Avoiding Conflicts of Interest

Servant of Two Masters

By Greg Olear
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Although the position offers little compensation apart from the satisfaction of a job well done, building board members are still in charge of running a business—a business with revenues, expenses, and assets. Regardless of the size of the complex and whether it is of the co-op or condo variety, a board member’s job can hardly be considered insubstantial.

Responsibility and Risk

Unlike their counterparts at Fortune 500 companies, the board members of co-ops and condos are not usually career executives armed with lengthy corporate management resumes. The boards of co-ops and condos are stocked with people from all walks of life. Some are attorneys, some dentists; some are real estate brokers, some plumbers. Whoever they are, their status as board members automatically exposes them to one of the perils of their position: the potential for conflicts of interest.

Board members have enough to contemplate as they carry out their buildings’ administrative duties, but avoiding conflicts of interest—or even the appearance of such—is crucial. Nothing undermines a community’s faith in their leadership faster than impropriety and self-dealing amongst the board and management team. Conflicts of interest can be hard to avoid completely, but how they are handled is of the utmost importance.

But what is a conflict of interest, exactly? How do they come about? Why are board members especially at risk of such relationships? And most importantly, how can they be avoided? Let’s take a look.

What is a “C of I?”

Board members have a fiduciary responsibility to their shareholders; the other owners of the units in their co-op or condo. This means, in simplest terms, that their loyalty cannot be divided. They cannot serve two masters. They must place the interests of their community above all other interests—including their own.

In legal terms, conflict of interest “is a term used to describe the situation in which a public official or fiduciary who, contrary to their obligation and absolute duty to act for the benefit of the public or a designated individual, exploits the relationship for personal benefit—typically pecuniary.” So says David Byrne, a partner with Stark & Stark, a Princeton-based law firm that also does business in New York. He goes on to explain that “a member of a condominium, cooperative or HOA board is a ‘fiduciary.’”

Conflicts of interest can also be looked at in simpler terms. “It’s called self-dealing,” says Steven R. Wagner, a partner with Wagner Davis PC in Manhattan. “If they’re negotiating for themselves at the same time they’re negotiating for the board.”

The textbook example of conflict of interest is the kickback. Vendor X wants to get a service contract in your condo that’s worth a small fortune. Vendor X promises to give Board Member Y a suitcase full of unmarked twenties for throwing the contract their way. Board Member Y makes sure Vendor X is retained.

Common Conflicts of Interest

Many conflicts of interest begin innocently enough—with favors to friends or family members that, rightly are wrongly, are perceived as special treatment. The board president’s son has started his own lawn care company, would the board float him the business—that sort of thing. While it may not seem like a huge deal, nepotism rears a head that smacks of impropriety.

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“I have seen board members related to owners or principals of vendors or professionals servicing that association, or trying to service that association,” says Byrne. Or it might be even simpler: the board president himself might be the one in the lawn business.

“Another very, very clear conflict is where a board member has himself, or a company with which he is affiliated, provide services or materials to the co-op,” says Wagner.

Then there are the conflicts of interest that involve real estate.

“The most typical conflict of interest is when someone who is a real estate broker is serving on the board, or is a relative of a board member (typically a spouse or child), and is involved in transactions in the building,” says Mindy H. Stern, a Manhattan-based attorney with Schoeman Updike & Kaufman, LLP. “In that instance, they should not participate in the decision to approve or deny the transaction.”

Another potential conflict of interest involves employment. Let’s say the superintendent buys another unit in the complex, and is now part owner, part employee. What happens if that super runs for board president, wins, and gives himself a fat raise? “I have also seen board members working for their associations while being on the board,” says Byrne.

Conflicts are not always about vendors, contracts, and bids. Any board member is also a unit owner, and as any board member knows, unit owners sometimes have conflicts with the board. What if the unit owner with a grievance is also the board president, whose job it is to defend the board from such grievances?

Two examples come to mind: a board member, acting as the individual owner, sues the board. Or, a board member is delinquent in maintenance payments, assessments, or other fees—so much so that the board must take action against him. In these cases, the inherent responsibilities of board member and unit owner are at cross-purposes, creating a conflict.

