Wheeling and Self Dealing: Can Directors Contract with the Association?

A fiduciary duty is defined as a relationship of trust and confidence between two or more parties.  In Florida, association board members owe a fiduciary duty to their fellow unit owners.  Florida Statute 718.111(1), which governs condominiums, sets forth that “the officers and directors of the association have a fiduciary relationship to the unit owners.”  Florida Statute 720.303(1), which governs homeowners associations, sets forth that “the officers and directors of an association have a fiduciary relationship to the members who are served by the association.”  As a result of these fiduciary relationships, there are several actions that are off limits to board members, but this has led to many misconceptions as well.  Possibly the most common misconception is that a board member (or his or her company) cannot contract with the association because it would be a conflict of interest and thereby, a breach of a fiduciary duty-this is not true.

Florida Statute 617.0832 deals with conflicts of interest for directors of non-profit corporations (ie: condos and HOAs).  It provides that “no contract or other transaction between a corporation and one or more of its directors or any other corporation, firm, association, or entity in which one or more of its directors are directors or officers or are financially interested shall be either void or voidable because of such relationship or interest” provided that 1) the fact of such relationship or interest is disclosed or known to those who are entitled to authorize the contract or transaction and 2) that the contract or transaction is fair and reasonable at the time it is authorized.

As long as this type of contract or transaction is before the board of directors for approval and is authorized by the affirmative vote of a majority of those directors who do not have a relationship or interest in the transaction (and as long as it is more than a single disinterested director that approves), the transaction will be deemed properly authorized under the statute.  It should also be noted that the mere presence or casting of a vote by a director having a relationship or interest in the transaction does not invalidate the process so long as the transaction is otherwise properly authorized.

The most important thing for a board member to consider is that while contracting with the association is statutorily permissible, it may nevertheless carry with it the appearance and stigma of self-dealing.  There is always a possibility that no matter how above board the transaction may be, other owners in the community are likely to think that the transacting director is acting with the same mindset as the cartoon character above.

Lesson: Don’t become the cartoon character.

Daniel Wasserstein

E-mail: danw@wassersteinpa.com

561-288-3999

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2 comments on “Wheeling and Self Dealing: Can Directors Contract with the Association?

  1. jack says:

    WE have a director, vice president who purchased a parcel of land contiguous with an association common intrest parcel for 100 dollars,he transfered the parcel which he purchased to his corporation listing the llc as the grantor and then sold the parcel to the association [grantee] without disucussion or vote of condo members for 10,000 dollars which was paid from association membership monies.

    This parcel in question was wet land, unable to support structures, was contiguous to the laundry building parcel [common area] and was added to that parcel by unity of title. Access to the parcel was through the common area only unless one could walk on water through the mangroves.

    Could this be self dealing or just a conflict of interest. The land has no written stated use for the future or purpose of use. this is just one parcel that could not be sold and incorporated with unity of title with any other lot onwer. The other 26 lots were sold to the other owners whos lots were contiguous with the parcels purchaced from this director.

    Could you comment on this in reference to self dealing. Thanks

    Jack

    • Jack,

      It sounds like the requirements outlined in my article were not followed based upon the information you have presented. It appears that there was never a vote of the disinterested directors where a majority approved this transaction, as is required, and further, that the transaction was not fair and reasonable based upon the utility (or lack thereof) of the property and the pricing information you have provided. If the association decides that it wants to try to void this transaction, further advice of counsel should be sought.

      Dan

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