HOA president wants to use his own management company

My HOA president has created a LLC for his own community management company and plans to put in a bid for the HOA's contract. The state is Florida. He has said that he will not vote on the matter. His estimated bid is more than twice the cost of our current contract but I still think that it will most likely get picked. This seems like a major conflict of interest but from what I find it is legal, is that true? He plans to remain the president of the board while owning the management company.

Hi Mark, Thanks for your reply. My issue is, yes he has to act as fiduciary for the HOA community but I think a valid argument is that he can do that by supplying a quality property management company. I feel it is very hard to prove legally that someone is not fulfilling their fiduciary responsibility. Your 401k manager acts as a fiduciary to you but he is still paid. I don't believe that simply being paid for a service would make him non fiduciary.

Do FL or your own docs require mangers to be certified???

Conflict of interest and transparency matters aside, the last thing I would ever want to do is manage the association in which I reside. I cannot think of a more effective and faster way to create uncomfortable situations for everyone involved. I like many of those who reside in our association. We have monthly social activities which would turn into non-stop "Tell or ask Bill about whatever" sessions if we were the managers. Its bad enough being on the Board.

Terminating the contract would be an excruciating exercise for all involved.

Plus, who wants the 0200 phone calls when an inebriated owner or guest is flopping around in the pool or has crashed into someone's mailbox.

Hi Kerry,

Yes he would be required to be certified but it apparently isn't a length or difficult process so I don't think that will be an issue. Thanks for your reply.

Mark, I agree with you completely and would add a more:

1. He should not participate in discussions regarding development of the RFB.
2. He should not be present when potential bidders are identified.
3. If he is the successful bidder, someone other than himself should sign the monthly payment checks.

My earlier post stated personal/emotional reasons why this is not a good idea. As a property manager of both homeowner and condominium associations and a board member of the association in which we reside, I cannot see a single reason why this situation would be a good idea. The other members of the Board could band together and tell him he has a choice: no bid or resign from the Board if he wishes to bid. The Board can remove him from the Presidency in most states; that will eliminate some of the conflict issues.

To much potential conflict. Do not let it happen.

Geno,
Thanks for adding this info to what we have already discussed. I would think even in an apathetic HOA a persistent homeowner could put up flyers and do a little door to door campaigning a get enough people to vote this down. It is so clearly only in the best interest of one individual a blind person could see the problem clearly.

My Elevator pitch would be show up for the vote on the date of the meeting or pay for this next many years. It is much easier to stop it before it starts than once it is in place.

I was going to say Ray Charles or Stevie Wonder as my blind example, but felt I may be getting to old to use other old guys as a reference.

Mark,
Thank you for all your input on this matter. If they do try to put this contract into place, I will certainly be going door to door to make neighbors aware of the situation. This will be our last regular meeting before our annual meeting, which is why my focus will now switch how to replace board members. Since there is never enough of a community input the board members just keep re-electing themselves. Thanks

Others have given you great advice.

I'd like to focus on this particular post of yours, which to me, demonstrates a misunderstanding of the breadth of the conflict of interest issue.

The quality of his management company is irrelevant. Proof is irrelevant. Your 401k manager is not a good comparison - He operates in a highly regulated industry with many checks and balances on his individual activity right down to the keystrokes he makes when entering information into the system. Your HOA does not exist within a highly regulated industry, and your Pres wants to be the check and balance on the activities of his own business. Not similar by any stretch of the imagination.

In a nutshell, the conflict question is about the potential for conflicting loyalties. "Potential" is about risk, not about proof. Is there a significant risk that your Pres won't be thinking about getting the HOA the best deal possible, because he has a vested interest in maximizing the profits of his independent business? Of course there is. That's only one of the potential conflicts. But let's stay with it. A potential remedy for such a conflict is full transparency or some form of recusal. Do you really think that you can anticipate every type of event where he is going to be potentially conflicted? Sorting out his dual role can be a nightmare.

I did my best to do just that a couple of years ago. Not in as strange a situation as you have, but something much simpler. We have a realtor on our Board who considers our community his private hunting grounds even though other realtors live in our community. We were launching 2 major initiatives, and I had concerns that he would betray his role as Board member because his incentives as a Realtor took precedence. He of course said there was no conflict - In his mind, he provides great service (but that's not the issue).

I wrote a letter to our HOA attorney. In it, I identified 7 or 8 scenarios. For each scenario, I asked the lawyer to comment on what restrictions on the realtor-board member should apply. Several of the attorney's answers said that the "perception" of "potential" impropriety was sufficient to exclude the realtor-board member from discussing certain matters with potential clients (which includes every owner, tenant, and member of the public).

My recommendation to you would be to get a lawyers letter on the issues of concern to you. Since the only reason for getting a lawyer's letter is the Pres' unusual proposal, I would even be so bold as to ask your Pres to cover half the cost. At minimum, the cost of the letter should be added to the amount of his bid on the project.

