Financial Issues
From: Bill
Sent: Saturday, March 24, 2007 1:23 PM
To: jhmmssm@adelphia.net
Cc: Chris Allison; David Buermeyer; Ken Murphy;
mlh1140@adelphia.net ; noel O'Brien ; Pat Shields;
stim_la_rim@yahoo.com ; Wayne Poyer ;
JBroome@rbdlaw.com ;
jcardenas@RBDLAW.COM ;
mgraham@rbdlaw.com ;
jkearnery@thecrisislawfirm.com ;
mkilmer@kilmercpa.com
Subject:
John:
I’ve just about exhausted my patience attempting to get documents
from the Association. For the moment, I’ll take you at your word
that you will immediately gather the missing documents and give them to
me personally in a face to face meeting.
In my March 1st email, I brought to your attention that the Rees Broome
Diaz invoice for $46,080.55 dated 9/30/06 was missing. I have requested
a copy of this invoice. To date, my request has not been honored. I expect
you to locate a copy of this invoice and provide it to me in our meeting.
In the same March 1st email, I brought your attention to the invoice for
$20,854.10 from Wisecarver. This invoice was omitted from the documents you
produced, despite the fact that it should have been included. I expect you
to locate a copy of this invoice and provide it to me in our meeting.
I have repeatedly requested balance sheets, income statements, and check
registers for each and every month of 2007, including on a going forward
basis. To date, you’ve provided me only a single income statement,
for January 2007 and a promise that the February check register and February
financial statements are ready for pickup. I expect you to provide me a copy
of the January 2007 check register and the January balance sheet in our face
to face meeting. I do not accept your statement that these reports exist in
draft form and therefore do not need to be produced. I have a clear right to
these financial statements at any time. If any report is a “draft”,
just mark it as such. Therefore, I request that I receive the monthly financial
statements by the 6th day of the month.
These 3 items are the most glaring of the documents I requested that I have
not received. Keep in mind, my original request was dated February 19th.
Your obligation is to make these documents available in 5 days. It is now over
30 days since my request, and I have still not received them. Do you want members
to conclude that you are stalling or trying to hide something? I hope not.
In your email of March 16th, you attached a PDF file with your replies to some
of my earlier questions. I reminded you that your obligation as Treasurer is “disbursing
such funds as directed by resolution of the Board of Directors….” Your reply
was that your “interpretation of the Bylaws differs from [mine].” The language
in the Bylaws seems straightforward. What is your position on your responsibility as
Treasurer relative to this issue of disbursing funds? Is it your view that you can
disburse without approval of the Board? The budget is approved by the Board, so if
expenditures take place over the budgeted level, surely these expenditures must have
been approved. Is it your policy to insure that such expenditures are approved, or do
you believe you can disburse without Board approval? Your very short statement leaves
more questions than answers, and I think you owe the members a full and complete statement
of your position. Please provide me with a full and complete statement of your interpretation
of the requirements of your office.
In the same PDF file, you requested further info from me on Association sales of membership
lots. 2 lots were repossessed from delinquent owners and sold to Thomas Henschen on 3/29/06.
The lots in question are both in Section 6A, lots 28 and 113. Please provide me with the
HUD-1 forms for both of these transactions. You indicated you would review the accounting
for these transactions, because based on the amounts in the G/L accounts, these sales do
not appear to be accounted for correctly.
Given that the specific documents I have requested have been the subject of several
back-and-forth emails, I expect that you will personally review the documents produced to
insure that they are what I am asking for and are complete.
I will call you to schedule a mutually convenient time to meet to receive these documents.
Bill Masters
-----Original Message-----
From: John Martel [mailto:jhmmssm@comcast.net]
Sent: Thursday, March 22, 2007 3:58 PM
To: Bill
Subject: LHCC Financial Records
Bill
In addition to the February check register that I emailed you about
on
Tuesday, the February LHCC income statement and balance sheet are
available for you to pick up at the Association office.
john
From: John Martel [mailto:jhmmssm@comcast.net]
Sent: Thursday, March 15, 2007 9:07 PM
To: Bill
Cc: Chris Allison ; Wayne Poyer ; PatLHCCBoard@aol.com; Noel O'Brien;
Chris Anderson; Margie Hoffman; David Buermeyer ; Steve Locke; Suzy
Marcus; Ken & Pat Murphy
Subject: Re:
Bill
The attached document provides answers to the questions you raised in
your 3/1/07 and 3/6/07 emails to me.
john
Financial Questions and Answers from Emails Dated 3/1 and
3/6/2007
Questions from 3/1/07 email
Q - 1. For example, you completely avoided any response
or discussion relating to the issue of an income tax liability of over
$425,000 and tax penalties of over $110,000. These are material amounts.
I find it hard to believe there are no documents that relate to these
liabilities. You also provided no written documents related to the
creation of the position of Assistant General Manager or the granting of
a raise to an employee after only 3 months of service. Again, I find it
hard to believe that there are no documents whatsoever that describe or
indicate approval for these material events. Are we to understand that
these actions are undertaken without Board approval? If the Board did
not approve them, who did? If these were approved by Ray Sohl, the new
GM, without board approval, this is a serious issue. I find it hard to
believe that after only a few months on the job he would engage in this
inappropriate behavior. Therefore, who authorized these personnel
position changes and expenditures?
A – 1 There is no Assistant General Manager position.
