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Subject: Did Our Developer Misappropriate HOA Money?
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CF4
(Pennsylvania)

Posts:4


01/04/2019 1:49 PM  
I'd like to get the forum's input on a situation our HOA is having with the developer.

Our HOA is currently in the development stage. Two out of three positions on the board are held by employees of the developer, which is an LLC created by a local builder for purposes of developing our subdivision. The head of the LLC is also president of the board (Let's call him Mr. President). This past May, two unit owners working in cooperation with one another planted a large number of large spruce trees on each of their adjacent lots. This caught the attention of Mr. President, who consulted with the builder/developer's attorney as to how to get the trees removed. Mr. President and the attorney ultimately decided to use the Community Documents to force the unit owners to remove the trees, and violation letters were sent out. The unit owners vigorously resisted, but they eventually removed the trees after six months of bickering back and forth (who was right isn't important for purposes of this post).

Last month, the HOA paid $3500 to the developer's attorney for fees relating to the tree issue. When this expense showed up on the financials, I asked the HOA to provide a copy of the HOA's contract with the attorney. In response, I received a letter from the attorney indicating that her agreement was with the developer, not the HOA, but that she billed the HOA at the direction of Mr. President.

I think that Mr. President did not act in the HOA's best interest when he directed the attorney to bill the HOA without first negotiating a contract. Because the agreement was actually between the developer and the attorney, I think MR. President misappropriated the funds and the developer should reimburse the HOA.

Am I right or wrong? I know very little about HOAs and HOA law, so I'm hoping the collective wisdom of this forum could provide some insight. Thank you!
RoyalP
(South Carolina)

Posts:698


01/04/2019 2:24 PM  
The developer has done NO wrong.

Nor have you suffered a tort as a result of the actions taken.

Be prepared to face legal action should YOU violate the covenant(s).


Welcome to community living ..
CF4
(Pennsylvania)

Posts:4


01/04/2019 2:33 PM  
Posted By RoyalP on 01/04/2019 2:24 PM
The developer has done NO wrong.

Nor have you suffered a tort as a result of the actions taken.

Be prepared to face legal action should YOU violate the covenant(s).


Welcome to community living ..





Thank you for your input!
JohnC46
(South Carolina)

Posts:8267


01/04/2019 4:19 PM  
Posted By RoyalP on 01/04/2019 2:24 PM
The developer has done NO wrong.

Nor have you suffered a tort as a result of the actions taken.

Be prepared to face legal action should YOU violate the covenant(s).


Welcome to community living ..




I agree.
MelissaP1
(Alabama)

Posts:8079


01/04/2019 7:13 PM  
Do not see an issue. The developer still owns the HOA. The HOA's money is his to spend. This was for HOA business why hired the lawyer. So the money would come out of the HOA's budget.

Former HOA President
CF4
(Pennsylvania)

Posts:4


01/04/2019 8:21 PM  
Posted By MelissaP1 on 01/04/2019 7:13 PM
Do not see an issue. The developer still owns the HOA. The HOA's money is his to spend. This was for HOA business why hired the lawyer. So the money would come out of the HOA's budget.




Thank you for taking the time to read and respond! Let me ask a follow up:

Our CDs specifically state that the Board shall “stand in fiduciary relation” and “act in the best interests of the association.” To me that would foreclose the developer from spending HOA funds carte blanche and requires some due diligence and avoidance of conflicts of interest. Wouldn’t the best interest of the association require an attorney/client agreement requiring the attorney to act as a fiduciary to the HOA, rather than the developer? Or to shop around and negotiate a fee?
MelissaP1
(Alabama)

Posts:8079


01/05/2019 12:19 AM  
So how do you want to resolve this? Get the HOA's money back? Or is this something to complain about?

What you described doesn't sound wrong and will happen to the HOA when it's owner owned too. The Developer/President has their own corporate attorney. They used them to handle the situation with the HOA members with the trees. Well the Developer's Attorney doesn't work for free. Has to be paid for their services. Since this was a HOA matter, the bill would go to the HOA.

Same thing will happen when the owners take over the HOA. If the board has to hire a lawyer to handle a lawsuit/issue with a HOA member, they too will have the HOA budget pay the attorney bill. Hence why suing your HOA is suing yourself and your neighbors. You all pay the price since the HOA is only funded by it's members.

Former HOA President
TimB4
(Virginia)

Posts:16291


01/05/2019 2:52 AM  
CF,

As I read what you wrote, allow me to summarize:


Issue: Individuals planted trees without proper authorization from the Association (expect association approval required for any exterior changes).

Action: The Association (regardless of who was in control) consulted with an attorney and resolved the issue by enforcing the covenant

Result: Issue was resolved and trees were removed.

Consequence: Attorney fees had to be paid by the Association as it was work done for the Association.




From your perspective: Individuals planted trees on neighboring property (trespassing to do so). The properties the trees were planted on (I expect) are owned by the developer. Therefore, the developer should have contacted the police for the trespassing issue and taken civil action (litigation) on the individuals who planted the trees to have them removed or to reimburse for their removal.



Comment: If I am understanding correctly, I can see your point and an argument can be made for each side. Having served on boards, I know for a fact that individuals will often contact the Board for neighbor v. neighbor issues hoping that the Association will take on the issue. Some Associations have strong board members and will tell the complainant "no, handle the issue yourself" and others will say "we will take care of it." Personally, I believe it's a bad business decision to take on such issues as it can easily cost a few thousand dollars (as you have seen within your own situation).

In my layman opinion, this has to be written off as lessons learned and hopefully when the developer turns the Association over to the membership, the members who serve won't make the same mistake.

Now, you can certainly choose to bring legal action against the board for the expense. However, it's likely that the court would rule on behalf of the Association because of the Business Judgment Rule, especially if an actual covenant was being violated.



It's likely not what you want to hear.
I hope it helps.

Tim
CF4
(Pennsylvania)

Posts:4


01/05/2019 8:39 AM  
Hi Tim- This matter didn’t involve any trespass; the neighbors planted the trees on their own lots. I think your comment applies the same regardless. Thanks for taking the time to respond!
TimB4
(Virginia)

Posts:16291


01/05/2019 9:19 AM  
Sorry for the misunderstanding.


With the trees being planted on their own lots, it would have certainly been an HOA issue (for reasons I stated earlier).
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