Anytime there is suspicion as to a director acting inappropriately or at least suspiciously, there are accusations of conflicts of interests. For example, I recently reviewed an email in which a director was accused of having a conflict of interest because his wife was a member of the architectural review committee. Somehow having one owner serve on the board, while the second owner served on a committee, felt wrong to an owner and that owner immediately jumped to the conclusion that there must be a conflict of interest.
In reality, however, a true conflict of interest may only exist when a monetary benefit is, or may be, gained by the pertinent director. The definition of a conflict of interest for a director is set forth in the Colorado Revised Nonprofit Corporations Act (“Nonprofit Act”), and is specifically referenced in, and adopted by, the Colorado Common Interest Ownership Act (“CCIOA”).
More specifically, a conflicting interest transaction is defined as 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.
Based on the above, any transaction or situation that does not involve a financial benefit, does not fall within the above definition and does not, therefore, constitute a statutory conflict of interest. That is not to say, however, the transaction is necessarily fair, ethical, or in compliance with the governing documents.
On the other hand, if the pertinent transaction fits under one of the above descriptions, such transaction would, in fact, constitute a conflict of interest. But, so what? Just because a transaction constitutes a conflict of interest, does that make it wrong or otherwise unlawful? Colorado law says no.
In fact, the Nonprofit Act specifies the conflicting transaction is lawful as long as one of the below options was utilized:
- Material facts concerning the director’s conflict were disclosed to the board and the board in good faith approved the transaction by a majority of disinterested directors;
- Material facts concerning the director’s conflict were disclosed to the homeowners and the owners authorized the transaction; or
- The transaction was/is fair to the association.
Based on the above, if any of the above provisions apply to the conflicting transaction, it will not be void, voidable, or give rise to any legal claim for damages or sanctions against the interested director, board, or association.
If you have questions or want to know more about conflicts of interest involving directors, please contact an Altitude attorney at [email protected] or at 303.432.9999.