How Bill Masters Saved Lake Holiday $120,000

At the April board meeting, LHCC directors discussed a serious problem: they pledged the clubhouse (LHCC common area) as collateral for a loan from Wachovia without first obtaining owner consent. Several board members referred to this as a breach of their fiduciary duty, since common area can’t be mortgaged without first obtaining more than two-thirds consent of Lake Holiday’s owners and that consent was never obtained. GM Ray Sohl introduced the solution to this problem: “the board of directors has expressed an interest in re-collateralizing the existing clubhouse loan.”

The board’s solution: ask owners to retroactively approve mortgaging common area, and if approval were not obtained, to refinance the Wachovia loan at a great expense. Doing so would require paying about $18,000 in refinancing costs, paying approximately $20,000 more in annual debt service over 5 years, pledging 91 LHCC-owned lots, and allowing Wachovia to put a bank hold on $150,000 to $200,000 of LHCC’s cash. Add that up and you get a cash savings of $120,000.

That initial discussion of the problem was lengthy. Our nine video clips cover over an hour and ten minutes in Clubhouse Loan Pts 1-9:

By July, preparations were underway to put the re-financing to an owner vote. LHCC announced the upcoming vote on July 21st. At the July 28th board meeting VP Dave Buermeyer, guided by Wayne Poyer, proposed the specific language to describe the issue to owners. Right away he met with resistance from 2 board members, John Martel and Jo-anne Barnard. Martel claimed that the language gave the refinancing proposal an “air of legitimacy that it probably never really achieved.” Then, Martel did an abrupt about-face and retreated from that position when Poyer seemed to be bothered by his remark. Jo-anne Barnard called the referendum “meaningless” because despite the high cost, the board had already decided to do the refinancing even if owners didn’t approve it. Nevertheless, every other director was satisfied with the decision to proceed with the refinancing. Many felt no further discussion was necessary.

Barnard and Martel felt the significant cost of the refinancing did merit further discussion. Barnard corrected the cost estimate served up by Poyer and Buermeyer. She observed:

It doesn’t cost $20,000. It costs $20,000 and $18,000 in the near term every year at the same time that we have to do the dam.

Here’s the July discussion in clips Oct 08 Referenda Pts 1-5:

So what’s the biggest problem in refinancing the clubhouse balloon note to fix pledging the clubhouse without first obtaining owner approval? The clubhouse isn’t even pledged as collateral on that note. Either Poyer and Buermeyer weren’t being candid about their reasons for proposing the refinancing or they never even bothered to check the documents. If they had taken just a moment to read the collateral exhibit, they would have seen that it clearly contains a description of real estate that is not the clubhouse.

A cautionary word to the non-lawyers that try to comprehend an important legal document like the loan collateral exhibit: it’s a whopping 2 pages, and the description of the property used as collateral involves potentially hard-to-understand legal terms, such as “231 Redland Road.” Proceed carefully!

After watching the video of the July meeting, property owner Bill Masters did bother to check the documents, and the exhibit showing the collateral for the loan very clearly listed the collateral as 231 Redland Road, the location of Lake Holiday’s management office. Masters contacted GM Ray Sohl, and directors Barnard and Martel to understand how they missed this.

Sohl initially disputed Masters’ assessment and insisted the clubhouse was used as loan collateral. Masters had to show Sohl that the loan for which the clubhouse had been used as collateral was paid off and closed months ago. Keep in mind that Masters was making his argument to Sohl and several board members using documents he originally obtained from the Lake Holiday office in the first place.

Barnard and Martel were surprised by his claim but promised to investigate. To further support his contention, Masters supplied loan documents to Barnard and Martel and Frederick County tax maps, one of which appears nearby. In a few days, Sohl, Barnard, and Martel came to the same conclusion that Masters had: the clubhouse wasn’t pledged on the loan in the first place, so there’s no reason to spend all that money on the expensive refinancing supported by Poyer and Buermeyer.

The cash savings, as Barnard herself pointed out at the board meeting, is about $120,000 over 5 years. When Masters discussed with Barnard the significant cash savings, Barnard disputed her own number. Evidently, dollars that Masters saves don’t count as much as dollars that the board very nearly wasted. Beyond the cash savings, Lake Holiday retains clear title to its 91 lots and has unrestricted use of the $200,000 that it would have had to pledge to do the refinancing. Masters managed to accomplish all of this while holding down a full time job and not serving on the board.

Barnard’s attempt to discount the savings is just evidence of the board’s spin machine revving up. More evidence of that is Sohl’s email to Masters, thanking him for catching the “error,” but pointing the finger at Wachovia for not securing the loan with the right collateral. Maybe Wachovia’s Mike Wilkerson has a different opinion of who owns the “error.”

Much can be learned from this episode to improve Lake Holiday. LHCC directors voted to spend over $120,000 of the organization’s cash based on the erroneous belief that the clubhouse was pledged as collateral, a belief that reading the loan documents would have quickly corrected. While Barnard and Martel were against spending money on refinancing, at a minimum they and every other director are guilty of approving a significant expenditure without bothering to read the underlying documents. That’s wrong. If any director did read the collateral documents and recommended the refinancing based on a claim that he knew to be false, that would be far more troubling.

When Masters first called Ray Sohl, he encountered far too much resistance. Sohl spent too much time defending the position that the clubhouse was pledged as collateral, perhaps because the board had already invested so much time to approve the refinancing. If the clubhouse were not pledged, it would make all the resources devoted to the refinancing an embarrassing waste. Fortunately, Masters took the time to make the phone calls and send the emails to overcome Sohl’s resistance. Masters was in an exceptional position because he had previously requested the relevant documents and closely followed the board videos, two things for which he is often unjustly criticized. But it shouldn’t be that hard for owners to get the management office to reach an obvious conclusion. While this went from start to finish in about 3 days, that was too long because the loan collateral exhibit was so clear and unambiguous. The initial response involved too much defensive posturing. If Masters had not persisted after receiving Sohl’s initial response, the savings may have been lost.

Fortunately, Masters saved $120,000 of Lake Holiday’s cash. What the community learns from this affair may be even more valuable.

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A Cup of Coffee

A question. Were you, John Martel, ever asked to meet over a cup of coffee?

John Martel’s answer: “That’s not true.”

From March 8, 2007. Let’s have a cup of coffee.

A tickler 4 days later, after no response from Martel or Buermeyer.