Dealing with Conflicts of Interest

The surest way to deal with conflicts of interest is to not let them happen in the first place. “A board member essentially should never take a position adverse to the legal rights of his association, if that position will benefit him,” says Byrne. “There are exceptions to that, but that’s the general rule.”

That said, there are occasions when what might appear at first blush to be a conflict of interest might be good business, when the appearance of impropriety is just that—an appearance, nothing more.

“Let’s say I’m the world’s greatest widget maker, and the co-op needs widgets,” says Wagner. “I’m willing to sell my widgets, which are clearly better, at a fair price. Can this be done?” Answer: yes. But the terrain is tricky.

“The board member must first disclose the conflict as a potential conflict of interest and then recuse themselves for consideration and any voting with respect to that negotiation,” says Wagner.

“Board discussions regarding a contract or transaction involving an interested director are more likely to be candid and complete if the interested director does not participate in the deliberations,” notes Stern. “Individual board members with reservations or concerns about the contract or transaction may not feel free to express them in the presence of the interested director, even though it would be a breach of their fiduciary duty not to do so.”

“Leave the room,” Wagner says, emphatically. “Just leave the room.”

To use the above example, Board President A would announce to the rest of the board, “Here is a bid from the widget company I own. I must recuse myself from the decision-making process. In order to avoid the appearance of impropriety, I’m going back to my apartment while the rest of you decide which bid to accept. Give me a call when you’re done, and I’ll participate in the next agenda item.” Or something similar. This way, Board President A has disclosed his involvement, recused himself from the process, and, even better, left the meeting while the bids were being weighed. Even so, it may not be the most prudent idea to buy the board president’s widgets.

“Absent special circumstances which make it clearly advantageous to the co-op to proceed with a contract or transaction involving an interested director, it usually is preferable for a board not to do so, even if the contract or transaction complies with the law,” says Stern. “The non-interested directors should ask themselves, ‘Does this pass the smell test?’ If the non-interested board members will be unable to explain to the shareholders why they entered into the contract or transaction with the interested director when there were acceptable alternatives, the board should not proceed with the interested director contract or transaction.”

Potential Problems

Conflicts of interest are usually not dealt with in the laws governing the co-op or condo, but in higher governmental bodies.

“Garden-variety conflict of interest cases are dealt with by the New York State statute under which the co-op or condo is formed,” says Wagner. Board members who have been benefiting financially from a conflict of interest can have that financial advantage stripped away by the courts, and then some.

“When there is a conflict of interest, the person who has been putting money in his pocket can be sued for breach of fiduciary duty,” says Wagner. The courts take the fiduciary relationship quite seriously. “As a fiduciary,” Wagner says, “you are held to a higher standard than the man on the street.”

And whether you’re a Fortune 500 CEO, or a stay-at-home parent working on their first novel, in your role as board member, your behavior and conduct has to be ethical and above-board—not just for the sake of your board, but for your entire community.

Greg Olear is a freelance writer and a frequent contributor to The Cooperator.

Comments

Irene S

I believe 4 members of 5 of my condo board is in conflict of interest with the develope of the conversion. Are there specific rules you can point out to me regarding this type of conflict? I'm talking about "giving" ownership of property to board members, allowing use of property without payment, etc. Thanks!

Tony

A front desk position in my building is about to come available. Our BOD is wanting to hire the son of our currently janitor. I am not in favor of hiring relatives and our bylaws state that in such an instace the BOD must notifly all owners. Our current president thinks that most of the staff is more like his family than employee of the building. Thus, they in turn tend to give him "extra" special services. This is why I would like to hire someone who is not part of the "family" to try bring some equality for the rest of the residents. Do you have any suggestions. Much Appreciate.

Gray

Our condominium community has 100 units. Due to the down market, nearly 20% of the units are now rentals. Our board president manges at least half a dozen for owners who pay him. Whenever anything must come up for a vote, he has been known to say he can get the necessary votes to pass it (whatever it might be), by telling his owners how to vote (and since not many people here bother to vote, he can sway the election with his "sure" votes ). This exends to getting people elected to the board. He has been known to put up a fence, not going through board approval, for one of "his" rentals, while the rest of us must submit applications to the board. What should the resident's steps be to remove him? Thanks.

