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Minnesota Community Living 2013-05-06 Abdicating Responsibilities and the Potential for Conflict of
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Abdicating Responsibilities and the Potential for Conflict of Interest

By Gil Cross, GWCross, LLC

What I am about to talk about may be a mystery to you. However, the definition of abdicate is to give up formally a throne or authority or to surrender or repudiate a right or responsibility. If you sit on a board of directors for a community association, you need to be aware of this possibility. You may have surrendered a responsibility without knowing it. But, before I get carried away with what I’d like to say, let me be clear that I am not suggesting the board of directors needs to micro manage anything. I am suggesting that board members need to recognize the responsibilities of the board of directors under the governing documents of the association and state statutes — especially, the nature of the obligations the board has to the membership. My goal is to create better-informed board members. (If you are on the board of directors of your common interest community, you have many of the same responsibilities that boards of directors of other corporations have within the state.)

How many times have you seen association members elected to the board of directors simply on the basis of having the "time” to serve on the board. Yet, they may have never read the association’s governing documents or the state laws that apply. For all intents and purposes, they are complete unknowns. Maybe they have read the association’s governing documents or maybe they haven’t. Yet, they are elected to serve the interests of their fellow homeowners and manage the affairs of the association according to the governing documents and state law. Homeowners frequently seem to elect new board members simply on the basis of "they have the time” and they have a good sense of what is fair and equitable. I am suggesting that the association should have a nominating committee that seeks out qualified candidates to serve — not simply candidates with sufficient time to devote to the board, but with skills and talents that will benefit the association as a whole. At the annual meeting, isn’t it better to have candidates who are known rather than subject the membership to the "grab bag” of nominations from the floor?

If you serve on the board of directors and there is no nominating committee, are you abdicating your responsibility to the membership by failing to recruit qualified candidates for the board of directors?
Most frequently, the abdication of responsibility occurs within the management agreement itself. It may be found in a paragraph that refers to some vaguely worded relationship the management company has with outside business partners or suppliers. Some management companies may even tout it as a list of preferred business partners. It is not that a list of preferred business partners is unusual or wrongful, but it is the basis of the relationship between the management company and the business partner that is most critical. For some, the nature of the relationship could mean a conflict of interest and the association may only discover this when the work performed by one of those business partners is unsatisfactory and there is a need for recourse on the part of the association. It’s only then that the association may discover that the contractor it thought it had hired to perform the work was not truly independent and free of any conflict of interest.

For some, the relationship between the management company and a business partner looks like a sparkling Christmas tree that’s fully decorated and has many huge gifts that are neatly wrapped with colorful bows that are all meant to serve the needs of the membership. It all seems to be too good to be true. It’s kind of an all-in-one service. You hardly need to lift a finger — it can all be done by the management company. If there’s a problem, they’ll fix it — all you have to do is approve the invoice. If this situation doesn’t give you a reason to pause and reflect — perhaps it should. Whose invoice is being paid, the management company’s or the business partner’s? Is there an underlying relationship that is not completely and indisputably disclosed to the association or its membership? Is there a reason that management fees of some companies may be less than they were 20 years ago? Are management companies acting in their clients best interest or are they merely attempting to make a buck by offering services that they have a financial or ownership interest in — could this be considered self-dealing?

Another potential problem that may lie within the management agreement may be insurance. I am not speaking of the type of coverage that may be required, but again I am referring to the nature of the relationship between the management company and an outside business partner. For example, if your association’s insurance is grouped with other properties managed by the management company, there may be a significant cost savings. Are all of those savings passed directly to the association? What about the makeup of the properties in the group? Are there properties within the group that have suffered repeated losses that have not been addressed — for example, ice dams? If the board of directors were to request a "loss run” or history of its insurance claims, it might not be able to get the information specific to its property (the information is likely to be for the group of properties). Without a history of its claims, it may be difficult or impossible for the association to get a quote from an insurance carrier. Who provides the insurance costs for your association? Does the premium for your portion of the insurance billing come from the management company or from the insurance company?
In addition, when a contractor is hired to perform work for the association, who is listed as the additional insured? Is the association named and listed individually as the additional insured or is it someone or something else?

Another arena that may be ripe for self-dealing situations is the acceptance of bids. If the association is involved in the solicitation of bids from business partners and suppliers, those bids may be delivered to the management company on or before the deadline. The management company may then provide its affiliate with the opportunity to see all of the competition’s numbers before they even reach the board of directors. So the self-dealing can begin when that information (numbers and construction methods to be used) is shared with an affiliate company. The affiliate may be given the opportunity to see all of the other bids and provide its own bid based upon that information. Self-dealing? The board of directors can develop specific policies to prevent any abuse of this process by working with a competent attorney.

By the very nature of being an elected board member, a relationship is created with the membership of your association. The law refers to this as a fiduciary relationship and this relationship carries a set of obligations or duties to the membership. Perhaps the greatest of these duties is loyalty. In other words, you must not put your individual interests above the membership of the association. Simply, there is to be no self-dealing where you might derive a gain or benefit from a relationship you create while on the board. Notice I said "might” because even the perception of a self-dealing transaction can be very damaging. Is it possible to avoid what might be perceived as a conflict of interest? Yes, through a complete disclosure of the relationship and a description of all of the benefits or gains that are or may be derived and the written consent of the association to the relationship. However, does the membership understand what is being consented to and who is providing the consent? Or is it more a matter of "If it’s OK with the board, it’s OK with me.”? Perhaps the easiest way to avoid any potential conflict of interest is to avoid the issue all together. However, to avoid them, you need to know what they can or do look like — when in doubt, seek appropriate legal counsel to learn why the situation should be avoided.

You may not know whether you are involved in a conflict of interest, but your management company may be — and if your association is party to a management agreement with that management company and unbeknownst to you, there is a potential conflict of interest — what is the membership supposed to think of the individuals they elected to serve their interests? You might ask: if this is so pervasive, why hasn’t it come to light through legislation or lawsuit? There may be several reasons:

    1. It may be difficult to find a management company that does not offer other services that may be perceived as a potential conflict of interest.

    2. Everybody’s doing it, so it must be OK.

    3. Board members may not see or know about the transactions that may occur between their management company and its business partners or affiliate companies. The disclosure paragraph provided in the management agreement may be too vague or inconclusive for board members to completely understand the implications.

    4. Some board members may not understand the significance of the relationship between themselves and the homeowners they are elected to serve.

    5. Individual members of the association may not have the financial resources needed to pursue litigation against self-dealing relationships that are discovered.

    6. This is Minnesota; it’s not Florida, California, or Texas — where there are far more common interest communities and far more troubled homeowners to complain to their state legislature. In other words, in Minnesota, the perception may be that if there is no apparent problem, there is no need to act.

    7. For most homeowners, their home is their sanctuary from the world. They do not wish to participate in the association’s responsibilities. It’s far easier to write the assessment check than it is to participate in a more direct fashion unless, of course, writing the check becomes too financially painful.

    8. Perhaps the language of the disclosure paragraph is unintelligible for the board of directors and perhaps their trust is given too freely rather than earned.

As a final word, I encourage board members to 1) revise their bid acceptance procedure, if needed, 2) have their management agreement reviewed by a competent attorney and 3) acquire copies of all of their association’s contracts, including the insurance policy. It’s difficult to protect the interests of the membership, but it’s nearly impossible if you don’t have copies of the contracts and agreements that govern the nature and standard of care provided to your association.

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 Joe Flannigan at joef@cai-mn.com, or at CAI–Minnesota Chapter, 1000 Westgate Dr., Suite 252, St. Paul, MN 55114.

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