A maintenance vendor owned by an HOA management company creates an inherent conflict of interest
Los Angles Times
Donie Vanitzian
08 April 2017
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!
creative accounting
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.
rules and regulations are only effective if
enforced
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.
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