Can board place association funds in risky investments?

Question: Our homeowners association is hemorrhaging money at an alarming rate, and the president tells owners he moved all reserve money elsewhere to avoid a potential judicial judgment from attaching it. Under management’s influence, he invested it all in an assessment recovery firm, claiming the association receives a very high return on our investment. He said management invests in the same firm.

This firm has been unrelenting in its voracious targeting of titleholders utilizing liens, fees, penalties, interest, threats of foreclosure. It badgers and intimidates owners into paying fees that are unexplained let alone substantiated.

Rather than use allocated reserves from monthly maintenance fees, this president has depleted the reserve account to zero each year for the last four years then specially assesses owners thousands of dollars.

Does the board have to follow laws for removing reserve money and investing in a company used to file liens and foreclose on units?

Answer: Mention of a potential judgment and attachment of funds should send up red flags the association is being mismanaged.

The Federal Deposit Insurance Corp. underwrites most private bank deposits, offering additional protections and assurances for depositors. Trusting association funds to any institution not FDIC-insured is an unnecessary risk.

A board’s duty to act in good faith and avoid conflicts of interest prevents it from making risky investments and mandates safeguards preserving association funds. Investing in the same so-called assessment recovery firm as its management company, and one that also forecloses on titleholder properties, sounds like a risky situation for the association and a conflict of interest for the board.

Civil Code Section 1365.5 describes board director fiscal duties, signatures required for withdrawal of money, and proper reserve account use. Not only must the board follow specific laws and procedures for removing reserve funds and “investing� it, such actions must be voted on at a duly noticed meeting and disclosed in meeting minutes. For withdrawal of money from association reserve accounts, Civil Code Section 1365.5(b) requires signatures of at least two board directors.

Pursuant to Civil Code Section 1365.5(c) the board shall not expend money designated as reserve funds for any purpose other than the repair, restoration, replacement or maintenance for which the reserve fund was established. The board may authorize temporary transfer of money from a reserve fund to association general operating funds to meet short-term cash flow, but only if the board has provided notice of intent to consider the transfer in a notice of meeting, which shall be provided as specified in Section 1363.05. The notice shall include reasons the transfer is needed, options for repayment and whether a special assessment is considered.

If the board authorizes the transfer, the board shall issue a written finding, recorded in the board’s minutes, explaining reasons the transfer is needed and describing when and how the money will be repaid to the reserve fund. Transferred funds shall be restored to the reserve fund within one year of the date of the initial transfer.

Under Civil Code Section 1365.5(a) directors shall review reserve accounts and account statements prepared by any financial institution where association funds are located and when necessary levy a special assessment to recover the full amount of expended funds within time limits required by Civil Code Section 1365.5.

Such actions must be reported in the meeting minutes. Because titleholders have a vested interest in real property, they have standing under Civil Code Section 1365.2 to view and obtain all items noted in Section 1365.5(a) and the board must comply. Owners are responsible for overseeing board actions and challenging questionable decisions. If there’s no money in a reserve account that has traditionally been funded, demand the board produce bank statements including reports from that so-called assessment recovery firm, independent audits, and any other financial documentation evidencing the flow of money, deposits, withdrawals, and the opening and closing of bank accounts, including changing banks.

Zachary Levine, managing partner of Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to P.O. Box 10490, Marina del Rey, CA 90295 or [email protected].