…caught in a situation that limits our ability to have an open conversation with you…

Two months later, on video.

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Quick Takes on the April 28th Board Meeting

The April 28th was long – over 3 1/2 hours, not counting an executive session. We’ve included all but about 15 minutes of that meeting, spread over 26 video clips.

Review of a new front gate contract took about 5 1/2 minutes, but review of a $1500 reimbursement for additional lifeguard open water rescue training took over 30 minutes. The latter issue apparently stemmed from roving patrol/lifeguard supervisor Zeb Brevard, rather than the board, authorizing an expenditure made by the parent of one of the lifeguards.

Just because review of the front gate contract took 5 1/2 minutes doesn’t mean there was serious review. The board rubber-stamped GM Ray Sohl’s recommendation of keeping the contract with Haines at a cost of $15 per hour rather than accept a much lower cost proposal from Spartan at a cost of $13.33 per hour. The potential savings from Spartan’s proposal? About $15,000. The board couldn’t spend a lot of time on this $130,000 contract because it had to have enough time to discuss a contract with the lifeguards requiring them to reimburse the $100 training cost if they failed to work the entire season. At one point, presumably just to shorten a ridiculously long (or was it just ridiculous?) discussion, an audience member volunteered that he would reimburse the $100 training cost if that event occurred.

For the monthly staples, Martel gave the Treasurer’s Report and GM Ray Sohl gave the Management Report. Martel also put forward a motion to fully expense rather than capitalize all of LHCC’s depreciable assets. No director asked whether that was GAAP-compliant. For that matter, no director asked what GAAP is.

Dave Buermeyer gathered up some projections from Miller & Smith and some boxes of old documents. He rolled them into his Vision 10, a plan for the next 10 years at Lake Holiday. It drew applause from the board, which is the only group that will pay any attention whatsoever. Buermeyer also brought back more modifications to a policy to fill board vacancies. Secretary Ken Murphy secured approval for a new Rules Tracking System. At least they’ll look pretty. Early topic of the video: picking the right font. We’ll state the obvious: when a simple community association has to have a rules tracking system, it has too many rules. The board also approved a motion to hire a new collection agency, Debt Recovery Bureau, to try to collect old LHEUC debts on a contingency basis. According to Ray Sohl, these debts are outside the 3 year statute of limitations, and 1 firm has already tried a similar approach and given up after about 2 months.

On a positive note, director Steve Locke brought up negative communications relating to architectural compliance during the Committee & Task Force Reports. He was critical of his own experience and said the board needed to find a “much more neighborly way of going about things.” He thought “a little conversation would have gone a long way.” Perhaps his wife Deborah is working with him to try to develop a “kindler, gentler” side rather than the pseudo-tough guy tactics he displayed in our Keep It Over Here Punk video. Imagine: one LHCC director thinks “a little conversation” with an adversary could go “a long way.” Believable? Enduring? Let’s wait and see.

In earlier meetings, the board concluded that LHCC lacked the money to install guard rails, a safety issue, but evidently the money is there for the GM to solicit proposals to improve the acoustics at the clubhouse. Safety, no. Better acoustics for board members to hear themselves talk, yes.

The biggest topic of the night: re-financing the clubhouse loan. GM Ray Sohl started the discussion by stating that the “Board of directors has expressed an interest in re-collateralizing the existing clubhouse loan.” Oddly, there’s no expression of such interest during open meetings. Since the board voted on a motion to direct the GM to get bids on changes to the clubhouse acoustics, why is there no approved motion to direct the GM to investigate refinancing the clubhouse? This is just more evidence of the backroom discussions that Wayne Poyer denied the existence of when questioned by Bill Masters at the February Round Table.

In a sometimes heated debate, the board decided what to do about the fact that it pledged common assets without first obtaining 67% approval of the membership. To those who say the board never violates LHCC’s governing documents, this is just 1 example. The board acknowledged it didn’t follow LHCC’s governing documents on one of the largest transactions in Lake Holiday’s history. Jo-anne Barnard expressed the view that had she been given a chance to vote to incur a big mortgage to remodel the clubhouse, she would have chosen not to do so.

According to some board members, to fix things would require:

  • pledging over 90 LHCC-owned lots
  • paying $18,000 in closing costs
  • paying an extra $1400 per month for 5 years
  • putting a bank hold on $150,000-$200,000 of LHCC deposits for 5 years

The hold would prevent LHCC from using the money. The board’s fix relies on an artificial distinction between “common area” and “common property.” Mortgaging the clubhouse without member approval was wrong because the clubhouse is “common area,” but mortgaging 91 lots without member approval is acceptable because these lots, according to the board, are something entirely different – “common property.” The extended debate is covered in a total of 9 parts, the first 8 of which include the discussion and the last of which includes the final vote.

Several directors expressed the view that the fix was expensive at a time when money is tight and the damage from violating LHCC’s governing documents can’t be undone. The decision: put the issue to retroactively approve pledging common assets to a member vote (which will almost certainly fail, as Poyer himself acknowledged), and if it fails, to enter into the refinancing, probably in early 2009. Martel asked that the record reflect that this decision to refinance is a breach of directors’ fiduciary responsibility, and when Poyer objected to the minutes reflecting Martel’s comments, he withdrew them. Not to worry, John Martel. The record of your inability or unwillingness to stick to your position is amply reflected on YouTube.

We extend our continued thanks to Bill Masters for his unflinching efforts to let property owners monitor the conduct of LHCC’s board. Despite the board’s talk of openness, they blocked Masters’ videographer from the boardroom on the grounds that he wasn’t an LHCC member. Property owners should be deeply troubled by a board that blocks openness and at the same time denies it is doing such blocking.

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Is There Any Hope?

At the February 23rd Round Table, a Membership Lot owner expressed concern about his prospects for being able to build on his lot in the future. The future that he had in mind: the year 2020. He had a question that is probably on the minds of many Membership Lot owners: “Is there any hope for me?”

LHCC President Wayne Poyer didn’t offer any promises and didn’t offer a lot of hope, but what he did offer came down to Rule 20, Aqua Virginia’s line extension policy. If, as Wayne Poyer described, Rule 20 is the source of salvation for Membership Lot owners, we thought it would be enlightening to review some of the history of LHCC’s treatment of Membership Lot owners and how this rule took shape.