LORI

Our HOA Board President and Vice President hired themselves as recreation aide and maintenance supervisor respectively. Our bylaw specifically state, board member should not be compensated for their services. The other problem is homeowners were falsely made to believe that homeowners could not be employed by the condominium.

an unknown user

Can an attorney for the coop serve as a director if he recuses himself from votes to approve shareholders?

an unknown user

Wanted to know if legal proof is available to show that Board members of a condominium should not lso be the superintendant? thanks.

an unknown user

How about a board president who creates a landscape contract specifically designed for his brother in law so that no other company can bid on it. The cost is a difference overpayment of $ 13,000 a year. This President also states in contract that all owners and workers must be US citizens with social security cards.

NORMA

BOARDMEMBER WANTS A CONTRACT FOR MAINTENIENCE AND TO BE PAID 3 MEMBERS THINK THIS IS A CONFLICT OF INTEREST WHAT IS YOUR THOUGHT?

an unknown user

cn a HOA president take job with the management company and keep his president of the board status? C of I for sure in my opinion, am I wrong?

NFreytes

Two boardmembers are carrying on a relationship which is creating a conflict everytime they are in the outs. The other board members requested one of them resign but the head says they are not allowed to vote him out. Can it be done?

Lindas K.

Our Bylaws are specific - NO CONFLICTS OF INTEREST, period. Any "conflict" must be disclosed to the Association Members. Condo President collects PROXY'S 2 months before the annual meeting, writes in her selection, remains President, and continues on, saying the new board member was "elected". No one has a chance to run for a position...and the President works for a law firm. She favors all owners who give her their PROXY, and ignores the rights of others. Last, she hires a management company who has multiple businesses. One business came on to our property to do a 1/2 million $ job. I looked up the business at the S.O.S.'s office. The owner? None other than the Property Management Company owner. It's pathethic. How can any owners fight something like this? She gives favors to all those that support her...a "quid pro quo" deal. It's illegal and improper. Can A States Attorney look into this, or must she move out before we replace her?

Lennore

The board member has put up her house for sale, but remains on the board of the HOA.. What are the potential areas of conflict?

KL

Suggestions? We had our former board president whom used his relatives for our building tax appeals, and he did not recuse himself during the process. Now that he is off the board however he might rerun for the next election. Should I bring this issue up if he were to rerun for the board again??

Pegy

Our condo board is controlled by development ownership. The community has no way to vote others onto the board. Also the board wants their "sister" corp. to take over the physical management of the development. other words, money back into their pockets. What can we do?

an unknown user

Under Virginia law, a larger HOA community with a condominium inside it must have a legally separate association for the condominium, which is the case in our community. Each association is run by separate boards. Several directors in our community are on both boards. This is bad for a number of reasons (aggregations of power, limits on diverse participation by others) but the most compelling argument against it is that it seems clearly to represent a conflict of interest. While the interests of the two associations are sometimes aligned, they are regularly at odds and the directors must choose which fiduciary duties to follow. Do other states' statutes speak to this issue?

an unknown user

Lennore, the homeowner/Board member that is selling their house, should resign from the Board once the house is sold. Until then she/he is still part of the association and has a right to be on the Board.

Andy

Does a FL condo board member need to be an anerican citizen ??

"Annoyed"

A member of my coop board is a real estate agent. I did not hire him to sell my apartment and he did not hide his contempt for me. When my prospective buyers filed their application and were interviewed, this board member was the sole dissenting voice, offering outlandish reasons why the buyers should be rejected. He managed to stall the approval for some time but eventually the board approved, as I say with only this member voting for rejection. I have been told that he has done this before with other applications which we had not brokered. Can anything be done to stop this behavior? Thank you.

Bob

We have a vice president, an owner, and our builder, who has been controlling the garbage recycle company contract for 8 years now. He has this company for all his business. Even if we get the same bid and everyone wants to change he contracts with him! He is the only person who does negotiations and signing of this contract? Is this a conflict of interest? Please I need an answer today before our meeting tomorrow?

Evil Prevails In Yonkers?????