The General Manager is authorized to make employee decisions consistent
with amounts in the approved budget and within guidelines that may be
established by the Board of Directors.
Q - 2. On my Point #15 relating to the financial
statements of the Association, you produced only an Income Statement for
January 2006. You produced no check register, and you produced no
balance sheet. You included a statement that the balance sheet is a
“work in progress” and therefore was not produced. You seem to ignore my
right of access to the books and records of my Association. My
Association uses accounting software, and this software can produce a
balance sheet on a moment’s notice. If this is incomplete or inaccurate,
you are free to attach a note to this effect. But you are not free to
withhold the information as you see fit. I repeat my earlier request for
this information, and I note that your response is now overdue and
outside of the timetable set in the law. Further, I remind you that my
request is a continuing one. On March 8, 2007 I have requested and
expect to receive copies of the check register, income statement, and
balance sheet for February. For each succeeding month, I have already
requested and expect to receive the prior month’s report by the 5th
business day of the month.
A – 2 The balance sheet for January 2007 is now complete, and a
copy is available for you to pick up at the Association office. As I
indicated to you in my prior email, financial records remain “DRAFT”
until a validated copy is provided by the Association’s CPA, about one
week prior to each month’s Board meeting. You will be provided a copy of
the validated balance sheet and income statement each month as they
become available from the CPA. For reasons that I outlined in my prior
email, we will not provide a copy of the check register. Nor will we
generate a redacted copy as you have requested. To do so would require
creation of a special financial report that is not required by the
Virginia Property Owners Association Act.
Q - 3. On my Point #6 regarding legal fees for
collections, there appears to be a major error in the reporting. Invoice
# 381645 from Rees Broome Diaz applies to collection expenses.
Therefore, it should be in G/L account 5105. However, this is
incorrectly reported in G/L account 5102. This results in a material
understatement of legal fees for collections. It makes the point I
raised about the ineffective collection efforts even more dramatic. I
fail to see why the Association is investing any money in legal fees in
this area when Association employees are able to file liens for unpaid
dues under the POA Act. This makes no sense whatsoever. Why are we
lining the pockets of lawyers at the expense of our own members? Related
to my Point #6, there is an invoice from Rees Broome Diaz for $13,352.69
(Invoice # 1248) that was not produced. Please produce a copy of this
invoice.
A – 3 Thank you for identifying the error in our
accounting records. Corrective action will be taken. The invoice you
requested was included in the March 12, 2007 package.
Q - 4. On my Point #5 regarding general legal fees, the
invoice dated 9/30/06 for $46,080.55 from Rees Broome Diaz is missing
from the documents you provided. I’d like a copy of this invoice. Also,
there is no entry for an invoice for October 2006 from this firm. Given
the fact that there is an invoice for every other month, I find this
omission unusual. Please re-examine the books and records to determine
if an invoice was not properly recorded. If there is no such invoice for
that month, please provide me an affirmative statement to that effect.
I’ll note that the legal fees paid by the Association, far in excess of
over $500,000, defy reason. These costs exceed the cost of hiring a full
time attorney! I plan to bring this to the attention of members in the
near future in meetings and mailings.
A – 4 The invoice you requested was included in the
March 12, 2007 package.
Q - 5. On my Point #11, I drew your attention to the
fact that the Miscellaneous account was approximately $7,000 over
budget. This is a whopping increase for an account budgeted at $3,000.
In reviewing this account, there are 3 transactions that are refunds of
conformance bonds: RC Adams (5A/135), Whitacre (8A/156), and Nunn
(4A/15). Refunds of conformance bonds are reductions in liabilities, not
expenses. These entries appear to be incorrect. Please provide an
explanation for these 3 entries and copies of the G/L account reports
that were adjusted/corrected in related transactions. For example, if
there are offsetting transactions in the G/L account for conformance
bonds, please provide copies of this account and the related documents.
A – 5 Adjusting entries such as those you’ve identified
would have had to have been made by our CPA. I have requested that the
CPA investigate this matter and advise me of his findings. Rather than
delay this response to you any further while I await the results of his
analysis, I will provide you a response to this question under separate
cover when I receive the data from the CPA’s office.
Q - 6. As I stated in my original email, I will
reimburse the Association for reasonable out-of-pocket costs, but I will
not be overcharged. I expect that you as the Treasurer agree with this
and rigorously enforce it. I have been told that the number of hours to
gather the documents was less than half what I was actually charged. The
total pages produced were less than that billed. I will also point out
that while the POA Act provides that an Association may charge a member
for information, there is no requirement that it must impose such
charges. Fees of this nature should not be used by the Association to
conceal or otherwise avoid producing documents that I am entitled to see
under Virginia law.
A – 6 It is the policy and practice of the Association
to charge for document production only our costs for providing such
production.
Questions from 3/6/07 email
Q - 7. I disagree with the position you set forth in
several of your answers. For many questions, such as 5, 6, 7, 8, 9, 10,
and 11, you simply copied and pasted a generic statement that there is
"no requirement" to address expenses that deviate from the budget. I
refer you to Article XI Section 7d of LHCC's Bylaws, which sets forth
the duties of the office of Treasurer. As Treasurer, you are responsible
for "disbursing such funds as directed by resolution of the Board of
Directors...." Take careful note of that word "resolution." As you are
undoubtedly aware, at the November 14, 2005 board meeting, the Board
voted in favor of the 2006 budget from which I drew the numbers in my
original email. The vote approving this budget was unanimous, On March
27, 2006 you were appointed to the LHCC Board and elected as Treasurer.
