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A new director with a felony conviction

Started by StephenP4 • 23 replies • 2245 views

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StephenP4 (Colorado)
Posts: 3
Posted:
Our HOA has just elected a new Board member woh has a felony conviction for theft. We have been advised by our insurer that they will not provide a fidelity bond to this person. Our decs required that the Board be bonded. Shall we try to remove the person form the Board? How? Shall we proceed as if it weren't an issue? What if the person engages in activity for which we can be held accountable? The person is at least popular enough in the community to be elected, and has in fact, served on the Board before. In his previous stint, some folks loved him and some had doubts about how the money was being handled. A sticky situation.

Steve
DonaldM3 (South Carolina)
Posts: 132
Posted:
It seems, Steve, you are in a very touchy situation. Your board must act in-accordance-with your docs. If your docs say it must be bonded and you are now unable to be bonded, it seems your election needs to be declared ‘null and void’. I would explain this to this chap and ask him to resign. If he refuses the board must take other action. Whether you want it to be or not, this IS an issue!
MaryA1 (Arizona)
Posts: 7,043
Posted:
Quote:
Posted By StephenP4 on 01/16/2009 9:12 AM
Our HOA has just elected a new Board member woh has a felony conviction for theft. We have been advised by our insurer that they will not provide a fidelity bond to this person. Our decs required that the Board be bonded. Shall we try to remove the person form the Board? How? Shall we proceed as if it weren't an issue? What if the person engages in activity for which we can be held accountable? The person is at least popular enough in the community to be elected, and has in fact, served on the Board before. In his previous stint, some folks loved him and some had doubts about how the money was being handled. A sticky situation.

Steve

Stephen,

IMO, this person should be removed from the board. The fact that some members had reservations about his trustworthiness when he last served on the board and now you find he has a felony conviction for theft, would certainly give me pause about him being a board member. Whether the board can do this or a vote of the members is required should be outlined in your bylaws. If CO HOAs are required to file an annual report with the Sec. of State I would take a close look at the form. The AZ annual report has a disclosure portion that must be signed by all board members attesting to the fact that they have never violated any securities, consumer fraud or antitrust or restriant of trade laws. CO may be concerned with other type convictions or violations. At any rate, it's worth checking out. However, if the board wishes to keep him on, he just will not be able to handle any of the funds because of his inability to obtain a fidelity bond. That doesn't mean he can't be covered by D&O insurance so the board would still be in compliance of the requirement for all board members to be insured.
GeorgerwilliamsW (Indiana)
Posts: 975
Posted:
Since the covenant declaration requires that board members be bonded, the board member in question is disqualified from election or service. Accordingly, he is not a member of the board despite appearances. His election is null and void. It would be no different if a non-owner were elected to the board when documents state that only owners may serve.

There is a greater issue here. Every vote of the board of directors could be invalidated by the fact that this person is illegally serving as a board member. Although it might be a hard sell to a court, it opens the association up for lawsuits that may not be covered by D&O insurance (since it is a known violation of the covenants). And all it takes is one disgruntled member and a talented, hungry attorney to wreak havoc. An aggressive attorney might just accept the case on a contingency basis, expecting to earn $5,000-$10,000 from an out of court settlement.

On the other hand, if no one objects, and there are no lawsuits, then it is likely that a court would overlook the disqualification, saying that it is a non-issue from a lack of demonstrated harm. In such a case board votes would be valid.

It might be solved were the individual in question to secure a fidelity bond at his own expense. Otherwise, it could be a time bomb.

A sticky situation, indeed.
KirkW1 (Texas)
Posts: 1,665
Posted:
As George said you certainly have a situation. And I would not ignore it. My inclination would be to start with a request that the man quietly resign and then choose to never contradict him (unless he has the nerve to run again).

Now if that should fail, I would start with a call to the lawyer. Perhaps you can just replace him. But if need be, I would refuse to attend a meeting and instead work on a recall vote. And yes, I would tell folks about the inability to get a fidelity bond.

