Recent examples of HOA Arbitration

I am writing to find out if anyone has entered into arbitration as a method of removing a board member. Our long time board President is a general contractor. He has been ( through a passive board ) awarding contracts to his company for building maintenance.

I am looking at this as a clear violation of conflict of interest, and violation of fiduciary duty. Has anyone recently gone down the road of arbitration to remove a board member for cause ?(Conflict of Int & Breach of Fiduciary Duty)?

Doubtful he will respond to an " informal meeting " so I am prepared with an attorney's help to ask for Arbitration.

Feel free to share your experiences and recommendations. I will keep everyone posted on the board here as well if there is interest.

PeterK9,Minnesota's nonprofit corporation statute defines what a conflict of interest is. The statute also states when a contract made between a HOA and a business is potentially voidable. Paraphrasing from the statute:

First, was this conflict of interest disclosed to the owners and the board?

No, the most recent budget that included a line item for contract maintenance was going to be paid to the President's company. The contract amount was allowing for a profit to the Board President through this billing. In effect
there is " skimming " going on.

Second, did the board president (also a director, yes?) abstain from voting on any contract involving his company?

No, President was leading the board / budget meeting and voted in favor of the budget, no recusal, no abstaining, no discussion or questions regarding the budget.

Please clarify a few other things--

-- Was this President duly elected to serve as a director? Not all HOA Presidents are also directors. Legally it matters.

Yes

-- Is this a condominium?

Yes

And indeed as Elle has read here many, many times, Owners in '06 and the again in '19 voted directors off the Board who'd comprised literally rogue Boards in my hOA of 200+ condos . By '07 we "good guys" had control of in the first example, . In '19, We good guys had control immediately following the annual meeting.

Anther frequent poster here also was successful with his neighbors in voting off disgusting directors.

I think there have been 1-2 more examples, but can't quite recall-- in Texas & in Calif.?

So it's by far the cheapest way to kick out lazy rubber-stamp direcrtors and a sleazy director/prez. BUT it requires unifying with your neighbors and campaigning the next time this jerk is up for election. When is that???

I do not recall even seeing arbitration on this forum or even a successful recall, except for discussion of the latter.

There is no need to go to court or hire an attorney. If you can persuade your fellow owners to be "citizens," i.e., active agents in fixing your broken Board, you can prevail.

If you or anyone else wants to know how this works via boots on the ground, based on real experience, lmk.

If you're shy or whatever to "reach out, as they say, at least try to get a couple of other owners to join you in seeking an attorney's advice.

Btw, are your bird meeting open in your state? Have you or anyone asked the prez how I'ts OK for her/him to vote to award contracts to his firm? Have you attended such a meeting? Or read the meeting minutes?

If the contract is fair and reasonable to the HOA, Mn statute says it is okay for him to vote to award contracts to his firm.

PeterK9 received some very good answers and references back to state laws. In Minnesota, state laws 317a and 515b are for both condos and HOA's. I do not believe that most board members do not know their state laws that pertain to condo and hoa laws.

Some additional information or viewpoint.

1) This issue here is not contract law. Btw there is no written contract. I believe the issue here is two fold. Has the board member/President

a) received a financial benefit at the expense of homeowners. Yes as there were no competing bids, no discussion by the board, no recusal action. Just a single line item in the budget that was not transparent.

2) The board member has

a. Duty of Loyalty (Duty of Good Faith)

Duty of loyalty requires HOA board members to act in good faith to promote the best interests of the entire association. HOA board fiduciary responsibility prevents board members from making decisions to further their personal
interests. Board members must also avoid an HOA board of directors conflict of interest. This includes choosing a family-related vendor or voting on issues with a bias.

b. Duty of Care

Duty of care requires HOA board members to make informed decisions regarding HOA matters. However, corporate law acknowledges that board members are constantly faced with countless decisions and it is impossible to thoroughly
review information related to each decision. As such, the board of directors can rely on other people such as an HOA manager or staff to provide the information necessary to make a decision. However, the HOA board of directors
is still responsible for making the final decision.

