No Fair! Understanding and Avoiding HOA Conflicts of Interest in Colorado

Filed Under (Real Estate) on 07-31-2012

Community associations, Homeowners association laws, governing board, community association management

By Douglas S. MacGregor, J.D., M.S.W. and Rachel Brand

Homeowners are rightly concerned when they suspect HOA board members of steering landscaping, repair and other service contracts to businesses owned by the board member.  You might also be concerned if you see HOA business going to vendors owned by board members’ family or friends. “Steerage” may be a conflict of interest.

Before you call a lawyer, though, here’s what you need to know about conflicts of interest and HOA board members.

Conflicts of Interest and Fiduciary Duties Defined
Conflicts of interest arise when the personal and/or professional interests of a board member are potentially at odds with the association’s best interests.

Board members have a duty – a fiduciary duty – to put the interests of the homeowners association collectively first. That means that when they step into the boardroom and make decisions, they should use sound business judgment and common sense. Personal considerations should be set aside.

A conflict of interest may appear to occur when a board member performs professional services for an organization; or proposes that a relative or friend be considered for a contract.

These transactions may be flat-out a disservice to your association. Or they may be a great deal for your association because they provide lower pricing and superior service.

But even if those transactions DO benefit your association, they may give the appearance of wrongdoing. And in a tightly knit community such as a common interest community, perceptions can breed ill will.

Policies to Avoid Conflicts of Interest

To avoid the hard feelings that come with the appearance of misconduct, many HOAs put a conflict of interest provision in their bylaws or board rules. The provision might:

•    Limit business transactions with board members and require board members to disclose potential conflicts;
•    Require board members to disclose conflicts when they occur so that board members who are voting on a decision are aware that another member’s interests are being affected;
•    Require board members to withdraw from decisions that present a potential conflict; and/or
•    Establish procedures, such as competitive bids, that ensure that the organization is receiving fair value in the transaction.

What Colorado State Law Says

In the absence of a conflict-of-interest policy, HOAs are governed by the Colorado Nonprofit Corporation Act. The statute defines a “conflicting interest transaction” (a.k.a. conflict of interest) as a contract, transaction, or other financial relationship between a corporation and a director; or between the corporation and a party related to a director, or an entity in which a director of the corporation is a director or officer, or has a financial interest. The Act allows associations to enter into “conflicting interest transactions” as long as:

•    The financial relationship between the conflicted board member and outside party has been disclosed to the board, and a majority of disinterested board members vote in good faith to accept the contract, even if they are less than a quorum; or
•    The financial relationship between the conflicted board member and outside party has been disclosed to the owners and the owners vote to approve the contract; or
•    The conflicting interest transaction is “fair” for the corporation.

For more information, see Colorado Community Association Law: Condominiums, Cooperatives, and Homeowners Associations, by Douglas S. MacGregor, J.D., M.S.W.