How does the attorney allow conflicts of interest in the first place? We have a vice president, newly appointed property mgr. his wife and their son as the super. They lived here forty yrs. and shareholders don't understand why I am causing trouble. The VP was the super for thirty years and some are intimidated by him and give their proxies so board can put their candidates of chose.

Joshua

A newly formed Co-op Board has recently retired the superintendent of the building who has been in the job for over 30 years. They have asked him to vacate his basement residence and have begun a $70,000 renovation of the apartment. When I asked the managing agent who the contractor was he gave me the name of the company. When I looked up this company i found that it was registered in the name of a Board member. Isn't this a conflict? If so, what can I do about this? Thanks

Spencer

We have a property manager who is also a realestate broker. This manager has recently listed one of our condos for 14000.00 less than any other condo in our complex. I believe this is a conflict of interest since the sale of said condo will in effect contribute to our lower property values. Am I correct?

Peter Brown

Can a codo board member president sway the vote for upcoming members? Our president wrote an email to all owners and said not to vote for me and one other owner because we have learned that he and his fellow board members have been acting unjustly.

Concerned Condo Owner II

A member of our board runs to the property manager on a whim and makes him do things that may or may not be approved by the board. She also knows EVERY single detail about the homeowners financials in terms of how they pay and who actually makes the payments. She also worked in the office to help out sometimes and I believe this is a conflict of interest between the board member and the property manager. He should NOT tell anyone how someone pays. She's the secretary NOT even the treasurer. Is this legal?

denyse

is a fla condo assoc, president required to live full time in the state and are they required to be usa citizens?

infuraited homeowner

Our board member is giving contracts to his neighbor also another member, he refuses contracts of lesser bids and has that same neighbor do work on his house I believe there are kick backs and it is a conflict of interest

Chris

Can a contractor living in a condo be on the condo board of mangers? New York State?

concerned about conflict of interest

the president of our condo association is also a realtor broker. He uses the office for his own real estate business which is only sales and rental from the condo and he does not list any condofor sale on the MLM it is all private. He fired the manager and he is now the manager as well. Everyone is afraid of him is this a conflict of interest and what can we do?

June

Can a Canadian citizen be a condo assn. president?

distressed condo owner

My wife and I purchased a condo 2 years ago and are very unhappy with how things are being mananged. We have a strong feeling that our President is having his taxes prepraid by our Condo Mgt. company, I feel that this is conflict of interest and he should rerove himself from office, and futhermore he is also using our Maitance Contractor to also do work for him.This person our so called president is very hard to deal with quote" Condo Bully". Our Management company hates us because we contacted the Attorney Generals office to look into books, and she was not very happy about this, and now bad mouthing us to other people that we are a problem. I'am sorry she feels that way, but we have to look at our intresst in these matters. And we feel that the fiduciary duties of all involved are being breached. We are very hard working people and have never to deal with this situation before and would to know what to do. Thanking you in advance for you time in reading about our problem.

Donna F

The President of the board has a contract with our association for all snow and landscaping for complex. Is this legal?

an unknown user

The President of our association (HOA) in CA has a domestic violins record on the court system. If it's a felony, they can serve on the board. The property Management Co. Wants to look the other way. How do you escalate this to find out what the record was for? Most domestic violins cases are closed to protect the victim.

Samantha

We own a unit in a commercial building with one other person owning one unit (the 2 of us are fairly new) & another owning the other 6 units. The major shareholder just sent us a copy of the new bylaws, the board members & management , which consists of him & his wife. He doesn't have a seperate account for the association fees that we pay in monthly. Above & beyond our Association fees we pay each month, his wife charges $500 for cleaning each month (which is very minimal), He charges us for snow removal (sometimes up to three times a day) & pretty much any time he walks outside we get a bill for $40 an hour for his time & upkeep of property. He recently put in surveliance cameras in parking lot that face our parking spots & one facing the front of our business, which is across the hall from him on second level. There has never & can't imagine there ever being a break in! He also lives in one of the units. He sent us a bill for a portion of the cameras & 8 hrs of labor to install them @ $40 an hour. He is an attorney so hides behind the law & how superior he thinks he is. We have a mess!!!!

an unknown user

Can the owner of the management company for a co-op be elected onto the board

Eileen

Can the Management Co. enter into a multi year contract with a landscape company or do they have to have bidders every year in Connecticut. My association wants to charge me $800.00 to "copy" receipts last year which I volunteered to copy. I know they can charge a fee but isn't that too much?

