Q. I have some questions about what would constitute a conflict of interest. One of the managers of our community recently hired his brother-in-law to do work on the property, and I don’t think proper procedures for the hiring and contracting were followed. Is that a conflict to have a board member relation work on the property? Additionally, we have another manager who has a very close relationship with a board member, if you know what I mean, and may even get married to that individual.This makes me very concerned that a potential conflict of interest situation is about to occur. What do you think?

—Out-of-Bounds in Ocean Township

A. “Conflicts of interest are always a concern in any condominium association or homeowners association. It's important that in every case the board take a hard look for any conflicts that might arise and that conflicts be identified and dealt with promptly,” says Stuart Lieberman, a founding shareholder attorney with the law firm of Lieberman & Blecher, P.C., in Princeton. 

“Members of the community should be able to trust their boards to scrupulously  undertake this task and failure to identify conflicts of interest may result in a host of problems ranging from improper self-dealing to unnecessary overpayment for services rendered by providers.

“Board members serve at the pleasure of the members of the community and have a fiduciary obligation to those members. This is a higher duty of care, greater than that of two contracting parties.   As part of that special relationship, they must ensure that their actions are impartial, fair and very  transparent. Actions which may be clouded as a result of conflicts discredit the board and cause harm to the community at large.

This does not mean that board members’ spouses/relatives,  or even board members themselves, are absolutely barred from doing business with the community. But as a general matter, this kind of transaction is far from preferred and should be avoided. Even if only  to maintain the appearance within the community of openness and transparency.  For example in the case of Kim v. Flagship Condominium Owners Ass'n., decided by the Appellate Division of the New Jersey Superior Court in 2000, the Court considered a somewhat similar issue.  It held as follows:

 “We do not suggest that Kay's position as a member of the Board, and the Board's grant of authority to Kay's management company, are inherently improper. See N.J.S.A. 14A:6-8 (governing corporate transactions with one or more of the corporation's directors). Such a transaction is neither void nor voidable on account of the relationship if the "contract or other transaction is fair and reasonable," or if there has been disclosure of the common interest and subsequent ratification by the Board or the shareholders. See generally, Pachman, CORPORATIONS, Comment 9 to ch. 6 (1999).”

“This means that as long as there is full disclosure and the contract is fair and reasonable, close relationships will not make an agreement with the board illegal.  But while the standard may permit such dealing, a better practice might be to avoid it altogether. After all, the boards’ view of what is fair and reasonable might not match that of members of the community. And whether that results in expensive litigation, or just a collective sense within the community that something is wrong,  neither outcome is particularly desirable.

In this particular case the question raises two issues.  First concerns a homeowner who was a prior trustee and has her own management company that has been chosen by the Board of Trustees for the purpose of managing the community. This would not appear to be a conflict on its face because the homeowner was a prior trustee. But the question that may arise is whether the prior trustee status afforded this owner of the management company any kind of inside information or preferential treatment in the selection process. A management company should be chosen  based on the merits of the applicant, in an open and fair manner As long as the process was open and transparent, a former status, as long as disclosed should not represent a problem. The problem would arise is the fact that the management company owner had been on the board afforded him or her a special advantage in the selection process, which would in fact be a problem.

The second issue concerns the manager, who is very close to and may even marry a board member. That becomes a tricky issue. Certainly, the board member should not participate in any discussions or votes relating to this manager or to the management company who employs the manager. In such case, the spouse of the manager would have to recuse himself or herself from participating in any vote or decision-making that in any manner might implicate this manager.  The problem is that the manager is very often at the center of every issue involving an association. It becomes difficult to extricate the manager from many issues since the manager is frequently the person who solicits bids, works with vendors, deals with the local government, and fields concerns by members of the community.  It would seem to be prudent for the community to simply not hire this manager so as to avoid the many instances in which the married board member will have to step aside.

“Again, there is often a difference between what is allowed and what is prudent.  There are many instances in which a board may contract with someone closely connected to it. My suggestion is to maintain a healthy distance from the bare minimum that is allowed, and the more high brow conduct that just makes a lot more sense. Here is a simple test:  If you need to spend a lot of time determining where a given situation represents a conflict of interest, it probably should be avoided regardless of the outcome of that research.”