You’ve, no doubt, heard the term “conflict of interest” flung around quite a bit in the HOA industry. But what does this term really mean? Did you know that CCIOA, with the help of the Revised Nonprofit Corporations Act (“Nonprofit Act”), specifically defines this term and provides guidance for associations with respect to this issue?Pursuant to Section 310.5 of CCIOA, which applies to pre and post-CCIOA communities, the Nonprofit Act provisions addressing conflicts of interest for directors applies to all common interest communities in Colorado. The pertinent provision in the Nonprofit Act lies in Title 7, Article 128, Section 501 of the Nonprofit Act and defines a conflicting interest transaction as including any one of the following situations:
- A contract, transaction, or other financial relationship between a nonprofit corporation and a director of the nonprofit corporation;
- A contract, transaction, or other financial relationship between the nonprofit corporation and a party related to the director; or
- A contract, transaction, or other financial relationship between the nonprofit corporation and an entity in which a director of the nonprofit corporation is a director or officer or has a financial interest.
To the extent the transaction in question does not fall within any of the above descriptions, it is not a conflict of interest transaction as far as the statutes are concerned—although it may still seem fishy and suspicious.If you’ve identified a transaction to fit under one of the above descriptions and confirmed the transaction is truly a conflict of interest, the Nonprofit Act specifies the transaction is still lawful as long as one of the below occurrences applies to the situation:
- Material facts concerning the director’s conflict are disclosed to the board and the board in good faith approves the transaction by a majority of disinterested directors;
- Material facts concerning the director’s conflict are disclosed to the members and the members authorize the transaction; or
- The transaction is fair to the association.
If any of the above provisions apply to the transaction, the Nonprofit Act states such transaction will not be void, voidable, or give rise to any legal claim for damages or sanctions. Therefore, if you have a situation in your community that you, or others, believe to be a conflict of interest, don’t automatically assume it’s unlawful or voidable. Make sure you run through the above factors to determine if the transaction may continue.If you have questions or want to know more about conflict of interest transactions involving directors, please contact a Altitude Community Law attorney at 303.432.9999.