The Common Interest Community Board (the “CICB”) revoked a management company’s license for regulatory violations. In a case reported in the September issue of the Community Associations Institute Law Reporter (Virginia Common Interest Community Board v. Sarraga t/a Lakeside Community Management, File No. 2010-00562, June 24, 2010), the CICB revoked the license of Sarraga t/aLakeside Community Management and issued fines totaling $2,000.
Lakeside Community Management (“Lakeside”) had management contracts with four community associations. Shirley Sarraga started the company in 2003 and experienced rapid growth, growing from “zero to twenty-one communities in less than six years.” The CICB found that the growth created heavy workloads, poor record keeping and a lack of supervision of personnel.
According to the facts found by the CICB, Lakeside experienced the type of problems as do many companies who grow fast without instituting proper oversight: Lakeside did not use properly executed management contracts; it used improper accounting processes; it let its license and corporate status expire; and it failed to provide records to one of the community associations after its contract was terminated.
Regulations for management companies require a signed, written contract between the management company and a common interest community before the term of the contract starts and before the management company accepts any payments. On one occasion, Lakeside failed to have a signed management contract with the community association. For three other contracts, Lakeside failed to amend the contracts to reflect that its corporate status had terminated and it now was a sole proprietorship. In addition, once the license for the corporation expired, Sarraga obtained a license as a sole proprietor, meaning Lakeside was no longer licensed. Because Sarraga failed to have the contracts assigned from Lakeside Management Company, Inc. to Sarraga, the CICB found that Lakeside Management Company, Inc. was managing without the required license.
The CICB found accounting issues. In a 3 month period, Lakeside incurred 19 excessive withdrawal fees and 12 overdraft protection transfer fees. During an office move, the company lost computer data from its general ledger. For a one year period, the company wrote checks without sufficient funds resulting in additional bank penalties. After one of its contracts was terminated, Lakeside continued to write checks on the association’s bank account without authority from the association. Although there was no evidence of fraud or criminal activity and the checks were written to pay legitimate expenses, Lakeside acted outside its authority and contrary to its regulations.
The CICB determined that Lakeside was negligent in maintaining and updating its contract and that it failed to properly account for association funds and records. The CICB stated that “fiduciary responsibility is one of the core responsibilities of a community association manager” and “it was clear to the board that Lakeside was not handling even simple matters pertaining to its own business, so there was no assurance that it could or would follow the regulations when managing associations’ affairs.”
This case deserves more than a blog because it provides a case study on how best intentions can go wrong in a small business without proper attention to details. Without a doubt, a visit to an attorney, early in the process, may have helped the company avoid this drastic outcome.
Management companies should engage in their own annual audits to review existing management contracts and business practices for compliance with the licensing regulations. Items to consider for your audit are:
- Annual report filed with the State Corporation Commission
- Annual fee paid to the State Corporation Commission
- Annual assessment paid to the CICB
- Fidelity bond in effect
- Internal accounting practices
- Data storage and retrieval policies
- Review of management contracts for compliance
Management companies should regularly consult an attorney to make sure they are compliant with the requirements of the State Corporation Commission and the CICB.
Tarley Robinson, PLC, Attorneys and Counsellors at Law
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