—Watching the Purse Strings
“All board members owe a duty of loyalty to the community and its residents. Levandusky v. One Fifth Avenue Aptmt. Corp., 75 N.Y.2d 530, 538, 554 N.Y.S.2d 807, 811-12 (1990). Under the circumstances presented herein, the board member’s interest in having herself or her family be paid for the subject services may conflict with the interest of the community in having the services rendered in the most cost-effective and workman like manner. Thus, “the board member must be especially careful not to gear his or her conduct to benefit his or her own self-interest…” Michaelson v. Albora, 196 Misc.2d 517, 519, 764 N.Y.S.2d 788, 790 (Sup. Ct. Suffolk Cty. 2003).
“This predicament presents what is referred to as a “conflict of interest” based on a “self-interested transaction” for the board member. The board member has a self-interest in having herself or her family paid for the services but that may not be in the best interest of the community. As a result, the board member must fully disclose the circumstances to the board so the board, with full knowledge of all the relevant facts, can vote (without participation by the bidding/interested board member) on what individual or entity should be permitted to render the subject service. In connection with this process, the board should consider several different individuals and entity’s proposals to render the subject services. See, Foley v. D’Agostino, 21 A.D.2d 60, 66-67, 248 N.Y.S.2d 121, 128 (1st Dep’t 1964).
“In the event, the interested board member and her board do not go through the process of considering other bids for the work or otherwise does not proceed with full disclosure, the board may risk losing the protection of the business judgment rule. See Wolf v. Rand, 258 A.D.2d 401, 404, 685 N.Y.S.2d 708, 711 (1st Dep’t 1999) (the business judgment rule does not protect board members who engage in self-dealing by making decisions affected by conflicts of interest, and the burden would be on the board member to prove the reasonableness and fairness of the challenged transaction).
“If, after full disclosure and considering other alternatives, the board votes to retain the board member or her family to provide the subject services because it is in the best interests of the community, the board member and the board will have discharged their duties properly and will likely prevail against any challenge to their actions.”