CONFLICT OF INTERESTS FOR NJ COMMUNITY ASSOCIATION BOARD MEMBERS
By Community Association Law ShareJuly 24, 2019 Posted in
New Jersey Community Associations are required by law to have in place a Board of Directors or Trustees to oversee and governs their affairs. Generally, the Board may only consist of unit owners, who are members of the Association. Most often they serve as volunteers, and without pay or compensation. Board members are chosen by nomination and election. Although membership on the Board is voluntary, these elected members are obligated to act as fiduciaries to the membership and must, therefore, endeavor to avoid conflicts of interest.
In the 2007 case of Kim v. Flagship Condo. Owners Ass’n, the Court addressed the relationship between the Condominium Association and its members. The Court stated;
A Board of Directors has a fiduciary obligation to its members similar to that of a corporate board to its shareholders. That obligation includes the duty to preserve and protect the common elements and areas for the benefit of all its members.
The Court further reasoned;
This fiduciary relationship requires that the Board act consistently with the Condominium Act and its own governing documents and that its actions be free of fraud, self-dealing, or unconscionability. Moreover, that fiduciary relationship requires that in dealing with unit owners, the association must act reasonably and in good faith. If a contested act of the association meets each of these tests a judiciary will not interfere.
The fiduciary duty of the Board includes the obligation to disclose potential conflicts of interest. In our view, this means that the Board must inform its members of any such conflicts. Conflicts of interest arise when a board member has a duty to more than one person or organization but cannot do justice to the actual or potentially adverse interests of both parties. This includes when a board member’s personal interests or concerns are inconsistent with that of the organization or party he or she represents. Further, conflicts may arise where a Board member has an interest in a transaction or arrangement from which he or she may benefit. However, it should be noted that not all transactions that might benefit a Board member are void. In Kim, the Court stated;
A transaction involving a condominium association's board of directors and a principal of a corporation who sits on that board is neither void nor voidable on account of the relationship if the contract or other transaction is fair and reasonable, or if there has been disclosure of the common interest and subsequent ratification by the board or the shareholders.” Id.
By way of example, a Developer representative to the Board serves two masters; the Association membership and the Developer. This conflict of interest is specifically permitted by law and by the governing documents, and is therefore disclosed to every member. This circumstance, while permitted by law, does not interfere with the obligation of that Developer representative to the Board to act as a fiduciary. When the interests of the Developer and the Association membership are in conflict, the Developer Board member must place the Developer’s interests to the side and act in the best interests of the community.
The same is true for unit owner representatives to the Board. Referring a Board Member’s Uncle John, for example, to do the Association’s landscaping is a conflict, and must be disclosed. Board members are required to exercise the duty of care and loyalty to the Association that is expected of one in a fiduciary role. This means that the Association and its member’s interest must be given priority above all others. The conflicted Board Member should consider abstaining from voting on an issue that presents a conflict. The Board should ensure that its decision-making process is transparent, not influenced by self-interest or duties to outside persons or entities. Documents should be made available where appropriate to assist all Board members in the decision-making process. There should be an open and fair discussion about the matter at hand. By fully disclosing potential conflicts, the Board will be better able to address claims of fraud or self-dealing that might later arise.
At Griffin Alexander, P.C., our attorneys have decades of combined experience representing community association boards and their members in various legal matters (from transactional concerns to disputes).
We are committed to the provision of client-oriented service. We form a close partnership with our clients, which gives us a significant informational advantage that we can leverage over the course of the dispute process. This level of engagement and transparency also ensures that clients have an opportunity to ask questions and get answers relating to their litigation concerns.
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