Company co-mingling, wasting board’s funds

Question: Our association has enough funds to cover our accounts payable, but the management company bounces checks written from our association’s account. The company charges our association hefty bounced check fees, fees for withdrawals and a penalty and processing fee for handling the transaction. At times, management is late paying our bills, and we’re charged late fees by businesses.

Management charges our board a “per hour fee� just to look at our own books, records and documents.

For the last several years, management has co-mingled our association deposits and funds. Management supplies our boards with as much petty cash as it wants, which is used for just about anything it doesn’t want to “put through the books.�

My spouse works at the same bank where our association funds are deposited. I learned that all the benefits of banking that would normally go to a client are given to the management company because it is considered the management company’s account. One benefit is that management company is not charged a bounced-check fee or penalty and processing fees, but the company bills my association anyway.

No board directors can access the account directly at the bank because it’s “not in the association’s name.� Because our account is co-mingled with the management company’s other clients, association board members are not on the signature cards. Management’s contract and renewal says it can co-mingle funds and enjoy the benefits of our money. How can the company get away with this?

Answer: Financial practices like these are highly suspect. The situations described are a risk to owners.

Your past and present boards of directors have seriously breached their duties to the titleholders and association by signing a contract allowing co-mingling of funds while giving the benefits away to a third-party vendor.

The management company is in violation of Civil Code section 1363.2, part of the Davis-Stirling Act. The law requires management companies to deposit association funds in a separate account; they may not co-mingle funds unless, at the very least, they have the association’s written consent, post a bond that provides adequate protection to the association and disclose any benefits received by them as a result of co-mingling the funds, which cannot be co-mingled for more than 10 days. One benefit that must be disclosed is the waiver of bounced check and bank processing fees.

By accepting the management company’s contract terms without question, the board agreed to allow the company to co-mingle funds, but it did not agree to allow the company to waste association assets.

Both the board and management bear responsibility for the mishandling of those funds. It is the board’s duty to perform due diligence by investigating the ramifications of entering into such a contract and then overseeing the company’s actions.

Even if the board approves co-mingling of funds, it is critical that the account be held in the association’s name with board directors as account signatories. Paying fees of any kind -- especially when the management company is not charged but imposes fees, as if it were -- is not only unethical, it may be illegal and a breach of contract between management and the association because it requires payments for charges never incurred.

Bounced-check charges, payment of late fees and other allegations raise serious questions about the management company’s business operations under board direction. For a board to cavalierly accept charges constitutes a breach of its duty to act in titleholders’ best interests.

Though it is important that this information has been discovered, the manner in which it was learned may cause you as much harm as it does the management company. Your spouse may have breached his or her duty to maintain confidentiality of the bank’s customers, and leaking such information may result in serious consequences.

It may be necessary to remove the present board and obtain a forensic audit of the association’s books to get back on a sound financial footing. Consult an attorney before disclosing information or taking action against the board.

Send questions to P.O. Box 11843, Marina del Rey, CA 90295 or e-mail [email protected].