There are a few facts that are important to understand utilities at Lake Holiday: the role of the SCC and the relationship between LHCC and LHEUC. Utilities in Virginia are regulated by the SCC, and utilities have tariffs approved by that Commission. These tariffs include both rates and rules, such as line extension policies. The SCC issues a certificate of public convenience and necessity to a utility. This certificate covers a specified area (often called the certificated area) and carries with it the obligation to serve all potential customers in that service area, subject to the line extension policy in the tariff. For LHEUC (and now for Aqua Virginia), that is the entire Lake Holiday community. LHCC owned 100% of the stock of the utility LHEUC. Under its Articles of Incorporation, LHCC was formed “to promote the…welfare of the members….” Logically, LHCC would be required to operate LHEUC to promote the welfare of members, which includes Membership Lot owners.

Some Lake Holiday critics of a utility’s contribution to a line extension make 2 false claims: that line extension credits (e. g., the old Rule 16 and now Rule 20 credits) would result in a “run on the bank,” and that the cost of the line extension work would raise utility rates. These critics exploit a lack of understanding of accounting and utility regulation to create fear of draining capital out of the Utility and higher rates. The truth is exactly the opposite of what line extension critics claim.

Line extensions provide utilities with new capital and they serve to help lower utility rates for existing homeowners. The Rule 16 credit was capped at an amount less than $3,000 per lot, and it is provided as a credit against the tap fee paid by the owner making the extension. Taps fees typically far exceed the amount of a line extension credit because the tap fee is intended to return capital to the utility for the investment required to build the system to which a new owner connects. In 2006, the tap fee was $8,868 and the Rule 16 credit was $2,861. Thus, every new line extension in 2006 would provide the utility with over $6,000 of fresh capital, less its cost to install the meter and finalize the connection.

In accounting terms, tap fee payments that come with line extensions are accounted for as a return of capital. For LHEUC, the return of capital would have boosted its interest income or helped lower its borrowing costs. With lower net expenses, LHEUC would have needed lower rates to operate. For Aqua Virginia, whose rates are set on a rate of return basis, the return of capital from a tap fee accompanying a line extension serves to lower Aqua Virginia’s investment. With a lower investment, the maximum profit that Aqua Virginia can earn is lower, and it is spread over 1 more rate-paying customer. These forces combine to lower homeowner utility rates, all other things being equal.

Up until the end of 2006, LHEUC’s line extension policy was embodied in Rule 16 of its tariff. Despite the fact that Rule 16 had been in effect for many years, it had been largely hidden from Membership Lot owners. Dave Ingegneri, the former GM of Lake Holiday, testified in a deposition that Chris Allison:

felt it was in the community’s best interest to not publicly announce Rule 16, but certainly, if somebody would request the information we would release it and certainly, Rule 16 is a public document, so if anybody really wanted to find the information they could.

In other words, the burden was on Membership Lot owners to discover Rule 16 completely on their own. But Chris Allison wanted to make that burden even harder. According to Dave Ingegneri, Chris Allison authored a document entitled Membership Lots and Water and Sewer Lots that was included in a number of disclosure packages to prospective buyers. The document falsely claimed that “LHEUC, the utility company, is not empowered by the SCC (VA State Utility Regulating Agency) to expand the current water and sewer infrastructure.” The truth is the exact opposite. LHEUC (and now Aqua VA) was obligated to extend the utility infrastructure in its certificated area, subject to its tariff.

Chris Allison is not the only LHCC leader that has acted against the interests of Membership Lot owners. Frank Heisey made false promises to Membership Lot owners and repeatedly failed to mention LHEUC’s Rule 16 obligations. In the February 2004 President’s Report, Frank Heisey wrote:

LHCC is responsible for expansion of the water and sewer system.

In January 2002, Frank Heisey replied to an email from a concerned Membership Lot owner. He wrote:

The issue with the future of membership lots is an issue of when and where we should extend water and sewer lines. We do not have the capital reserve to do this now based on all of the other issues facing us with the infrastructure….

Note that Frank Heisey was writing as the President of LHCC, and that he wrote “…when and where we should extend…” rather than “…if we should extend….” He wrote that LHCC didn’t have the money “now” rather than “we will never do that.” Tellingly, he didn’t breathe a word about LHEUC’s obligations under Rule 16, something that would have benefited this particular Membership Lot owner. Membership Lot owners were not seeking out Rule 16 precisely because the President of LHCC was telling them that LHCC was responsible for expansion and that LHCC would resolve the “when and where [it] should extend” once its finances improved.

As we previously discussed, in the 3 year period from 2004-2006, Membership Lot owners contributed about $1.4 million to LHCC. Much of this money was contributed because of representations from leaders like Frank Heisey.

But in a 2006 deposition, Frank Heisey discussed extending utilities to Membership Lots: “We had no plans for doing that.” Would Membership Lot owners have paid $1.4 million to LHCC if he had said “we have no plan and no obligation?” Did Frank Heisey make those representations because the money paid by Membership Lot owners was almost exclusively used for pay for benefits to homeowners like himself? To the best of our knowledge, not a single Membership Lot owner has ever made and completed a Rule 16 line extension request over more than 30 years. At least 1 of these owners so desperate for utility service would have pulled this off if LHCC had not concealed Rule 16 from them.

Former LHCC President Chris Allison described just what Rule 16 could mean to a Membership Lot owner in 2006. For a Membership Lot owner just 1 lot away from the end of the utility line, Rule 16 would mean that the Membership Lot owner was “probably not going to have to pay very much….” But to benefit from Rule 16, Membership Lot owners needed honest information about LHCC’s plans and LHEUC’s obligations. They never got it.

Get the Flash Player to see the wordTube Media Player.

Our references to representations from LHCC about its obligation to extend utilities are not isolated. In 2003, Frank Heisey wrote LHEUC President Jack Fastnaught and the entire LHEUC board that he had legal advice that “LHCC is responsible for new lines….” In 2004 LHCC President Heisey and LHEUC President Chuck Brewer jointly wrote to every property owner that “We must expand the water and sewer system to meet the on-going growth and development in our community.” Discussions in public meetings often went far beyond broad-brush, general statements. At a May 2005 joint LHCC Board and Master Planning Task Force meeting, engineers from Patton Harris Rust Associates (PHRA) presented a project to extend utilities to 70 lots in Section 8A near Dogwood Drive and Mill Court. The project had a specific per lot cost estimate of $13,000, and the LHCC Board approved a motion to “facilitate the Dogwood Project.” Today, those lots sit just as they did in 2005 – without utilities.

