Q&A: Corrupt Board and Money Troubles

Q “Recently our association dues went from $166 to $275, and the main reason we  were given was that the last board was 'corrupt' and money wasn't being  allocated correctly. Another reason we were given was that others in the  complex were not paying their dues. The charges in arrears total about $75,000.  Is it legal for them to increase our dues because others were delinquent? We  just want to know if we have a leg to stand on if we try to fight it.”  

 —Concerned Unit Owner  

A “While you may feel pinched by the increase in your association dues, it is legal  for the board to increase your dues because of delinquent payments from other  owners and, indeed, it may have no real alternative but to do so,” says Phyllis H. Weisberg, an attorney with the New York-based law firm of  Montgomery McCracken Walker & Rhoads, LLP.  

 “The monthly association dues which you pay are necessary for the maintenance and  repair of the common areas of the complex in which your unit is situated as  well as the hiring of staff to manage and maintain the property. Most of these items are fixed (as opposed to discretionary) costs which must be  paid regardless of the board’s success in collecting association dues. Since each owner possesses an undivided percentage interest in the common areas  together with his or her fellow owners, all owners are theoretically  accountable for any deficit in the operating budget.  

 “A factor which may underlie your association’s deficit is more the product of the current economic downturn than the business  acumen of your board. Owners who are currently delinquent in paying their association dues are likely  in default of their mortgages. Since under such circumstances it is unlikely that the sums owing will be  recovered by the association, the deficit in the operating budget will remain  until a new owner purchases the unit. As the gap in the operating budget must still be resolved, the proverbial buck  will likely be passed to the remaining owners.  

 “You should be aware that the decisions of the board are protected by the  so-called 'business judgment rule.' To challenge your board’s decision to increase association dues to meet any operating deficit, you would  need to establish that the board acted outside the scope of its authority, that  it acted in bad faith, or that its actions were not undertaken in furtherance  of the welfare of your condominium. In defense of its decision, the board would likely show that it considered the  issue (i.e. how to cover the financial shortfall), that its decision was based upon relevant facts (i.e. unpaid association dues  and the operating deficit), that it acted within the scope of its authority  (i.e. pursuant to the governing documents which authorize it to adopt a budget,  and set the amount of and collect common charges/dues) and that it acted in  furtherance of the association’s purpose (i.e. the increased dues were used for association-related expenses). And on that showing, a court would decide in the association’s favor.”  

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