Trying to pursue this yourself without getting a professional involved is dangerous IMO. Even if you study the issue fully, you're not going to convince others on your own. Once you have a lawyer's letter, the other Board members are risking personal liability if they don't take heed of the contents of that letter.

Best of luck.

Barbara,
You made me laugh out loud. That would scare me and most others of trying this stunt.

--UPDATE--

We had a meeting Thursday night where there were not enough community members to form a quorum. Our by-laws require three board members and just prior to the start of the meeting we had four active board members. The meeting started off with a two board members present and the President made a phone call to a third board member, and was put on speaker phone. The meeting was called to order(2 board member physically there, 1 on speaker phone) immediately the board member on speaker phone resigned of his position(not in writing only verbally, also the only identifying of the board member was "Hey (board members first name")). According to the attorney this is legal (though both Florida Law and our by-laws say "in writing"), he also stated that since a quorum was formed the meeting could continue and all voting was allowed. After a lot of discussion about that the meeting went on.

The president proposed the idea to the community and took a little feedback but not really. He argued his side relatively convincingly and promised the world. He proposed his bid of $50k and verbally said all the things he would do. He vaguely discussed other bids, saying ballpark numbers, that he and only he obtained. After a bit of discussion the President stated he would recuse himself from the vote(he did not leave the room and clearly tried to sway opinion in his favor). Once he stated that, the remaining board member made a motion to approve the contract. To be clear there was only 1 board member proposing and voting on the issue, there was not physical contract, the President had not formed a business entity and is not currently licensed or insured. When the motion was made I spoke up and brought up the fact that there was no physical contract, some discussion happened and a vote was not made. It was then motioned again by the board member to accept on good faith. I again spoke up and stated that he can be held personally liable for this vote(I have no idea whether that is true but the lawyer kind of nodded his head )and the vote again was not made.

Some other business went on and at the end of the meeting the board members complained that there were no volunteers and that why they have to do it this way, yet I have been volunteering to fill any empty seat for months along with others. After this was brought to their attention myself and another community member were nominated and voted onto the board. The President has now given an ultimatum that if this contract is not approved in one week then he is leaving the board. I think good riddance how ever there are still 3 of the of the 4 board members that seem to think the idea is not a terrible idea, not including the President.

I feel that there was a lot of questionable stuff going on and have reached out to an independent lawyer to check my liabilities as a board member and to also get some feedback on what happened above and moving forward.

Thank you to anyone who wants to weigh in on this situation.

Every situation is fact specific. Depending on the issue, your lawyer might suggest:
- Recusal from the vote; or
- Recusal from all discussion prior to voting plus the vote itself.
Your instinct that influencing can have an even greater damaging effect than voting is spot on.

As far as being conflicted, that seems blatantly obvious. How can he, at the same moment in time, represent the community as President, and make a pitch to you as an independent businessman? How can he wear both hats at the time? As fiduciary, he is obligated to give priority to his role as President. But he's using his authority as president to get the inside track on making his pitch.

As far as evaluating competitive bids is concerned, he obviously sees them as competitors rather than options for the Boards consideration. The other Board member present has opened himself up to liability for violating his own fiduciary responsibility to act in the best interest of the community if he's willing to blindly go along.


No written bids from anyone - not from Pres and not from other potential vendors - sufficient IMO to remove any and all Board members who allowed this to happen. Especially on a contract that size.


Nice move.
Why was the lawyer present? Was he running the meeting? Is that typical, or was it just for this one meeting? If it was just for one time, was his presence explained prior to the start of the meeting? Smells to me - Both the phone resignation and the lawyer's presence. Too much prior plotting for my liking.


Who voted you onto the Board?
If it was the membership, probably not legitimate unless it was an Annual Meeting and nominations from the floor are allowed. Otherwise, member elections need to be pre-announced to the entire community, not just those present at a meeting,
If it was the Board, that decision is reversible at the discretion of the Board.


Good riddance is only one small part of the issue. Here is a Pres who threatens to take action that he considers harmful to the community if he doesn't get his way. That's just plain scary. What if every Board member had his or her own pet project. Would it be ok for them to threaten if they didn't get their way? Of course not. Can you convince them to see things from that perspective?

Best.

What's legal or illegal can only be determined by a court, but I don't think this needs to go that far.
If the facts presented are accurate, then:
- Approving a non-existent $50k contract with a company that does not yet exist is not legitimate.
- The Prez violated his fiduciary responsibility to the HOA. Period.
- Any other Board member who accepted the Prez' presentation without reasonable & diligent investigation violated their fiduciary responsibility to the HOA. Period.
- These are grounds for removal from office.
- If this did become a legal issue, then the Prez and those other Board members cannot rely on the Business Judgment Rule and it's likely that they would not be protected under the HOA's D&O insurance policy. They would have to cover their own legal fees plus a percentage of the HOA's legal fees. Things could get quite expensive for them individually.