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PAID
DIRECTORS
QUESTION: I am the president on our
board, and we have gone through management companies quite a bit lately. Our
treasurer is a CPA. He and I have been thinking of taking over the management
and the books to save the HOA money. We would require compensation. We'd
get board approval first, of course, but what are the legal implications?
ANSWER:
Many small associations self-manage. However, it’s done with volunteers. Paying
directors for service rendered is not illegal provided (i) there is full
disclosure, (ii) the fees charged are at or below market, and (iii) the benefited
directors recuse themselves from discussion and votes on this and related
issues.
Even so, it is not a good idea. In addition to potential conflicts of interest,
any time you have a disgruntled owner he/she will go after you and make a myriad
of claims involving self-dealing, conflicts of interest, incompetence,
over-charging, and so on. It gets very personal. To reduce potential conflicts,
you should resign from the board—it reduces the large targets on your backs. Another consideration is insurance. Will you be carrying your
own insurance? You won’t be covered by the association’s D&O policy for paid
services in the event you are sued. If it were me, I would continue using an
outside service.
TREASURER'S
POWERS
QUESTION: I am the treasurer of our
association. Our bylaws state "The Treasurer shall supervise the receipt and
deposit in appropriate bank accounts of all monies of the Association, and the
expenditure of such monies." I believe this statement empowers me to direct
anything related to collection, deposition, and expenditure of association
funds, including the accounting activity used for such purposes, without direct
concurrence or intervention from the remaining board members. Is this point of
view valid?
ANSWER: No,
it's not valid. The board can still establish policies and procedures for
collecting, depositing and spending the association's monies. The treasurer then supervises to
make sure the board's policies are carried out. The board can give you a
great deal of latitude in handling funds, but it is at the
board's discretion. Moreover, the board is responsible for its delegation of
duties into your hands. It should be looking over your shoulder to make sure you
are doing your job.
DIRECTORS SLEEPING
WITH
EMPLOYEES
QUESTION: We have a female director who
is sleeping with our manager. She goes on weekend jaunts and vacations with him.
Our board president allows her to remain in executive sessions when we discuss
problems with the manager. This has caused problems between the manager and
board members who have been critical of the manager. How do we handle this?
ANSWER: The
situation you described exposes your association to significant potential
liability. If you were to terminate the manager's services, he might sue
claiming sexual harassment. Right now he probably considers sex with your fellow director as a
perk of the job. Once he is terminated, he might claim that he "had to" sleep with
the director because she was his employer. Employment litigation is quite
costly. To avoid such problems, your amorous director should immediately resign from
the board. Then she can spend as much time as she wants with the manager without
jeopardizing the association. You should also check with the association's
insurance broker to make sure you have
employment practices liability coverage.
UNDOCUMENTED
WORKERS
QUESTION: I just read your recent
newsletter about a board hiring an undocumented worker. We recently underwent a
multi-million dollar rehab on our building and the entire work-force was Hispanic. We
often wondered how many were undocumented workers. Can an HOA be liable if a
contractor is using undocumented workers?
ANSWER:
Fortunately, you are only responsible for employees of the association. When it
comes to contractors, you need to make sure they are licensed and insured. It is
the contractor’s responsibility to make sure his employees are legal.
FINANCIAL
MELTDOWN
Just a reminder that with recent
reports of instability in the banking system--Washington Mutual Bank (WaMu--the
nation's 6th largest bank) and Wachovia (4th largest bank)--associations need to
make sure they do not have more than $100,000 in any one financial institution.
 The Federal Deposit Insurance
Corporation (FDIC) insures the safety of checking and savings deposits in member
banks up to $100,000 per depositor per banking institution (not per bank
branch). If a board places $500,000 of its reserves in a single bank (for a jumbo CD so as to
receive a greater return on its money) and the bank goes under, the association
could lose $400,000. For smaller associations, if the board keeps in the same bank an operating account with
$30,000 and a reserve account of $150,000, the association is at risk of
losing $80,000. The FDIC does not insure each account separately, it insures the
aggregate amount.
RECOMMENDATION:
Boards should avoid exceeding
$100,000 per financial institution. Instead, they should spread their association's money between
various FDIC insured institutions.
Very truly yours,
Adrian Adams, Esq.
Adams Kessler PLC |
