Dealing with conflicts of interest in condo management
Question: I live in a large condo complex. When owners inquire about board procedures for hiring contractors and vendors, the president gives a big speech about how careful the board is in following ethical practices of obtaining at least three bids and looking over each bid thoroughly, then choosing the best contractor for the job.
That’s not what happens. In reality and without thought, the board just turns everything over to the manager who is plagued by bias. Contractors are related either to a board director or the manager. The manager’s father’s friends are the landscapers who double as contractors who did our fencing, roofs and new decks. The pool service person is the manager’s cousin. The troubled son is our security guard. Security contractors are the manager’s relatives and friends. Plumbers are buddies of the president. The cleaning products representative works with the president at his day job. The $1-million-plus painting contract for our entire complex was awarded to the manager’s live-in boyfriend. Later the same “painter” surfaces as our arborist and gets an ongoing contract diagnosing trees. Another board director is on the payroll for unspecified Web consulting.
Because of these relationships, the association can’t account for tens of thousands of dollars. Owners end up with lousy work and no one to complain to. When owners object to these obvious relationships, the president insists these people were the low bidders and there’s no favoritism. These entities are overpaid and have poor work ethics. We’ve got constant complaints of incompetence and substandard job performance. How can we stop it?
Answer: Replacing the board and terminating the manager should be on the next meeting agenda. These seemingly incestuous relationships disenfranchise owners and devalue association assets. Boards must act in the best interests of the titleholders and the association, not third-party vendors and certainly not friends of the board and manager.
Even if the association’s governing documents are silent as to conflicts of interest, the association should refrain from contracting with friends, family, owners and directors. Civil Code section 1365.6 and Corporations Code section 310 impose certain requirements that must be met for contracts and hirings. The “material” facts of a board director’s relationship with vendors must be “fully disclosed” at the time the board votes on a potential contract or hiring without the vote of the director with the alleged conflict. Anyone objecting to the hiring or with proof of impropriety must be given an opportunity to speak and go on the record before a board vote.
Once the issue of impropriety has been raised, the manager or director with an alleged conflict must prove the recommendation is not based on their relationship. The board will still have to prove that the association’s best interests were the motivating factor in allowing the conflict to exist.
When the law refers to “disclosure” prior to a vote, it means that all facts pertaining to the conflict must be revealed, and that those voting directors know, understand and appreciate the risks attached to their vote and willingly accept those risks along with the incumbent liability.
Directors must make reasonable inquiries into all potential transactions involving a third party pertaining to association assets and resources. All decisions must be made in good faith for the benefit of the association as a whole and not the board or any individual director, according to Corporations Code section 7231.
There is no way a board director can fulfill the good-faith requirement in the decision-making process if he or she hires friends and relatives. Also, such decisions, if made in closed meetings or executive sessions, disenfranchise titleholders by preventing them from protecting their assets.
Owners should avail themselves of every opportunity to confirm perceived indiscretions. Make frequent, methodical requests to prevent gaps in document retention. Don’t take the president’s word that ethical practices are followed, verify that statement for yourself. Don’t procrastinate: Each time a vendor is hired, titleholders should immediately demand, pursuant to Civil Code section 1365.2, a copy of the executed contract; minutes pertaining to board discussion; the motion, second and vote approving that hiring as well as any documented investigation and bids related to the proposed transaction.
The board, not the manager, is duty bound to investigate all third-party vendors, including management company and security personnel. Investigate education and employment history, past and present litigation and arrest records, and ask for referral letters as part of new and continuing employment.
On the referrals, speak directly with the letters’ authors, visit the sites that are referred to and view the work firsthand. Every employee should be interviewed at hiring and at least once a year thereafter.
Zachary Levine, partner at Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to P.O. Box 10490, Marina del Rey, CA 90295 or noexit@mindspring.com.