By the end of that same year, prospects for Membership Lot owners would take a bad turn. In September 2005, we filed a lawsuit against both LHCC and LHEUC that focused attention on the line extension issue. A little more than a month later, LHCC signed contracts to sell LHEUC’s assets to Aqua Virginia. The deal was never put to a member vote. When Lake Holiday was under a court-ordered building moratorium and the Circuit Court was overseeing LHEUC’s affairs, then LHCC President Frank Heisey wrote to members that “selling of the utility company would require a 2/3 majority vote of the eligible membership. This in itself would not be a quick or easy process, nor should it.” The sales contract with Aqua Virginia was hurriedly signed on the eve of LHCC’s 2005 annual election of directors, after which Heisey would no longer be on the board. One representation to members while the Circuit Court was involved; an opposite action when that oversight was gone.

Despite the fact that LHCC already had a deal in place to get out of the utility business, about 2 weeks after signing that deal, its subsidiary LHEUC filed a rate and rule change request in which it attempted to remove any obligation to extend utilities to Membership Lots. Why was LHCC rushing to eliminate the Rule 16 obligation when it would soon be out of the utility business? Were its directors concerned that line extension issues were now part of a lawsuit, and LHEUC’s Rule 16 line extension obligation would now come to light?

Had LHCC bothered to make one, a quick check with the SCC would have revealed that a utility is obligated to serve new customers in the service area covered by its certificate. When asked in a deposition about the SCC’s response to LHEUC’s effort to eliminate Rule 16, Dave Ingegneri testified that “it [the SCC] would in no way approve that, those tariff sheets without Rule 16.” Whose idea was it to eliminate Rule 16? According to Ingegneri: “Chris Allison’s.” Ingegneri went on to describe where LHEUC’s own board had problems with the proposed tariff changes, but Chris Allison went to a Utility board meeting to offer a dictate:

the outcome or the, the [sic] dictate was, if you guys [the LHEUC board] don’t approve it the Association board will.

We collected and filed with the SCC over 450 complaints to fight LHEUC’s effort to increase rates and eliminate its line extension obligations. In just 3 weeks, the SCC ruled that LHEUC’s changes were “defective and should be given no effect.” LHCC had concealed the existence of Rule 16 from Membership Lot owners for years. When it attempted to eliminate any obligation to extend utility lines, it didn’t even bother to provide notice of its plan to these same owners. Instead, LHEUC apparently hid behind the notion that no notice of utility rule changes needed to be sent to Membership Lot owners since they were not Utility customers at the time. All of this is old news to our regular blog readers. We’ve written about LHCC’s shabby treatment of Membership Lot owners during the tariff change effort, and the SCC’s initial rejection of LHEUC’s rate and rule change. LHCC made 2 efforts to undo the SCC’s initial ruling, but the Commission let its ruling stand.

In February 2006, at the same time that the SCC was reviewing LHEUC’s rate and rule change request, LHCC, LHEUC, and Aqua filed a Joint Petition with the SCC to sell LHEUC’s assets to Aqua. It took the parties about 3 1/2 months from signing the contract to file their petition with the SCC. That petition contained a new line extension policy, or the proposed Rule 20. This new proposal was materially different from the previous tariff. Under Rule 16, LHEUC contributed 3 1/2 times the estimated annual utility revenue per Membership Lot, or about $2861. Under the proposed Rule 20, that contribution would drop all the way to $0.

In March of that year, we joined the utility transfer case (PUE-2006-00013) as a Respondent in that proceeding. We were the only Respondent to join the proceeding. Many Membership Lot owners purchased their lots 30 years ago, expecting to have a second home at Lake Holiday. Most own 1 lot that is of little value. With the passage of time and the high cost involved to understand the facts and participate in a utility transfer case against one of the largest water utilities in the entire country, most have given up. Some twist the fact that we were the sole respondent into a characterization of us as trying to block the utility sale. The truth is that we urged the SCC to not approve the transfer as it was proposed, which is lawyer-speak for saying we wanted certain provisions of the original deal changed. That is exactly what happened. After our testimony, the original line extension deal was changed dramatically.

In June, we filed testimony, largely complaining about the line extension policy that LHCC and Aqua proposed. We encouraged adoption of a line extension policy where Aqua Virginia would contribute 3 1/2 times estimated annual utility revenue to the cost of line extensions. We argued simply for continuing the in-force Rule 16, a requirement for the utility to make an investment in line extensions that had been in place for more than 30 years. In July LHCC and LHEUC responded. Chis Allison on behalf of LHCC and Mark Kropilak on behalf of Aqua filed 30 pages of testimony to argue against our proposal. To the question of Aqua’s willingness to contribute 3 1/2 times revenue, Kropilak had an answer: “No.” Chris Allison was spending legal dollars to reduce Aqua Virginia’s contribution to line extensions. Why? Since Aqua Virginia is unrelated to Chris Allison, why was he spending LHCC’s money in this manner?

By August, the SCC staff had reviewed our testimony and LHCC’s rebuttal, and SCC staff members filed their own testimony on the line extension issue that we raised.

Here’s what the SCC had to say:

The proposed main extension rule also forms the main argument, or at least one that squarely falls within the jurisdiction of this Commission, by the Respondent [Ogunquit] in this proceeding.

All water and wastewater utilities currently contribute three and half times the annual revenue per customer to the cost of a main extension.

Staff is concerned that Aqua’s rule differs radically from all other water and wastewater utilities regulated by the Commission.

LHCC, its subsidiary LHEUC, and Aqua Virginia proposed a line extension policy that “differs radically” from the policy for “all other” water utilities regulated by the SCC. The policy proposed was different from just about every other water/wastewater utility in the entire state of Virginia. That’s the policy that LHCC put forward to the SCC to serve Membership Lot owners, whose interests LHCC was allegedly serving. We, quite reasonably, opposed that policy.

Less than a month later, Aqua Virginia filed new testimony, adopting the position that both we and the SCC recommended. Aqua wrote:

We have now moved to a position, consistent with the Staff testimony, for Aqua Lake Holiday (under the general provisions of its main extension rule) to invest in the applicant’s main extension in the amount of 3 1/2 times the estimated annual revenues anticipated to be generated by the home to be constructed on the applicant’s lot. In addition, regarding the payments for intervening lot connections, the payment of these refunds will be extended to ten years from the original five years that was proposed. These changes will cause an increase in the investment needed from Aqua.

