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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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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Silent Sitters Vote Unanimously To Raise Dues

Have you ever read something and thought to yourself “Wow, that’s a great idea. Why didn’t I think of that?”

We had just such a reaction to the phrase coined by an anonymous poster on Bill Master’s website in a thread discussing LHCC’s then upcoming 2007 election of directors. The phrase: Silent Sitter. That phrase succinctly describes the conduct of too many of LHCC’s directors at board meetings. A Silent Sitter just occupies a chair during a board meeting, contributes very little and seriously questions even less, and ultimately votes in support of the decision already made by the powerful few.

We’re going to award a Silent Sitter award to that board member that contributes the least at each board meeting in the hope that highlighting this bad behavior prompts potential Silent Sitters to change their conduct. We make it in the spirit of Sen. William Proxmire’s Golden Fleece award.

The November 12th board meeting to review and approve the 2008 budget is a good place to start. After the organizational meeting on November 5th, this was the first meeting to take up the business of Lake Holiday. Despite the fact that the board was reviewing 2008 expenditures that will exceed $2.275 million, the board meeting on the budget was the shortest meeting that we’ve watched on video, coming in at 38 minutes. Most of the discussion for the entire budget focused on how a single, unbudgeted $9,000 dock repair expense could be deferred or delegated to a committee. This lack of debate shows that the Silent Sitter race will be a close one.

LHCC VP Dave Buermeyer said next to nothing at the November 12th meeting. But in light of the nearby photo from that meeting, we can’t be sure if Dave Buermeyer was actually awake throughout. We don’t want to turn the award into the Sleeping Sitter. We also don’t think it’s fair to the other board members vying for our award to credit what little he did say at the meeting in light of our uncertainty over his sleeping status.

We also had to seriously consider Jo-Anne Barnard. Among Jo-Anne’s many qualifications to serve on LHCC’s board, she is LHCC President Wayne Poyer’s neighbor. She recovered somewhat from the “deer in the headlights” look she displayed at the board’s organizational meeting and managed to ask several questions. One of her questions helped clarify a caption on a budget line item. Unfortunately, substantive contribution requires more than debating captions.

We also had to consider Suzy Marcus and Ken Murphy, who stayed true to their usual performances and contributed next to nothing. Had Noel O’Brien been in attendance, our decision may have been even more difficult since she’s expected to be a regular contender for our award. We’re sure these three will put up strong showings in future Silent Sitter contests.

Despite the close race, we give our first Silent Sitter award to LHCC board newcomer 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. During the board’s organizational meeting, Rick Bleck managed to correct his own phone number on a board member contact sheet. That apparently talkative performance was not repeated on November 12th, when Rick Bleck was virtually silent. He didn’t question any element of the 2008 budget, nor did he suggest any change. When it came time to vote for the budget, he dutifully raised his hand. He fulfilled the role of a Silent Sitter to perfection. He questioned nothing and voted in favor of everything. Congratulations, Rick Bleck, the first recipient of our Silent Sitter award. We have to wonder: did his involvement peak very early?

We think LHCC’s board erroneously believes that unquestioned unanimity indicates a good decision. In contrast, we believe that open, thorough examination of alternate and sometimes opposing views is a better approach. At the very least, those holding the minority view can take comfort in the fact that their position was given careful consideration and had a fair chance to capture support.

For example, in an earlier post we reviewed LHCC’s administrative expenses and discussed the need to adjust these expenses downward by the portion reimbursed by LHEUC. This shows how dramatically LHCC’s administrative expenses have grown since 2006. After deducting LHEUC’s share, LHCC budgeted $182,826 for 5 administrative expense categories (office supplies, office equipment, printing/copying, administrative salaries, and telephone) in 2006. Based on the approved budget for 2008, these expenses are projected to jump to $297,429, an increase of $114,603 or about 63% in 2 years. That is one example of out-of-control spending. Yet no director had the common sense to ask: “Why are these expenses going up so much?” No director made any effort to discuss ways to reduce LHCC’s expenses at the November 12th meeting.

Another example of the perils of blind acceptance can be found in John Martel’s discussion of the balloon note used to finance the clubhouse remodeling, which is part of the above video clip. John Martel says that both he and the 2007 board have been criticized for committing LHCC to a balloon note. To directors operating reasonably, at a minimum criticism indicates an issue that should be carefully scrutinized. John Martel defends this decision:

We have a commitment from Wachovia that they will refinance the loan when it comes due in 5 years.

Unfortunately, the Promissory Note dated February 2, 2007 that John Martel himself signed doesn’t support his claim. That note provides for full repayment of all principal and interest by February 2, 2012 (which is less than 5 years away) and contains no language committing Wachovia to extend the loan. The Promissory Note itself states that:

This Note and the other Loan Documents represent the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties.

Yet no director – especially not the Silent Sitters – saw fit to ask John Martel if he had that commitment in writing. Apparently, they accepted his unsupported statements as fact. LHCC’s board operates on the principle of “don’t question – just blindly accept.” Silent Sitters are an important component of this “question nothing-act unanimously” culture.

Lake Holiday owners pay a price for Silent Sitters. A portion of that price is the higher dues discussed in the above video and unanimously approved by LHCC’s board. Lake Holiday does not have a board of 11 people who independently and critically evaluate information. Instead, it has a board packed with Silent Sitters that gives the community the illusion of an independent and thoughtful governing body yet keeps power in the hands of a few.

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It’s Time For Answers

Bill Masters, a longtime Lake Holiday resident, has sent an email to John Martel, LHCC’s Treasurer, and most of the other LHCC directors. His email addresses a topic important to us all: money. He makes a request for additional documents and asks to get answers to certain questions.

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