Q: How can I solve a conflict of interest on an HOA board?

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Q: How can I solve a conflict of interest on an HOA board?

Q: How can I solve a conflict of interest on an HOA board?

Can a condo board president work as an “independent contractor” and receive 1099 income from the condo’s property management company or is this a conflict of interest?

Condo Board Meetinganswer-icon-masterGood question. It sounds like a lawsuit waiting to happen. Seriously bad news. Here’s why:

Condominium and HOA boards are held to a fiduciary standard when it comes to acting as a steward of condo owners’ money. That’s the highest standard of fidelity and good faith recognized under the law.

Under a fiduciary standard, the fiduciary owes the utmost in fair dealing to the client – and courts tend to weigh these things heavily against the fiduciary when it comes to litigation. Board members should understand this concept well, and take it to heart.

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This means that a conflict of interest would be very problematic. And the fact that you perceive that there might be a conflict of interest indicates right off the bat that there’s a problem – because it’s not enough to avoid an actual conflict of interest:

Fiduciaries, military officers, judges, government officials, journalists, baseball umpires, youth soccer referees and just about any other profession with a stake in preserving the public perception of its integrity and good faith will tell you it’s important to avoid even the appearance of a conflict of interest.

Now, there are two ways to deal with a conflict of interest: Recusal and resignation.

In some cases, where a conflict is temporary or minor or limited in scope, a board member or president can resolve the issue by disclosing the conflict and recusing himself or herself from any votes related to the matter.

These are not normally problematic. If you’re in a small town with only a few plumbers or landscapers, somebody’s nephew or cousin may well be one of the most qualified bidders for the job. It’s just something that comes up. It happens. These are good examples of a case where a board member with a conflict should disclose the conflict and recuse himself. The remaining board members can determine who gets the landscaping contract without him.

This is more difficult to do with a board president than it is with a board member, since the board president has more responsibilities day to day. One way to deal with this arrangement is to use a property manager who can handle the day to day activities with the board president’s nephew’s company and present any problems that arise with the contract to the board as a whole – with the president recusing himself from proceedings.

A good board member or president won’t have to be told to recuse himself – he’ll do so without being asked. If you have a board member with an obvious conflict and this person has to be pressured into recusing himself, then that would raise some big red flags with me and I’d start investigating his other dealings with the association, business ties, etc.

If the conflict cannot be avoided, though, or if the nature of the conflict is simply so pervasive and constant that it would be impossible to conduct association business as a dispassionate participant with no perceived conflict, then it’s probably time for the board member or president to resign.

Furthermore, in some jurisdictions, your board president may be breaking the law. For example, in California, the Davis-Sterling Common Interest Development Act contains a number of passages defining what a conflict of interest is and prohibiting certain suspect arrangements that create conflicts of interest.

Here is the precise language of the Davis-Sterling Act regarding conflict of interest:

5350.  (a) Notwithstanding any other law, and regardless of whether an association is incorporated or unincorporated, the provisions of Sections 7233 and 7234 of the Corporations Code shall apply to any contract or other transaction authorized, approved, or ratified by the board or a committee of the board.

(b) A director or member of a committee shall not vote on any of the following matters:

  1. Discipline of the director or committee member.
  2. An assessment against the director or committee member for damage to the common area or facilities.
  3. A request, by the director or committee member, for a payment plan for overdue assessments.
  4. A decision whether to foreclose on a lien on the separate interest of the director or committee member.
  5. Review of a proposed physical change to the separate interest of the director or committee member.
  6. A grant of exclusive use common area to the director or committee member.

(c) Nothing in this section limits any other provision of law or the governing documents that govern a decision in which a director may have an interest.

Note that this law doesn’t specifically define outside business interests as a conflict. But there’s plenty of case law arising from breach of fiduciary duty lawsuits that establishes that these outside business interests may cause a problem.

In California, there’s also Corporations Code 310.  This part of California law makes some contracts voidable if there are undisclosed and insurmountable conflicts of interest with one or more directors. See also similar language in California Corporations Code Section 7233

In this particular case, though, it may be possible for the board president to recuse himself or herself from any board dealings with the property manager’s contract, and resolve any potential conflicts. This is the case if the president’s work with the property management company have nothing to do with your property.

For example, if the president just happens to have a janitorial services company and the property management company just happens to be one of his accounts, it’s probably not enough to warrant resignation. A recusal will be fine. The president will not have any ability to steer money to his client and the property management company will have nothing they can leverage the president to do on his behalf.

The problem is stickier if, for example, your board treasurer was also the accountant for the property management company. In this case, this would cause a potential erosion of financial controls for both parties and render the association vulnerable to embezzlement. In this case, the Treasurer should resign from one position or the other.

If a problem does arise, owners would have a legitimate negligence claim against the board, because they did not exercise due care or ordinary business discretion in allowing the conflict to persist.

And therein lies the danger. Once word gets out to all the other homeowners in the association, how will it look to them? Will they accept the board’s rationalization? The president’s? If they don’t, and if they suspect the board president may be enriching himself with their money and at their expense, over and above the usual compensation to which he is entitled via the existing bylaws, someone is quite likely to file suit.

Author Bio Writing about personal finance and investments since 1999, started as a reporter with Mutual Funds Magazine and served as editor of Investors’ Digest. He now publishes feature articles in many publications including Annuity Selling Guide, Bankrate.com, and more. Author Bio for Jason Van Steenwyk

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