Homeowner business

What are the issues related to using a Homeowner's business for HOA work?
The HOA has some maintenance items to be done and a Homeowner would like to be able to bid on the projects.
There is nothing in the covenants that would prevent this, but what are the potential problems?

Get several quotes using sealed bids so you can prove it was fair.
Make sure the business and the association have all the proper insurance.

What Cathy and Mark said. There's also the scenario of one or two board members also trying to bid on work by companies they own or work for, and you already know or should know of the dangers of conflicts of interest among board members. This homeowner means well, but it's a terrible idea - don't do it.

Terri's tips are also good - in fact that should be a standard board policy.

I read the other posts. My concern is that I do not think the HOA can legally prohibit the owner from bidding and then being treated equally with all other bidders. If the HOA flatly rejected this owner's bid because the owner is a member of the association, I think the owner would have a right to sue and might very well prevail.

Hence I say proceed as TerriS6 advises.

I agree. Simple enough.

Re: conflicts of interest, I see a potentially bigger conflict between the homeowner and his employer - assuming he does not own the business. If I were the business owner, I'd put different workers on the HOA job. It's the blurring of roles issue again.

David,
Personally, having delt with Pools as a board member for over 14 years I would advise against this very strongly. Pool monitoring companies take a lot of Heat during any Pool season. Usually, it is because they hire young low wage employees that are just starting their first jobs. The customers (owners in the HOA) are very critical of being told what to do while they are at the pool. Once word gets out and it will that a board member owns the company it will become the "Board" owns the company and you board will all own every mistake this company makes.

The Board currently is entertaining two types of companies. One is a pool company that provides young kids and I believe would certainly be a disaster, as the "trouble makers" are older teenagers who I think would be prone to ignoring that kind of monitor. Indeed, much of the trouble results in people who don't even live in our community and climb the fence, but who are gone before any police arrive.

The second type of company they are considering are actual security companies, with trained and uniformed personnel who are often retired NYC or Philadelphia police officers. The expectation is that this type of presence would stop the problems. One of the proposals is from a company owned by a Board Member. I think most people would be fine with his acquiring the contract (he is well liked and personable) but the board is uncertain what the ethics are.

DavidG45,

Are the bylaws silent about conflicts of interest? Also check the Articles of Incorporation.

I spent a fair amount of time checking Delaware's HOA statute and corporate statutes on this subject. So far I see nothing in Delaware's statutes that is expressly applicable here. A Delaware government site offers this caveat:

Delaware law affords directors making [certain] decisions a set of presumptions—known as the “business judgment rule”—that, so long as a majority of the directors have no conflicting interest (see “duty of loyalty” below) in the decision, their decision will not later be second-guessed by a court if it is undertaken with due care and in good faith. The business judgment rule, which applies even if the business decision later turns out to have been unwise, is the centerpiece of Delaware corporation law.
...

If a majority of the board has a conflicting interest in a transaction challenged in court, the board’s decision may not be protected by the business judgment rule. Rather, Delaware courts will generally require the directors to demonstrate that a self-dealing transaction was entirely fair to the corporation.

See https://corplaw.delaware.gov/delaware-way-business-judgment/

Obviously a single director is not the same as a majority.

Do you want my further opinion?

DavidG45,

My opinion is that neither covenants, bylaws or state law prohibit the director's security company from bidding on the contract. Their bid should be welcomed exactly as other companies' bids are welcomed.

Otherwise, my advice is similar to that of others. To protect the HOA and itself, I think the board should consider taking steps like the following:

At a board meeting, put on the agenda and discuss the article I linked above. Each director will hopefully state that they agree they have a duty of loyalty to the corporation, and that the law requires them to act in the best interests of the corporation. In other words, lay everything out there for all owners to see. Send a message to owners that the board understands the problem with conflicts of interest.

As needed, have the HOA attorney speak to the board in executive session about this duty of loyalty. Have the HOA attorney explain that in his/her opinion, the director with the conflict of interest should not be involved in any way with discussions about any bid. Nor should the director vote on any bid. This is because doing otherwise holds the HOA out to liability with respect to fair bidding practices in Delaware. The director with the conflict should not be allowed to review other companies' bids. Why? Because this director might then use this "inside information" to alter his/her company's bid. Even if this director is quite honest, the //appearance// of possible corruption must also be avoided. To minimize liability, the director with the conflict of interests should disclose this conflict.