We appreciated the opportunity to present our ideas in a public forum and play a role in persuading Aqua Virginia to improve its line extension policy. The changes for which we argued applied not just to us, but to all Membership Lot owners equally. The SCC and its staff played a central role in making Aqua Virginia’s line extension policy more typical of the policies in place for other utilities. What’s clear is that, despite its obligation to promote the welfare of Membership Lot owners, LHCC played no role in improving the line extension policy. Instead, LHCC spent Membership Lot owners’ own money to come up with a bad plan and then paid lawyers to block our efforts to improve it.

Even with all of our references to testimony, the resolution of the line extension issue was very swift. Most testimony in the case was filed in electronic form with follow-up paper copies. Once Aqua Virginia agreed to make its line extension policy more like every other water/wastewater utility in Virginia, we supported these changes, and our further participation was limited to expressing this support. We did not contest any element of the SCC staff testimony, and we did not even appear at the hearing in Richmond. If we were seeking to block the utility sale, we would have done both things.

It took just a couple of days to reach an agreement to stipulate into the record our pre-filed testimony, and we were “excused from participation…,” all of which is discussed in the SCC’s November 2006 order granting the transfer. LHCC’s directors have managed to spin our successful but limited involvement in the transfer case into the false notion that we fought hard to block the transfer itself and lost. Wayne Poyer repeats this worn-out lie in the April 2008 President’s Report, where he describes our involvement in the transfer case as “legal obstacles thrown up (unsuccessfully) by a Member of the Association.” The sale of LHEUC’s assets was not approved by the SCC on the terms proposed by LHCC; it was approved on terms very similar to the terms that we recommended. Wayne Poyer needs to recheck his definition of “unsuccessful.”

In the fall of 2006, the Utility sale was moving toward closing by the end of the year. But Chris Allison remained as unsympathetic to the plight of Membership Lot owners as ever. After working to conceal the Rule 16 obligation, Chris Allison responded via certified mail to a Rule 16 extension request from an owner in Section 6A. A summary of his response: LHEUC will contribute its required $2,861.46. You just need to send in your check for $1,499,713.59. The property owner in Section 6A had been waiting years for utilities, perhaps over 30 years, and probably only recently learned of LHEUC’s obligations under Rule 16. For Chris Allison, who worked to conceal and remove those Rule 16 obligations, to waste the postage to send a letter requesting a deposit check for nearly $1.5 million is far beyond mean-spirited. It’s petty and callous.

Under Chris Allison’s leadership, LHCC wasted thousands of dollars fighting our recommendations before the SCC. Chris Allison discussed just how much money LHCC spent at a board meeting in March 2007. In our video Allison Attacks Masters, Chris Allison said that LHCC spent $200,000 on the SCC proceeding, and that one half of that – or $100,000 – was to fight our recommendations. He claimed that our recommendations amounted to “only 2 lines” in the final SCC ruling. In a final stab at Membership Lot owners, Chris Allison wasted $100,000 fighting to make Aqua Virginia’s line extension policy unlike every other water/wastewater utility in the state. Unsurprisingly, he lost. Instead of recognizing his error of fighting black letter law, he tried to make us the scapegoat by suggesting that our actions triggered legal spending.

The following table summarizes LHEUC’s old Rule 16, the proposed Rule 20, and the Rule 20 actually adopted by the SCC:

Proposed & Adopted Rule 20 vs Old Rule 16
# Feature Old Rule 16 Proposed Rule 20 Adopted Rule 20
#1 Credit to original applicant 3.5 X avg annual utility revenue $0 3.5 X avg annual utility revenue
#2 Future credit for intervening lots that connect later 3.5 X avg annual utility revenue $1,000 $2,000
#3 Expiration of credit for intervening lots 10 years 5 years 10 years

In the summer of 2007, LHCC made a hasty, ill-conceived effort to amend the deeds of dedication in 4 sections where most Membership Lots are located. That effort, called the Utility Extension Program (UEP) was a big flop. At the February 2008 Round Table Wayne Poyer told the concerned Membership Lot owner that:

the best minds in this community contributed to that and in fact authored it.

Really? We’re one of the largest owners of Membership Lots, and we were never contacted about helping to develop a utility extension plan. We’ve spoken to hundreds of other Membership Lot owners, and none of them were contacted either. It’s not credible that “the best minds in this community contributed” when most Membership Lot owners were never even contacted. In fact, the plan was crafted by LHCC’s Development Executive Committee (or DEC, discussed in our video Only 3 For The DEC, which at the time (and still, as of this writing) included no Membership Lot owners. It did, however, include Chris Allison.

During the debate over the UEP kickoff, Wayne Poyer said Membership Lots had “virtually no value” (predictably in our video clip Virtually No Value). LHCC concealed the existence of LHEUC’s Rule 16 from Membership Lot owners for years; it went so far as to deny its obligations. It tried to eliminate those obligations under that rule without sending any notice to these owners. When it came time to sell the Utility’s assets, LHCC jointly proposed a new line extension policy that required Aqua to make no contribution to the cost of line extensions, and then blocked our efforts to secure a larger contribution from Aqua. Five of LHCC’s current directors (Wayne Poyer, Dave Buermeyer, John Martel, Noel O’Brien, and Pat Shields) were on the board in 2006 that fought to block what became Rule 20. In fact, for all the importance Wayne Poyer now attaches to Rule 20, there’s no link to it anywhere on LHCC’s official website.

On February 23rd, Wayne Poyer described the plight of Membership Lot owners as a “sorry situation” and for the Section 6A owner on the video, he had a harsher outlook: “tough.” It’s time for LHCC to own up to its deplorable behavior of thoroughly obstructing Membership Lot owners’ efforts to get utilities.

LHCC’s directors have spent a lot of time and money to insure Membership Lots have “virtually no value.” They have drained hundreds of thousands of dollars from LHCC. Yet the hope for Membership Lot owners, according to Wayne Poyer, is in the Rule 20 protections that LHCC obstructed at every turn.

It’s time for Membership Lot owners to ask themselves a hard question: have LHCC’s directors lived up to their responsibilities to serve the interests of those property owners? The answer can be found in another question with a simple, objective answer: Does my lot, after more than 30 years, have utilities yet?

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Quick Takes on the March 27th Board Meeting

Here’s our quick take on the March 27th board meeting. We now include video thumbnails directly in posts. If you click on the thumbnail, a video player will pop up and begin playing the video. Look for this feature in future posts. If you have problems using this feature, make a comment on our Help page.