You inherited the responsibility for the 2006 Budget, and you oversaw
spending under this budget for more than 9 months of the year.
Therefore, each and every disbursement over budget must be approved by a
resolution. At the bare minimum, the Board should have approved a motion
authorizing these higher expense levels. This is not at all consistent
with your claim that "There is no requirement in Virginia law or the
Association's governing documents for specific Board approval of
expenses that deviate from the budget." With respect to my original
questions 5, 6, 7, 8, 9, 10, and 11, I request the following documents:
the minutes of each board meeting where the deviation from the budgeted
amount and actual amount was discussed, the minutes of the board meeting
where a resolution authorizing the higher expenditure was approved, and
a copy of the actual resolution itself. If you as Treasurer disbursed
funds without a written resolution of the Board of Directors, as
required by the Bylaws, this is a fundamental breach of your fiduciary
duties as a director generally and as the holder of the office of
Treasurer, specifically. As an individual member, you may see no problem
with making over-budget disbursements not authorized by resolution.
However, I and most of my neighbors do not share this view. At the
beginning of 2005 we had nearly $2 million in the bank, and now we have
to resort to borrowing money. You need to uphold the responsibilities of
your office as set forth in the Bylaws of our Association. Is that too
much to ask?
A – 7 My interpretation of the Bylaws differs from
yours.
Q - 8. With respect to your response to my original
question #13 regarding LHCC staff, I am sensitive to the privacy issues
relating to individual compensation. However, your response ignores my
basic right to understand the staffing level of the Association and the
positions that the staff occupies. I have a document from LHCC's website
that lists LHCC staff. On this document, Mike Goodwin is not listed as
the Assistant General Manager. Nevertheless, I have been told he
occupies this position. What is Mr. Goodwin's official title? Is it
accurately reflected on the Association's website? Is there a position
of Assistant General Manager? Is it occupied or open as of this writing,
and if it is occupied, by whom? I request all documents that detail the
job descriptions of current Association employees.
A – 8 There is no position of Assistant General
Manager. Mr. Goodwin’s official title is Architectural & Maintenance
Standard Supervisor.
Q - 9. With respect to your response to my original
question #14, I have re-checked the facts I included in my original
email, and I believe they are correct..According to the land records of
Frederick County, 2 membership lots were in fact sold in addition to the
1 buildable lot you referenced. Keeping in mind that your duties as set
forth in our Bylaws require you to keep "proper books of account", I
request all documents that show the accounting of 2 membership lot sales
by the Association in 2006.
A – 9 I am unaware of the sale of any LHCC-owned
membership lots. If you can provide any more specific information, I
will research this issue further.
Q - 10. With respect to my original question #15, it
appears that you are refusing to supply me with a check register on the
grounds that some small portion of the entries may involve privacy
concerns. This is a bogus reason to refuse my request in its entirety.
You can very easily black out those privacy-related entries, omit the
related pages, or exclude those accounts from the report altogether. As
you are aware, the Association uses Quickbooks, and Quickbooks has the
ability to exclude transactions meeting certain criteria (e. g., payee,
date, account, etc.) from a report. I urge you to re-think your refusal
to comply with my rights under Virginia law.
A – 10 See my answer to Question # 2 above.
Q - 11. Further, my document request is not related to
the document the Association receives from the Association's accountant
one week prior to each month's board meeting. My request is to obtain
the requested financial statements shortly after the close of each
month. Since the Association has Quickbooks and financial statements are
printed like any other report in Quickbooks, this is a simple request.
The balance sheet and income statement involve fewer than 10 pages
combined. I am aware that you are directly set up on the Association's
Virtual Private Network (VPN) and have the knowledge to print these
documents. Therefore, your refusal to provide this information is
particularly disturbing. I urge you to reconsider your refusal to
provide me the documents to which I am entitled under Virginia law. I
also request an electronic copy on computer readable CD or DVD of the
Association's Quickbooks data files, copied each month. This will make
production of these reports less work for both of us.
A – 11 See my answer to Question # 2 above. There is no
easy way to exclude individual personnel salary information from an
electronic copy of the Association financial data. Because of privacy
considerations, the Association will not provide in hard copy or
electronic form records that would reveal individual employee salary,
performance, or related information.
Original Message-----
From: John Martel jhmmssm@comcast.net
Sent: Friday, March 09, 2007 2:16 PM
To: Bill Masters
Cc: Chris Allison; Wayne Poyer; PatLHCCBoard@aol.com; Noel O'Brien;
Chris
Anderson; Margie Hoffman; David Buermeyer; Steve Locke; Suzy Marcus;
Ken &
Pat Murphy
Subject: Re:
Bill
The financial records you requested in your emails to me of 3/1/2007
and 3/6/2007 will be available for you to pick up at the Association
office anytime after noon on Monday, March 12. The actual costs
associated with retrieving and coping the records you requested
total $55.45.
Please provide a check for the this amount made out to LHCC, Inc
when you come to the office to pick up the records.
