Facing Financial Mismanagement When Boards or Managers Are at Fault

The board of a building or community association has a fiduciary duty to uphold its community’s governing documents, act in good faith, and advance the interests of the community at large. Occasionally, boards fail to carry out this duty – sometimes through mismanagement and poor decision making, and sometimes through willful disregard for the association’s bylaws. In the latter situation, there’s usually one uniting motivator: money. 

When a board or manager mishandles association funds (whether they are from operating accounts or reserves), the negative ramifications can be felt across the entire community, impacting individual owners’ and shareholders’ investments. So it’s in everyone’s best interests to have competent management and legal pros helping the board guide members along the straight-and-narrow path. It’s also crucial to have a robust insurance policy in place and to identify mismanagement before it becomes debilitating.

Identify and Act

Budgeting and bookkeeping mistakes are inevitable, but diligent accounting will usually catch them before they spiral out of control. It’s the willful mismanagement and misappropriation of funds that can lead to severe problems, which need to be rooted out.

“My advice to clients faced with mismanagement or misappropriation is to gather proof – often via forensic accounting – and then, if criminal conduct appears to be involved, contact the office of the District Attorney,” says John J. LaGumina, Partner at The LaGumina Law Firm in Purchase, New York. “This usually results in swift enforcement action, including requiring the perpetrator to make restitution of the misappropriated funds. [Without] proof, it will be difficult to get the district attorney’s office interested. And a civil lawsuit would be problematic, since you’d eventually have to prove your case, and will incur legal fees while trying to do so.”

There’s also the reality that even when an individual is caught engaging in shady business, it can fall to that person’s friends and neighbors to out him or her as the perpetrator. For obvious reasons, this can be tricky. “If someone commits a crime such as theft or fraud, it should be reported and that person held accountable,” notes Robert E. Ducharme, a condominium attorney with Ducharme Law in Stratham, New Hampshire. “But unfortunately, I’ve seen multiple occasions where a board of directors has chosen not to report the matter to law enforcement or to file a civil suit, and sometimes to not even report the theft to the association’s insurance carrier – all for fear of word of mismanagement getting out and affecting resale prices.

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2 Comments

  • These articles and comments are helpful and easy to digest. I recall reading about a corrupt balcony scam in New York some 10-12 years ago. I would welcome any information about the balcony scam and news reporting and to know why her any legal actions resulted,
  • January 30, 2021 – Board 1 and STILLMAN wants us to borrow up to 4 Million—STILLMAN? WE WISH to THANK the Lesser Law Group (ATTORNEYS of BOARD 1), for advising us and Board 1 of our Condo Laws regarding our repeated requests to see Payment, Vouchers and Records that in the past has had our Board refuse to do. This will finally be CORRECTED – Transparency was/is a major ISSUE, and costly Bidding “Issues” and Red Flags still Continue. “PURSUANT to the Condo’s BY-LAWS, you (meaning we) ARE PERMITTED to examine the books and account of the Condo at reasonable times; on business days.” Would you believe, that prior requests to do this were denied by our Board. As far as seeing Costly Bids for our Roof or Façade, I cannot review them due to Board 1 claiming I was not a volunteer (totally untrue,) but that is alright—Some of us ex-volunteers have met and contacted roofers and already know what the costs should be and what others have paid for similar, quality work. As a volunteer, Board 1 reports will show WE— (2 Treasurers and I that have since resigned) have substantially lowered our roofing bids (when involved) that were initially costing in the MILLIONS per roof (we said NO) to now as advised $500,000 per roof. If we re-read Board 1 reports, they write of delays and their continued mistakes (steps, engineers, roofs etc.) Prior to those that resigned or quit, someone on our board gave the engineers (Stone--$25,000) the wrong specs. Our board did not know that TPO or PVC (membranes) are now used until I/WE told them what is needed for our roofs. We gave them several top-of-the line roofers to contact including their last pick. Mr. Lesser, Board 1 has overpriced non-membrane bids and none comparable to S and S—let’s all talk truths regarding this. If at $500,000 or less and one bid-- thank Iver and let’s go with S and S. On 09/2020, our board reports admits mistakes in writing, and if our board or an ego seeks to disregard or take credit my/our research that has stopped the massive waste—who really cares, if it will save us MILLIONS.” Delays and patch repairs cost big bucks (3% per year) and create added damage--sound business judgment knows that. Board 1 has wasted thousands on engineering reports that other boards do not need, on costly delays, on their use of G.C.’s/Contractors others don’t use, and we had great hope our New Board Members will correct past mistakes. On 01/19/2021—Borrowing/Assessing $4 MILLION is their Answer. Facade Repairs went from $750,000 for both on 2019 reports, and now is up to $800,000 Per Roof on our recent Board 1 report. In another condo, it will cost approximately half of that ($436,000.) I AM SURE when deemed “non-urgent” we expect that TOO WILL BE Bid Properly and CORRECTED. Thank you Board 1 (and Stillman’s Lesser Law Group) for ruling on this – we can review any and all vouchers, record payments and costs. * Stillman we are told, sold their assets to Gartchester, but are still here—another Red Flag. If anybody would like to know specific costs we paid to a company or person, let me know. This is OUR MONEY and proper business decisions are needed to safeguard it. Awareness and Knowledge are great cost saving tools when used properly and will benefit all of us. Re-Modeling—FUGGETTABOUTIT.