Litigation Account, Emergency Assessments and Expenditure Limits
Section 2.10 was revised in June 2005, requiring the Treasurer to establish a separate Litigation Account, constructed from donations separate from Dues, for legal expenses to defend the Covenants. This was done following a court case where significant legal expenses were incurred and immediately prior to an appeal to the Owners for supplemental contributions for Covenants defense. However, the Litigation Account was never established as a separate account, although litigation contributions were tracked in the accounting spreadsheet.
Simultaneously, Section 6.05.1 (Emergency Assessments) was created that empowers the Officers to levy Emergency Assessments on all Owners that appear to be mandatory, for which not such authority exists. Upon further review of the Board minutes, these assessments are voluntary and are accompanied by enticements related to the membership level of the contributor. Effectively, if Dues had not been paid, payment of the Emergency Assessment would include a portion attributed to Dues and another portion attributed to the Litigation Account, and raises an Associate Member (non dues-paying without voting rights on Board business) to a Regular Member with full voting rights.
This created two problems. First, since Dues are to be deposited into an account separate from the Litigation Account, where the Emergency Assessment included a Dues portion, technically, the Treasurer would have to determine that ratio and make two deposits for each such Assessment. But, the Litigation Account was never created. All funds were commingled and records did not delineate between regular Association expenses (from Dues) and legal defense expenses (from the Litigation Account). While this may have made for simpler accounting, it was not consistent with the requirements the same Board placed upon itself when it changed the Bylaws two weeks prior to the appeal to the Owners and did not properly track the legal contributions and expenses.
Second, Section 2.08 limits the ?“amount of any transaction ?… involving funds derived from Members Dues?” to the ?“sum of such membership dues in the Association?’s bank account?” without the majority consent of the Owners. This section was changed simultaneously with the creation of Emergency Assessments, allowing the expenditure of all the dues-derived funds in the account, but not those in the Litigation Account, where previously, expenditures were limited to the total of Dues collected in the current fiscal year, without Owner consent. So, by commingling the dues and Litigation monies, compliance with this limit could not be tracked accurately and could easily be exceeded.
Two things are recommended, here. First, that the bank accounts be separated with the creation of a separate Litigation Account, as required by the Bylaws change, which was clearly intended. The Litigation Account could be created in an interest-bearing account to further expand that resource. Second, that the Board revisits the spending limits in Section 2.08 to define the term ?“transaction?” so as to clarify the intent of these limits.
And, the intent of Section 6.05.1 must be reconciled with Section 6.05.2 where Emergency Loans can be solicited. An Emergency Loan implies going into debt, which is not allowed by the expenditure limits in Section 2.08.
Also, since the administrative expenses tend to be stable and the legal expenses more variable, it is suggested that the Bylaws be further revised to allow for the transfer of excess dues at the end of the year to the Litigation Account. If dues are based on a budget, then transfers of excess funds could create a regular funding mechanism for the Litigation Account in addition to Emergency Assessments.
Section 2.10 was revised in June 2005, requiring the Treasurer to establish a separate Litigation Account, constructed from donations separate from Dues, for legal expenses to defend the Covenants. This was done following a court case where significant legal expenses were incurred and immediately prior to an appeal to the Owners for supplemental contributions for Covenants defense. However, the Litigation Account was never established as a separate account, although litigation contributions were tracked in the accounting spreadsheet.
Simultaneously, Section 6.05.1 (Emergency Assessments) was created that empowers the Officers to levy Emergency Assessments on all Owners that appear to be mandatory, for which not such authority exists. Upon further review of the Board minutes, these assessments are voluntary and are accompanied by enticements related to the membership level of the contributor. Effectively, if Dues had not been paid, payment of the Emergency Assessment would include a portion attributed to Dues and another portion attributed to the Litigation Account, and raises an Associate Member (non dues-paying without voting rights on Board business) to a Regular Member with full voting rights.
This created two problems. First, since Dues are to be deposited into an account separate from the Litigation Account, where the Emergency Assessment included a Dues portion, technically, the Treasurer would have to determine that ratio and make two deposits for each such Assessment. But, the Litigation Account was never created. All funds were commingled and records did not delineate between regular Association expenses (from Dues) and legal defense expenses (from the Litigation Account). While this may have made for simpler accounting, it was not consistent with the requirements the same Board placed upon itself when it changed the Bylaws two weeks prior to the appeal to the Owners and did not properly track the legal contributions and expenses.
Second, Section 2.08 limits the ?“amount of any transaction ?… involving funds derived from Members Dues?” to the ?“sum of such membership dues in the Association?’s bank account?” without the majority consent of the Owners. This section was changed simultaneously with the creation of Emergency Assessments, allowing the expenditure of all the dues-derived funds in the account, but not those in the Litigation Account, where previously, expenditures were limited to the total of Dues collected in the current fiscal year, without Owner consent. So, by commingling the dues and Litigation monies, compliance with this limit could not be tracked accurately and could easily be exceeded.
Two things are recommended, here. First, that the bank accounts be separated with the creation of a separate Litigation Account, as required by the Bylaws change, which was clearly intended. The Litigation Account could be created in an interest-bearing account to further expand that resource. Second, that the Board revisits the spending limits in Section 2.08 to define the term ?“transaction?” so as to clarify the intent of these limits.
And, the intent of Section 6.05.1 must be reconciled with Section 6.05.2 where Emergency Loans can be solicited. An Emergency Loan implies going into debt, which is not allowed by the expenditure limits in Section 2.08.
Also, since the administrative expenses tend to be stable and the legal expenses more variable, it is suggested that the Bylaws be further revised to allow for the transfer of excess dues at the end of the year to the Litigation Account. If dues are based on a budget, then transfers of excess funds could create a regular funding mechanism for the Litigation Account in addition to Emergency Assessments.
