By Lilliana M. Farinas-Sabogal, Esq. / Published August 2019
Association budgets usually run pretty lean in order to keep monthly assessments under control. As a result, one of the worst things that can happen to a condominium or homeowners association is when association funds have been stolen or converted. Since usually only board members, officers, or managers have access to the association funds, the effect of this theft is compounded by the fact that “one of its own” is the person who committed the crime.
Although it may seem obvious that the board members are required to discharge their duties in good faith and in the manner he or she reasonably believes to be in the best interest of the association, the Florida Statutes helpfully supply laws requiring this to be the case. The Florida Not for Profit Corporation Act, the Florida Condominium Act, and the Florida Homeowners Association Act all reference such a standard. The latter two specifically state that board members and officers of an association have a fiduciary relationship to the owners and members of the condominium.
This is not to say that a board member is forbidden from making mistakes in his or her decision making process, such as voting in favor of a contractor that seemed good on paper and based on its references, but that ultimately did a poor job for the condominium. Board members who act in good faith and with the care that an ordinary prudent person would exercise under similar circumstances are usually protected by the business judgment rule. This rule basically states that where the board acts reasonably, its business decisions are protected from liability. This is based on the facts of each case, so there is no bright line test to know if an action is or is not “reasonable.” Board members are simply expected to use reasonable, prudent judgments. Also, if a board relies on professionals in the field, such as lawyers, engineers, etc., it is entitled to rely on their advice in making their decisions.
Although the vast majority of board members are truly doing the best they can to serve their communities, unfortunately, not every board member plays by these rules. Sometimes, decisions are tinged with conflicts of interest and/or outright malice. In recent years, the Florida Condominium Act and the Florida Homeowners Association Act have both included specific language regarding how to handle conflicts of interests that may arise in contracts or transactions entered into between the association and any of its directors, and criminal activity, including theft or embezzlement involving the association’s funds or property. The statutory changes range from disclosure requirements, to automatic removal from the board, to specifying that certain activities are criminally punishable.
So how can associations protect themselves? There are many policies that boards can put in place to help curb the ability to steal or embezzle funds, such as requiring two signatures or authorizations in order to sign or authorize a check or withdrawal from the association accounts. If both persons are reviewing the proposed expenditure and its propriety (and not simply assuming that every check presented to him or her “is probably ok”), this will help minimize the abil-ity of one person to commit outright theft or embezzlement. Monthly reviews of the association expenditures, receipts, and upcoming expenses are helpful as well. Boards can (and should) be proactive on this front, even where there doesn’t seem any possibility that any such theft would occur. This means meeting as a board to discuss specifically how the association finances are kept and managed, what kinds of procedures make sense for their particular community, and what fail-safes can be put in place in order to avoid troubles down the line.
Also, if the association employs a financial professional, manager, or management company that has access to its funds, it should have policies in place to periodically check the access to the accounts, activity on the accounts, and adherence to policies.
Theft can happen to even the most prepared association, however. For this reason, it is also very important to remember that among the numerous provisions in the Florida Condominium Act and the Florida Homeowners Association Act, there is a requirement that the association carry fidelity bonding/insurance.
Florida Statute Section 718.111(11)(h) states the following:
The association shall maintain insurance or fidelity bonding of all persons who control or disburse funds of the association. The insurance policy or fidelity bond must cover the maximum funds that will be in the custody of the association or its management agent at any one time. As used in this paragraph, the term “persons who control or disburse funds of the association” includes, but is not limited to, those individuals authorized to sign checks on behalf of the association, and the president, secretary, and treasurer of the association. The association shall bear the cost of any such bonding.
Florida Statute Section 720.3033(5) of the Florida Homeowners Association Act has very similar requirements. However, unlike the Condominium Act, the Homeowners Act allows the owners to opt out of this requirement.
If annually approved by a majority of the voting interests present at a properly called meeting of the association, an association may waive the requirement of obtaining an insurance policy or fidelity bond for all persons who control or disburse funds of the association.
In cases where defalcation [misappropriation] of funds has indeed occurred, these fidelity policies help protect the association against the financial loss. The association should have a careful discussion with its insurance agent regarding the policies it has in effect and ensure that they are properly covered for this (hopefully non-existent) event and that they have obtained the best available options for the association. It should also be very clear what the requirements are for them to notify the insurance company in the event of any losses and whether there are any policies or procedures the insurance company requires the association to adopt or keep in order to provide coverage. Worse than having the association funds stolen would be the inability to collect on insurance policies taken out exactly for that eventuality simply because the association did not know it was supposed to take a particular action or make a claim in a particular time frame.
In addition, in cases where the association has a contract with a management company or their managers and/or employees, it should discuss with the association attorneys contract provisions protecting the association from any such unlawful act that its managers or employees may take with association funds.
In short, the association should take stock of its current policies, procedures, and protections related to association finances. In order to reduce the likelihood of theft or other misuse of association funds, it should adopt sensible, clear, and verifiable policies when dealing with association funds; ensure the adopted policies are followed; and perform routine checks on accounts and finances. In order to protect itself from the financial impact of theft or other misuse of association funds, it should be properly bonded and insured and also ensure its contracts with any party that has access to its finances is clear on indemnification, insurance, and other provisions flowing in favor of the association in the event such party commits such theft or other misuse.
Lilliana Farinas-Sabogal is a shareholder in Becker’s Community Association and Business Litigation practice groups. In addition to her experience in assisting community associations in their day-to-day business, management, and the operational aspects of governing their communities, she assists boards of directors, unit owners, and community association managers in analyzing and resolving their often complex contractual and transactional disputes and issues. Ms. Farinas-Sabogal is also one of only 190 attorneys statewide who is a Board-Certified Specialist in Condominium and Planned Development Law. For more information, email LFarinas@beckerlawyers.com or call (305) 262-4433.