for breaching its fiduciary responsibility to obtain professional legal advice. Once we receive that advice, we can choose a course of action which may be to do nothing. Both our Accountant and our Attorney feel that there has been a breach of fiduciary duty. Is it right to ignore that advice?

I'm not sure if you have 29 lots total, or if Joe owns 29 lots at the present time. But I don't think it matters.
You are not declarant controlled, so Joe needs to pay up. Simple.

How is it that Joe is even on the board at the present time? I assume he cast all of his votes (as a member, not a declarant) in his favor in order to get himself elected?

In your shoes, I would quite-frankly go behind the board's back and advise the general membership of the financial irregularities.

Are there enough other units to successfully recall the current board?

MatthewW4 (Arizona)
Posts: 500

Posted:

Quote:

Posted By DaveD3 on 09/13/2013 8:13 AM

In your shoes, I would quite-frankly go behind the board's back and advise the general membership of the financial irregularities.

I agree. You need to get the information out to the homeowners and let them know what is going on. Right now they are financing Joe's misadventure in real estate development; they are paying more because Joe is paying nothing. Mail fliers or hand them out door-to-door, but keep the members informed. BTW, you owe no alligience to the other board members; your duty is to the homeowners.

Resigning is a big mistake. Those who are left on the board will then have the ability to appoint someone to fill your position. Who are they going to appoint? Someone who thinks like you or someone who thinks like them?

CarolR11 (Colorado)
Posts: 2,563

Posted:

I agree with Dave & Matthew, Rebecca. You need to go to the membership if the Board will not accept the advice of experts. I also agree with Jon: don't resign.

And, again with Jon, what reasons did other directors give for not pursuing this matter? If you haven't already, get yourself on record in the minutes as disagreeing with the board.

JM10 (California)
Posts: 503

Posted:

Quote:

Posted By CarolR11 on 09/14/2013 5:12 PM
I agree with Dave & Matthew, Rebecca. You need to go to the membership if the Board will not accept the advice of experts. I also agree with Jon: don't resign.

And, again with Jon, what reasons did other directors give for not pursuing this matter? If you haven't already, get yourself on record in the minutes as disagreeing with the board.

Hi,

We left our HOA over the issue of legal liability.

Your question was how to protect yourself. I agree with CarolR11. I recommend that you be absolutely sure to have minutes that record your dissenting vote--that includes in closed sessions with the issue identified. If you need to see how to do that for executive sessions, then check out school board or city council meeting minutes. Usually in a closed session, the board lists the legal issue (exact code and in your case that would be civil code and/or CC&R) and the vote. The names of the directors who voted for and the names of the directors who voted against.

Establishing a voting record is how we know who represents our best interests and is for that reason an important part of any meeting minutes.

If you dissenting vote is not listed in the minutes, you need to write a business letter and address it to the board detailing the vote, issue.

The board is not totally covered. If directors are negligent or show willful misconduct (such as breaking state laws), then they can be held personally and individually liable. Ignorance of the law is not a good defense. Get everything in writing.

I agree also with Dave, Matthew and Rebecca. The issue needs to be brought to the attention of the membership. We also did this, but we were in a small HOA and people didn't want to make waves. The two units that were willing to help us and sympathized with us only helped us under the radar.

However, we did spend our own money to inform the membership about things such as termites (board refused to put it on the agenda) and non-disclosure of documents and petty theft by a board director.

When professionals start backing away from dealing with your HOA you are in trouble.

RebeccaB3 (South Carolina)
Posts: 16

Posted:

Thank you everyone for your advice. I have a lot to consider and appreciate the help and different points of view. It has helped me to see the beyond the trees to the forest.

ValerieS2 (Michigan)
Posts: 244

Posted:

Melissa: "Do not take this the wrong way, but you had no rights to go to the lawyer without board approval to do so. "

How strange. You should really take the time to thoroughly READ the posts you are so quick to criticize. She clearly stated she went to the attorney for an ESTIMATE of fees.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

Valerie even an estimate of fees has to be approved by the board. You can't arbritrarily go to the HOA's lawyer without going through the board. The lawyer is NOT every member's of the HOA's lawyer. It is the ENTIRE HOA as a WHOLE. The board represents the HOA as a whole. Hence, communication to the HOA's lawyer should be limited to a designated board member. Which is typically the President as they represent the Board/HOA. It was the President's job to contact the lawyer and even that is after approval from the other board members to have that expense or encounter.