Lee

C of I ? Board is dealing w/ a nearby proposed construction that will affect condo property. Not known by other Board members, a Board member went "as Homeowner" to the Town Planner but refuses to report to Board Pres. what she said. He also went as "Homeowner" to the developer of said construction to "help gather information". The Board did not know about these actions until after the contacts & did not ask him to do either. one.. He believes he can present and act as a Board member OR homeowner at will. Is this a C of I?? Thank you.

Kathleen

Can children of trustees of a condominium association receive paid jobs at the condominium complex without those jobs being offered to all children residing in the complex?

ConcernedUnitOwner

One investor who owns 45 units out of the 152 units in our association is also a board member. Aside from being a board member, he also owns a company that does the upkeep and grounds keeping for our community and also has access to the association's fund. His company invoices the association with the work he does with his own units which the board members approve. I feel that the other homeowners, including myself are being taken advantage of with all the overcharges. How can we stop this conflicts of interest?

ConcernedHomeowner

One of the board member of our condo association owns 45 units out of the 152 who is also an owner of a company that does the upkeep of the association's premises. He also has access to our association's operating and reserves accounts. He approves and write checks to his own company. How can we stop conflicts of interest such as these?

Ofie

Can a property manager buy units where he manages?

Confidential

What should be done when a renter is drinking friends with all the Board member and the same renter is causing problems in the community with a homeowner? Does these relationships create a conflict of interest? I thank you in advance.

Curious

A common pipe clog flooded our apartment. Management company offered to take care and filed claim. They mishandled things made problem worse we have insurance issues and asked board to be able to get help with a public adjuster. We are now refered back to Management that messed up to handle the claim as their HOA representative. HOA key members live on other coast and Management does everthing. We want Condo back to pre-damage condition and not be short cut with the insurance dealings. Manager and adjuster of insurance know each other.Do we have any rights in this matter? They also lied about contacting the front unit owner about water seeping into their unit. Found out they never contacted them as it's a rental unit. We spoke to them personally and got this info. They are upset too as we were told a claim was filed for them as well and they do not know of anything at all.

an unknown user

Can 7 board members of a condo association hire full time maintenance and property manager with benefits without the owners voting on it

Squirrel

Obviously a lot of corruption/unethical goings on with Boards...Does anybody actually answer these?

rollie polly

One of HOA member donate ground coffee all the time for a.m daily men's social at the community club. Recently he donated $600.00 for this coming christmas party. These donations enjoyed by BOD and members. Thus this gestures falls under conflict of interest? Thanks.

Howard beach

Can a condo attorney represent not the association and the manager when both are named in a complaint in court by a unit owner?the flood insurance settlement was paid in march for damaged units I. Hurricane sandy and no repairs have been made to date. The manager is the only one Named on the buildings floodins. Policy and now his place is for sale.

Soto

Can the president of my condo association be president of the association if he doesn't live on the premise?

Robyn

I am the treasurer of a coop board in bayside my husband wants to retire from his current position and take a position of porter that has opened up in the development my other board members are trying to figure out if its a conflict of interest if i have nothing to do with any staff matters whatsoever they claim they are afraid of a lawsuit please see if u can answer thank u

Mary

. We have a clubhouse coordinator at our condo who is in charge of renting the room out for parties. It is a paid position. Our board president awarded this position to her husband even thou 2 other residents applied for the position. Is this a conflict of interest

Mary

I live in a 228 unit condo in a Cleveland suburb. Our Board President appointed her husband to a paid position. There were 2 other residents who applied for this position in writing. This is a blatant act of Conflict of Interest. What can we do about it.

Phil

Can an attorney who sits on HOA condo board of directors sue residents of that condo for maintenance arrears or is it a conflict of interest; Is it an avoidance of a conflict of interest if the attorney who sits on the board abstains from voting as what attorney may be retained to said collection work ?

