HOA Boards must be wary of potential conflicts of interest

HOA Boards must be wary of potential conflicts of interest

Question:  What is a reasonable course of action for homeowners who have legitimate concerns about a board member with a clear conflict of interest? For example, say a homeowners’ association (HOA) has a board member who is also a contractor specializing in replacing siding. This person, along with the other board members, makes the decision to interpret a provision of the restrictive covenants (the CCRs) that requires homes to have a “pleasing exterior” to mean that homeowners must replace their siding with a particular (translation: expensive) type of siding that the board member’s company sells and installs. Do homeowners have any recourse in such a situation?

Answer:  Most HOAs are established as nonprofit corporations. Nonprofit corporations, including most HOAs, are governed by the North Carolina Nonprofit Corporation Act (the “Act”). The Act has provisions that deal with actual or potential conflict-of-interest “transactions” for directors. The Act defines a conflict of interest as “a transaction with the corporation in which a director of the corporation has a direct or indirect interest.”

The Act goes on to say that a transaction which presents a conflict of interest is not automatically void if the details of the transaction are disclosed to and approved by the full board, a committee appointed by the board, or the members of the corporation—and the transaction is fair to the corporation.

Under a narrow reading of the Act, your hypothetical does not appear to involve a transaction between this director (or his company) and the HOA, so the scheme you have described may not necessarily be deemed a conflict of interest. However, the situation certainly reeks of self-dealing and unfairness to the homeowners, especially if there are few or no other competitive local providers of this particular type of siding.

While I realize there are always two sides to every story, and I am hearing only your side, this arrangement (if true) certainly reflects poorly on the board’s judgment. HOAs are creatures of democracy, so if the members of the board won’t reconsider their decision, then you and your like-minded neighbors can certainly elect new directors at the next annual meeting, or even request a special meeting of the members to remove some or all of the sitting directors now, rather than waiting for the annual meeting.

This column was originally published in the Charlotte Observer on September 10, 2016. © All rights reserved.