Misuse of HOA Funds

Hello,

I live in a small Michigan HOA with 20 homes. Our president recently spent hoa funds for an audit of our treasurer after a dispute regarding the HOA checkbook. The hoa bylaws say expenditures require majority vote but the audit was purchased using hoa funds without any vote. The president also refuses to answer any questions or share the audit with hoa members whos funds were used to pay for the audit. Any recommendations for how to handle this would be greatly appreciated. I've contemplated filling a police report for unapproved or misuse of hoa funds but I'm not sure it would be considered a criminal activity ?

thx

John,

Contacting the police likely won't result in anything. What you claim to have been done would be a violation of civil laws. When civil laws are violated, the issue is resolved between the parties involved either amongst themselves or through the courts (after one of the parties files legal action).

An audit can not be done without the cooperation of those involved. Records need to be turned over. The auditor needs written permission to discuss legal expenses with the attorney's. Copies of signature cards from the bank need to be made available. There is simply too many things that need coordination which would make it difficult for only one person to authorize the audit. Even if the President initiated the audit, it's likely the rest of the Board agreed to it after the fact.

Michigan does not have an HOA act (only a condominium act). However, if your Association is incorporated (most are) the Association would have to comply with the applicable corporate codes. Expecting that your Association is incorporated as a non-profit (check to be sure), Michigan's NONPROFIT CORPORATION ACT would be applicable.

Per MI 450.2487, it appears that the members are limited in what records they may inspect without a court order.

John, Are you on the Board?

Hi John

You've raised 3 questions and answered a 4th yourself.
1. Can the pres spend hoa funds for an audit in violation of the bylaws.
2. Can the pres refuse to answer questions.
3. Can the pres refuse to share the audit.
4. Will filing a police report accomplish anything.

IMO, only the 3rd question is worth pursuing. The pres would be acting within his fiduciary responsibilities to have the audit done if he had reason to believe that there was some impropriety. Not getting pre-approval from the members for the expense is at most a wrist slapping offense. Refusal to answer questions is too vague of an issue. And as you recognized yourself, it's not a criminal matter.

Per 450.2487.487(1) "Upon written request of a shareholder or member, a corporation shall mail to the shareholder or member its balance sheet as at the end of the preceding fiscal year; its statement of income for such fiscal year; and, if prepared by the corporation, its statement of source and application of funds for such fiscal year."

An typical audit includes a balance sheet, an income statement, and probably a statement of cash flows or similar document under a different name. These are records of the HOA that the statute refers to. They must be mailed to you upon request.

Even without the statute, there is a long history of decisions by the Michigan Supreme Court supporting the right of shareholders to have access to financial records. What the statute does is make the mailing of certain financial records mandatory - which prevents the HOA from forcing you to physically go to a place where the records are kept.

So make your request in writing. If the financial docs are not provided, go to the courts for relief.

The Michigan chapter of CAI has put together a handy Q&A chart of rights. I found it by googling 450.2487, but I couldn't figure out how to copy the link here. They might be a resource for you.

Thanks for all the info everybody. I also checked and we are incorporated as a non-profit.

If the bylaws say a majority vote is needed for spending money, you should confirm that it's the board who is voting, not the entire HOA? Bylaws usually cover the Board of Directors as to what they can do and the CCR's say what the owners can or can't do.

Also, was it you personally who asked the Prez to see the results of the audit? Be careful if you are getting your information second hand, and if that is the case, you should reach out to them personally with your concerns about the "rumors" being spread about.

It's all in how you approach them, and it would help if you put yourself in their shoes for a minute. If you were the Pres. and your treasurer won't give you the checkbook, what would you do? Really what would any of us do in that situation?

And if they did finally hand it over, would we not think for a second or too, "hmmmm...why the delay?" Perhaps it should be looked into and an audit is the way to do so. Then when it doesn't show any problems, it's clean and tidy, well, now I have egg on my face and dont' want to face the neighbors with what can be seen as an HOA witch hunt.

Tough situation, but putting yourself in their shoes will go a long way to getting the best results for the present HOA and the future of it.

You understand that saying there was a dispute regarding the check book has individuals to believe that there was an issue with the finances. Now, saying (clarifying) that as the Treasurer would not give the President the checkbook gives a different perspective.

Why wouldn't the Treasurer give the President the Checkbook?
Why did the President want the checkbook (to review it or to issue checks)?

An Officer refusing access to the books to another Officer, Director or Member gives the impression that there is something to hide. There may be nothing to hide, but the perception created with the denial is that there is something to hide.

An Officer refusing to turn their duties over to another Officer when they were not properly removed from the position is something completely different.

John, You never answered my question. Are you serving on the Board?

Tim B ...

I am not on the board but definitely looking to become more involved. Some good points about how being or not being on the board can change the perspective and rules.

