04 July 2012

Common Frauds on Homeowners' Associations

The three main players are a triumvirate, whose symbiotic relationship consists mainly of kickbacks and no-bid contracts among and between

  1. the property manager,
  2. the HOA attorneys, and
  3. the HOA's collection company (sometimes owned by the HOA attorneys and/or property manager).

The below scenarios have come to my attention in my work with homeowner and consumer groups.

The "construction defect" scenario

  • Property manager of the homeowner's association ("HOA") has a prior relationship with "construction defects" attorneys.
  • Property manager makes an unauthorized, impromptu "inspection" of the HOA premises without the use of disinterested, neutral experts.
  • Property manager identifies alleged "construction defects" and urges the HOA to correct them with property manager's chosen vendors, whom property manager has chosen without the use of competitive bidding; or property manger makes an arrangement with construction defects attorneys and urges HOA to hire property manager's chosen construction defects attorneys.
  • Construction defects attorneys, paid by the hour or on a contingency basis, sue developer, settling the case for much less than HOA's expectations.
  • Property manager chooses vendors to do the "repairs", without the use of competitive bidding, often at rates much higher than the fair market rate.
  • Repairs by property manager's chosen vendors are sub-standard and must be redone.
  • A special assessment is levied against homeowners to pay for the new work.
  • The "construction defects" law firm stays on as general counsel for the HOA, often meeting with the property manager.
  • See the Las Vegas Review-Journal, which reports that the FBI is investigating a trio of business partners who allegedly conspired to rig board elections so that the HOAs were positioned to push for construction defects lawsuits against builders. The legal work and repair contracts resulting from the lawsuits would be funneled to businesses participating in the scheme.

HOA assets siphoned off

  • In one example, a property manager siphoned off an HOA's electricity to developers/construction sites in which property manager has an interest.

Homeowners set up for foreclosure

  • Homeowner falls behind in paying his/her HOA dues, or property management simply does not tell the homeowners that assessment payments are to go to a new address or that automatic payments from homeowner bank accounts are to be routed to a different bank.
  • Homeowner is in default, often without knowing it.
  • HOA hires a collection company, often owned by the HOA attorneys, that insists (contrary to law) that its penalties and fees be paid before the delinquent assessments are paid. This drives the amount due over the $1800 debt limit for foreclosure.
  • Homeowner attempts to pay back assessments, but his/her checks are refused by the HOA and by the collection agency which insists that collection penalties and fees be paid first.
  • HOA begins foreclosure proceedings.
  • Property manager, collection company, or HOA attorneys purchase the homeowner's property at the foreclosures sale for pennies on the dollar.

The elections scenarios

  • Property manager is named inspector of elections by the HOA board of directors without first giving homeowners the 30-day comment period required by the law. (See CA Civil Code §1363.03 et seq. and CA Civil Code §1357.110.)
  • Election rules that do not properly follow the Civil Code are written by the HOA attorneys in favor of the property manager, which whom the property manager has an ongoing, symbiotic relationship. (See CA Civil Code §1357.130, §1357.140, and §1350.7.)
  • Homeowners who are employed by the property manager serve on board of directors.
  • HOA board continuously renews property manager's contract, which is often worded in terms that will make the contract automatically renewable, year after year, in perpetuity.
  • HOA board turns over control of HOA records, elections, and finances to property manager, and allows property manager to preside over HOA meetings, including those in which property manager's employment is discussed.
  • Board of directors, at the direction of the property manager, approves work that is expensive and unnecessary. HOA funds are then paid to property manager's chosen vendors, without competitive bidding.
  • Election materials are not sent to homeowners whom property manager has deemed to be "troublemakers".
  • Note: CA Civil Code §1357.100 grants homeowners the right to overturn the election rules through a referendum process created by the California Law Revision Commission. The referendum process is laid out in the same section of the Civil Code.

The Board of Director scenarios

  • Property manager is given gifts of free services or materials from vendors who court lucrative HOA contracts.
  • Property manager, in turn, gives gifts to HOA board members in order to insure their loyalty.
  • HOA board members who have accepted gifts go along with all property manager's proposals for expenditures and choice of vendors, or risk exposure for accepting gifts.
  • Note: CA Civil Code §1357.140, and CA Corporations Code §7612, §7613, and §7510, address challenging and reversing rules adopted by an HOA board of directors.

The HOA attorney scenarios

  • Property manager recommends to HOA board that the HOA hire attorneys with whom property manager has a prior relationship.
  • HOA board designates property manager as contract person for HOA attorneys.
  • HOA designates property manager as custodian of HOA records.
  • When a homeowner requests access to inspect and copy HOA documents, property manager delegates the homeowner's requests for access to HOA documents to HOA attorneys.
  • Homeowner is given no chance to discuss with property manager or HOA attorneys where the inspection of HOA records will take place, as required by law, or may be denied access altogether. (See CA Civil Code §1365.2, which sets out the homeowner's rights to inspect and copy HOA records.)
  • HOA attorneys charge HOA by the hour to respond to the homeowner's request for inspection of documents, and also charge by the hour to observe as homeowner inspects and copies HOA documents at the offices of the HOA attorneys.
  • HOA attorneys refuse to divulge their hourly rate for these charges, calling it privileged and confidential information.

Predatory towing

  • Property manager has a "kickback" arrangement with a towing company in which homeowners' cars are towed for minor violations. Although kick-back arrangements are not illegal, the HOA pays a premium for often low-quality vendors' services.

Changing governing documents to make HOAs unattractive to looters

Below are some anti-fraud measures I submitted to mediation/arbitration in a recent HOA case in which I represented a homeowner who was seeking to amend the CC&Rs to make her HOA less attractive to looters (in particular, the property manager):

  1. HOA shall require three or more competitive bids for any vendor (including attorneys, insurance, and construction or repairs to the HOA premises) of over $1500, and shall engage the lowest bidder;
  2. HOA shall require three or more independent, neutral, and disinterested expert assessments of any purported construction defects or repairs on the HOA premises;
  3. HOA funds shall be tied to HOA's tax ID;
  4. HOA shall use a lockbox system for receipt of assessments;
  5. HOA shall segregate and monitor HOA reserves;
  6. HOA shall use duplicate bank statements and insure person reconciling the account is not the same person writing the checks;
  7. HOA shall enable online account review for HOA members;
  8. Members of the HOA shall be allowed access to records in order to compare invoices with corresponding checks;
  9. If the HOA is allowed to use a credit card, the HOA's credit cards must have a low limit, and HOA members must be allowed access to monitor the invoices;
  10. When obtaining insurance, HOA shall make certain that every person with access to HOA money is covered;
  11. Should the HOA hire a property manager, said property manager shall not serve as Inspector of the HOA elections;
  12. Should the HOA hire both an attorney and a property manager, said property manager shall not be authorized to contact the HOA's attorney;
  13. The HOA shall not hire collection agencies to collect unpaid assessments;
  14. The HOA shall not use foreclosure as a collection tool, but can opt to use other collection remedies such as bank levies, 8-hour keeper, and wage assignment;
  15. The HOA shall apply any late assessments to pay the late assessment, and not to interest and penalties, until after the late assessment has been paid in full, as required by law.