We’ve uploaded 15 videos from the March 27th meeting, representing over 1 1/2 hours of about a 2 hour meeting.

One of the first orders of business: fill the board seat vacated by Rick Bleck, who did not meet the 1 year ownership requirement for nomination set forth in LHCC’s bylaws and was invisible on the campaign trail but was elected anyway. There were 2 candidates: Bill Masters and Mike Sweeney, who is the husband of board member Robin Pedlar.

LHCC’s own Articles include the requirement that “A Lot shall not have more than one membership, but the single membership shall be shared by all owners of the lot.” Since Robin Pedlar is a director, she must be a member. If there’s only 1 membership for a lot, there’s no membership opportunity left for Mike Sweeney. LHCC’s directors get around that major roadblock by obtaining a legal opinion from Juan Cardenas of Rees Broome. That opinion starts out “Assuming Mike Sweeney is a member of LHCC….” As far back as Aristotle in 350 B. C., this con job has been understood to be a logical fallacy, often referred to as “circular reasoning.” Check it out: Assuming pigs can fly, then pigs can fly. Use it, like Wayne Poyer did, to impress passive directors and gullible neighbors. Just don’t actually try to fly, because that will expose the fallacy pretty quickly. Buermeyer gave a speech intended for the camera that encouraged diversity on the board yet offered Masters the hope of joining the board only if he became a clone of Buermeyer himself. Buermeyer and Pedlar abstained; Murphy and Marcus avoided controversy by skipping the meeting. Task #1: pass a resolution to make the vote on this charade an open vote. Watch LHCC’s rules trampled on and tossed away in these 2 clips, Breaking The Rules Pt 1 and Breaking The Rules Pt 2. This action shows the board will recklessly violate LHCC’s own governing documents to keep its grip on power.

GM Ray Sohl gave the management report, Mar 08 GM Rpt Pt 1 and Mar 08 GM Rpt Pt 2, in which the topic of the effectiveness of the Roving Patrol was raised. Is it effective? The board moved that question to Executive Session, so members will never know just what the roving patrol led by Zeb Brevard, the roving patrol supervisor, actually does all day. Treasurer John Martel, who sometimes struggles with accounting issues, offered a friendly health tip in his Treasurer’s Report. Wayne Poyer raised a concern that an owner/builder was possibly blocked from using white garage doors, which should automatically be approved, in our clip Garage Doors and asked Judy Platt about stocking the lake with non-native fish.

There have been 2 serious accidents on West Masters Drive, so the topic of guard rails (Guard Rails Again Pt 1 and Guard Rails Again Pt 2) came up again. We’ve heard reports that a driver was very seriously injured, perhaps paralyzed, in a recent accident on West Masters. If guard rails had been installed, the seriousness of these accidents may have been reduced. Steve Locke did offer a suggestion: put up caution tape. Action on the guard rail issue was “tabled” because of LHCC’s “serious financial headaches.” Estimates for dam culvert work (just 1 part of a much bigger project) came in at approximately $175,000 compared to a budget of $45,000. This $130,000 surprise didn’t find its way into Wayne Poyer’s April 2008 President’s Report, which discussed dam costs.

Changes were made to construction guidelines, apparently requiring a member to be in good standing for all properties owned, rather than the property for which construction approval is applied, before approving new construction permits. If allowed to stand, this will just about kill any new construction at Lake Holiday. The board also discussed taking more aggressive action against serious compliance violations. That could mean spending more money on lawyers at a time when money is in short supply. With her husband’s help, Robin Pedlar outlined the plans for 2008 social activities and suggested that LHCC in effect have a second set of books to get around the troubles created by accrual accounting. Directors seemed comfortable they could find a way to shift expenses from one time period to another to make everything work.

Dave Buermeyer led a discussion of changing LHCC’s water conservation rules, but most of that discussion focused on eliminating the single word “services” from a motion actually made by Jo-anne Barnard. Barnard was concerned about expressing positive comments about Aqua Virginia’s services when there have been so many complaints from Lake Holiday homeowners that Aqua Virginia’s service is “not at an acceptable level.” Buermeyer lost control of his own topic, and in the end, voted against the resolution he presented. John Martel seemed to have no idea what he just voted on, since he voted against Buermeyer’s resolution but said that he wanted the resolution to pass. Maybe that one word “services” was the glue that held everything together. Maybe some would pout and block their own ideas if they couldn’t have it their own way.

The Middleton story that we previously covered has recorded a new chapter, after he put “No Trespassing” signs on his property. Wayne Poyer vowed to “do it much more crisply than we did the last one.”

We’ve also added a link on our sidebar to SchoolMatters, a Standard & Poors website with test scores, demographics, district finances, parent reviews, and other information on schools nationwide. It’s easy to compare schools. Our link is for Frederick County, VA schools. Check it out.

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A Proxy Policy To Battle Dissidents

LHCC’s proxy policy was one of the most important topics discussed at the December 27th meeting. The board uses the proxy policy to unfairly restrict the opportunities that LHCC members have to express their opinions in elections. This policy is one of the board’s principal weapons to attack what it calls “the dissidents.” Using characteristic put-downs, the board describes those who vote by proxy as “less sophisticated.”

The most visible sign of LHCC’s efforts to block the use of proxies is right on the ballot envelope itself. In 2005 the ballot envelope didn’t contain any mention of proxies. In 2007, “proxy revocation” is front and center. Compare the 2005 ballot envelope to the 2007 version:

As used by LHCC, the proxy policy is nothing more than an election manipulation tool. Let’s review the 3 most recent LHCC board elections to understand what has changed and why. In each of these elections, the final outcome of who sits on the board would change based on the resolution of these challenges.

In the October 2005 election we solicited proxies almost exclusively from Membership Lot owners. Our success in capturing votes surprised LHCC’s leaders. Several facts from the 2005 election stand out:

2005 Election Facts
# Fact
#1 M & S builders voted lots they no longer owned and LHCC counted these votes
#2 LHCC counted more in person ballots than there were eligible voters who attended the meeting
#3 LHCC refused to count a proxy, claiming the owner voted in person – despite the person swearing under oath that she did not attend the meeting

The election results were very close, too close from the perspective of LHCC’s entrenched board. Our votes were almost all in the form of proxies. So LHCC apparently concluded it was time to develop a way to disqualify proxies before the next election. If LHCC’s directors could disqualify proxies, they could reduce our votes.

