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Q&A: Hiring a board member as a vendor is not good business for an HOA

Hiring a board member as a vendor is not good business for an HOA.
(John Wildgoose / Getty Images)
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Question: Our board has five members and the president of our homeowner association is a real estate salesperson. Her three friends are also on the board and voted to approve hiring the president to act as property manager of a foreclosed condo in our development that the association owns. Our development has many “snowbirds” who also pay the president to watch their properties during the summer months.

She does not report any of this income to the IRS or state. Neither the association nor the snowbirds generate any W-2 or Form 1099s for her. Is it legal for a board president to receive payments like this? She claims she is being paid “as a professional Realtor,” not as the board president. Can homeowners do anything about this?

Answer: Blurring the line between board director and vendor is never a good idea. While a director is not precluded from conducting business with the association’s members, or even with the association, there is potential for a conflict of interest.

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If a conflict is established and the resulting deal is not fair to the association, then owners can challenge these transactions, seek reimbursement for the association and even pursue the participating directors for liability. The reimbursement would include any payments that board director received and could also include damages to the association from the activity that the director conducted.

To avoid such a messy outcome, special steps must be taken when a director makes a bid to act as a vendor. The directors who consider the bid must be disinterested and not receive a benefit from the transaction, and they must be governed by an overarching duty of care owed to the association. This duty requires the board to take reasonable steps to make the best deal, which generally involves considering the prices and experience of alternative vendors and not giving the president a preference simply due to her position or their familiarity with her.

But just because a board can legally do something doesn’t mean that it should or that it is a good idea. The special process to approve director bids is in place to protect homeowners and the association from inappropriate self-dealing. Still, there can be an assumption that the board is doing something wrong when it pays a member for services that are regularly handled by third parties. Even if all proper procedures are followed, there will be members in your association that won’t trust this type of transaction.

If there are reasonable alternatives to contracting with a director, they should be strongly considered. If a director and a third-party vendor are equally qualified, it may be best for the board to avoid the perception of bad faith and hire the third party. Should there be a problem with the job and the association needs to file a lawsuit, it is less complicated to litigate with a third party than with a director.

In the particular case of this president, she may be qualified to act as a manager for the association’s property, and there might not have been any impropriety in selecting her. But the board has an obligation to consider alternatives to renting the unit. Treating the foreclosed property as a rental comes with the additional costs of insurance and management and the additional risk of renter damage and liability.

If the board failed to consider a sale of the unit because the president wanted to make money from management, then the board failed to act in a responsible manner and let the president’s conflict of interest get in the way of the careful exercise of its own duties to the owners.

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As for her compensation, individuals and corporate entities are required to file a 1099 for any independent contractor that is paid $600 or more for services in a fiscal year. Although you cannot do anything to force the “snowbirds” to issue or file 1099s, you should demand that your association’s board comply with state and federal law in this regard if it is paying the president $600 or more to manage any association property.

Zachary Levine, a partner at Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian, JD, P.O. Box 10490, Marina del Rey, CA 90295 or noexit@mindspring.com.

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