I am preparing responses to the questions you raised in your two
emails. I should be finished and will email you responses early
next week.
john
From: Bill Masters
Sent: Tuesday, March 06, 2007,10:24 AM
To: John Martel jhmmssm@adelphia.net
Cc: mkilmer@kilmercpa.com; David Buermeyer; Chris Allison;
mlh1140@adelphia.net; WaynePoyer;JBroome@rbdlaw.com; jcardenas@RBDLAW.COM;
mgraham@rbdlaw.com; Ken Murphy; noel O'Brien; Pat Shields
Subject:
John -
Thank you for taking the time to respond to my questions. I am very
disappointed in the overall tone of your response. I had hoped that you
would respond to my questions as a neighbor concerned about the escalating
costs of running the Association. I had hoped you would discuss the thinking
behind the skyrocketing expenses I questioned. Instead, you dismissed these
questions by repeating an answer that contradicts the responsibilities of
your office.
I disagree with the position you set forth in several of your answers. For
many questions, such as 5, 6, 7, 8, 9, 10, and 11, you simply copied and
pasted a generic statement that there is "no requirement" to address
expenses that deviate from the budget. I refer you to Article XI Section 7d
of LHCC's Bylaws, which sets forth the duties of the office of Treasurer.
As Treasurer, you are responsible for "disbursing such funds as directed by
resolution of the Board of Directors...." Take careful note of that word
"resolution." As you are undoubtedly aware, at the November 14, 2005 board
meeting, the Board voted in favor of the 2006 budget from which I drew the
numbers in my original email. The vote approving this budget was unanimous.
On March 27, 2006 you were appointed to the LHCC Board and elected as
Treasurer. You inherited the responsibility for the 2006 Budget, and you
oversaw spending under this budget for more than 9 months of the year.
Therefore, each and every disbursement over budget must be approved by a
resolution. At the bare minimum, the Board should have approved a motion
authorizing these higher expense levels. This is not at all consistent with
your claim that "There is no requirement in Virginia law or the
Association's governing documents for specific Board approval of expenses
that deviate from the budget." With respect to my original questions 5, 6,
7, 8, 9, 10, and 11, I request the following documents: the minutes of each
board meeting where the deviation from the budgeted amount and actual amount
was discussed, the minutes of the board meeting where a resolution
authorizing the higher expenditure was approved, and a copy of the actual
resolution itself. If you as Treasurer disbursed funds without a written
resolution of the Board of Directors, as required by the Bylaws, this is a
fundamental breach of your fiduciary duties as a director generally and as
the holder of the office of Treasurer, specifically. As an individual
member, you may see no problem with making over-budget disbursements not
authorized by resolution. However, I and most of my neighbors do not share
this view. At the beginning of 2005 we had nearly $2 million in the bank,
and now we have to resort to borrowing money. You need to uphold the
responsibilities of your office as set forth in the Bylaws of our
Association. Is that too much to ask?
With respect to my original question #1 relating to income taxes, please
supply me with the following documents: copies of the Association's original
tax returns (including all schedules, forms, extensions, and penalty
estimates) for 2004 and 2005, including any amended returns, copies of all
payments for income taxes, and copies of all communications with the SCC and
all SCC rulings relating to the income tax filing issue that you referenced
in your reply. I also request a schedule showing the date of each board
meeting where income tax issues were discussed and copies of any and all
resolutions that resulted from such discussions. I hope you recognize your
answer is more than a bit of mumbo jumbo. You wrote that the tax liability
was "a result of gain on the sale of lots during 2004 and 2005, a taxable
event for any HOA." You go on to say that the taxes were not paid "when we
filed our return in 2006." The taxes on the 2004 lot sales were due by the
Spring of 2005. LHCC did not pay them. The taxes on the 2005 lot sales were
due by the Spring of 2006. LHCC did not pay them. Your justification for
this behavior is that LHCC realized that "the sale of the utility company
was imminent...." Really? The utility sale was not an imminent event at the
end of 2004, when most people and businesses were doing their tax planning,
since a contract to sell the utility had not even been signed.
It was not an imminent event at the end of 2005, when approval for the
transaction had not even been requested from the Virginia SCC. There is
simply no justification for using 2006 losses on the Utility as an excuse
for not paying taxes due for tax year 2004.
With respect to my original question #5 relating to general legal expenses,
you state that the "Association's point of contact for communications with
the legal firm is the Board president." Chris Allison was LHCC President in
2006 up until the board's first organizational meeting following the October
2006 election. On the December bill from Rees Broome & Diaz, Chris Allison's
name appears 18 times as communicating with Association counsel.
Keep in mind this comment only applies to a single bill for a single 30 day
period! This is a staggering amount of contact with Association counsel from
someone who, according to you, lacked authority to do so. At this time,
Chris Allison was not the Board president. In fact, he was not even an
officer. Did you personally verify the factual accuracy of your statement
prior to making it, or was it an intentional misstatement, or is there some
other benign explanation? I request copies of all board resolutions relating
to establishing the "point of contact" with legal counsel that you reference
in your written reply, along with a schedule setting forth the dates of the
board meetings where contact (both authorized and unauthorized) with legal
counsel was discussed.
With respect to my original question #4 relating to the proceeds from the
Utility sale, your answer brings up several important issues. Firstly, you
state that the amount actually received to date is $1,163,589.30. At the
January 22, 2007 Board meeting, you moved to allocate the Utility sale
proceeds to repay accounts that you never should have taken money from in
the first place: the Clubhouse Reserve and the Conformance Bond account.
