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Owners feel left in the dark on use of reserves for legal bills

ASSOCIATIONS

January 31, 2010|By Stephen Glassman and Donie Vanitzian

Question: Our association financial records were not provided to titleholders for more than five years. I tried to get the financial statements but received only the 2004-to-2007 audits. I found that in 2007, more than $48,000 in CDs was cashed in from our reserve account to pay a portion of legal bills totaling more than $88,000. Our 2009 budget did not reflect any balance due for the legal bills.

I obtained copies of the attorney's fee statements indicating that the association still owes more than $20,000 incurred from 2006 to 2008. Our board president said the attorneys gave us a 50% reduction of that balance due, yet that's not reflected in any documents I received.

I also found that association reserves were depleted in 2007, though that was not disclosed until 2009. We owners are being told that we're facing a special assessment to "rebuild reserves" and that more are looming. As the association's bankroll, shouldn't owners be better informed by the board regarding our finances?

Answer: There is no excuse for a board's unlawful use of reserve funds. The association board's duties include performing due diligence and acting in good faith when it comes to preparing a budget and anticipating increases in assessments.

The Davis-Stirling Act (Civil Code sections 1350 through 1378) is very specific about circumstances allowing a board to raid its reserve accounts, the findings it must make beforehand, the methods to repay those reserves and attendant disclosures. All of that must be discussed at an open meeting of the board of directors that was duly noticed with an agenda distributed to all titleholders. The result of that meeting must be documented in minutes made available to all titleholders.

Civil Code section 1365.5(c)(1) states in part that the board of directors shall not spend reserve funds for any purpose other than the repair, restoration, replacement of major components that the association is obligated to repair, restore, replace or maintain and for which the reserve fund was established or litigation associated with that obligation. Still, spending more than $80,000 on legal fees without some mention of it in the minutes looks suspicious and begs for an explanation.

Audits, financial accountings and pro forma budgets are merely informative measures. They do not prevent the misuse of funds. Because there is no other source for obtaining money to fund the association, titleholders are responsible for coming up with the resources to keep the association solvent. That means replenishing the association's operating funds and reserve accounts.

To help track the funds, owners should continue making written demands for documents and information.

Send questions to Box 10490, Marina del Rey, CA 90295 or e-mail noexit@mindspring.com.

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