It may also be wise to introduce a change to the bylaws to make the whole thing easier should this happen again. Some sort of wording about what happens should a director fail to be bonded. The best thing (in my opinion) would be to state that the position shall be declared empty and filled in accordance to the same procedure as any other vacancy.
GlenL (Ohio)
Posts: 5,491
Posted:
Kirk don't you mean WILL be declared empty.

For those that don't get the joke, go to: http://www.hoatalk.com/Forum/tabid/55/forumid/1/postid/65855/view/topic/Default.aspx
Studies show that 5 out of 4 people have problems with fractions
MaryA1 (Arizona)
Posts: 7,043
Posted:
Glen,

I get it and you are toooo funny. OOps forgot to preface with "IMO". Ten lashes with a wet noodle for me. LOL
KirkW1 (Texas)
Posts: 1,665
Posted:
When I wrote that I would use the words interchangeably. (Well actually, I will most likely continue to do so since it seems that either way the intent is that something be done a certain way. And I really doubt that I will remember this if and when the time comes up that I think I might actually have a defense against not doing what the shall or will. (Can't believe I will say this but, hopefully a lawyer will be around. )
RobertR1 (South Carolina)
Posts: 5,164
Posted:
Stephen,
All that has been posted sound pretty good to me. I am a little bothered by the perceived hesitanscy to be cut and dried about this.
Certainly a legal opinion is needed about the ramifications of any action and the proceedure on how to do it. But, it seems conclusive that this person can not and is not now a member of the Board. It bothers me he was elected, and I suppose that means he was accepted formally by the Board and annouced publicly by the Board. All that takes, it seems, would be a statement by the Board, they acted in error and will rescind that acceptance of the election and will call for new elections in the near future. In the mean time that board position will remain open, and his fellow will not be seated.

Granted, your block building towards the action that must be taken has to be careful, you still have the mandate and the authority to operate under state laws as a corporation licensed by the state. IMHO.
JohnK3 (Pennsylvania)
Posts: 967
Posted:
Hmmmm.

Our Fidelity Bond app did not request any info about the criminal (or other) backgrounds of our BOD, and once issued, does not require further notification about any current or future BOD members.

Did somebody contact the bondsperson (insurer) to get this ball rolling? Just asking.

In any event, if the FB won't be extended to the crook, despite being elected, he can't retain the position by operation of the docs.
RobertR1 (South Carolina)
Posts: 5,164
Posted:
John,
The thought springs to mind after reading your post, if the differences in your Bond requirements and another can be traced back to how the developer wheeled and dealed the wording in order to meet some criteria he was trying to cover.

I am certainly surprised to find your FB does not require some sort of authentication or recognition of the legal authority of the Board.
Somewhere, sometime, I recall reading about there being different types of Bonding Companies and some, at greater cost, tend to be more forgiving than others. Know anything about that anyone?
MaryA1 (Arizona)
Posts: 7,043
Posted:
John,

Now that I recall, when I was treasurer of my former assn, there was no requirement for criminal background checks for our fidelity bond either. That was a number of years ago. Perhaps the rules have changed in light of all the criminal activities being perpetrated by business people these days.
RobertR1 (South Carolina)
Posts: 5,164
Posted:
Mary and John,
How would you know what the Bonding company bases their decision to insure or not to insure?
SusanW1 (Michigan)
Posts: 5,202
Posted:
Stephen - this is really cut and dried. You said:

"Our deeds required that the Board be bonded."

You say he can't be bonded. Therefore, he is not elegible to serve out his elected position (term).

Call an ES at once. Have a resignation letter ready for him to sign. If he does not, then remove him from the board.

Your documents should tell you how. Most boards have the power to remove fellow board members for such reasons as ineligibility. but you need to check out statutes and other governing rules.

Fill the position by appointment if your board has that power and get on with board business.

PS - your nomination committee or election committee need to "vett" the board nominees better.

MaryA1 (Arizona)
Posts: 7,043
Posted:
Robert,

I seems to me I would know whether or not a criminal background check were being performed on me, wouldn't I?
RobertR1 (South Carolina)
Posts: 5,164
Posted:
Susan. a question?

