Responsible stewardship of resources and appropriate money management is central to the well-being of all homeowners associations (HOA). It doesn’t matter if you’re in Wilmington or Bald Head Island for that matter. Throughout North Carolina, HOA boards collect dues, maintain common areas, and oversee shared facilities.
These responsibilities require prudent budgeting and careful, conservative allocation of resources. When suspicions arise that board members are misusing funds—whether intentionally or through carelessness—tensions can escalate quickly.
This FAQ explores what “misuse of HOA funds” looks like, how the North Carolina Planned Community Act influences board responsibilities, and how clients may address potential breaches to fiduciary duties. While each situation is unique, having a clear understanding of legal standards is an important first step. Have questions for an HOA dispute? Call the Law Office of Bradley Coxe in Wilmington at 910-834-8400.
What Does “Misuse of HOA Funds” Mean Under North Carolina Law?
In general terms, the misuse of HOA funds refers to any inappropriate or unauthorized use of association money. The North Carolina Planned Community Act, along with an HOA’s own covenants and bylaws, establishes guidelines for how associations manage budgets, fund reserves, and pay for community expenses.
- Personal Expenses: If board members are charging personal expenses—meals, travel unrelated to HOA business, or other perks—to the association’s account, that may qualify as misuse of funds.
- Unapproved Projects: Even if expenses are community-related, the board generally must follow established budgeting processes. Paying for large or controversial projects without proper homeowner approval can raise questions about financial mismanagement.
- Poor Accounting Practices: Misuse sometimes occurs through sloppy bookkeeping, where funds are mixed with personal accounts or not properly documented. It may appear unintentional but can still harm the association.
Key Point: Not every disputed expense is “misuse.” Some homeowners might disagree with legitimate spending decisions that benefit the community. For a claim to rise to the level of legal concern, there typically must be a clear diversion of funds away from community-approved uses.
When is HOA Board Action a Breach of Fiduciary Duty?
The concept of a fiduciary duty means that board members must act with loyalty and care toward the homeowners they represent. In practice, this means making decisions in the community’s best interest, avoiding conflicts of interest, and following both the law and the association’s governing documents.
A board may breach its fiduciary duty if it:
- Fails to Act in Good Faith: Board members are expected to remain honest and transparent about budgets, expenditures, and contracts.
- Puts Personal Interests Above the HOA: If a board member directs association funds into a personal venture or directs payments to a family member’s business without disclosures, this could be a breach of a fiduciary duty.
- Ignores Governing Documents or State Law: The North Carolina Planned Community Act and the association’s bylaws (if there are any) may outline how money should be allocated. Deliberately bypassing rules can constitute a breach of duty.
Proving a breach ordinarily involves showing intentional wrongdoing or neglect that substantially harms the HOA or homeowners.
What evidence do homeowners need to show financial misconduct by the HOA?
Gathering evidence is a necessary and important first step for anyone wanting to pursue a claim of financial misuse. In North Carolina, legal issues focus on whether the board acted within the scope of its governing documents and statutory authority. Review of the relevant materials and documentation may include:
- Financial Statements & Budgets: Compare budgets approved by homeowners to actual spending. Look for unexplained variances or unapproved line items.
- Meeting Minutes: Identify whether votes took place authorizing specific expenditures and whether quorum requirements were met.
- Receipts & Invoices: Document any questionable expenses that do not align with normal community operations.
- Correspondence or Board Communications: Emails or written reports that may indicate a board member used funds improperly.
If a homeowner believes the board is withholding pertinent records, they may be able to request an inspection of HOA documents. Under the North Carolina Planned Community Act, HOAs must typically keep accurate financial records and make them reasonably available for review. When boards refuse to share information, the homeowner could have grounds to pursue legal remedies for transparency and disclosure of financial records.
Can Homeowners Demand a Financial Audit?
It depends on the specific community’s governing documents and North Carolina law. Some HOAs require periodic audits, especially for larger associations. Other times, the bylaws or covenants allow homeowners to request a financial review if they suspect mismanagement or if a significant percentage of owners sign a petition.
- Audits vs. Reviews: An independent audit can be more thorough, whereas a financial review is often a simpler (and less expensive) check of records.
- Reasonable Requests: A board typically cannot outright refuse a legitimate request for an audit if the bylaws or membership majority supports it.
- Costs: The HOA may impose assessment fees for a special audit, especially if the bylaws require homeowners to bear part of the cost for additional reviews.
When disagreements arise, some Wilmington communities opt for a third-party accounting firm to review the books. This can help confirm or disprove allegations of fund misuse. If the board refuses a valid request for inspection or financial review, homeowners might consider legal intervention to compel transparency.
What Legal Remedies Are Available in Wilmington for Misuse of HOA Funds?
When an HOA or its board members misuse funds, homeowners typically consider several legal options:
- Injunctive Relief: A court could order the board to halt certain spending or follow specific accounting practices to prevent additional misuse.
