Appropriate Use of Common Funds Handling Other People’s Money

Here’s a scenario:  It’s mid-December.  The board has assembled for their last meeting of the year.  The managing agent brings great news: due to several unforeseen factors, including the past year’s mild winter and savings resulting from converting to energy-saving technologies, the association is ending the year with a $10,000 surplus over projected expenses.  Should the board throw an extravagant holiday party for the residents?  Reward their hardworking staff with larger bonuses?  Install a hot tub?  Remember, this surplus is made up of residents' money. Can the board spend it on...whatever?

In a word, “No,” says Mark L. Love, CPA, an associate with the Massachusetts-based M Love & Associates, LLC. “Boards doing anything unilaterally in a bubble are asking for trouble.  There is no law against it, but there would be hell to pay if it’s done in a vacuum.  Our experience is that [unilateral spending decisions] are poor judgment.  Usually, there is a budget that drives everything, and if it’s not in the budget, the board would be well served by not spending the money.  That doesn’t mean they can’t bring it to the membership and suggest the expenditure and vote on it.”

Proprietary Rules and Propriety

Exactly how a board can spend common funds “is based on the law, fiduciary duty, and the governing documents – as well as also good management,” says Jeffrey Turk, an attorney and  partner at the firm of Turk & Quijano, located in Braintree, Massachusetts.  “Trustees must think about the long-term ramifications.  It’s also a matter of scale, which is a practical difference – not a legal one. Say $50, versus $15,000.”

Turk cites a situation he recently encountered with a 100+ unit condominium association client in Dorchester, a rapidly gentrifying neighborhood in greater Boston.  “The neighborhood was having issues with gun violence.  A task force was set up to do prevention programming.  One of the board members for this condominium serves on the task force.  Local people, businesses and organizations were donating money to get the task force up and running.  The condo association board voted to donate $10,000 to the new organization.”

Turk points out the conflict in the situation.  “On the one hand, this is supporting the common good of the larger community.  On the other hand, is this benefiting the personal interests of the board members who might be in favor of gun curbs and controls?  Board members owe a fiduciary responsibility to the association of good faith and fair dealings.  On the flip side, boards have some discretion. There’s the Business Judgment Rule, which means a court won’t second-guess business decisions made in good faith.  Is that donation in the association’s best interest?  It reduces crime, shootings, etc., but it’s a difficult thing to say.  We see this all the time when boards make charitable donations.  Board members aren’t self-dealing, but is it really in the interest of the association?  That’s where a board can get into trouble.”

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