Can an ES be called and held without it being part of the regular meeting?

If so how do you do this?
RobertR1 (South Carolina)
Posts: 5,164
Posted:
Mary,
Beats me, I doubt it. I imagine all kinds of businesses require background checks and they hire a company to do them. Nothing illegal I can see , what they are looking at is all public record.
MicheleD (Kentucky)
Posts: 4,491
Posted:
Quote:
Posted By MaryA1 on 01/18/2009 12:38 PM
Robert,

I seems to me I would know whether or not a criminal background check were being performed on me, wouldn't I?

Not necessarily.

There is quite a bit that can be accomplished in a back ground check without any signatures from the party being investigated and without any notice being given.
SusanW1 (Michigan)
Posts: 5,202
Posted:
GENERALLY, a board can motion to go into ES to discuss issues (except in Florida, as I understand it) These situations MAY be stated in the bylaws. They usually cover disciplinary, employment, staff, or legal issues.

The OP will have to see if her documents or state statutes all ES.
RobertR1 (South Carolina)
Posts: 5,164
Posted:
Susan,
Is this post in answer to my above post whe I asked the question when and how can a Board go into ES. I suspect not , but you would be a good one to ask personally.

Can a Board just go directly to ES. I understnad a little about uncalled meetings and special meetings, but ES is another story.

I was under the impression you have to announce a ES as part of a Board meeting, and it is put on the agenda. you call the ES from the chair, suspend the regular meeting and meet. The subject matter to be consider may vary from one state to another, but it is specific and no other business can be discussed. At the end of ES, the board returns to their seats and the meeting is declared reopen and the ES results or action are announced if any taken.

I think that is pretty close, I just can't fit the Board, putting out an advanced notice of a Board Meeting, inclde the agenda, one item was to go to ES.
A day before meeting the Board meets in a room privately, calls it an ES, and when the regular meeting opens the next day the first item mentioned was the president annoncing the Board went into ES the day before to save time and the results of the ES was there was nothing to announce, Thenthere is the issue of the items listed to to covered in ES, they don't seem to fit either. I questioned a Board member, his explanation was that the Board has full authority to do anything the board decides is best for the association or words to rhar effect,
GeorgerwilliamsW (Indiana)
Posts: 975
Posted:
Susan is correct. Unless state statutes or governing documents specify otherwise, a homeowners association board may call an executive session at any time.

There is no general requirement that the executive session be announced or scheduled. Further, the board may vote and take any other action in executive session it might in an open session.

Indeed, unless statues or governing document otherwise specify, board meetings need not be open to members at all.
FrancescaM (Washington)
Posts: 264
Posted:
I am a very simple thinker. If your documents require your board to be bonded and this individual can not be, then how can they be on the board? It has to be null and void... sorry, it's that simple.
RobertR1 (South Carolina)
Posts: 5,164
Posted:
FrancescaM,
Of course you are not a very simple thinker. Oxymorons all over the place. And you recognize your conclusion is not simple. What you may not recognize if how the folks posting here, and most are Board members, and how run of the mill Board members think. I have to include myself into this loose knit group, uninvited and maybe unwanted, (see what I mean) and we just have never met a simple issue that we can not make more complicated. We fail to recognize the word "simple", it does not appear on our screens.
JohnK3 (Pennsylvania)
Posts: 967
Posted:
I don't know how InsCos price or evaluate FBs. I'd imagine the process is pretty standard. I doubt one can "bargain" over the terms, though I also know riders or endorsements can change anything. Such as in ours...

Which looked pretty goofy when I first read it. What it does is provide 3 pages of (new) CRIME GENERAL PROVISIONS and restates 3 pages of (existing) COMMON POLICY
PROVISIONS, all of which are essentially lists of what ain't covered, including acts of dishonesty by partners, employees, etc.

Then an endorsement is attached which states the definitions do not apply to any compensated employee...

The BOD is not compensated, so what's the poop? Well, the policy also states Directors are considered employees if they perform duties that an employee would typically be compensated for....

Go figger. Thank the Lord I had two semesters of Ks.

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