New Legal Remedies Against Director Conflicts of Interest for Associations

hands-and-breaking-handcuffs_shutterstock_58240561-300x184In the pursuit of association fraud and embezzlement, one of the most important aspects of the major legislation that was adopted earlier this year is the law’s effort to curb conflicts of interest by association board members and officers.

The new law provides that presumptions of conflicts of interest exist in the following circumstances:

  • A director, officer or one of their relatives enters into a contract for goods or services with the association.
  • A director or officer . . . holds an interest in a corporation, LLC, LLP or other business entity that conducts business with the association or proposes to enter into a contract or other transaction with the association.

The law requires that directors and officers must disclose to the board any activity that may reasonably be construed to be a conflict of interest.  The activity in question must then be properly noticed and put to a board vote.  It will need to be listed in the meeting agenda, and all of the related contracts and transactional documents should be included with the agenda.  The director/officer may attend the meeting and make a presentation to the board, but they must leave the meeting during any discussion and the ensuing vote.

The remaining members of the association’s board of directors will then need to vote on whether to allow the officer/director to remain on the board while engaging in the activity.  If the board votes no, the director/officer must notify the board in writing of their intention to withdraw from office or cease the proposed activity.

Association officers/directors in situations which may be construed to be a conflict of interest would be well advised to disclose it in accordance with the new legislation.  Unfortunately, if they do not disclose the matter, determining whether officers/directors “hold an interest” in companies that are contracted by an association can present some difficulties.

The good news is that the new law provides associations with legal recourse to address conflicts of interest when they are disclosed or detected.  Because courts have not yet ruled on cases involving the rebuttable presumption of conflicts of interest for community association officers/directors under the newly amended statute, association directors and property management should consult closely with highly qualified and experienced legal counsel regarding the specifics of their circumstances.