When it comes time to vote, and if per chance this director foolishly insists on having her or his vote counted, and his/her vote tips the scale so that his/her company wins the bid, then take this situation to the HOA attorney immediately. Do not sign any contract. Why? Because the risks of other companies threatening suit is too great.

The fact that the vote must be done in an open meeting will help.

I have no problem in letting a fellow owner, who is not on the BOD, bid on a job. It gets murky and best avoided when that fellow owner is on the BOD.

A CA HOA attorney who has a weekly column in several major CA newspapers always impresses me with the quality of his reasoning. Today, his following appeared: "Should We Hire a Member?" Jul 2, 2023. By Kelly G. Richardson, Esq. https://www.roattorneys.com/blog?tag=h+o+a+homefront. Scroll around his site for other articles that might interest you.

He presents three scenarios with this theme. To summarize, he advises, “I believe HOAs should bend over backward to avoid hiring one of their own.” He, btw, says nothing about a board being required to interview such a member. As many of us former directors know, Often, there are several vendors' proposals or "bids" to provide staff or projects personnel. Volunteer Boards, at least the one I was on for years till recently, read the several proposals, and then vote on 3 to interview.

I too have cited the Business Judgement Rule (“The BJR” —CA Corps Code 7231) on this forum. It is, I believe, in corporation codes in all US states. Given all of the red flags such a contract would raise, with all proposals being roughly equal and only choosing 3 of say, 5, I would reject the homeowner’s proposal and urge the entire Board to do the same. Too risky to the well-being of the corporation --a directors duty of loyalty-- given the many ways such an arrangement can turn south as detailed by Richardson.

The business judgment rule gives judicial deference to boards when making ordinary maintenance decisions.

I don’t go along with this. If a criticism is not “this is not in the best interest of the homeowners” but is simply “I think this is unethical” the response, “No, it’s not” is a perfectly fine response. Also, I disagree with the Board being prevented from making good decisions out of fear of the small gaggle of critics who, let’s be honest, will ALWAYS find something to be upset about.

ElleN please look up the word "deference." I don't need to write a dissertation for every comment I make. What I wrote is true and is a direct quote from an often used opinion.

TerriS6, of course it is not a direct quote from any opinion. You left off about half of the sound bite version of the BJR. The result is a grossly incorrect statement.

Like many forums, this forum often provides crowd-sourced problem solving. When you post something obviously wrong, and especially when someone reading it would use this to their detriment, expect to be called out.

Are you proposing that I am saying that bids from HOA members get preference?

I expect no bylaws, covenants or statutes have ever given a HOA owner such a preference. Nor do I support such a preference.

I am saying:

An owner has a right to submit a bid and not be disqualified solely because the owner is a member of the HOA.

The HOA Board has an obligation to act in the best interests of the association. The board has the right to use reasonable criteria. Regarding a HOA contracting with its own members, Attorney Richardson wrote at https://www.roattorneys.com/blog/should-we-hire-a-member:

-- If the member performs poorly, is the HOA board going to hold that person to the same standard as any other service provider?

-- If the member’s design services are negligently performed, will the HOA board sue the designer for damages?

-- If the HOA’s relationship with a service provider is personal as well as professional, it's not truly an “arm’s length” relationship, and that makes it much harder to keep things strictly professional – potentially harming the HOA’s interests.

-- Furthermore, no matter how much a member may discount their services, there will always be those HOA members who feel that it is improper to hire homeowners or residents.

Yes to the first two questions.

To the third question: Why does Richardson assert that the HOA has a "personal" relationship with an owner? Richardson could as easily say that HOAs should never fine or sanction an owner's tenants, because this affects the very personal(?) relationship the HOA has with the owner. Huh? HOAs should not have 'personal relationships' with owners.

To the fourth question: I revert to DavidG45's comment that there will always be owners grousing.

Attorney Richardson opined a board should dig hard to find lawful criteria that would justify rejecting the member's bid. I actually think attorney Richardson is advocating skulduggery (and a real man would admit this :_) ). It's a good thing that discussions involving the formation of contracts are to be done in executive session in California. I say this in complete seriousness. If I were on a board, would I participate in this skulduggery? I say: There's skulduggery and there's being clever in coming up with reasons to reject a bid.