Ray

We recently transition from the developer to a board. Since we are still expanding the developer wants us to do an amendment that would put him on the board. We believe this to be a conflict of interest and don't want him on the board. How do we respond

druis

is it normal for a co-op and their separate managagement company to have the same insurance carrier?

an unknown user

Is it un-ethical for a secretary to collect resumes for a position she herself has put in for? To me it seems she should not have privy to the resumes. There is also rumor she got rid of resumes that came in the last two days of the posting.

Helen

I own a condominium unit in a building in Miami Beach. The condo board/association is made up of three members. Two of the members; the president and secretary, a married couple, own several units in the building which they do not occupy. The third member owns several units as well, but he uses one unit as a pied-à-terre. The three members hold Florida Real Estate Licenses and have received compensation for the majority of rental/sale transactions in the building. Many owners have suggested it is a conflict of interest having a married couple on the board. Others have questioned whether the board is acting in their best interest when they control all rental/sale transactions and often rent their own units before others being marketed at the same time. Moreover is it appropriate for a board member to collect a commission whenever there is a rental or sale transaction in the building? When they alone can approve or decline an applicant or buyer? Complaints brought to the property manager about board members renting their units for less than the minimum lease term allowed and questions about the building's finances have gone nowhere. This week a board member (a licensed real estate salesperson)has called multiple unit owners suggesting they should sell their units to a developer. The board member has been selective-avoiding anyone who owns only one unit. In addition the board member will be "brokering" the deal but claims there will be no compensation paid for the deal. The board member units will be included in the sale. The board member has also claimed that the developer will eventually control the board and it will have a negative impact on the value of the units. As board members are they permitted to solicit sales given their access to "insider" information? While they are also the three people approving their own sale transactions? Can the owners who have not been approached block the sales? Or can a special election be held to have the current board members replaced before the sales are finalized? It is a great little building where the owner occupied units are made up of people on a fixed income who want to spend their retirement in Miami Beach. Is legal action against the board and or the property manager an option? Thanks very much for your consideration.

Anonymous

The HOA of the building I live in has not officially held an election and the president has been there for over 10 years. What can be done to remove her according to the Illinois Condo Act?

James Branch

Can a Board refuse to deal with an abusive property manager that was hired by an owner?

Vote

Can a long time condo maintenance manager collect votes via proxy for a long time condo board member in Missouri? Thank you very much for your answer.

kelly

Can two relatives be on the Condominium Association Board of Directors

BJ

As president of HOA Board can I recuse myself from voting to hire a maintenance person and a handyman because I voted against firing them.

NewintheSaddle

We moved in the Winter to a nice area in which we studied the HOA rules prior and talked to neighbors. Now that summer has come, and coming to an end quickly, we have been in a battle with our HOA/Builder (Same person) because nothing in his own CC&R is doable for us because our neighbor does not think anything should be in our yard. We want an inground pool and a fence, both allowed and set by a dozen plus already here with in view of a good 60 houses in our sections. For some reason he is playing favorites to this couple. He back pedals and fights and has now caused a ton of issues when he, as the HOA should have in our opinion just went by the rules he set in place. He continues to engage them with our emails and conversations and they are not on the comity to seek approval and of course, they do not like it. We are being used as a target, a pawn and now picked on and treated differently. He actually sat the other day at my kitchen table and said every person here is treated differently and that is my choice. Why are HOA's not held more accountable and able to treat paying home owners who are with in their rights like doormats?

Invoice another company

I am a real estate agent who invoiced another agency for grass cutting. I have a separate business license LLC company to preform small jobs for clients. The agent agreed the work could be done but then was upset that my company name was on the invoice. what kind of disclose should I put on my form to let them know I have a financial interest in real estate and my company?

dick ullrich

i have found out today-condo association can do anything including conflicts because they have 3 of 5 votes for builder for 10 years--steal with a smile

Maria

Our janitor has purchased 2 units in our condo association, is this legal. Thanks

Un FAIR Winds

Our "treasurer" has had repeated issues with her condo & water seepage. She hired an engineer which was paid for by the HOA ($2000) without BOD approval - only by email to a few other BOD members. Now she wants the HOA to cover the cost of her floors (which is not covered under our HOA rules) because her insurance doesn't cover it & she feels it is the HOA responsibility. Is this legal?


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