The condo president is also a vendor
Los Angles Times
Donie Vanitzian
10 December 2016
Question:
Our board has five members and the president of our homeowner
association is a real estate salesperson. Her three friends are also on
the board and voted to approve hiring the president to act as property
manager of a foreclosed condo in our development that the association
owns. Our development has many “snowbirds” who also pay the president
to watch their properties during the summer months.
She does not report any of this income to the IRS or state. Neither the
association nor the snowbirds generate any W-2 or Form 1099s for her.
Is it legal for a board president to receive payments like this? She
claims she is being paid “as a professional Realtor,” not as the board
president. Can homeowners do anything about this?
Answer:
Blurring the line between board director and vendor is never a good
idea. While a director is not precluded from conducting business with
the association’s members, or even with the association, there is
potential for a conflict of interest.
If a conflict is established and the resulting deal is not fair to the
association, then owners can challenge these transactions, seek
reimbursement for the association and even pursue the participating
directors for liability. The reimbursement would include any payments
that board director received and could also include damages to the
association from the activity that the director conducted.
To avoid such a messy outcome, special steps must be taken when a
director makes a bid to act as a vendor. The directors who consider the
bid must be disinterested and not receive a benefit from the
transaction, and they must be governed by an overarching duty of care
owed to the association. This duty requires the board to take
reasonable steps to make the best deal, which generally involves
considering the prices and experience of alternative vendors and not
giving the president a preference simply due to her position or their
familiarity with her.
But just because a board can legally do something doesn’t mean that it
should or that it is a good idea. The special process to approve
director bids is in place to protect homeowners and the association
from inappropriate self-dealing. Still, there can be an assumption that
the board is doing something wrong when it pays a member for services
that are regularly handled by third parties. Even if all proper
procedures are followed, there will be members in your association that
won’t trust this type of transaction.
If there are reasonable alternatives to contracting with a director,
they should be strongly considered. If a director and a third-party
vendor are equally qualified, it may be best for the board to avoid the
perception of bad faith and hire the third party. Should there be a
problem with the job and the association needs to file a lawsuit, it is
less complicated to litigate with a third party than with a director.
In the particular case of this president, she may be qualified to act
as a manager for the association’s property, and there might not have
been any impropriety in selecting her. But the board has an obligation
to consider alternatives to renting the unit. Treating the foreclosed
property as a rental comes with the additional costs of insurance and
management and the additional risk of renter damage and liability.
If the board failed to consider a sale of the unit because the
president wanted to make money from management, then the board failed
to act in a responsible manner and let the president’s conflict of
interest get in the way of the careful exercise of its own duties to
the owners.
As for her compensation, individuals and corporate entities are
required to file a 1099 for any independent contractor that is paid
$600 or more for services in a fiscal year. Although you cannot do
anything to force the “snowbirds” to issue or file 1099s, you should
demand that your association’s board comply with state and federal law
in this regard if it is paying the president $600 or more to manage any
association property.
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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