Your board is considering whether to assume the maintenance of the perimeter fencing in the community, which is allowed by the governing documents. Two of the five board members’ lots border the perimeter fence, and if the maintenance is assumed by the Association, those board members will no longer have to maintain the fence bordering their lots. Owners are demanding that those two board members abstain from voting on the matter because the decision will directly benefit them, and is therefore a conflict of interest. Is that true?
Colorado law (C.R.S. 7-128-501(1)) defines a conflicting interest transaction as:
A contract, transaction, or other financial relationship between a nonprofit corporation and a director of the nonprofit corporation, or between the nonprofit corporation and a party related to a director, or between the nonprofit corporation and an entity in which a director of the nonprofit corporation is a director or has a financial interest.
Colorado law (C.R.S. 7/128-501(5)) then defines “party related to a director” as a spouse, a descendant, an ancestor, a sibling, the spouse or descendant of a sibling, an estate or trust in which the director or a party related to a director has a beneficial interest, or an entity in which a party related to a director is a director, officer, or has a financial interest.
So, what the heck does all of that mean?
First and foremost, there has to be some sort of contemplated contract, transaction, or financial relationship between the association and the director or a party related to a director. For example, if the association is considering hiring a director to perform routine maintenance around the community for a fee, that is clearly a conflicting interest transaction because the association is considering entering into a financial relationship with the director. Another example would be the director selling a used computer to the association – that is obviously a transaction between the association and the board member. Another example of a conflicting interest transaction is a situation where a director’s son or brother is a landscaper and wants to bid on the association’s landscaping contract.
In the example at the beginning of this article, while the directors may receive an indirect benefit as an owner in the community as a result of the decision, that situation does not result in a direct contract, transaction or financial relationship between the association and the director that would not otherwise exist outside of the director’s relationship with the association as an owner. If the reasoning that this is a conflict of interest were taken to its extreme, almost any decision a board makes, especially in relation to the finances or budget of the association, such as decisions to increase or decrease assessments, could be considered a conflicting interest transaction. The intent of the statute is to require open disclosure of conflicts of interest that would benefit the director separate from his or her interest as an owner. As such, as stated before, the primary focus should be on whether there is a contemplated contract, transaction, or financial relationship between the director or a party related to a director, separate from the director’s interest and role as an owner, and the association.