- Damages: If the misuse led to financial harm—for instance, draining reserve accounts or forcing special assessments—homeowners may seek compensation.
- Board Member Removal: North Carolina law and the bylaws of the HOA, may also include procedures for a membership vote on removal even before going to the court.
- Restitution: A court could order repayment of misused money back into the HOA’s accounts.
The North Carolina Planned Community Act guides how courts evaluate board decisions and whether they align with standard practices. Even so, each case depends on its facts, and not every suspicion results in a determination of improper conduct. Courts typically look for evidence of bad faith or willful neglect, rather than good-faith disagreements over which projects to fund.
Is Mediation or Alternative Dispute Resolution a Better Option Than Suing?
Some associations in Wilmington include dispute resolution or mediation clauses in their bylaws. It may be easier and result in a more expedited resolution to request arbitration or mediation before filing a formal lawsuit. This approach may offer:
- Lower Cost: Mediation is generally less expensive than a trial.
- Faster Results: Disputes can be resolved more quickly, providing clarity and preserving community relationships.
- Privacy: Mediation is private, whereas litigation records become part of the public domain.
However, mediation relies on both parties being willing to collaborate. If the board refuses to disclose financial records or denies any wrongdoing, the path to resolution may still lead to court. Homeowners uncertain about whether mediation is viable may benefit by consulting a lawyer in Wilmington to interpret their association’s dispute resolution provisions. Call Bradley Coxe now to schedule a consultation: 910-834-8400
How Do Courts Distinguish Between Legitimate Spending and Misuse?
Courts in North Carolina typically examine:
- Bylaws and Covenants: Were the questioned expenditures properly authorized under the governing documents?
- Intent: Did the board have a good-faith belief that the spending benefited the community, or was it used for personal gain?
- Transparency and Record-Keeping: Were meeting minutes, budgets, and receipts recorded and disclosed in line with the HOA’s rules?
Some Wilmington HOAs, for example, may authorize board dinners or appreciation events if the membership has historically supported these activities. Others do not. The dividing line is often whether these expenses were voted on and fit within the association’s established budget.
Are There Situations Where Misuse of Funds Overlaps with Other Legal Claims?
Yes. Financial misuse sometimes occurs alongside allegations of discrimination, harassment, or retaliation against homeowners who raise concerns. A homeowner who questions the board’s financial practices might also claim the board selectively enforces rules to discourage scrutiny. Alternatively, the board may target a dissenting member by imposing fines unrelated to actual violations.
When multiple claims arise, the legal dispute can become more complex. Homeowners might pursue breach of fiduciary duty, defamation (if the board makes harmful false statements), or even claims under the Fair Housing Act if protected classes face discriminatory practices. Each of these claims must meet its own legal elements, so it is wise to focus on clear evidence, strong documentation, and the governing documents that shape HOA authority.
How Long Does It Take to Resolve HOA Disputes?
The timeline varies. Some HOAs and homeowners settle quickly if the board corrects its behavior and repays any improperly spent funds. Others turn into drawn-out court cases, especially when large sums or fundamental governance issues are at stake.
- Pre-Litigation Phase: Attempts at internal resolution—speaking at board meetings, requesting audits, or holding a community vote—may span weeks or months.
- Mediation or Arbitration: If the association’s rules require or permit it, this process can resolve matters in a few months.
- Litigation: Taking a case to trial can extend the timeline to a year or more, depending on court availability and the complexity of the evidence.
Staying organized can help expedite the process. Homeowners who keep a thorough paper trail of communications, receipts, and bylaws often find it easier to present a cohesive argument when challenging board actions.
Where to Go from Here
Suspicions of misused HOA funds can place strain on any community. Whether homeowners feel the board is funneling resources into questionable projects or believe personal expenses are being paid from association accounts, it helps to understand how North Carolina law addresses these issues. The North Carolina Planned Community Act and each HOA’s governing documents can provide a roadmap for accountability and appropriate spending.
Anyone worried about potential breaches could start by taking these important first steps before making an allegation:
- Review Governing Documents: Check bylaws, covenants, and budgets for guidance on what the board can do.
- Request Information: Ask for financial statements, meeting minutes, or audits if applicable.
- Consider Mediation: Some associations resolve conflicts faster when a neutral third party helps clarify misunderstandings.
- Seek Legal Advice: If the board continues to deny access or refuses to address evidence of misuse, speaking with an attorney may clarify whether injunctive relief, damages, or other actions are appropriate.
For more information about addressing misuse of HOA funds or any other community dispute, our team at the Law Office of Bradley Coxe in Wilmington is here to help. To schedule a consultation, please call us at 910-834-8400. Our office is located at 3907-200 Wrightsville Ave, Wilmington, NC 28403. You may also email [email protected]. We help clients evaluate their specific circumstances and consider the most suitable path forward—whether through amicable resolution or legal intervention to protect the community’s interests.
