FALLS RUN COMMUNITY ASSOCIATION

Meeting Minutes:

Whiteford, Taylor & Preston (WTP), LLP (legal counsel to Falls Run Community Association and Villas at Falls Run Condominium Association)

The meeting was called to order at 7 PM by Bill Nosal, who introduced the representatives from

Chris Jones added the following to his review of the handout on the Koger Management Group (KMG) bankruptcy filing:

· Bob Koger testified under oath that KMG is trying to reorganize but may consider a sale.

· We are less than half way into the 120-day period during which KMG can submit a reorganization plan.

· KMG appears to be in no hurry to move the traditionally slow bankruptcy process along.

· WTP will need to motivate KMG to take a more aggressive stance in pursuing a claim against its insurer in an attempt to regain assets.

· Attorney-client privilege between the Committee and its counsel (a Bethesda-based legal firm), prohibits WTP from sharing negotiation details with residents of the Falls Run Community or its boards.

· By virtue of Bob Koger’s real estate license, the VA Real Estate Board was able to file a petition of receivership against KMG.

· As a result of a spring 2007 compromise, a monitor and a forensic accountant were assigned instead of a receiver.

· Although the Virginia Real Estate Board’s (VA R.E.B.) decision to appoint a receiver prompted the bankruptcy filing, further action by the VA R.E.B. was stayed by the bankruptcy.

· KMG’s management team’s lack of cooperation was responsible for National Realty Partners withdrawing its offer to purchase the firm.

· Both the FRCA and Villa Condominium Association will try to recover at least part of their losses through claims against their insurer.

Unless otherwise noted, the following questions from the audience were answered by the appropriate legal or accounting representative:

A. At this point in time it’s $98,681.20 for FRCA and $167,667.26 for the Villas.

A. First, administrative costs; then priority claims (e.g. taxes); finally, unsecured claims, which is where we fall. We’ll know the number of priority claims on Dec. 4.

A. Through bankruptcy proceedings, yes. KMG has four potential sources of revenue: its insurance claim, the sale of the company, equity in a building owned by a subsidiary, and claims against Bob and Jeff Koger and their wives.

A. Through bankruptcy court, yes. More likely we will get paid through claims against the associations’ insurance policies ($100,000 maximum for each), although we can’t say how much nor how long it will take. We’ve already notified the insurer that we are submitting a claim.

A. We have supplied copies of bank statements to the FBI, IRS, Fairfax City Police and Alexandria City Police for their ongoing investigations. Jeff Koger ‘washed’ the fraudulent transactions (large withdrawals and diversion of ACH funds) through various accounts, making it difficult to trace directly back to him. We believe charges will be brought against him and an arrest made. We cannot say why the Commonwealth and US Attorneys haven’t yet made a case.

Q. Can’t we go after Pulte/Del Webb, who was running the associations at the time?

(The following are answers to the various versions of this question that were raised.)

· The associations were formed earlier than the transition dates of Dec. 2005 (FRCA) and Jan. 2006 (Villas), and all monies were held in association accounts.

· Jeff Koger’s manipulation of the bank statements made the fraudulent information undetectable.

· Pulte/Del Webb would have had no reason to believe that Koger would misappropriate millions of dollars, making it difficult to bring a negligent intention case against them.

· There could be a claim against the Pulte/Del Webb-appointed directors if we can show they breached their fiduciary duties.

· There is no evidence of collusion between KMG and Pulte/Del Webb, but we can look into it.

Q. When did the two Falls Run boards become aware of the situation with KMG?

A. In spring 2006, a committee formed by the two Falls Run associations ‘started asking questions.’ That summer, portions of the financial reports ‘didn’t seem right.’ Later in the year, we became aware of significant problems, which were brought to the public’s attention early in 2007.

A. KMG is responsible for the duration of the reorganization plan it proposes. Because few companies survive reorganization under Chapter 11 bankruptcy, it is likely they will sell, liquidate or be taken over.

A. GCA determined that $50,000 had been taken from FRCA in Dec. 2004. KMG had supplied Oakes, P,C. the prior auditor, with a fraudulent bank statement—one belonging to another association—as a cover-up. To the best of our knowledge, Jeff Koger controlled everything. We saw two additional bank statements for FRCA where the numbers had been altered. Jeff Koger had been a forensic accountant and knew how to hide transactions. Bob Koger appears to be in a state of denial.

A. Each association has a claim against KMG and Jeff Koger. Civil remedies against either are probably not something that can be looked at.

A. Oakes, P.C., performed the 2004 audit. The first elected FRCA board felt strongly about choosing an independent auditor for 2005 and, therefore, hired GCA. GCA subsequently performed the 2006 audit as well.

A. The delays were due entirely to the fact that KMG was not forthcoming with the requested materials. Also, KMG had changed accounting systems in 2006 and ‘couldn’t recover’ some files. The 2005 audit has been completed and approved. The draft of the 2006 audit has been presented for board and attorney review and should be final within the next two weeks.

Q. Are there procedures in place to prevent the withdrawal of (FRCA) money with just a single signature?

A. [Jim Armstrong] Most management companies require two signatures for a check. FRCA invoices are reviewed and coded by Sylva and sent to Armstrong’s office for payment. If the board decides, for example, to purchase a certificate of deposit, Armstrong does so on their behalf or gives a check to the committee member responsible for the purchase. The main crime fidelity bond we carry against the board of directors, employees and the management agent was increased to $1 million in the spring of 2007.

A. [Paul Niemi] We didn’t invite him. The Villas board closely monitors JCA activities. When we became a board in January 2006, we had unanswered questions and went through six different property managers. We decided we needed a new management company and that JCA would provide the service we need. We keep funds in bank accounts we can control. The reserve money has a two-signature requirement for withdrawal. We keep our operating account funds in accounts that don’t exceed the FDIC maximum for insurance, and we invest in laddered CD accounts.

Q. Given the fact that no one has yet been charged with a crime and the insurance companies are dragging their feet, are we dealing with the statute of limitations?

A. The statute of limitations for fraud claims is two years and for theft, five years.

A. When Pulte turns an association over to a resident board, it also turns over the association’s money. Therefore, we may be due more than we received. That is part of the bankruptcy case.

Q. Were Pulte/Del Webb board members covered under D&O (Directors and Officers) insurance?

Q. Given the unreasonable period of time it took for KMG to provide requested information, can we file a claim of obstruction?

A. There is the possibility of a claim against Bob Koger for failing to supervise the activities of Jeff Koger. This will be investigated during the bankruptcy proceedings.

Q. The group on the stage doesn’t seem to recognize that Pulte/Del Webb may have done something wrong.

A. It is extremely difficult to prove negligent supervision under Virginia law. Maybe Pulte/Del Webb could have discovered it earlier; but the money is gone.

[Bill Nosal: When the FRCA board took over in January 2006, we did go with an auditor. Our finance committee began asking questions in March, but was not satisfied with the answers. That is why in late summer 2006 we sought a new management company.]

Q. If KMG was reticent in providing bank statements, why not just drive to the bank and request them?

A. That is a board policy decision. From Armstrong’s work with the FRCA board on its 2008 budget, it appears that the missing funds have had no effect on the community’s operations. At the end of Aug. 2007, the villa association had a $62,000 surplus, although its reserves are under funded by about one-half.

A. The current arrangement is very typical. Despite two separate management companies, a lot of checks and balances are built into the system.

A. Residents can always ask questions at board meetings. Management companies will keep us updated. If it makes sense to hold another meeting, we will.

· Falls Run Community Association & The Villas at Falls Run Condominium Legal and Audit Analysis – Koger Management group