The LHCC Board took $450,000 from the Clubhouse Reserve and $150,000 from
Conformance Bonds to fund general operations. The allocations you
recommended on 1/22/07 are in excess of the actual sale proceeds received.
That's simply not viable. Please produce a copy of a motion that corrects
the distribution of the Utility sale proceeds. Please explain why funds were
taken from these 2 important accounts in the first place.
With respect to your response to my original question #13 regarding LHCC
staff, I am sensitive to the privacy issues relating to individual
compensation. However, your response ignores my basic right to understand
the staffing level of the Association and the positions that the staff
occupies. I have a document from LHCC's website that lists LHCC staff. On
this document, Mike Goodwin is not listed as the Assistant General Manager.
Nevertheless, I have been told he occupies this position. What is Mr.
Goodwin's official title? Is it accurately reflected on the Association's
website? Is there a position of Assistant General Manager? Is it occupied or
open as of this writing, and if it is occupied, by whom? I request all
documents that detail the job descriptions of current Association employees.
Further, in my original email I drew your attention to the raise given to
Robin after just 3 months of service, something that is relatively unheard
of. However, my question dealt with the Association's policy on granting
raises, and this does not involve any privacy considerations. So that I can
obtain the information to which I am entitled by law, I will restate my
question in the form of a document request: please produce copies of all
Association policies relating to the hiring, firing, job responsibilities,
and compensation of staff. Note that my request is a request for documents
setting forth the Association's policies.
With respect to your response to my original question #14, I have re-checked
the facts I included in my original email, and I believe they are correct.
According to the land records of Frederick County , 2 membership lots were
in fact sold in addition to the 1 buildable lot you referenced. Keeping in
mind that your duties as set forth in our Bylaws require you to keep "proper
books of account", I request all documents that show the accounting of 2
membership lot sales by the Association in 2006.
With respect to my original question #15, it appears that you are refusing
to supply me with a check register on the grounds that some small portion of
the entries may involve privacy concerns. This is a bogus reason to refuse
my request in its entirety. You can very easily black out those
privacy-related entries, omit the related pages, or exclude those accounts
from the report altogether. As you are aware, the Association uses
Quickbooks, and Quickbooks has the ability to exclude transactions meeting
certain criteria (e. g., payee, date, account, etc.) from a report. I urge
you to re-think your refusal to comply with my rights under Virginia law.
Further, my document request is not related to the document the Association
receives from the Association's accountant one week prior to each month's
board meeting. My request is to obtain the requested financial statements
shortly after the close of each month. Since the Association has Quickbooks
and financial statements are printed like any other report in Quickbooks,
this is a simple request. The balance sheet and income statement involve
fewer than 10 pages combined. I am aware that you are directly set up on the
Association's Virtual Private Network (VPN) and have the knowledge to print
these documents.
Therefore, your refusal to provide this information is particularly
disturbing. I urge you to reconsider your refusal to provide me the
documents to which I am entitled under Virginia law. I also request an
electronic copy on computer readable CD or DVD of the Association's
Quickbooks data files, copied each month. This will make production of these
reports less work for both of us.
I expect the documents I have requested in this email to be available to me
no later than Monday, March 12th.
Sincerely,
Bill Masters
-----Original Message-----
From: John Martel jhmmssm@comcast.net
Sent: Saturday, March 03, 2007 4:09 PM
To: Bill Masters
Subject: Re: Financial questions:
Bill,
The attached file provides the answers to the questions you raised in
your February 19 email to me.
John
Although the Virginia Property Owners Association Act does not mandate
that the
Association respond to specific questions from a member, in the spirit
of full
disclosure and Board transparency, I’m providing the following answers
to the
questions you raised in your February 19 email to me.
1) How did the Association come to owe over $425,000 in income taxes?
Have we
already paid these taxes? If not, when do we expect to pay them? Why
weren’t
these taxes paid on time to avoid having to pay penalties and interest?
Who is
responsible for incurring these huge penalties? Does this mean that we
expect to
get a refund of the taxes payable? When do we expect to receive this
refund? If the taxes payable and refund offset, why are we paying over $110,000 in
interest
and penalties?
A1. The Association incurred the tax liability as a result of gain on
the sale of
lots during 2004 and 2005, a taxable event for any HOA. We had
originally
planned to submit a consolidated LHCC/LHEUC return whereby utility
company
losses would have offset some of the lot sale gains, and we would have
had little
or no income tax liability. However, the State Corporation Commission
ruled that
we could not submit a consolidated return as long as we owned the
utility
company. Realizing that the sale of the utility company was imminent, we
did not
pay the taxes when we filled our return in 2006. We have been advised by
our
auditor/tax preparer and legal counsel that, since we no longer own the
utility
company, we will be able to file a consolidated return for 2006 and that
a
consolidated LHCC/LHEUC tax return for 2006 will contain sufficient
LHEUC related
losses that we will be able to offset most, if not all of, the amount
due for
prior years. We have not paid and do not expect to have to pay the
income tax
liability. Therefore, we will not receive a tax refund. The interest and
penalty
liability will be reviewed with the IRS, and we will request an
abatement, which
is subject to IRS approval. We have been advised by counsel that this
liability
will most likely be substantially reduced, but the final amount cannot
be
determined at this time.
2) Now that we sold the Utility, how are dues-paying LHCC members such
as
membership lot owners going to recoup their share of the $1.9 million
that was
lost on LHEUC?
