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Avoiding Conflicts of Interest Inside a Community Association

homeowners_associationThe board of a homeowners' association (HOA) has a duty to its members, but each board member also has a duty to the association itself.

Part of this duty is acting on behalf of the association and members without benefit or personal profit.

If any member uses voting rights, influence, or position unethically, both the member and the HOA can be subject to lawsuits.

Our attorneys take a closer look at conflicts of interest, including examples of improper behavior and what HOA board members can do to prevent these situations from arising.

Common Conflicts of Interest Involving HOA Members

It can sometimes be difficult to tell when there's a conflict of interest involving a community association member. Most conflicts of interest involve someone using his or her influence for personal benefit, even if others will benefit as well.

For example, a member who votes to build a park on HOA land because he has children doesn't necessarily have a conflict of interest. However, if the same member nominates a friend who is a contractor to oversee construction of the park, that is a conflict of interest.

Some common conflicts of interest include:

  • Nepotism. Board members must be prohibited from voting for or supporting a family member to join the board, do paid work, or otherwise benefit from the association.
  • Loans. Board members have a fiduciary obligation to the association, and must conduct themselves appropriately when using the association’s finances. A board member who asks for a loan from association funds or distributes a loan to member from association funds has breached fiduciary duties, and can face legal penalties.
  • Business contracts involving members. Professional services, such as housecleaning or underwriting the HOA insurance, should never be offered or performed by a member’s company. This is true if the member is an owner or partner in the company, and whether or not the member is the one performing the paid work.
  • Business contracts involving friends of members. Business or personal relationships with developers, contractors, or other service providers must always be disclosed.
  • Payments and deductions for HOA activities. It's not a good idea for one of the board members to take on the role of a professional property manager for the HOA. Even when a member in this situation acts in the HOA’s best interest, there are still many opportunities for conflicts, such as receiving compensation for performing HOA activities, reimbursements for purchases and mileage for HOA duties, and home-office tax deductions.
  • Placing personal benefit above the association. Any personal interest that affects a member’s ability to make an impartial decision creates a potential conflict of interest. For example, if a handful of board members who are smokers vote to allow smoking in shared areas, they've put their personal preferences ahead of the good of the community.

Ways to Identify and Prevent Conflicts of Interest

The best way to avoid conflicts of interest is to acknowledge the potential for conflicts and their remedies in the association’s bylaws and governing documents. The bylaws must outline clear procedures for identifying when a conflict may exist, actions the HOA must take to remain impartial, and remedies if legal action is taken as a result of a conflict.

An HOA may be able to avoid many conflicts by requiring:

  • Full disclosure. Board members are expected to make a full disclosure of any conflicts of interest as soon as they realize the conflict exists, allowing disinterested board members to approve or reject any proposals involving the conflict without input from the involved board member.
  • Recusal. After identifying a conflict, an involved board member should recuse him or herself from any voting in the issue, as well as refrain from participation or presence in the room when remaining board members discuss the issue.
  • No exceptions. Rules must apply equally to all members, including those on the board.  Allowing any member to live outside the HOA covenant can open the organization to potential legal liability.
  • Ethical behavior. Requiring board members to sign an ethics policy—especially if it contains a provision to avoid self-dealing—gives the association leverage to take action against any board member who commits a violation.
  • Acceptance of consequences. Board members should be willing to accept the consequences of allowing a conflict of interest to continue, including censure, removal from committees, recall proceedings, request for resignation from the board, other disciplinary action, and legal proceedings.

It may take some effort to avoid a conflict of interest, but it will directly benefit and protect the association you've built.

If you're dealing with a potential conflict of interest, we can help you interpret the governing documents, find a legal remedy for dealing with the conflict, and draft new bylaws to prevent the situation from arising in the future.

Our attorneys have over 30 years of experience representing homeowners and their associations through all aspects of their business operations. Simply fill out the quick contact form on this page to set up a consultation.

 

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