December 2017 Newsletter
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New Legal Remedies Against<br />
Director Conflicts of Interest for Associations<br />
by Michael E. Chapnick<br />
SRHL Law<br />
In the pursuit of association fraud and embezzlement, one of<br />
the most important aspects of the major legislation that was adopted<br />
earlier this year is the law’s effort to curb conflicts of interest by<br />
association board members and officers.<br />
The new law provides that presumptions of conflicts of interest<br />
exist in the following circumstances:<br />
A director, officer or one of their relatives enters into a contract<br />
for goods or services with the association.<br />
A director or officer ... holds an interest in a corporation, LLC,<br />
LLP or other business entity that conducts business with the association<br />
or proposes to enter into a contract or other transaction<br />
with the association.<br />
The law requires that directors and officers must disclose to the<br />
board any activity that may reasonably be construed to be a conflict<br />
of interest. The activity in question must then be properly noticed<br />
and put to a board vote. It will need to be listed in the meeting agenda,<br />
and all of the related contracts and transactional documents should<br />
be included with the agenda. The director/officer may attend the<br />
meeting and make a presentation to the board, but they must leave<br />
the meeting during any discussion and the ensuing vote.<br />
The remaining members of the association’s board of directors<br />
will then need to vote on whether to allow the officer/director to<br />
remain on the board while engaging in the activity. If the board<br />
votes no, the director/officer must notify the board in writing of<br />
their intention to withdraw from office or cease the proposed activity.<br />
Association officers/directors in situations which may be construed<br />
to be a conflict of interest would be well advised to disclose<br />
it in accordance with the new legislation. Unfortunately, if they do<br />
not disclose the matter, determining whether officers/directors<br />
“hold an interest” in companies that are contracted by an association<br />
can present some difficulties.<br />
The good news is that the new law provides associations<br />
with legal recourse to address conflicts of interest when they are<br />
disclosed or detected. Because courts have not yet ruled on cases<br />
involving the rebuttable presumption of conflicts of interest for<br />
community association officers/directors under the newly amended<br />
statute, association directors and property management should<br />
consult closely with highly qualified and experienced legal counsel<br />
regarding the specifics of their circumstances.<br />
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