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posted: 12/29/2012 5:34 AM

When should an association board be bonded?

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Q. I live in a self-managed, 75-unit association. Should the board members be bonded?

A. A condominium or common interest community association in Illinois with 30 or more units is required to obtain and maintain fidelity insurance, covering persons who control or disburse funds of the association, for the maximum amount of coverage available to protect funds in the custody or control of the association, plus the association reserve fund. So, the board of your association should obtain and maintain this insurance.

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Professionally managed associations also need protection of a fidelity bond. If an association is professionally managed, the management company, if it is responsible for the funds held or administered by the association, must also maintain and furnish to the association a fidelity bond. The bond must be for the maximum amount of coverage available to protect funds in the custody of the management company at any time. The association pays the cost of the fidelity insurance and fidelity bond, unless the management contract between the association and the management company says otherwise.

Q. Our condominium held its annual meeting earlier this month. Turnout was low, and we did not have enough owners present in person or by proxy to establish a quorum. A couple of the absent unit owners were contacted by phone and they sent a text message to an owner who was present, appointing the owner to whom they sent the text message as their proxy holder for the meeting and authorizing the proxy holder to vote on the owner's behalf at the annual meeting. This, we thought, gave us the needed quorum and permitted the annual meeting and the election to proceed. A question has now been raised. Were the proxies given by text message valid?

A. Unless the association's articles of incorporation or the bylaws otherwise provide, a unit owner may generally vote by proxy. The proxy must be executed in writing by the unit owner or by his duly authorized attorney in fact. The proxy must bear the date of execution.

There are several problems raised by the attempt to create a proxy by text message here. There could be a question as to whether the text message actually came from the owner, or their authorized agent, even if there is evidence the text came from the owner's phone. Further, the text message was not signed (which is what "executed" means here), and did not indicate the date it was signed. The law is generally slow to embrace technology, and I do not have a high level of confidence that a court would find that the text message here constitutes a valid proxy.

Q. Our association has an on-site property manager. During the manager's vacation, the board located several years' worth of credit card statements in the association's office. The statements revealed that our manager opened a credit card under the association's name, and the board was not aware of this. Many of the expenses on the statements appear to be for legitimate association expenses. However, there are numerous and expensive charges on the statements that are either questionable or clearly not association related, and appear to be personal expenses of the manager. What should the board do here?

A. The association should immediately engage the services of an attorney and a forensic accountant. These professionals will perform an investigation. The investigation should include review of the expenses at issue and the association's bank records to confirm the expenses were paid for with association funds and not reimbursed by the manager. The investigation should also include obtaining copies of the actual charge receipts from the credit card company to determine what was purchased and who signed the receipts.

If the investigation indicates the manager used the association's credit card for unauthorized personal expenses paid for with association funds, the association should make a claim under the fidelity bond, and pursue both civil and criminal remedies against the manager. Termination of the manager should also be discussed with the association's attorney.

It is easier than many associations may realize for a person to embezzle their funds. Every association should have measures in place to guard against these unfortunate practices. The association's accountant can provide needed guidance.

• David M. Bendoff is an attorney with Kovitz Shifrin Nesbit in Buffalo Grove. Send questions for the column to him at CondoTalk@ksnlaw.com. The firm provides legal service to condominium, townhouse, homeowner associations and housing cooperatives. This column is not a substitute for consultation with legal counsel.

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