What is a Conflict of Interest?

With the recent scheme involving property managers, construction companies, HOA board members from several communities, lawyers, etc.  It was a good time to define just what a conflict of interest is and some examples of situations.  Because management companies have to disclose conflicts or potential conflicts to the associations yearly it's something the board should expect to get at the first meeting of the board.  As an owner who makes up a portion of the entire association you also have a right to know of any conflicts board members have or anyone who is trusted to act in the communities best interest.  If you think that a conflict exists seek legal advice. 

My suggestion to any HOA is to retain independent legal counsel for the association so, the board has direct access to the attorney.  For obvious reasons before the attorney is contacted it should be documented by a vote of the board specifying who will contact the attorney.  The most important thing is to retain the attorney by paying a retainer fee. 

CONFLICT OF INTEREST


Q.

Please define "conflict of interest."

A.

A conflict of interest exists where an individual's duty to one party leads to the disregard of a duty to another. It exists when an outside influence affects a person's ability to make an independent, unimpeded, objective decision or when a person owes duties to separate parties with conflicting interests.

Whether or not a conflict of interest exists depends on the facts of a particular situation which must be evaluated on a case-by-case basis.

KICKBACK?

Q.

The management company for our homeowners association has a website with links to various vendors that they use for various management clients. The vendors are required to pay the management company a fairly substantial fee in order to be listed. Is this a disguised form of kickback?

A.

Possibly. Without knowing the amount of money involved it is difficult to determine if the fee is reasonable given the cost of service provided or whether it's a means for the management company to generate income as a result of providing business to the vendors. In any event, at the minimum it creates the appearance of a conflict and, in my opinion, is evidence of poor judgment.

SUE YOUR MANAGEMENT COMPANY

Q.

We recently learned that the management company for our homeowners association owns a construction and maintenance company that they have utilized to provide services to our association. The management company did not disclose this relationship. The construction company completed a large renovation project exceeding $500,000 only few months ago and we're certain they made a significant profit. Can we sue them?

A.

Yes. You can sue them for breaching their fiduciary duty as your association's agent and for unfair business practices. In such a suit, your association would normally ask the court to require the defendant to reimburse all profits they made plus all legal fees and costs incurred. You should consult with an attorney immediately to protect your rights.


CONFLICT OF INTEREST

Q.

Our management company has been using the husband of an employee to provide maintenance services to our association for several years. We just learned of the relationship because it was not previously disclosed to us. Is this a conflict of interest for the management company?

A.

Absolutely. Whenever a management company uses a related party to provide services, it must be disclosed in writing, in advance. This type of conduct does not reflect positively on the management company to say the least.


CONFLICT OF INTEREST WITH LAW FIRM

Q.

Our homeowner association needed a referral to a law firm that would represent us on a contingency basis. Our management company made a referral and our board of directors subsequently signed an agreement with the law firm that was referred to us. The retainer agreement called for the law firm to receive 40% and the management company to receive 10%. The management company was required to provide some minor administrative assistance to the law firm. The case settled for millions of dollars and consequently the management company was paid several hundred thousand dollars for less than $2,000 worth of services! The members were never informed of the arrangement. As a member of the association, I am very concerned about this situation. What do you suggest?

A.

You should be concerned about your board, the law firm representing your association and your management company. The situation you described calls for a confidential consultation.

LEGAL ADVICE

Q.

The management company for our homeowner association is constantly calling an attorney for advice of a general nature. Our association is being billed for the advice, which is very expensive. Is this to be expected and what advice can you offer?

A.

Management companies should not have their association clients billed for general legal advice.

General legal advice should be paid for by the management company, if required. Specific legal advice that addresses a unique set of facts, concerning an association, should be billed to the association.

Many management companies retain attorneys for a flat monthly fee at their cost, to answer general legal questions. Other management companies have in-house legal counsel to provide the same service. Since legal fees can be one of an association's largest expenses, it makes sense to explore all of your options by comparing the services available.

LAW FIRM WON'T SUE MANAGEMENT COMPANY

Q.

The management company for our townhome association gave our board of directors some very bad advice which resulted in our association losing several thousand dollars. Our association law firm refuses to get involved in a suit against the management company. Our board is finding it difficult to find an association law firm that will sue any management company. Is this common?

A.

Yes. Most association law firms get the vast majority of their business from management companies and thus, most of these law firms refuse to represent associations against management companies. Your board should continue to interview association law firms. If they are diligent, they will find a competent firm.

NO CONFLICT OF INTEREST

Q.

The attorney that represents our homeowner association owns an interest in our association's management company. Is this a conflict of interest?

A.

No. The fact that your attorney owns an interest in your management company is not a conflict of interest. However, your attorney has the obligation to advise your board that he or she has such an interest. In addition, should a conflict or potential conflict ever arise between the attorney's representation of your association and the interests of the management company, he or she would be required to advise you of such a conflict or potential conflict. In the event of an actual conflict, the attorney would be required to advise your association to seek other legal counsel. In the event of a potential conflict, the attorney would be required to advise you to seek other legal counsel or explain under what circumstances a potential conflict can be waived.

Permission to reprint our HOA Questions and Answers is granted provided Michael T. Chulak & Associates (MTCLaw.com) is credited as the source.