Conflicts of Interest – Are they a real issue or just a fancy turn of phrase?

The term “conflicts of interest” is often referred to and used in connection with community associations with respect to actions and decisions of board members.  However, most people do not know what constitutes a legal conflict of interest as that term is defined by the Colorado Revised Nonprofit Corporation Act (“Nonprofit Act”).

The Nonprofit Act defines a conflicting interest transaction as any of the following:

1. A contract, transaction, or other financial relationship between a nonprofit corporation and a director of the nonprofit corporation;

2. A contract, transaction, or other financial relationship between the nonprofit corporation and a party related to the director; or

3. 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.

The above list is exhaustive, and to the extent a transaction does not fall within any of the above categories, it is not considered a statutory conflict.  That being said, while some transactions do not fall into the statutory definition of a conflict of interest, they may still appear suspicious or peculiar to owners in the community.  Such transactions should not be ignored by boards as a perception of wrongdoing (even when the board did nothing wrong) may still result in a loss of trust of the board and may need to be addressed with the membership.

To the extent a transaction does fall into one of the above categories, it does constitute a conflict of interest.  Just because a transaction is a conflict of interest, it is not necessarily unlawful.  The Nonprofit Act provides three options to deal with conflicting transactions:

1. Material facts concerning the director’s conflict are disclosed to the board and the board, in good faith, approves the transaction by at least a majority of disinterested directors; or

2. Material facts concerning the director’s conflict are disclosed to the owners and the owners approve the transaction; or

3. The transaction is fair to the association.

Any of the above options serve to “legalize” the conflicting transaction.

Regardless of the above, all common interest communities are required to adopt a conflict of interest policy, and the policy may contain additional details and specifics for conflicting interest transactions in your community.  If you have not reviewed your policy recently, you may want to do so to determine whether your policy adequately meets the needs of your community.

For more information on conflicts of interest or for assistance in preparing a conflicts of interest policy, please contact an Altitude attorney at 303.432.9999 or at [email protected].