Touchez.

ElleN, I was certain you had these cases committed to memory.

No, only that the temptation is there. It's one of the ways in which the roles of homeowner vs. vendor will be distorted, which - going way back to my first response - is what I consider the big problem in this situation.

States use either the BJR (as developed in the state's appeals courts, possibly informed as well by statutes); the reasonableness standard (again, as developed in the state's appeals courts et cetera); or some combination. For example, Florida courts at times are said to be applying a reasonableness standard, and not the BJR, to determine whether a board decision will stand and so on. To me this means that Florida HOA/COA directors can be honest, operating in good faith, and have good intentions. But if what the directors did was not reasonable (in the eyes of a court), the BJR might very well not protect either the directors, the HOA or both from liability.

The interested reader can google on {"business judgement rule" "reasonableness" "standard"} to see what's what.

I think what one can say is that volunteer directors have a lot of legal protections against being held personally liable for their decisions. Also the courts say that volunteer directors are permitted quite a bit of leeway in their decision-making. Just because one owner does not like a board decision does not necessarily mean a court will throw out the board's decision.

To get back to the original question posted by Parris:

The issues would be the similar to using a friend to work on your house.
If everything goes well - everyone is happy.
If something doesn't go well - the friendship may be ruined.

Personally, I see no issues with allowing a homeowner to bid.
They should have the same level of insurance the Association is requesting from other bidders.

If the everyone on the board can live with the (worst case) potential of losing a friend, and if the bid checks out - award it to them if they are the lowest.
If anyone on the board can not live with the potential of losing a friend (worse if it's an actual neighbor) - don't award it to them.

However, let them bid.

The thing is Terri, to tie your observations back into the original post. I agree you've summarized Lamden accurately so far as I recall. I know it was about a maintenance issue.

But the BJR in CA and in numerous others states, their Business Judgements Rules do not only refer to maintenance. They refer to all decisions a board of "reasonable" persons can make within the confines of their authority as found in their governing documents.

In the case under discussion, we have the opinion of a highly regarded HOA attorney, who opines, “I believe HOAs should bend over backward to avoid hiring one of their own.” And he gives reasons as does Cathy, above. A non-lawyer here feels so sure of her legal book knowledgedge that she accuses Richardson of "skullduggery" for f&!X%'s sake.

And one reason is not merely that owners would snivel as they often do, but instead of the Board's choice of fence colors or some other matter, they'd charge that the Board is showing favortism, and is dishonest. This can cause a loss of trust of the Board and suspicion. THIS kind of disturbance is NOT healthy for the corporation. Why risk it, when as Richardson asks: Aren't there plenty of landscaping firms in your county?

There also is no way, that anyone can demand a board interview an owner & her firm when the board has several proposals, which is common. It is impossible to demand a board sit through 6-10 one hour interviews, which they already have three preferences form among the stack. And the Owners firm is not included.

IF concerned, to circle back to the BJR, Boards must do their due diligence, their duty of "care" before making decision. This often requires, the BJR in CA, consulting with experts, e.g., CPAs, reserves specialists, attorneys and others. In the case about hiring an HOA owner, the Board should, then, seek the HOA attorney's advice. It's that simple. While the BJR gives boards lotsa protection and "deference," ignorance, stupidity, and lack of inquiry are no excuse for bad choices by corporate directors.

Elle also misquotes me, I NEVER claimed Richardson says to "automatically" disqualify owners. He does not; nor do I. I clearly stated with "all else being equal… " In addition, I frankly can see that a very specialized job, let's say elaborate glass etching on a window panel, would have so few applicants that I'd consider hiring an owner with proper guardrails.

Btw, After every annual election, my HOA holds an organizational meeting for the Board to select officers. Our HOA attorney, who attends the annual meeting & the org mtg. as part of his retainer, verbally reviews the CA Corp Code, which is distributed by the MC, with all directors & the PM at the conference table. He always begins by declaring, "Corporate directors are held to a higher standards than other association members..."

With all else being equal, you would disqualify the member solely because he/she is a member. You just invented a covenant or bylaw that does not exist.

"Judgment rule doctrine" is the same as "judicial deference." You can look it up. I am in California. I shouldn't answer you at all, you are so rude.