A conflict of interest describes a situation where one stands in a position to derive a personal benefit from actions or decisions they make in their official capacity. In the HOA context, the concerns regarding conflicts of interest typically stem from situations in which a director acts contrary to his duties to the association in order to advance the director’s personal interests, and/or to exploit his authority to obtain some form of benefit (monetary or otherwise) for himself, his family or friends. For example, a director is in a position to vote to award a maintenance contract to a company owned by the director or the director’s spouse. In that circumstance, the director is considered an “interested director” and the approval of the contract is considered an “interested transaction.” Situations involving conflicts of interest implicate the duty of loyalty that directors must uphold in their role as fiduciaries of the association.
Disclosure of Material Facts
A contract that was approved by an interested director may become void or voidable pursuant to Corporations Code Section 310 unless the material facts of the conflict are fully disclosed at the time the contract was approved:
- The material facts as to the transaction and to the interested director’s conflict are fully disclosed or known to the membership and such contract or transaction is approved by the members, with the interested director abstaining from voting; or
- The material facts as to the transaction and the interested director’s interest are fully disclosed or known to the board or committee, and the board or committee authorizes, approves or ratifies the contract or transaction in good faith by a vote sufficient without counting the vote of the interested director or directors and the contract or transaction is just and reasonable as to the corporation at the time it is authorized, approved or ratified. (Corp. Code §§ 310, 7233; Civ. Code § 5350(a).)
Interested Transactions: Disclosure & Recusal
In order to avoid problems and liability exposure resulting from transactions involving interested directors, boards must ensure that (a) full disclosure was made of all material facts regarding the interested director’s conflict, (b) the interested director recused himself from the board’s discussion and vote on the proposed transaction, and (c) the contract or transaction was “just and reasonable at as to the [association] at the time it is authorized, approved or ratified.” (Corp. Code §§ 310, 7233; See also “Interested Transactions.”)
Prohibited Actions by Directors & Committee Members
A director or member of a committee is prohibited from voting on the following matters affecting the director or committee member: (Civ. Code § 5350(b).)
- Discipline of the director or committee member (i.e., the vote to impose a fine against the director or committee member);
- An assessment against the director or committee member for damage to common area or facilities (i.e., the vote to levy a reimbursement assessment against the director or committee member);
- A request, by the director or committee member, for a payment plan for the director or committee member’s delinquent assessments;
- A decision whether to foreclose on a lien on the separate interest of the director or committee member;
- Review of a proposed physical change to the separate interest of the director or committee member (i.e., voting to approve the director or committee member’s architectural application); and
- A grant of exclusive use of common area to the director or committee member.
Related Case Law
- Harvey v. The Landing Homeowners Association
(2008) 162 Cal.App.4th 809
[Conflicts of Interest; Burden of Proof] The burden of proof transfers onto the person challenging the interested transaction when the interested Director makes full disclosure of all material facts and recused himself from the board’s discussion and vote.