A2. The Association determined that sustaining the Utility Company was
in the
best interests of all the members. Individual LHCC members will not be
compensated for “losses” incurred.
3) In light of these obvious financial challenges, why has the Board not
acted
aggressively to reduce spending? Why has the Board not been more open
about
discussing the Association’s cash crunch?
A3. The Board openly discussed the cash flow challenges and our means of
dealing with them during the Treasurer’s Report portion of the monthly
Board
meetings.
4) What was the actual amount of proceeds received from the Utility
sale? Why
has the Board been unwilling to communicate accurate financial
information on
the Utility sale?
A4. The actual amount received by the Association to date is
$1,163,589.30. An
additional $50,000 is being held in escrow pending final, unappealable
completion of the Ogunquit law suite. Once this legal action is
complete, the
$50,000 will be released to the Association. In addition, Aqua will
provide the
Association a series of payments over 15 years that equal $76,000 per
year if
certain numbers of new water and sewer connections are made. Taking all
these
figures into account, the total proceeds from the sale of the utility
company could
equal $2,353,589.30
5) General Legal Fee expenses exceeded $475,000 for the year 2006. The
budgeted
amount was $60,000. There is no discussion or approval in the minutes
for
exceeding the budget amount by over $415,000. Who authorized these
additional
expenses? What subject matters are covered by these legal fees, and who
from
the Association communicates with the attorneys that submitted these
invoices? If
this board wants to control legal fees, why does it act in such a
secretive manner
and make decisions that will only cause additional law suits?
A5. Comparisons between budgeted and actual expenses were and are
discussed
during the Treasurer’s Report portion of the monthly Board meetings and
are
reflected in the Board meeting books on file at the Association’s
office. There is
no requirement in Virginia law or the Association’s governing documents
for
specific Board approval of expenses that deviate from the budget. The
Association’s point of contact for communications with the legal firm is
the Board
president.
6) Legal fees for Collections expenses exceeded $83,000 for the year
2006. The
budgeted amount was $50,000. Who authorized these additional expenses?
Why
do we have such a large amount for legal fees for collections at a time
when our
accounts receivables (past due amounts) is at an all time? Is it true
that legal fees
for collections increased so dramatically because the Association
changed the
law firm handling this matter? If this is the case, were directors
informed of the
financial consequences of changing the law firm charged with collection
issues?
Please provide me with a copy of each invoice that was charged to this
account
for 2006.
A6. Comparisons between budgeted and actual expenses were and are
discussed
during the Treasurer’s Report portion of the monthly Board meetings and
are
reflected in the Board meeting books on file at the Association’s
office. There is
no requirement in Virginia law or the Association’s governing documents
for
specific Board approval of expenses that deviate from the budget. Copies
of the
invoices you requested have been provided.
7) At a time when our accounts receivables are so high, we had a Bad
Debt Write
off of over $27,000 for year 2006 against a budget of $8,000. There is
no
discussion or approval in the minutes for exceeding the budget amount by
over
$19,000. Who authorized these additional write offs?
A7. Comparisons between budgeted and actual expenses were and are
discussed
during the Treasurer’s Report portion of the monthly Board meetings and
are
reflected in the Board meeting books on file at the Association’s
office. There is
no requirement in Virginia law or the Association’s governing documents
for
specific Board approval of expenses that deviate from the budget.
8 ) Postage expenses were nearly $28,000 for the year 2006. The budgeted
amount
for 2006 was $12,240. There is no discussion or approval in the minutes
for
exceeding the budget amount by nearly $16,000. Who authorized these
additional
expenses and when were they authorized? Does the $28,000 include postage
for
the proposed governing documents and political mailings? It was my
understanding that Miller & Smith had agreed to pay for the postage for
related
to proposed governing documents. Did they make this payment? If not, why
not?
Please answer these questions and provide me with a breakdown of all
expenses
for General Ledger account 5010-Postage and provide me with a copy of
each
invoice that was charged to this account for 2006.
A8. Comparisons between budgeted and actual expenses were and are
discussed
during the Treasurer’s Report portion of the monthly Board meetings and
are
reflected in the Board meeting books on file at the Association’s
office. There is
no requirement in Virginia law or the Association’s governing documents
for
specific Board approval of expenses that deviate from the budget. Miller
and
Smith paid the invoices submitted to them.
9) Printing and Copying expenses exceeded $64,500 for the year 2006. The
budgeted amount was $30,000. There is no discussion or approval in the
minutes
for exceeding the budget amount by over $34,500. Who authorized these
additional expenses and when were there authorized? Does the $64,500
include
printing and copying for the proposed governing documents and political
mailings? Did Miller & Smith pay for the printing expenses for the
proposed
governing documents, and if not, why not? Please answer these questions
and
provide me with a breakdown of all expenses for General Ledger account
5015-
Printing and Copying. Please provide me with a copy of each invoice that
was
charged to this account for 2006.
A9. Comparisons between budgeted and actual expenses were and are
discussed
during the Treasurer’s Report portion of the monthly Board meetings and
are
reflected in the Board meeting books on file at the Association’s
office. There is
no requirement in Virginia law or the Association’s governing documents
for
specific Board approval of expenses that deviate from the budget. Miller
and
Smith paid the printing invoices submitted to them.
