Private Loans from the Reserves

Bleakley Platt & Schmidt
James W. Glatthaar, Partner

A board member wished to borrow a portion of the reserve fund for a personal business transaction. He agreed to (a) pay seven percent interest on the money, (b) repay the money within 30 days of a demand by the board, (c) execute an assignment of rental income from a rental property he owned, (d) execute a confession of judgment for the full amount of the loan, and (e) repay the loan in full and any accrued interest within 90 days. The board member’s transaction closed and the money was repaid to the association. The owners learned of the transaction and rebelled at the annual meeting. The two board members seeking re-election were nearly thrown out. When the insurgent candidates lost by fewer than five votes, the rebelling owners demanded to inspect all the ballots and accused the board of fixing the election. Some owners sued the association and the board members individually. The board members counter-sued and the cases were settled with an exchange of releases. There is considerable anger, even two years later.

Legal Lesson

Two things. First, the board members should learn that personal relationships cannot dictate management decisions in an association of homeowners. No matter how many precautions are taken and how favorable the loan terms might appear to the association, owners will never accept a board member using association assets for a personal business decision, even for a short-term period like this. Second, years of excellent work were nearly undone by one unfortunate decision. Homeowner trust must be gradually won back. And some people decline to pass up a gratuitous cheap shot at the board when they have a chance. The problem could have been averted simply by saying “No” every time the transaction was proposed. Some unit-owners will never forgive, and most will never forget.