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Understanding Community Association Ethics

By Jennifer L. Alexander, Esq. and Steven Mlenak, Esq. March 25, 2013 Posted in Community Association Law

Save for maybe audits and taxes, it is a topic that excites Association volunteers like no other: ethics. Still, understanding the ways board members or other Association volunteers, such as committee members, are expected to act, and in many cases are required to act, is something very important to the long-term success of a Community Association.

There are many different areas of concern when discussing ethics: non-disclosure of confidential information, accountability, financial ethics, business ethics, relations among Board members, and resolution of differences. Here are just a few examples of situations in which understanding the ethical requirements of serving on an Association board can prevent harmful and sometimes expensive repercussions.

Election to a board creates fiduciary obligations in accordance with the standards set forth in the governing documents, the New Jersey Condominium Act, the New Jersey Non-Profit Corporations Act, and other relevant state and federal laws. Disclosure of confidential communications and information shall be considered a breach of a Board Member’s fiduciary obligation. The consequences of a breach may include, but not be limited to:

1. removal from office, as set forth in most Association’s governing documents, if that board member is an officer;

2. removal as a member of the board, as set forth in most Association’s governing documents;

3. a cause of action for any loss to the Association proximately caused by the board member’s willful misconduct or bad faith.

Board members are often provided with and exposed to confidential communications and information concerning the business affairs of the Association and, possibly, private and personal information concerning the residents of the Association. For example, if a unit owner is delinquent on their maintenance fees, board members could potentially learn about that individual’s private financial status, including whether that resident has suffered expensive health conditions, job loss, bankruptcy, or other private sensitive information that should not be disseminated.

Board members must also make sure not to violate any conflicts of interest to ensure the integrity of the Association. For example, if a Board member is a realtor and is negotiating a short sale for a unit that is delinquent in maintenance fees, it would be a conflict of interest for that Board member to vote or participate in discussions on whether to release an Association’s lien on the unit as the realtor will be collecting a commission for the sale.

These are just a few of the many ethical situations that can arise for Association volunteers.

It is expected that Association volunteers discharge their fiduciary duties and powers in a manner that protects and furthers the health, safety, and general welfare of the unit owners. To help live up to that expectation, Griffin Alexander, P.C. has developed personalized Ethics Resolutions that we encourage our client Associations to adopt. By adopting the Resolution, board members are required to sign a Confidentiality and Non-Disclosure Agreement form which provides assurance to the unit owners that the board member will uphold the tenants of fair and ethical dealing while representing the Association.

By signing the Confidentiality and Non-Disclosure Agreement, board members agree that the will adhere to, among other items, the following:

1. Complete abidance to the Resolution Pertaining to Ethics, Confidentiality, and Non-Disclosure for Board Members and Committee Members.

2. Agree not to use or disclose the confidential communications and information to anyone or for any purpose other than as contemplated by the requirements of board service, committee assignment, or appointed task with the Association. The Agreement is intended to encompass all voluntary services performed by the board member without the need for any further writings.

3. Service on a committee or any other appointed task is at the sole discretion of the Board. Nevertheless, the Board Member agrees that committee assignment or other appointed task means that he or she is an agent of the Association. This creates fiduciary obligations in accordance with the standards set forth in the governing documents, the New Jersey Homeowners Act, the New Jersey Non-Profit Corporations Act, and other relevant state and federal laws. Any violation of the Agreement shall cause immediate removal of the assignment and may include a cause of action for any loss to the Association proximately caused by the undersigned’s willful misconduct or bad faith.

Knowing and understanding how to serve your Association ethically will help prevent problems down the road such as the mismanagement of the Association, distrust of the Association from its unit owners, and could even result in legal action against the Association and the individual Board member.

If you would like to talk to an attorney from Griffin Alexander, P.C. to learn how we can help develop an Ethics Resolution for your Association, please contact us at (973) 366-1188 or at attorneys@lawgapc.com

This posting is intended to provide general information and is not intended as specific legal advice or to establish an attorney-client relationship. Please contact Griffin Alexander, P.C. at (973) 366-1188 to assist you with both your Community Association law and Landlord-Tenant law needs.

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