Beware Conflicts When You Hire Board Members’ Companies–Part 2

 

There’s a split among experts on whether you should hire a board member for your association’s work.

Elizabeth White, a shareholder and head of the community associations practice at the law firm of LeClairRyan in Williamsburg, Va., is hesitant. “You’ve got so many things boards need to think about,” she says. “One is the awkwardness. Let’s say things don’t go so well with the company. The board is going to be discussing the company’s performance. We also have some board members who want to be employed themselves and offer up such a good deal on things like accounting services, [but then we] find they don’t have errors and omissions or malpractice insurance or aren’t properly licensed and bonded.

“Also, the very act of entering into that contract puts the other board members at risk of breach of fiduciary,” White adds. “Finally, what if you have to sue that company? All those things that make arms-length transactions are challenged when you have an interested party.”

What if it’s a small association with a smaller budget hiring board members? “I hear this all the time from the smaller associations,” says White. “The reasonability of the transaction is going to be related to the size of the budget of the association and the nature of the association. I can’t say there’s a one-size-fits-all answer, but you have to be very careful.”

White has been asked to represent associations in which she’s lived. “I always decline,” she says. “I don’t want to be sending violation letters to my neighbors.”

Robert Galvin, a partner at Davis, Malm & D’Agostine PC in Boston who specializes in representing condos and co-ops, is also reticent about such arrangements. “It’s probably not a good idea, but with disclosure it could be done,” he explains. “And if a conflict or a potential conflict came up, that board member would have to recuse himself. One conflict I can think of is if the board member who’s also a lawyer doesn’t pay his association fees or has some kind of disagreement with the board over anything, like repairs or his pet. At that point he couldn’t represent the HOA against himself. That might cause the board to say, ‘Why hire him in the first place if that’s a possibility?'”

Hire Away, But Take Precautions

Others are comfortable–and have done it themselves–with the proper disclosures. “If you’ve got somebody on the board who provides services nobody else can do or does as well, why should your association suffer because someone happens to be on the board?” says Donna DiMaggio Berger, managing partner at Katzman Garfinkel Rosenbaum in Ft. Lauderdale, Fla., who advises associations. “When I served on my HOA board of directors, my firm represented the association. I wanted my firm to work for our association because I think we’re the best association attorneys out there, and why shouldn’t my community have the best?”

Berger admits her association probably asked her to be on the board in part because it thought it might get added benefits–and it probably did. “There was pressure to discount rates, and I told them they got the same discount everybody else got,” she explains. “I also think the expectation from the rest of the board was, ‘Can you give us some more freebies?’ It’s human nature to expect you’re going to get special service when the person who owns the company is also the recipient of the service. So you have to be careful. On the other hand, do I think the associate working on that file put in more effort because it was for the boss’ association? I do.”

Keeping Some Distance from the Association

Even when board members’ companies are hired, many of those board members segregate themselves from the work. Both Berger and James R. McCormick have done that.

McCormick is currently his association’s president, and his firm does work for his association. “Here in California, there are specific conflict rules, and I had to disclose my material financial interest in my company, which I did,” explains the partner at Peters & Freedman LLP in Encinitas, Calif., who represents associations. “But I don’t want to be involved in the work. My partner and an associate handle these issues, and I try to stay out of them as much as I can. If I were a sole practitioner, it’d be much more difficult, and I don’t know I’d want to do that.”

Still, McCormick has taken some guff from owners because of his firm’s representation of his association. “We did have an owner in for a hearing because he hadn’t paid his dues,” explains McCormick. “We negotiated a settlement, and I suggested cutting him a break. Then he submitted a claim with the state bar stating I hadn’t disclosed a conflict to the owners. Nothing came of it, but it made me mad because I’m the one who suggested giving him a break! That’s the type of thing that could conceivably come up–someone might say you have a conflict.”