By Lee Freedman, Gravely Pearson Wollenweber Freedman, LLC
Budget Acres Condominium Association is desperately looking to hire a fencing contractor to redo the common element exterior fencing around the community. For Budget Acres, price is always a factor. You sit on its Board of Directors. Luckily, your brother-in-law happens to be a fencing contractor. You do not know how good he is, but you know he will give the Association a good price because he is “family” and he would be eternally grateful to you for the work. You convince your fellow Board members to stop looking because you have the perfect person. He cuts the Association a great deal, however, he does not provide a contract or even an itemized bid because, again, he is “family.” What could go wrong?
These type of “sweetheart” deals are not uncommon in community associations throughout Colorado because they tend to provide associations cheap and quick labor. However, not only can these arrangements pose considerable legal exposure for Colorado communities if the work is done poorly or is not completed, they raise serious ethical concerns for associations, their board of directors, and the individual board members who may personally or whose family members may profit in some way from the deals.
The ethics concerning the selection of vendors/contractors is not complicated. Board members generally are not supposed to earn compensation in their roles as board members. They are volunteers. Their family members are not supposed to profit from their roles as board members either. Board members of community associations are required under Colorado law to discharge their duties as a board member: (1) in good faith; (2) with the care an ordinary prudent person in a like position would exercise under similar circumstances; and (3) in a manner the board member reasonably believes to be in the best interests of the community association. These are known as fiduciary duties. In discharging their duties, board members may rely on information or statements of other officers or employees of the association whom the board member reasonably believes is reliable and competent on the matters presented. This may come in the form of competent professionals, experts such as attorneys or public accountants, or a Board-appointed committee the board member is not on but which he or she reasonably believes merits confidence.
Under Colorado law, to comply with their fiduciary duties, board members must, at the very least, act with loyalty towards the community association and with an extreme measure of candor, unselfishness, and good faith. To ensure such compliance, community associations are required under the Colorado Common Interest Ownership Act (CCIOA) to adopt a policy governing the handling of board member conflicts of interest. Such a policy must, at least, define or describe the circumstances under which a conflict of interest exists and set forth procedures to follow when a conflict of interest exists, including, but not limited to, whether or not the board member must recuse himself or herself from voting on the issue.
Unless the conflict of interest policy states otherwise, board members with conflicts may, but are not required to, recuse themselves from any discussion or vote on the issue. However, a board may want to require such recusal in its community’s conflict of interest policy to help reduce the appearance of impropriety in the board’s decision-making process. Further, a board member is not prohibited from entering into a transaction with the community association so long as the transaction is fair as to the association.
Under the scenario with which we started, the board member must disclose to the other board members prior to any vote that the contractor is related to him or her. The board member must also disclose to the other board members any negative information about the transaction or the contractor known to the board member that would make reliance on the information about the transaction unwarranted. Basically, if the related board member knows that his or her brother-in-law does shoddy work, has been sued many times, or is otherwise unreliable, the board member must share that information.
If the related board member chooses to not recuse himself or herself and proceeds to participate in the discussion on or vote to approve the agreement, the board member must be honest and upfront with the other board members. The board member also must remove his or her personal relationship with the contractor (the brother-in-law) and make a determination solely on what he or she believes to be in the best interest of the community association and as any other person in his situation as a board member would do. This may include, if it is reasonably believed to be in the best interest of the community association, a requirement to have a written agreement with the brother-in-law, which contains express warranties.
Failing to comply with these fiduciary duties could put a board member in jeopardy of facing extensive and expensive litigation and place their community association similarly at risk. Under Colorado law, the elements for a suit against any association for breach of fiduciary duties are really simple. A member of a community must only demonstrate that a board of directors has made an arbitrary or capricious decision, which is not reasonable under the circumstances and in the best interests of the given community. Hiring contractors for self-dealing purposes opens a door for an allegation of breach of fiduciary duty that no community wants to defend. Preventing these allegations is not hard if board members simply avoid conflicts of interest. Be upfront, candid, and unselfish in your role as a board member and you will avoid the risk.