Q&A:  Should HOA board sue an ex-director who used association funds for a condo upgrade?

Question: Our association recently elected a new board of directors and audited the association’s financials. It obtained proof that one of the former board directors used about $35,000 from association funds to upgrade her condominium. This director still lives here and does not deny receiving this money but she absolutely refuses to pay it back, ignoring all invoices from the board. The association’s attorney says “it isn’t worth it to sue this board director to get the association’s money back, the association should just write it off.” Is this sound advice? What can we do about this?

Answer: This attorney’s advice is not sound. Writing off such a significant debt to the association is foolhardy, especially one created by a director’s breach of fiduciary duty. To do so would set a very bad precedent. To follow that advice and not recoup the association’s funds would also be a breach of the current board’s obligations to the titleholders.

The board’s obligation is to safeguard association assets. This means pursuing claims against third parties for the benefit of the owners who fund its operations — even if it means recouping money from a past or present board director. This does not mean the association must file lawsuits against every debtor or that every claim is worth the association’s resources to prosecute.

A board’s duty is to investigate and pursue available options by making informed and rational decisions, a duty that cannot be delegated. Those actions may entail obtaining a forensic accounting or other such investigations.

Depending on the amount owed, there may be a significant cost of litigation in going after the director, which may or may not be recovered if the association is the prevailing party. Either way, start shopping for another attorney. Some attorneys take certain types of cases on a contingency basis, recovering their fees and costs from the ultimate recovery. Others may offer reduced fees or hybrid fee arrangements as a means of gaining an introduction to a new client, but today, too few perform pro bono representation.

The association’s attorney should generate an invoice demanding the board director reimburse the amount owed and detail consequences for failing to comply. In addition to an attorney-generated invoice, the director should be presented with an invoice detailing the amount owed and due date for payment during a board meeting. This act should be documented in the minutes. That invoice must also be sent every month with a detailed accounting indicating the amount owed and interest fees if applicable.

If the association’s covenants, conditions and restrictions allow for assessments to recover damage to the association, then a special assessment can be imposed on the director. If she continues to refuse to make payment or ignores the statements, then the association has the option of filing a lien on her property and ultimately foreclosing.

Filing a lawsuit is not the only option available. The board could initiate a foreclosure proceeding. Or it could seek to have criminal charges brought against the director, which will not cost the association anything other than its time. Start by filing a police report with the proof you have obtained from the audit and other association documentation.

It is never advisable for the board to not take action to recover lost or stolen association assets. Even when an attorney recommends against filing a lawsuit, the board must still make it clear by its actions that it does not condone wanton mismanagement and theft of its resources — especially by a director.

Zachary Levine, a partner at Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian, JD, P.O. Box 10490, Marina del Rey, CA 90295 or noexit@mindspring.com