Before the October 2006 election ever took place, LHCC knew we would show up with over 400 proxies. We presented these proxies in the governing documents vote in June of 2006, so LHCC knew exactly what to expect that October. LHCC’s directors had to act, or they might have been voted out of office. Before the October 2006 election, LHCC adopted the policy that submitting any absentee ballot revoked a proxy, even if the proxy were executed after the absentee ballot was presented. This was the beginning of the proxy policy as a political tool.

The 2007 election attracted few candidates. There were 7 announced candidates running for 6 seats. One of the announced candidates was Rick Bleck, who did not meet the 1 year ownership requirement for nomination set forth in LHCC’s Bylaws and was invisible on the campaign trail but was elected anyway. Before the election took place, candidate Bill Masters challenged Bleck’s nomination, based on this simple statement in LHCC’s Bylaws:

All nominees must have been Members of the Association for at least one (1) year.

Bleck closed on his Lake Holiday home on October 12, 2006. The cutoff for nominations was September 5, 2007. Bleck obviously didn’t meet the 1 year requirement spelled out in the Bylaws. This presented a serious problem to LHCC’s entrenched board because it will go to just about any length to block Masters from winning a board seat. If Bleck’s nomination were found to be improper and therefore withdrawn, that would leave only 6 candidates – one of which would be Masters – running for 6 seats, virtually guaranteeing Masters a board seat.

The solution to this problem: pay LHCC counsel Rees Broome to produce a 3 page letter to try to explain that that 1 sentence in the Bylaws means something other than what it says. Reader beware: have a big bottle of aspirin handy before reading Rees Broome’s explanation because trying to follow their logic will cause your head to rotate more than once on your shoulders. Rees Broome has been the recipient of checks totaling hundreds of thousands of dollars, signed by LHCC’s entrenched board.

In the October 2007 we supported Bill Masters, who solicited proxies from Lake Holiday property owners. Masters added a new wrinkle to the proxy debate. Because of the cost of soliciting proxies, Masters solicited proxies good for 5 years. And that apparently scares LHCC’s directors.

So how did LHCC respond? By using association funds and resources to conduct a poorly disguised political attack on Masters. Mailed in an official LHCC envelope with a hard-to-miss yellow sticker claiming to hold “Important Information”, LHCC directors spent Association money to send out in early October what was nothing more than a blatant political campaign letter.

LHCC’s mailer attacked proxies generally and the Masters proxy in particular. The mailer also attacked Masters’ campaign positions. Amusingly, the letter misquoted one of Masters’ own campaign letters and falsely claimed that Masters’ calculation of the expected dam repair cost was wrong. Masters used actual numbers from the board meeting on the dam repair and did nothing more complicated than dividing the estimated total cost of the dam repair by the number of property owners actually paying dues. After misquoting the number in Masters’ letter, LHCC’s response was that “No arithmetic we know of gets to this number.” More simply: LHCC’s directors acknowledged they don’t know how to do basic arithmetic.

Three candidates, who also happened to be incumbent officers or directors – President Wayne Poyer, Treasurer John Martel, and Pat Shields – used association resources to mail out their own political response to candidate Masters, who used private resources to pay for his campaign. Wayne Poyer, John Martel, and Pat Shields failed to separate their roles as officers and directors of the association from their personal interests as candidates for re-election. At the bare minimum, they should repay the full cost of this political mailer. We challenge them to do so.

That’s the background for December 27th’s proxy policy discussion, which we present in 4 video clips:

At the meeting, all directors except VP Dave Buermeyer favored allowing proxies. Buermeyer continued to be against allowing proxies even though LHCC has a legal opinion from Steve Moriarty, former LHCC counsel, that proxies must be allowed. Pat Shields cautioned Buermeyer that “we need to follow our lawyer’s advice.”

The proxy policy that LHCC’s directors want to adopt is inherently unfair. Directors want an absentee ballot to revoke a proxy, even if the proxy is executed after the absentee ballot. The only way to revoke an absentee ballot is to show up in person at the election site. This is an easy task for a homeowner. But how about for the Membership Lot owner living in California? His only way to revoke an absentee ballot is to show up in person. The burden is very different for a homeowner who could just walk across the street compared to a Membership Lot owner who has to travel across country. Once LHCC directors capture an absentee ballot vote from a Membership Lot owner, they don’t want to let it go. So they make it very difficult and expensive to revoke.

Revoking an absentee ballot also shows a sloppy inconsistency in LHCC’s voting procedures. In September of 2005, LHCC was planning to hold a vote on new governing documents. At that time, we challenged in court LHCC’s refusal to let members change their absentee votes. LHCC subsequently canceled that scheduled vote and revised its procedures for revoking an absentee ballot. Those changes are reflected in the minutes of the 9/27/05 board meeting. The revised policy states that:

Eligible Members exercising their right to vote an absentee ballot retain the option of changing that absentee vote up to the deadline for all voting. Once an absentee ballot has been witnessed, mailed to and logged in by the office or registered agent, to change that vote the Member must attend the Membership meeting called for the purpose of that vote and, providing proper identification, request that the ballot be recovered for the purpose of recasting the vote.

That policy was adopted in the 2005 election. By 2007 it was abandoned. Compare the note at the bottom of the 2005 ballot to 2007′s version. 2005′s ballot says: “If you desire to change your absentee ballot you must do so in person at the annual meeting on October 22nd, 2005.” 2007′s ballot says: “Once submitted, this Absentee Ballot may not be retracted or changed.” The message from LHCC’s directors to members: Once we have your vote, we’re not giving it up.

The proxy policy also is an attempt to modify LHCC’s Bylaws by board resolution. LHCC’s directors would like to require directed proxies, where the proxy spells out how the proxy holder will vote. Requiring directed proxies blocks unannounced floor nominations. If a candidate to be nominated on the floor is announced in advance, LHCC can discourage that candidate from accepting the nomination. But there’s no requirement that proxies be directed in either LHCC’s Bylaws or in Virginia’s Non-Stock Corporation Act. Wayne Poyer clearly understands that the Non-Stock Corporation Act places few restrictions on proxy use. He described the flexibility that the law puts on proxies to his fellow board members: “the back of an envelope is quite fine.” So what’s an entrenched board to do? Amend LHCC’s Bylaws without the required member vote and circumvent the act by passing a board resolution.