10) Patrol Services charges for 2006 totaled over $54,000. Yet the
budget for 2006
was only $29,066. There is no discussion or approval in the minutes for
exceeding the budget amount by approximately $25,000. Who authorized
these
additional expenses? Why do we have 3 security patrols in the winter? We
were told that Miller & Smith was paying for “extra” security. Did they
pay for
any extra security as the Board has claimed? If Miller and Smith did pay
for
any security, please provide me with a copy of the reimbursement check
that
applies to the extra security detail.
A10. Comparisons between budgeted and actual expenses were and are
discussed
during the Treasurer’s Report portion of the monthly Board meetings and
are
reflected in the Board meeting books on file at the Association’s
office. There is
no requirement in Virginia law or the Association’s governing documents
for
specific Board approval of expenses that deviate from the budget. As you
are
aware from the records furnished you, Miller and Smith did, in fact, pay
for “extra
security”.
11) Miscellaneous expenses exceeded $10,000 for the year 2006. The
budgeted
amount was $3,000. There is no discussion or approval in the minutes for
exceeding the budget amount by over $7,000. Who authorized these
additional
expenses? Why do we have such a large amount for Miscellaneous? Please
answer these questions and provide me with a breakdown of all expenses
for
General Ledger account 5065-Misc and provide me with a copy of each
invoice
that was charged to this account for 2006.
A11. Comparisons between budgeted and actual expenses were and are
discussed
during the Treasurer’s Report portion of the monthly Board meetings and
are
reflected in the Board meeting books on file at the Association’s
office. There is
no requirement in Virginia law or the Association’s governing documents
for
specific Board approval of expenses that deviate from the budget.
12) We now have a “New Position Expense” with an amount of $3,655 spent
in
2006. There is no discussion or approval in the minutes for this expense
item.
Why do we have a “New Position” that was not approved, particularly at a
time
when we should be reducing - not increasing – staff? Who authorized this
New
Position? What is the New Position?
A12. The New Position Expense on the Association’s statement of income
and
expenses is not a new staff position per se but reflects the amounts
approved by
the Board for conducting the search for a new General Manager. The
$3,655
actually spent is only a small portion of the total amount authorized by
the Board.
13) In addition to the above referenced New Position, I have learned
that the
Building Construction Supervisor, Mike Goodwin, was recently promoted to
Assistant General Manager and given a salary increase to over $45,000.
There is
no discussion or approval of this in the minutes. Who authorized this
new
position and salary increase? Why are we increasing office staff and
salaries
when we should be reducing fees, salaries, and personnel following the
Utility
sale? The Utility paid 32% of office salaries so we should be able to
reduce office
staff by at least 32%. I have also learned that Robin, the front desk
administrative
person who was hired just this past September, has already received a
raise. Is it
your policy to give raises to office staff after just three months of
service? Please
explain your rational for these expenditures to me in writing.
A13. Because of privacy considerations, the Association will not discuss
individual
employee salary, performance, or related information.
14) Income statements for the Association show sales of LHCC owned lots
(General
Ledger account 4321) of approximately $54,000 for $2006. Yet according
to my
research, the Association sold 1 buildable lot for $60,000 and 2
membership lots
for a total of $11,500, or a total of $71,500. Why does the sale of lots
understate
the actual amount? If the actual amount is reported under different
General
Ledger accounts, under what accounts and in what amounts are these sales
reported? If that is the case, why aren’t they reported under a single
account to
make this information easier to locate?
A14. The Association sold one buildable lot in 2006 for $60,000 for
which we netted
$57,261.49 after paying the costs of the sale. The cost basis of the lot
was
$3,169.24. GL account #4321 correctly reflects the gain on the sale of
the lot as
$54,092.25 (57,261.49 – 3,169.24).
15) So that I can keep my information current, I would like to receive a
check
register, a balance sheet, and an income statement within 5 days of the
close of
each month.
A15. A check register reveals the salaries of each of the employees of
the
Association. In the interest of preserving the privacy of our staff, a
check register
will not be available for review by the membership. The Association
receives a
balance sheet and income statement from our accountant one week prior to
each
month’s Board meeting. A copy of the balance sheet and income statement
will
be available for you to pick up at the office within 24 hours of the
receipt of the
material from our accountant.
TO: John Martel
From: Bill Masters
Sent: Thursday, March 01, 2007 9:00 PM
To: jhmmssm@adelphia.net
Cc: poyer@verizon.net; Ken Murphy ; Chris Allison;mlh1140@adelphia.net; Pat Shields; noel O'Brien;
stim_la_rim@yahoo.com.;JBroome@rbdlaw.com;jcardenas@RBDLAW.COM; mgraham@rbdlaw.com; David Buermeyer
Subject:
John,
I've reviewed the documents you gathered. Unfortunately, as I indicated in an earlier email, these documents can best be understood in light of your answers to my original questions. So far, I have not received any response from you to these questions.
When can I expect your replies?
For example, you completely avoided any response or discussion relating to the issue of an income tax liability of over $425,000 and tax penalties of over $110,000. These are material amounts.
I find it hard to believe there are no documents that relate to these liabilities.
You also provided no written documents related to the creation of the position of Assistant General Manager or the granting of a raise to an employee after only 3 months of service. Again, I find it hard to believe that there are no documents whatsoever that describe or indicate approval for these material events. Are we to understand that these actions are undertaken without Board approval? If the Board did not approve them, who did? If these were approved by Ray Sohl, the new GM, without board approval, this is a serious issue. I find it hard to believe that after only a few months on the job he would engage in this inappropriate behavior. Therefore, who authorized these personnel position changes and expenditures?