Having enough legal knowledge I find multiple sources going to a lawyer can be confusing, expensive, and can cause more trouble. It's best to deal with the HOA lawyer (IF you have one)with one open source and with approval. The contact of which should also be revealed in the meeting notes. Do not have to state the confidentiality of the issue. It just has to be reported that a lawyer was hired by the HOA to represent the HOA in the matter. Details of the actual case stay in the court system. Which will eventually be public unless the court issues otherwise.

Members have the right to know they are being sued or involved in a legal matter. They may not need to know all the confidentiality involved as most of the time it involves another member. Who will know the details themselves through their own lawyer. They too are not to disclose the confidentiality there either.

Former HOA President

ValerieS2 (Michigan)
Posts: 244

Posted:

Posted By MelissaP1 on 09/16/2013 4:03 PM
Valerie even an estimate of fees has to be approved by the board.

I disagree that the Board Treasurer would be prohibited from seeking an ESTIMATE of legal services. I would be extremely interested to see your source on that approval requirement. Or did you just arbitrarily make up that requirement?

MelissaP1 (Alabama)
Posts: 13,836

Posted:

I like to think I arbritarily make things up and not use a bit of common rational sense. Who needs reality or facts? The fact that a treasurer is still part of the board and thus part of the decision making to go to the lawyer may be a factor. The last time I checked, even asking the lawyer for an estimate costs money. They will charge for phone calls, emails, and certain communications. Considering the money the board spends is EVERYBODY's money and NOT just the board's, I'd prefer that ALL board members participate in a vote to decide to spend the money whether it is an estimate, advice, or use of an attorney. That may be just me.

Now that is not to say that the board lawyer source can't be the treasurer. It can be the President, Vice-President, Secretary, or Treasurer. Whomever is trusted and knows the best on how to deal with lawyers. I found in my experience that having one responsible source on the board to communicate to the lawyer after approval, saves time, money, confusion, and effort.

I've seen too many posters on here who have "consulted the HOA attorney" who shouldn't have. Then don't understand why the HOA would send them the bill for doing so. Even board members can be subject to paying the bill if the contact was not approved. Lawyers are TOOLS of the HOA since the HOA can NOT practice law. To me, it's like hiring an Electrician or any other contractor. Their skills are specialized and licensed. You all would consult before hiring a contractor, so why not the same for a lawyer?

Example: It would be like board members going to the electrician to get electrical work done at the clubhouse, but each one wanting something different. After the work is done, requesting the bill be paid by the HOA. Well the work has to be done by an licensed Electrician, but who decided what that work should have been and if it needed done? It's NOT up to the individual as the clubhouse is commonly owned.

The money the HOA spends is EVERYONE's money. Don't ever forget that!

Former HOA President

ValerieS2 (Michigan)
Posts: 244

Posted:

I have never known of a single instance where an attorney has charged for an estimate. I am genuinely curious if this is common practice though. I would appreciate hearing from anyone who has experience this.

DaveD3 (Michigan)
Posts: 796

Posted:

I'm not heard of charging for estimates either.
Regardless, Melissa seems to be hung up on the "going to an attorney" aspect of the topic, rather than the "poorly managed HOA" aspect. Oh well.

JH3 (Maryland)
Posts: 67

Posted:

Aside from the fact that I agree with Melissa on going to the attorney - should not be done without a board vote - I think there is a major aspect here that is being missed by all.

Most bylaws require owners to be current in their assessments to serve on the BOD. Its clear that Joe is not current in the assessments, and the association has been turned over to the owners. If this provision exists, as I'm sure it does, Joe cannot be on the board, and cannot vote as an owner, until his assessments are brought current. Problem Solved.

MelissaP1 (Alabama)
Posts: 13,836

Posted:

JH3, do not assume this to be true. Ironically, being up to date on your dues does not mean you can't run or be in office. Not all HOA's have this rule in their documentation. Here is the rub. The documents most likely state that one not up to date on their dues forfeit their right to vote. Meaning they can not vote in elections or participate in decisions. However, does this mean they can not run for office? No. They can run for office and even win. The reality? Who is going to vote for someone who does not pay their bills to the HOA? Plus they can't even vote for themselves nor the other candidates.

Now if you get a board member in office who suddenly decides to "Protest" or not pay their dues, that requires a recall vote. It's not automatic removal. Plus you have to have a policy at what point is it considered "Non-payment of dues?". Miss one payment and out? We had a policy of 6 months and we liened. Which would basically be our set point for deciding why the non-payment situation is. This could also apply in modifying your HOA's rules of board members behind in dues for 3 months, they forfeit their position. However, that rule has to be documented before being enforced. It could be in meeting notes as long as it is understood by everyone.

Former HOA President

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