You may be curious as to how a Cooperative Board of Directors determines how to expend its cooperative finances. As Cooperatives are formed as non-profit corporations, any monies derived from carrying charges from members go straight to the operation and management of the Cooperative. However, the expenditure of financials can vary from Cooperative to Cooperative depending on how a Cooperative is organized.
For example, if a Cooperative is subject to HUD, then the Cooperative must abide by HUD’s guidelines with respect to expenditures. In addition to the terms and conditions found within a Cooperative’s written agreement with HUD, such as a Use Agreement or Regulatory Agreement, with respect to expenditures, a Cooperative is also bound by HUD’s housing handbooks when it comes to expenditures and budgets. Expenditures and budget line items are detailed in HUD’s housing handbooks.
Examples of HUD housing handbooks detailing financial mandates are found in “Reviewing Annual and Monthly Financial Reports” and “Financial Operations and Accounting Procedures for Insured”. Other pertinent information can also be found in “The Management Agent” HUD Handbook. Essentially, these HUD housing handbooks ensure that Cooperatives subject to HUD expend their finances in compliance with HUD regulations.
However, it is pertinent to note that HUD itself is not an absolute governing force in the determination of and control over a Cooperative’s expenditures. Often times, HUD may attempt to interject in Cooperative expenditures that either fall outside of the written agreement between the parties or fall within the written agreement but are so prejudicial to the Cooperative’s organization and operation that it warrants the Cooperative Attorney to intervene on the Cooperative’s behalf with HUD. An example of HUD overreach in this sense is HUD denying expenditures relating to Cooperative training and education and prohibiting Board Members from participating in said training and education programs without any authority to do so.
HUD’s overreach in this example is not only unfair, but warrants the Cooperative’s attorney to intervene. The Cooperative’s attorney intervention in this example would be absolutely warranted so that HUD is prohibited from asserting such governing force over the Cooperative’s expenditures as it has no legal authority to do so. In these cases, it is important for a Cooperative to stand its ground and push back against HUD due to the unfairness and lack of authority of HUD to make such decision. Again, the written agreement between the Cooperative and HUD will detail the terms and conditions with respect to expenditures. However, having your Cooperative Attorney involved to help push back when these scenarios present further protects the Cooperative.
If a Cooperative no longer falls under HUD, then the above noted HUD housing handbooks are inapplicable. However, this does not mean that a Cooperative not subject to HUD can do whatever it wishes with cooperative funds. Expenditures are subject to the confines of Board approved budgets.
Essentially, expenditures of Cooperative funds are tied to line items in a Cooperative’s budget. For example, expenditures relating to seasonal lawn and snow are tied to grounds line items in the budget. Another example would be expenditures relating to Board of Directors education and training courses, which may be tied to miscellaneous Board of Director expenses line items or be a specific line item relating to Board of Directors education and training courses.
However, this does not mean that expenditures outside of HUD are not subject to scrutiny. Expenditures outside of HUD are subject to Cooperative Board of Directors’ discretion under the Cooperative’s state law governing business judgement. The crux of the Business Judgment Rules works to insulate a director or officer of a corporation when discharging his or her duties in good faith. Each state’s Business Judgment Rule varies, but generally speaking, a court will not intervene in corporate decisions so long as said decisions are conducted within the confines of the law.
Using the above examples relating to seasonal lawn and snow expenses and Board of Directors education and training courses, a Cooperative under HUD, would detail these expenses in its budget. So long as the Cooperative complies with all HUD regulations, and if HUD requires approval of the Budget and said budget is approved by HUD, the seasonal lawn and snow expenses and Board of Directors education and training courses would not be subject to scrutiny. For Cooperatives who are not subject to HUD, the Board of Directors would rely upon the Business Judgment Rule for expenditures relating to seasonal lawn and snow expenses and Board of Directors education and training courses and so long as the Board of Directors discharged these decisions in good faith, said decisions would not be subject to scrutiny.
Notwithstanding the foregoing, misappropriation of Cooperative funds is always subject to scrutiny. This holds true regardless if a Cooperative is subject to HUD or not. A Board of Directors(s) use of cooperative funds for personal use is not only a misuse of Cooperative funds, but it is illegal. Most importantly, misappropriation of cooperative funds opens the Cooperative up to liability.
In sum, a Cooperative Board of Directors does not have the freedom to simply expend cooperative funds as it sees fit. If a Cooperative is subject to HUD, then expenditures are controlled and scrutinized by HUD. For Cooperatives not subject to HUD, a Board can use its discretion and rely upon the Business Judgment Rule without being subject to judicial review. Regardless of how a Cooperative is organized, it is always vital to get your cooperative attorney involved to ensure that expenditures are not subject to scrutiny, whether from the membership, HUD or a judge.