With respect to the documents actually produced, there are a number of discrepancies that I want to bring to your attention.
On my Point #15 relating to the financial statements of the Association, you produced only an Income Statement for January 2006. You produced no check register, and you produced no balance sheet. You included a statement that the balance sheet is a "work in progress" and therefore was not produced. You seem to ignore my right of access to the books and records of my Association. My Association uses accounting software, and this software can produce a balance sheet on a moment's notice. If this is incomplete or inaccurate, you are free to attach a note to this effect.
But you are not free to withhold the information as you see fit. I repeat my earlier request for this information, and I note that your response is now overdue and outside of the timetable set in the law. Further, I remind you that my request is a continuing one. On March 8, 2007 I have requested and expect to receive copies of the check register, income statement, and balance sheet for February. For each succeeding month, I have already requested and expect to receive the prior month's report by the 5th business day of the month.
On my Point #6 regarding legal fees for collections, there appears to be a major error in the reporting. Invoice # 381645 from Rees Broome Diaz applies to collection expenses. Therefore, it should be in G/L account 5105. However, this is incorrectly reported in G/L account 5102. This results in a material understatement of legal fees for collections. It makes the point I raised about the ineffective collection efforts even more dramatic.
I fail to see why the Association is investing any money in legal fees in this area when Association employees are able to file liens for unpaid dues under the POA Act. This makes no sense whatsoever.
Why are we lining the pockets of lawyers at the expense of our own members? Related to my Point #6, there is an invoice from Rees Broome Diaz for $13,352.69 (Invoice # 1248) that was not produced. Please produce a copy of this invoice.
On my Point #5 regarding general legal fees, the invoice dated 9/30/06 for $46,080.55 from Rees Broome Diaz is missing from the documents you provided. I'd like a copy of this invoice. Also, there is no entry for an invoice for October 2006 from this firm. Given the fact that there is an invoice for every other month, I find this omission unusual. Please re-examine the books and records to determine if an invoice was not properly recorded. If there is no such invoice for that month, please provide me an affirmative statement to that effect.
I'll note that the legal fees paid by the Association, far in excess of over $500,000, defy reason. These costs exceed the cost of hiring a full time attorney! I plan to bring this to the attention of members in the near future in meetings and mailings.
On my Point #8, there is a charge for $5,145.06 related to the cost of mailing the revised governing documents to members. It was my understanding that Miller & Smith agreed to reimburse the Association for this expense. You provided no cancelled check to support this, and there is no entry in the general ledger to indicate that such payment was received. Therefore, I will repeat my earlier question: why
was this agreed-upon payment not received?
On my Point #9, there is an invoice for $20,854.10 to Wisecarver. It is my understanding that this cost was for printing the revised governing documents. Like the above referenced postage cost, I understood that Miller & Smith had agreed to reimburse the Association for this expense. There is no entry in the general ledger to indicate that this payment was received.
Why not? Why is this information kept from members? This seems like very favorable treatment to Miller & Smith.
On my Point #10 relating to Patrol Services, you produced 2 invoices to Miller & Smith, one for $6,864.81 and one for $7,715.29. Both of these invoices are marked "Paid" with a check # noted on the invoice. This strikes me as unusual, unless Miller & Smith provided the check in an exact amount prior to the preparation of the invoice.
No copy of the cancelled check was produced, despite my request. Please verify that these payments were received and provide a copy of the actual payment received.
On my Point #11, I drew your attention to the fact that the Miscellaneous account was approximately $7,000 over budget. This is a whopping increase for an account budgeted at $3,000. In reviewing this account, there are 3 transactions that are refunds of conformance bonds: RC Adams (5A/135), Whitacre (8A/156), and Nunn (4A/15). Refunds of conformance bonds are reductions in liabilities, not expenses. These entries appear to be incorrect. Please provide an explanation for these 3 entries and copies of the G/L account reports that were adjusted/corrected in related transactions. For example, if there are offsetting transactions in the G/L account for conformance bonds, please provide copies of this account and the related documents.
On my Point #12, I'd like to observe that approximately $3,700 was spent to interview 5 candidates for the GM position. While these search expenses may be reasonable, they should alert you to the fact that the Board's behavior prevents the Association from attracting qualified local candidates. Perhaps I should spend some time reviewing why the named candidates opted not to work for the Association and whether our employment decision was in the community's best interest.
As I stated in my original email, I will reimburse the Association for reasonable out-of-pocket costs, but
I will not be overcharged. I expect that you as the Treasurer agree with this and rigorously enforce it. I have been told that the number of hours to gather the documents was less than half what I was actually charged. The total pages produced were less than that billed. I will also point out that while the POA Act provides that an Association
may charge a member for information, there is no requirement that it must impose such charges.
Fees of this nature should not be used by the Association to conceal or otherwise avoid producing documents that I am entitled to see under Virginia law.
Further, I am concerned that one board member continues to dominate the affairs of the Association. I have raised serious concerns about the financial matters of the Association with you, and you have yet to fully address or satisfy those concerns.
If you and the other board members do not quickly provide tangible evidence that you are effectively managing the Association and preventing one domineering board member from making bad decisions that affect everyone, you will be endangering the well being of the community.
I look forward to your response. More importantly, I look forward to your action.
Bill Masters
