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MCL Jan/Feb 2014 - Ask the Attorney
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Ask the Attorney

By Nigel H. Mendez, Esq., Carlson & Associates, Ltd.

Nigel Mendez

This column is comprised of questions that have been posed to me by homeowners, property managers and related professionals regarding legal issues that they have encountered with respect to their associations. Discussion of these questions, as well as prior questions, can be found on the CAI-MN LinkedIn page:

www.linkedin.com/groups?gid=1769135

What is the difference between a director, a board member and an officer?

Homeowner associations use a variety of terminology.  Very often I hear people talking about associations and misusing words that have a specific meaning.  This is especially true when it comes to the leadership of an association.   Associations are governed by a board of directors.  The board usually consists of between three and nine directors depending on the requirements set forth in the bylaws. The directors are elected to serve on the board by the members of the association.  The term of service is usually two or three years long. Directors are usually members in the association, but unless stated in the governing documents, are not required to be.

The board of directors has numerous officer positions.  Typical officer positions are president, vice president, secretary and treasurer.  Generally, at the first meeting of the board of directors following an election, the directors elect officers.  Some associations allow for one director to hold more than one officer position, and other associations allow for non-directors to be elected to officer positions.

One of the more confusing aspects of the director/officer connection is how they are elected and removed.  Directors are elected by the entire association membership, usually at the annual meeting.  Because they are elected by the membership as a whole, they are removed in the same manner — by a vote of the members. Conversely, officers are elected by the directors.  Should the directors wish, they can remove a person from an officer position and vote in a new officer.  Simply put, the homeowners vote for a board of directors, the board of directors then determines who will fill each of the officer positions.  The homeowners do not directly elect a president, vice president, etc.

Finally, people sometimes believe that the president is the most powerful position in an association. However, all of the directors have equal voting power: there is no additional voting power assigned to any officer.

What are the fiscal responsibilities of the board of directors, and how do we handle conflicts of interest that may arise?

Associations are organized as nonprofit corporations and are governed by the Minnesota Nonprofit Corporation Act.  Members of the board of directors are required to abide by the statutes as well as their association’s governing documents.  There are two particular statutes that directors should be aware of: Standard of Conduct (Minn. Stat. §317A) and Director Conflict of Interest (Minn. Stat. §317A.255).

Standard of Conduct

Directors should always do what they feel is in the best interest of the association. The law requires that all directors "discharge the duties of the position of director in good faith, in a manner the director reasonably believes to be in the best interest of the [association], and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.”  Minn. Stat. $317A.251, Sub. 1. In attempting to make the right decisions, a director is allowed to rely on information, opinions, reports and statements that were provided by fellow directors, attorneys, accountants, property managers, other professionals, or were the result of a committee which the directors established.  

Directors should always act in a manner that benefits the association as a whole, rather than themselves.  For example, a director should not receive complimentary work as a "thank you” from a contractor for awarding a bid to make other repairs in the association.  Even if the bid was the best bid for the association, a director should not receive preferential treatment.  Of course, every decision made by a director will not be "the best” decision in the eyes of all the homeowners. Provided that the decision was made in good faith, and made with the care expected of a reasonably prudent person, it will be in compliance with the law.

Conflict of Interest

Directors have to be alert to any conflicts of interest that may arise while performing their duties on the board of an association. Minnesota law states that a conflict arises when an association enters into a contract or other transaction with a director or a family member of a director or an organization of which the director, or member of the family of a director, has a material interest or serves as a director. Minn. Stat. §317A.255.  Simply put, associations need to be careful about working directly with an organization in which a director, or member of his/her family, has an interest.  The law does not bar such interactions but it does require that they be established in a manner that helps reduce impropriety.

The statute provides that a contract or transaction that is formed between the association and a director or organization that a director has an interest in is permitted as long as:
  1. the contract or transaction was fair and reasonable to the association when it was entered into;
  2. the material facts of the contract or transaction and the director’s interest were fully disclosed to the members of the association, and were approved by two-thirds of the members entitled to vote (not counting the interested director); or
  3. the material facts of the contract or transaction and the director’s interest were fully disclosed to the board, and a majority of the board approved the action, with the interested director not voting.
Minn. Stat. §317A.255.  It is best for associations to generally avoid contracting with directors (or their families) unless it is clearly disclosed, the interested director abstains from the vote, and the contract is in the best interest of the association.  Before entering into such a contract, be sure to obtain competitive bids from companies or individuals who do not have a connection to the board. 

Why should you care?

Members of a community association board of directors generally volunteer their time to make their association a better place.  Most would probably not undertake such a duty if there was a risk of personal financial liability.  Minnesota law provides that a person who serves without compensation as a director for a nonprofit entity "is not civilly liable for an act or omission by that person if the act or omission was in good faith, was within the scope of the person’s responsibilities as a director [or officer] and did not constitute willful or reckless misconduct”  See Minn. Stat. §317A.257.  Accordingly, if a director acts outside of his or her responsibilities, engages in bad faith decisions, etc., the director could be personally liable to the association for such actions.

In summary, directors must always act in the interest of the association as a whole, and not in their own interests.  Be cautious about entering into transactions that would directly benefit a director more than the members as a whole.  Boards should avoid situations that appear to an outsider that a director is being treated more favorably than other members of the association.

To have a question answered in a future article, please email it to me at nmendez@carlsonassoc.com with the subject line of "Ask the Attorney.” While I can’t promise that all questions will be answered, I will do my best to include questions that have a broad appeal. Questions will also be answered by other attorneys practicing in this area of law. The answers are intended to give the reader a good understanding of the issue raised by the question but are not a substitute for acquiring an opinion from your legal counsel.

Published by Community Associations Institute — Minnesota Chapter, copyright 2013. All articles and paid advertising represent the opinions of authors and advertisers and not necessarily the opinion of either Minnesota Community Living or CAI–Minnesota Chapter. The information contained within should not be construed as a recommendation for any course of action regarding financial, legal, accounting, or other professional services by the CAI–Minnesota Chapter, or by Minnesota Community Living, or its authors. Articles, letters to the editor, and advertising may be sent to Chapter Staff Editor Joanne Penn at joannep@cai-mn.com, or at CAI–Minnesota Chapter, 1000 Westgate Dr., Suite 252, St. Paul, MN 55114.

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