To answer your other question, I'm under the impression the original dispute between the treasurer and the president arose because the treasurer would not reimburse the president for a dinner party at his residence that involved other hoa members.

Hi John

I took a look at your Bylaws. There is no mention of a budget. The only reference to expenditures is in the board indemnification section. And the only basis for obtaining relief from a board member for inappropriate expenditures is willful misconduct or gross negligence. These are very high standards to meet.

There should be another document - a Declaration a.k.a. CC&Rs - that was filed at the recording office.

But based on what you provided, it is reasonable to assume that the board members have the authority to make expenditures without a community vote.

John,

As others have pointed out, there should be several other documents that govern your Association.

There should be some deed restrictions (the CC&Rs). These should be available from the County Recorders office (whichever office is responsible for recording property records). The CC&Rs is the contract that every homeowner agreed to.

There should be some sort of incorporation paperwork. Typically these are called the Articles of Incorporation and may or may not be available from your State Corporation Commission.

There are likely various resolutions. Resolutions are formalized decisions made by the Board. These are only available from the Association. Typical resolutions are assessment collection policies, architectural guidelines, rules for the common areas, etc.

Since your not on the Board, it will likely be difficult for you to obtain a copy of the audit. My suggestion is to bring the issue up at the annual meeting, as peer pressure from the whole membership may have the Board release the document.

I strongly encourage you to volunteer to serve and to encourage others to serve. The fact that the President and Secretary are from the same household should be enough to encourage others to serve. Although there is no statute preventing two individuals from the same household to serve at the same time, it's not the best situation. For example, the President can call a vote to be reimbursed for the party. With a three person board, expecting that the wife supports getting reimbursed, the Board vote goes 2 yea 1 nay. The President is now reimbursed.

John,

You can obtain a copy of the Articles of Incorporation at:
http://www.dleg.state.mi.us/bcs_corp/sr_corp.asp
Although, they are really the bear minimum for Articles of Incorporation. Therefore, they won't tell you much.

In looking at the reports, it appears that your Association has had problems with volunteers stepping up to serve since 2009 (perhaps earlier).

In looking at those reports, it's also possible that what you cited as Bylaws may in fact be the deed restrictions. It would be interesting to find out. That is because your Bylaws do not require membership in an Association. It only specifies that owners are eligible for membership.

It probably would be a good idea to make a trip to the County clerks office and obtain a copy of the deed restrictions. Then take a copy of the deed restrictions, a copy of the articles of incorporation and a copy of the Bylaws to an attorney and ask for a legal opinion if you are required to be a member of the Association. If not, you will likely have a fight on your hands but you may win and not be required to pay assessments. However, you would still be bound to the deed restrictions that were recorded.

Tim

John,

In doing some more research, I see that the homes were built in 1998 but the Association wasn't incorporated until 2010. Was the Association started in 2010? Was it previously incorporated and had to reincorporate? Did the Association exist prior to 2010 but was finally incorporated in 2010?

Hey Ellie,

Information overload and may take me a week to follow up on all the other good comments. Its my understanding the reimbursement request was for approx $160 for food and wine at the dinner part. There was an hoa meeting were the people at the meeting thought it would be a good idea to have a progressive dinner. To my knowledge other people in the neighborhood who were going to host it backed out at the last minute due to late notice by the president for the date of the dinner, so the president ended up having it at his house. I do not believe there was an agreement or vote in place prior to the dinner for using hoa funds for it. Other hoa members who participated have not submitted requests for reimbursement. I was not involved with nor did I attend any of these events.

The treasurer was not sure if funds should be reimbursed or not so a denial was made based on not having any prior agreement. Pretty tough question to answer with our hoa's poor documentation.

you may need a 'title search' if you did not have one done before closing

if you have title insurance perhaps the insurer could help you re: restrictions against deed

or

UNLIKELY - there may NOT be any deed restrictions at all

imo: you need professional assistance at this time

TimB4 ...

I called a local HOA lawyer today to get his legal advice. Thanks a million for your 4 questions to ask him.

For you other questions I am on a private road but I have not seen or do not remember a private road agreement.

The association provides lawncare for a couple small common areas and snowplowing for the private road. Historically there have not been any other expenses.

There is an easement thru the subdivision for the county drain line but I do not think the hoa is responsible for the maintenance or any issues with it.

Well, the Association was incorporated by the Association Board of Directors. Creating a corporation does not create the Association. Deed restrictions would create the corporation.

Since you are on a private road, there are either statutes or a private road agreement (which could be the basis for the Association) governing who maintains the private road.

Well, creating a corporation can create an Association.

My point was that Associations are normally created by CC&Rs, private road agreements, etc. Most Associations will incorporate due to the benefits that they receive by incorporating. There are unincorporated Associations and it's possible that John's Association existed as an unincorporated entity prior to being incorporated.