( our HOA management company is in his " back pocket " so to speak as he holds their contract over their heads )

c. HOA Breach of Fiduciary Duty

HOA fiduciary duty when a breach of fiduciary responsibility takes place, the HOA may find itself in legal trouble. Suing for HOA negligence, which may be interpreted as a breach of fiduciary duty, is a common thing. But, what
are some examples of breaches you might encounter?

Failure to enforce the governing documents
Enforcing the governing documents inconsistently
Failure to do their due diligence before making a decision, especially a financial one
Breaking confidentiality
Failure to maintain the reserve fund (in some states)
Conflicts of interest

Sorry for opening a can of worms but as a 300 unit HOA high rise with $ 3,00,00 gross revenue we are not talking about a hundred dollars here and there.

Finally to add insult to injury, the board awarded a $ 600,000 bid for front door replacement in 2023 with only one other bid that would have resulted in a much lower special assessment to the homeowner's. There is plenty of malfeasance going on. Not just one instance.

Recall efforts - doubtful due to the passive nature of the owner's and our governing documents requiring a 75% voting percentage to pass a recall

Any other ideas ?

Please consider elaborating on why Director-President Slugworth (fictional name) here is performing services for the HOA without anything in writing and without even an oral vote by the directors approving payment of Slugworth's company for services rendered.

Does the line item in the budget even give the name of Slugworth's company?

The long-time posters and many new folks here are well acquainted with the duties you listed. The forum talks about them often, but almost always in abstract terms or in terms of "best practices." Why is this? First, whether a board is complying with these duties is legally quite subjective (regardless of how strongly you feel). This is a huge problem. Second, it would take a lawsuit (or threat of a lawsuit) claiming breach of xyz duty to try to get the current board to improve its conduct. Third, start skimming the HOA case law where people have tried to sue directors for breach of these duties. It is rare that the courts rule against the directors. It pretty much takes a bona fide criminal conviction. Then a judge might rule against a director or board.

I continue to suspect that only a massive campaign putting sunshine on the conduct of Slugworth and the board will result in Slugworth's being thrown out at the next election.

If you post more details about the "agreement" the HOA has with Slugworth (or just confirm again there are no signs of any agreement, in writing or by board vote), then I will post a draft of a letter you can write to the board that might possibly get them to shape up.

One can rant and rave all they want, alleging lack of due diligence, breach of fiduciary duty and so on. The real question is: Can the ranter and raver prove to a court that the board's conduct rises to the level that directors should be held liable?

If directors are "liable," how does one compute the damages (dollars owed) here?

This is why the discussions here discussing BJR, fiduciary duty et cetera are often in the abstract and in the context of "best practices" to fulfill as well as possible BJR requirements (expectations, really, since they are subjective), fiduciary duty et cetera.

You are misreading the statute. Depending on the details, Director-President Slugworth (with a conflict) can lawfully vote and the contract can still be legally enforceable.

The OP should probably keep reading here for a few months. He needs to get a handle on his options practically speaking, perhaps especially given possibly apathetic co-owners. He needs to state whether he wants to be on the board and so on. Yes, question this guy. But be ready to replace him with yourself, too.

Conflict of Interest. Hmmm, I'll need to look again. Mt (mis?)reading was that, "(b)(3) the material facts as to the contract or transaction and as to the director's interest are fully disclosed or known to the board ...and the board...authorizes, approves, or ratifies the contract or transaction in good faith by a majority of the directors ... .. provided that the interested director or directors may not vote...."

He did vote, apparently.

So, I had read this to say (as in Calif., btw) that the "contract or whatever Peter want to call it, is not voidable so long as the interested director (the prez) does not vote. In addition, I'd read (b) (2), the prez needed to disclose his "interest" (ownership of the HOA maintenance firm) to the membership , which apparently he did not. Please show me where I'm' wrong, Elle.

