By David Graf and Tim Moeller, Moeller Graf, P.C.
When Governor Jared Polis effectively ended Colorado state licensing of community managers, he also ended the statutory obligation for community managers to disclose fees and other remuneration that community managers might receive through their management of a particular community. This statute, C.R.S 12-61-1004.5, took effect on January 1, 2015 and was thought by many in the community association world to be a significant step towards increased transparency. In my conversations with certain management company owners, they also felt that the statute would help dispel the “urban legends” of certain management companies taking kickbacks and preventing legitimate management companies from giving away a competitive advantage due to their honesty in disclosing of ancillary sources of revenue.
That statute is no longer in effect. However, the Community Associations Institute has long had ethics standards governing community managers who are members of CAI. Specifically, the Professional Manager Code of Ethics (“Code”), in Rule #6, requires that managers disclose in writing any actual, potential, or perceived conflict of interest between the manager and other vendors. This Rule goes on to require that the manager take all necessary steps to avoid any perception of favoritism or impropriety during the vendor selection process and negotiation of any contracts.
The comment to Rule #6 provides a scenario where a manager may have a financial interest in a vendor and as long as disclosure of that interest is in writing and is made “sufficiently in advance of the selection process to allow full consideration of the possible conflicts and any alternatives,” then the manager has fulfilled his or her duty under the Code. The fact that the Code requires disclosure of not only actual or potential conflicts, but also perceived conflicts of interest shows CAI’s commitment to a high-level of ethics and transparency among its manager members. These conflicts would typically be disclosed to the Board of Directors.
With respect to volunteer leaders (also known as board members or directors), conflicts of interest as nonlawyers might view them, are not regulated by state statute, presumably because being a volunteer leader in a small or even a larger community could result in perceived conflicts of interest among neighbors, friends, golf buddies, or the like. In some communities where there is a sense of “community,” some people will naturally know many others within that community and trying to regulate those interpersonal relationships in any meaningful way and still have people volunteering to serve would be difficult. Instead of trying to regulate interpersonal relationships, state statutes have two areas of concern related to volunteer leader conflicts of interest. The first is the mandate that an association have a conflicts of interest Responsible Governance Policy under CCIOA, found at C.R.S. 38-33.3-209.5, which requires that the policy describe the circumstances under which a conflict of interest may exist and set forth procedures to follow when a conflict of interest does exist. The second is the provision of CCIOA that references the “conflicting interest transaction” provisions of the Colorado Revised Nonprofit Corporation Act, found at C.R.S 38-33.3-310.5 and C.R.S. 7-128-501.
The provisions of the Nonprofit Act with respect to conflicting interest transactions, paraphrased, define a conflicting interest transaction as a contract or a financial relationship between an association corporation and a member of the Board of Directors-- or between the association and a party related to a member of the Board of Directors or between the association and an entity in which a member of the Board of Directors is a director, officer, or has a financial interest. This statute is designed to address profiteering by a member of the Board of Directors and is not intended to get into nonfinancial “conflicts of interest” that may arise among people who live in a community and may know each other socially or otherwise.
The Nonprofit Act provision addressing conflicts of interest states that no conflicting interest transaction shall be void or voidable solely because of the existence of a conflicting interest transaction or because the conflicted board member participates in a discussion of the conflicting interest transaction or even votes on behalf of it if any one of three criteria have been satisfied:
- Disclosure has been made of the conflicting interest transaction and a majority of the disinterested homeowners approve of the contract. This almost never happens, as rarely does an association send out contracts to a vote by homeowners.
- Disclosure has been made of the conflicting interest transaction and a majority of the disinterested directors approve of the contract. This is the most common method of addressing a conflicting interest transaction.
- The contract is fair to the association.
This means that a court could find that the contract was fair to the association, in which case the failure to disclose the existence of the conflicting interest transaction would be irrelevant. Of course, there can be a significant credibility problem if a board member fails to disclose the existence of a conflict of interest, notwithstanding the fact that a court may decide that the contract was fair to the association. Some Boards of Directors will disclose actual or potential conflicts at the start of any or even every meeting in an effort to head off any appearance of impropriety among members of that board.
CAI has homeowner leader resources to promote professionalism and transparency among homeowner leaders. The first is the Civility Pledge, which is downloadable from the CAI National website. The second is CAI’s Rights and Responsibilities for Better Communities, which sets forth principles for all those who interact with or live within the community to follow with respect to better governance and general principles of fairness. While these guideline documents are not legally binding, they are helpful for volunteer leaders to be familiar with as they make decisions on behalf of their homeowner constituents. These documents are also helpful for owners to be aware of and to take to heart when dealing with their neighbors, with their volunteer leaders, and with their community management professionals. Lastly, CAI has the [board leadership development program] which is a daylong class intended to train volunteer leaders on issues of basic community governance.
David Graf has practiced community association law exclusively since 2001. In this time, he has represented a wide range of communities throughout the State of Colorado. David is one of the most sought-after community association industry trainers and speakers in the United States. He is a national faculty member of the Community Associations Institute’s Professional Management Development Program (“PMDP”) and travels throughout the United States to facilitate multi-day corporate trainings for professional community managers. In 2015, he was named CAI’s National Educator of the Year.
Tim Moeller has practiced community association law since 1999. Tim supports associations in such areas as collection of delinquent assessments and enforcement of covenant matters, which includes litigating covenant violation and collection cases, and bringing foreclosure and receivership actions. Tim has extensive experience in creating and amending governing documents, preparing opinions concerning the many different matters facing associations in Colorado, and drafting and reviewing contracts.