Q&A: A maintenance vendor owned by an HOA management company creates an inherent conflict of interest
Question: As a board director I cannot get the other directors to adhere to a rule that the board implemented. The rule requires all vendor work over $2,000 to be submitted for bidding by three unrelated, competent vendors.
The problem is the management company operates its own maintenance vendor. Because of the company’s interest in the business, management plays games by creating multiple bills for dollar amounts under $2,000 for any project. They do this to get around the bidding rule.
For example, management billed the association $1,380 six different times to replace linoleum in common-area trash facilities. The final total for that project exceeded $8,280. Afterward, I personally solicited a proposal for the same project only to find that the association could have had the entire project done for $3,300 by a qualified, licensed and independent linoleum contractor. Over $5,000 was misappropriated and wasted by management!
In my opinion, that money was actually stolen through creative accounting. How can I force the board to enforce its own rules and regulations?
Answer: Although there is no general rule that requires multiple bids from vendors working for an association, it is a good business practice to compare vendor services and estimates — and always strive to get the association the best possible deal from qualified and licensed contractors.
Any time there is a possible conflict — such as a direct financial relationship between someone working with the association and a proposed vendor — the board must take special precautions to avoid having that conflict influence its decision-making process. Any deal with a vendor owned by the management company comes with a presumption of undue influence and a conflict, which is evidenced by the discrepancy between the final cost for this project and the bid you were able to secure.
The association’s rule requiring bids for work over $2,000 is a good start but not sufficient alone. Rules like that are meant to assist boards in competently managing association resources. But, whether or not the rule exists, the board has an ongoing obligation to act as fiduciaries who manage money for the titleholders. Even when considering work under $2,000, boards must be cognizant of possible conflicts of interest while simultaneously looking out for the best interest of the association and the titleholders who fund its operations.
As your situation shows, rules and regulations are only effective if enforced. And other than pressure from the homeowners, only the courts can compel the board to adhere to the rules. Your role as a dissenting board director is to competently and firmly argue your position. These kinds of overpayments happen because the board members are asleep at the wheel and they will continue to snooze until titleholders take sufficient action to wake them up.
Notifying the titleholders of both the rule and the reasons supporting it will strengthen your position. In this situation the waste of resources is the association’s overpayment for services using titleholder money. You should present all of this information, and the need to avoid future problems of this nature, to the board and the owners.
Should the present board continue to not be responsive, titleholders can circulate a petition to remove the board and elect directors more representative of owners who want to follow the rules and avoid wasting funds.
Board directors are encouraged to work with each other to resolve issues quickly and fairly. However, as a last resort, you could take legal action against your fellow directors for breach of fiduciary duties, but this would be an extreme and costly step. Filing a lawsuit could further fracture an already fragile community, especially since courts have been known to order individual directors to pay fines for violating fiduciary duties.
Directors should also keep in mind that a board that cannot adhere to its own rules certainly cannot expect owners to follow them either.
Zachary Levine, a partner at Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian, JD, P.O. Box 10490, Marina del Rey, CA 90295 or email@example.com.
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