Several years ago, three members of what was supposed to be a five member board of directors (which actually had only four members) purported to act on behalf of a self managed homeowners association by entering into a $75,000 financing agreement with the local bank to lease satellite television equipment. Immediately afterward, these same three directors signed a satellite programming agreement with Mr. Doogood who was doing business as Snow Cable Television Company (SCTC). The programming contract had a term of ten years and a base price of $2,500 per month. A fourth member of the board never signed the documents.

In any case, Mr. Doogood, purported to act as the equipment vendor as well as the programming contractor. As it turns out, the Board President, who was a tenant and not an owner, was Mr. Doogood's silent partner/conspirator in the programming contract, and was sharing in Mr. Doogood's profit on the lease of the equipment. A large part of the equipment had already been installed when the lease was made.

A certificate representing that the equipment lease was duly approved by a board resolution at a meeting duly held, was signed by the Secretary of the Board. Howeve, upon investigation, this document failed to appear in the association records. The board was notorious for meeting secretly in violation of the Civil Code. An open meeting was held and the satellite system was discussed, but no resolution was adopted concerning this $75,000 lease.

Shortly thereafter, the association began paying on the lease to the bank. Three of the four board members were reelected. at the next annual meeting and adding two new members. Three months later a special meeting was called to consider recalling the entire Board. Prior to the special meeting, it was discovered that the board president had been indicted by a grand jury in another state on several counts of mail fraud based on insurance scams. After learning this, the owners recalled the entire board.

The new board of directors then discovered that the past president, purporting to act on behalf of the board, made a programming contract with Poor Management Service (PMS) to supply the association with the same programming supplied by Mr. Doogood. The previous President executed the agreement by himself and kept it a secret. The new contract was to provide service for 1/3 the project for one year at $1,000/mo versus. the contract with Mr. Doogood which was for 10 years at $2,500/mo. As it turned out, Mr. Doogood was not supplying any programming, and he and the board president were surreptitiously pocketing $1,500/mo. The board promptly adopted a resolution repudiating and rescinding the purported agreement with P.M.S.

The current board of directors has since filed suit against the previous governors in office when the lease and satellite contracts were made. The assertions of liability against all previous directors will be based on neglect and failure to discharge their fiduciary duty. The assertions of liability against the president will be based on fraud as well.

People who live in homeowner associations must take an interest in the operation and management to prohibit mismanagement and wrongful acts. In this case the property was self-managed without the assistance of a repurtable management company. This might never have happened if the association had a professional licensed and insured management company involved.

Andrew Menas, CPMÒ is President of Menas Realty Co. in San Diego, CA

This article appeared in the January 1997 issue of Condo Manangement Magazine