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