But even If I'm not, what can Peter do about it??? If he is uninterested or unable gather support from his neighbors, I guess he finds & pays a lawyer. I guess I he wants to ask that the Board be ordered seek 3 bids for these very expensive maintenance services if they're anything like in my twin tower high rise HOA.

For such VERY expensive contracts, our Board privately interviews 3 firms*, in person, which often are represented by a principal & a couple of staffers, and take about an hour apiece. Now, THAT is "due diligence" for what is likely a very complex HOA.

*As a director for 14 years in a similarly complex HOA that also hadl a construction defect settlement, I'd say I actively participated in few dozen such interviews, a few of which we had "call-backs" for further info.

Posted By PeterK9 on 02/12/2025 9:38 AM
Btw there is no written contract. I believe the issue here is two fold. Has the board member/President

a) received a financial benefit at the expense of homeowners. Yes as there were no competing bids, no discussion by the board, no recusal action. Just a single line item in the budget that was not transparent.

Please consider elaborating on why Director-President Slugworth (fictional name) here is performing services for the HOA without anything in writing and without even an oral vote by the directors approving payment of Slugworth's company for services rendered.

Does the line item in the budget even give the name of Slugworth's company?

No, it is described as " contract labor " I have some confidential documents that go into more depth who the payee is ( Presidents ) company. He bills the HOA $ 130,000 per year for one of his employees to perform this labor and
then he pays the employee around $ 65,000 including all taxes and benefits etc. Where does the remainder go ? In his pocket.

The long-time posters and many new folks here are well acquainted with the duties you listed. The forum talks about them often, but almost always in abstract terms or in terms of "best practices." Why is this? First, whether a board is complying with these duties is legally quite subjective (regardless of how strongly you feel). This is a huge problem.

Second, it would take a lawsuit (or threat of a lawsuit) claiming breach of xyz duty to try to get the current board to improve its conduct. Third, start skimming the HOA case law where people have tried to sue directors for breach of these duties. It is rare that the courts rule against the directors. It pretty much takes a bona fide criminal conviction. Then a judge might rule against a director or board.

I am totally aware of the bias of the courts to favor existing directors. However most of the times these cases are he said/ she said and there usually is no bright line to follow the money as they say.

I continue to suspect that only a massive campaign putting sunshine on the conduct of Slugworth and the board will result in Slugworth's being thrown out at the next election.

If you post more details about the "agreement" the HOA has with Slugworth (or just confirm again there are no signs of any agreement, in writing or by board vote), then I will post a draft of a letter you can write to the board that might possibly get them to shape up.

This dispute is in the planning staged. All of this lack of transperancy is well documented. There are and will be multiple avenues of putting pressure to bear to force a resignation or recall.

Just out of interest, how much money is involved with the service being provided to the HOA?

I'll be interested to hear what the lawyer had to say about this.

I agree wholeheartedly with Kerry that co-ordinated homeowner action is the cheapest and fastest way to resolve this. Homeowners may remove a board member for whatever reason they darned well please - they are the final authority (assuming they've correctly followed procedures).

Legal action is a time-consuming and expensive way to achieve an uncertain outcome.

In this case, there are enough dollars on the line that Mr. Businessman may also choose to lawyer up and fight. If there is no language in the CC&Rs or bylaws that requires arbitration *in this particular situation*, he may well decide that it is not in his interest to play ball.

The eventual cost to all parties can exceed the value of the contract. And that's before the HOA's insurer gets a look at this and decides that this HOA is hazardous to the bottom line. Insurers in Minnesota are already thinking along those lines. The last thing individual HOAs should do is to invite closer scrutiny.

I always advocate for treating disputes strictly as financial decisions - get the emotions out of it. We have a low cost/low risk option available that can't be legally challenged unless the membership messes up. And we have a higher cost/risky option that can be challenged (risky because the limits on the expenses are undefined at this point). Seems like a no-brainer to me.