HOA Elections: How to Identify HOA Proxy Fraud or Abuse

HOA Elections: How to Identify HOA Proxy Fraud or Abuse

July 2012
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Tags: Proxies

It's perfectly OK for candidates for board positions to solicit proxies from other owners and then vote the proxies on those owners' behalf. But an HOAleader.com reader is suspicious of the practice.

Our reader writes, "I live in a community of 24 townhomes. They were built approximately 10 years ago. During the past 10 years, three board members have managed to continually be re–elected, making sure certain other homeowners have very little chance of serving. Every election time, they magically have proxies from absentee homeowners. I recently requested to see the proxies from our annual meeting in February of this year. My request was declined by both the board, as well as our property manager. The proxies only show the signature of the absentee homeowner, along with the homeowner they are giving authority to vote or to establish a quorum. There is nothing private about these documents, as every homeowner receives the exact same. Our bylaws state that all records are to be made public to all homeowners upon request, etc. My question is: Are the proxies to be held private, or are they, as a matter of record, allowed to be disclosed upon request to other homeowners?"

Our reader's concerns are valid. "Associations can be rife with fraud where boards keep themselves in with proxies," says James R. McCormick Jr., a partner at Peters & Freedman LLP in Encinitas, Calif., who represents associations.

That said, are there any circumstances under which the board or manager could deny this owner's records request? And are there common red flags indicating proxy fraud or abuse? Here are five tips for answering those questions.

1. This owner should probably be allowed to see proxies.

In most states, proxies are considered association records available for owners to review. "I do think most Michigan associations allow their members to inspect the records at a reasonable time, on reasonable notice, and during normal business hours," says Nathaniel Abbate Jr., a partner at Makower Abbate & Associates PLLC in Farmington Hills, Mich., who represents associations. "Proxies would be among the things you could see."

However, there could be twists on a state's open records rule, as there may be in California. "A couple of years ago, there were changes to California's Davis–Stirling Common Interest Development Act, and section 1363.03 of the civil code addresses voting within community associations," says McCormick. "It sets forth procedures for elections, ballots, and proxies. You now have a two–page proxy. The first page says, 'I designate so and so,' and the designee has to be an owner, not the board of directors. The second page is the designation of how the owner wants to vote. There's nothing secret about proxies. But the reasonable interpretation of the statute is that the second page is a ballot, so that's secret and not allowed to be viewed by owners."

2. Remember that proxies aren't inherently bad.

"There's nothing preventing any of the owners from soliciting proxies from anyone," says McCormick. "And the reader asking these questions can solicit his own proxies, too."

3. Also remember proxies can be faked and abused.

"If they know some people aren't going to attend the meeting, owners can make several copies of a proxy, signing the absent owners' names," says Jim Comin, president of The Management Trust—CDC, an association management firm in Kirkland, Wash. "It's deceitful and forgery, but it can be done. We had to watermark proxies so you couldn't copy them. I've also created a system so that each has a secret code—it's a small batch of letters and numbers at the bottom—so that when someone walks in with a proxy, you can tell what unit it's for to compare it against what unit they say it's for. It's few and far between when there's that type of abject cheating on elections. But it happens."

Another easy way to cheat? Just don't vote the proxy as designated. "You're assuming the person you gave your proxy to voted as you said," says McCormick. That may not be the case.

4. Cut abuse with good record keeping.

"The best way to avoid fraud is to be very militant in reviewing proxies and applying the rules uniformly," says Abbate. "Most associations require owners to designate a voting representative. For example, if the place is owned by some entity that's renting it out, one of the entity's officers or employees might be the voting representative. You need to make sure the person giving the proxy is the designated voting representative for that unit. So you can reduce fraud by keeping your records strong and enforcing provisions stating that a person can sign a proxy only if that person has the power to vote."

5. Be wary if the board is secretive.

"It's a red flag that the board and manager are secretive in this case," says McCormick. "If you're afraid to show what's going on, it's a red flag."

6. See if you can avoid using proxies.

If your state permits voting by mail or electronically, it might be wise to not offer owners the option of using proxies at all. "I tell my clients, 'Why waste time with proxies? Why not just vote?'" says McCormick.

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