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Legal action against Management Co

Started by JeffK17 • 14 replies • 343 views

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JeffK17 (Texas)
Posts: 7
Posted:
I am on a board and have a concern about the ethics of my Management Company. I have raised concerns about our budget and invoices and the community manager has told me not to upset the vendors by asking questions. She said we should be thankful they work hard for us. Many on the board have questioned her regarding kickbacks in the past, yet we have no direct proof of that. The Manager is having side conversations often with other Board Members who support her. If I want to take legal action against her and the Management Company, yet not harm my HOA....what would be the best course? Should I resign first and then consult an Attorney? Can I stay on the board and have my own litigation, while others who side with her remain. How do I not break board confidentiality?
ElleN (Idaho)
Posts: 4,420
Posted:
Arguendo I will presume you simply have no hard proof of any illegalities. The most competent HOA attorneys advise that the easiest path to cause change is by campaigning with others who feel as you do and then winning a majority of the seats on the board. Be aware: This is the easiest path of only difficult paths.

Suing or threatening suit while still on the board is a bad idea. The Board will be justified in excluding you from many (all?) of its executive sessions with the HOA's attorney.

Most importantly, you must brace yourself for retaliation. The vindictiveness of directors' egos, combined with their very own "free" attorney (the HOA attorney) who makes them feel so special and so maligned by you, should not be underestimated.
JeffK17 (Texas)
Posts: 7
Posted:
Yes, I have invoices from a vendor that are incorrect. I have already reclaimed thousands, yet there is much more. Being instructed to look the other way should be enough cause?
MelissaP1 (Alabama)
Posts: 13,836
Posted:
The management company is a paid contractor to the HOA. The best way to deal with them is to get a new one. Find out what it takes to fire them and hire a new one. I am not seeing any "personal" damages of which requires a lawsuit. Plus this is a GROUP decision not just a "YOU" decision.

Court can ONLY make one "Whole". So what would it required to make your HOA "Whole"? Meaning what kind of money is it out outside of paying what the contract says?

Suing your HOA is suing yourself and your neighbors. Suing your MC is the HOA job NOT an individual member. All can do is find a new MC if you all not happy with the current one.
Former HOA President
CathyA3 (Ohio)
Posts: 6,299
Posted:
I agree with ElleN is that suing either the HOA or the management company while serving on the board is almost impossible. Aside from the likelihood of retaliation or being excluded from discussions, there are the ethical issues involved. As a board member, you have a various duties such as a duty of loyalty and a duty of care, both of which are almost impossible to fulfill if you have strong disagreements with the rest of the board. This is true regardless of who is actually in the right. And any litigation that involves the association will cause financial harm, no way around it.

There is also the issue of how the manager will respond. Any legal action against that person will very likely result in a counter suit - they'd have to respond this way since you'd be threatening their reputation and livelihood. This will harm you personally, financially and otherwise. People who sue their associations often end up as the community pariah even if they were totally justified in their actions.

And of course there is no guarantee that you will win.

If you truly believe there is something going on with this manager and you have at least some evidence to back up your claim, it may be worth having a chat with your own lawyer. Look for someone who is experienced with real estate and especially HOA issues. That person should be able to advise you on whether or not you have anything worth pursuing and what's involved if you do move ahead.
TerriS6 (California)
Posts: 3,284
Posted:
As a director, you have an absolute right to inspect ALL the records. Also, you could have an independent audit done. I would start with all the disbersements.
TerriS6 (California)
Posts: 3,284
Posted:
As a director, you have an absolute right to inspect ALL the records. Also you could have an independent audit. I would start with all the checks/disbursements.
MelissaP1 (Alabama)
Posts: 13,836
Posted:
HOA records have a right. A MC is a separate business. You have no rights to theirs. Only the HOA records.

Find a new MC replacement to bring to the board to vote on. Make sure what current contract says. You can not fire them without certain conditions.
Former HOA President
TerriS6 (California)
Posts: 3,284
Posted:
In California, a board is required to review the check register and bank statements monthly.
MelissaP1 (Alabama)
Posts: 13,836
Posted:
Yes if the HOA. The MC is its own business. You do not see their business records. You can request to see the HOA via the MC.
Former HOA President
MarkM19 (Texas)
Posts: 1,459
Posted:
Jeff,
Let's talk many steps back and talk about the issues.

1) Who approves the invoices on your board?
2) Have you brought up the discrepancies to that board member?
3) Has the PM made corrections when called out?
4) You speak about kickbacks, but do you have proof?

If it were me, I would see if you can get at least 1 other board member to agree that this is a concern. If you do this, you should have the ability to add the item to the agenda and speak about it at the next regular meeting. You need to have your case in order and be ready for the debate. In board life you sometimes only get to fire one shot. Make sure you aim correctly.

Only 1 team wins in this type of lawsuit, and it is the lawyers. If you have a case and are able to sell it the PM needs to go. If you lose and are wrong, YOU need to go.
LizD3 (California)
Posts: 200
Posted:
1. If you have the legal right to inspect documents (statements, etc.), then do so (I do in my state).
2. There should be an annual audit of your books. This will tell you what is happening with Association funds. It won’t identify kickbacks, however.
3. Do not quit the Board. If you do so, you lose your Board vote and voice.
4. In fact, consider running for Treasurer. Then you will be privvy to all financials.
5. Not “upsetting vendors by asking questions” is absurd. Vendors work for you. They should not be upset that you ask; they should be delighted that you are involved. If not, then you don’t want them working for you.
6. Board business has to be discussed in Board meetings, so put a stop to “side conversations."
7. It is my understanding that legal action generally has to be against the Board, not one member (unless she is embezzling, in which case it is a criminal matter).
8. By all means, consult an attorney. No need to resign to do so. You can consult a lawyer, privately, or if your position permits, speak to the HOA lawyer (typically it is the job of the Board president to do so, however).
9. It is not impossible to sue the HOA as a Board member. Just do it, if need be.
10. Someone mentioned ethics and duty of loyalty. There is no duty of loyalty, which tends to be dangerously blind, anyway. What there is is a fiduciary duty. And that duty is to the owners, not to the Board. So if there is mishandling of Association funds, then you will be fulfilling your fiduciary duty by addressing your concerns.
11. Yes, some owners may end up hating you. This must not prevent you from doing what is right. Remember, if you are not part of the solution, you truly are part of the problem.
12. Very tricky to prove kickback. The Board member surely won’t admit it, so pointless asking. But a pissed off vendor may complain about it, so that is probably your best option.

It’s a tough road, doing what is right. Most people are too scared. Or apathetic. So good for you and good luck.
ElleN (Idaho)
Posts: 4,420
Posted:
Quote:
Posted By JeffK17 on 08/01/2023 8:27 PM
Yes, I have invoices from a vendor that are incorrect. I have already reclaimed thousands, yet there is much more. Being instructed to look the other way should be enough cause?
If you feel you have a slam-dunk case, then IMO your next step should be to consult an attorney.
JackieB4 (California)
Posts: 398
Posted:
Ellen, AMEN!! Well said.
MarkB28 (New York)
Posts: 40
Posted:
Do your best to seek out alternative management companies and convince your fellow Board Members to NOT renew your current management company's contract.

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