Above all else, LHCC uses false claims about proxies. At the December 27th meeting, Wayne Poyer said some voters gave up their vote for 5 years. That’s absolute non-sense. The proxy that Bill Masters solicited from property owners was revocable at any time by the person that granted the proxy. Revocation could be accomplished by something as simple as sending an email to the proxy holder.

The other false claim is that a proxy granter has somehow given up his vote. That view is expressed in the title of the board’s political attack on Masters: “Its Your Vote – Keep It.” Voting is expressing an opinion, and proxy granters have made a decision to express their opinion by executing a proxy. They have elected to work together to improve their chances of winning an election. There are legitimate reasons for voters to work together and vote by proxy. Voting by proxy gives someone other than LHCC’s board the ability to verify the accuracy of a vote. If 400 voters vote individually, the task of confirming that their votes were counted correctly is insurmountable. If 400 voters vote by proxy, that task becomes simple. LHCC’s directors apparently would rather members act in an isolated manner, have no chance of winning an election, and have no chance to independently verify their votes were counted properly. To keep power, try to divide the opposition.

It’s time for LHCC to clean up its elections.

Election Recommendations
# Election Recommendations
#1 Give every voter a fair opportunity to change his mind and have his most recent vote counted. That means if a proxy is executed after an absentee ballot, count the proxy. If an absentee ballot is executed after a proxy, throw away the proxy and count the absentee ballot.
#2 Don’t make it any harder for a Membership Lot owner to change his vote than it is for a homeowner that lives next door to the polling place. Treat all owners fairly. Let owners undo an absentee ballot easily. A proxy executed after the absentee ballot is one way to do this.
#3 Stop focusing attention on how people vote, be it in person, by absentee ballot, or by proxy. Stop criticizing others who opt to express their vote in any particular manner. A vote by proxy is just as much a vote as that made in person. Someone who votes by proxy is every bit as smart and sophisticated as someone who shows up to vote in person.
#4 Stop all political mailings from the office, period. If candidates want to spend their own money to campaign, let them.
#5 Acknowledge that the October 2007 attack on Masters was a political one, and make the politicians who benefited from it – Poyer, Martel, and Shields – pay for it.
#6 Take the office – controlled by the entrenched board – out of politics altogether. Have the absentee ballots mailed to an independent vote counter. Stop accepting ballots hand-delivered to the office.
#7 Stop hiring armed guards to defend a homeowners’ election. Third-world dictators have armed guards at elections. Responsible community association leaders do not. Its an unbecoming mix of menacing and pathetic, and it only exposes how far some LHCC directors will go to keep power.

Until LHCC’s directors implement these changes to election rules, the community’s elections will continue to take place under a cloud of suspicion and mistrust.

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Suzy Marcus, Silent Sitter

Rick Bleck, who did not meet the 1 year ownership requirement for nomination set forth in LHCC’s bylaws and was invisible on the campaign trail but was elected anyway, was absent from the December 27th meeting. Rick was the two-time defending champion (if that’s the right phrase) in our Silent Sitter contest. In fact, up to this point, Rick has won every Silent Sitter award we’ve given, since we’ve only given 2. We’re not sure if he was busy or has a strong sense of fair play that required him to give another director the chance to win the Silent Sitter award.

Given a fair chance, somebody other than Rick Bleck did win our Silent Sitter award. That person is Suzy Marcus. Congratulations, Suzy! You’re our Silent Sitter for the December 27th meeting. Ever since we conceived copied the idea for the Silent Sitter award, we just knew that as long as she showed up, Suzy Marcus would put in a strong showing. The video clip Oops We Goofed (also linked in our post Twenty Certified Letters Later… and on our Videos page) pretty much includes Suzy Marcus’s entire contribution at a meeting that was well over 2 hours in length. In other words, if you don’t count silence, she didn’t contribute very much. When you consider that board members get their board books in advance of the meeting so they can show up ready and prepared to contribute, there’s simply no excuse for that much silence.

Suzy was absent from the 11/26 board meeting, at which she was responsible for presenting an “Open Discussion on Realtor Outreach.” Presumably, she was planning to lead a discussion of ways to help market the Lake Holiday community to real estate agents. When she was absent in November, this topic was moved to December. Perhaps she forgot about her own agenda item. We didn’t. Any benefits from a realtor outreach have now been delayed for 2 months. Sellers may not take kindly to a board that talks tough about a challenging real estate market but when it’s time for action only procrastinates. Chalk it up to having Silent Sitters on the board.

We do have sympathy for Rick Bleck, Suzy Marcus, and every future Silent Sitter. It’s very difficult to break out of the Silent Sitter role, as our video Only 3 For the DEC demonstrates. The DEC is LHCC’s Development Executive Committee, and this committee is where the important stuff happens. As Wayne Poyer explained in the following video, the DEC manages the relationship with Miller & Smith, the biggest developer at Lake Holiday. The DEC also handled the initial relationship with potential golf course purchasers and developed the Utility Extension Program (UEP). In other words, it plays a lead role in critical development issues at Lake Holiday before these issues ever reach the board.

After Wayne Poyer described the DEC at the board’s November organizational meeting, a number of directors jumped at the chance to serve on this important committee. Directors Noel O’Brien and Robin Pedlar, two directors who could challenge for a Silent Sitter award in any given month, wanted to serve. But alas, after offering the tease of what the DEC got to work on, Wayne Poyer explained that there are only 3 seats on the DEC. Without further explanation, these potential Silent Sitters who wanted to contribute just had to understand that Wayne Poyer, John Martel, and Dave Buermeyer would take over the DEC. Is it unusual that 3 men appear to just assume they should dominate this committee and 2 women appear to just understand that this committee is not for them?

Why aren’t Noel O’Brien and Robin Pedlar on the DEC?

We’re reminded of LeeAnn Stevens’ comments about former LHCC President Chris Allison’s attitude toward women:

Chris [Allison] has a real problem with women. We don’t have brains. Our opinions don’t matter. He’s not going to give her the time of day.

Get the Flash Player to see the wordTube Media Player.

Silent Sitters like Suzy Marcus and Rick Bleck have to overcome more than any general reluctance to contribute. They’re fighting against a highly concentrated leadership that blocks them from tackling important tasks.

As much as board members may claim to dislike our Silent Sitter award, the powerful few cherish the existence of Silent Sitters like Suzy Marcus.

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