Conflicting Interests Recognizing and Avoiding Them

Conflicting Interests

It starts innocently enough. The plumbing in your building has been giving the residents grief: toilets constantly running, inconsistent water pressure and sputtering faucets. The reserves are low and the three quotes you got from plumbing contractors were way out of your board’s price range. 

Just as your board is ready to throw up their hands and resign the building’s residents to a life of cold showers and clogged drains, you remember: your Cousin Tommy recently graduated from a technical school and got a maintenance certificate in plumbing! You excitedly call him up and—after hearing about all the drama at Aunt Janet’s last birthday party—you and Tommy strike a deal: he’ll come do all the necessary repairs for half as much as the previous quotes. Feeling smug and heroic, you report to your board that the problem thankfully has been solved.

Cousin Tommy arrives a week later to assess the issue. He seems like he knows what he is talking about, and even though he has to go to Home Depot twice to get tools that he surprisingly doesn’t have, you feel pretty confident that you’ll be getting high fives in the elevator from your neighbors after all is said and done. 

Three weeks into the repairs, it becomes apparent: Cousin Tommy is not all he’s cracked up to be. He's isn’t the most reliable or even the most trustworthy guy and really didn’t have the expertise needed to finish the job. After he packs up his gear and you hand him the check, things start to really fall apart: new leaks break out, pipes continue to overflow, ping and make awful noises. 

Not only are the issues not fixed, they're worse than before. And now there's damage to some residents' flooring and walls because of the leaking—damage that your building can't afford to repair, and for which Tommy evidently had no insurance.

Ultimately, the board is forced to dig into the reserves and levy an assessment on the whole building in order to cover the cost of bringing in an actual professional to not only fix Tommy’s mistakes but also repair the damage his 'fixing' has caused.

This might be the absolutely worst case scenario (but let’s face it, we all have a Cousin Tommy out there), but it illustrates two major issues for building boards and managers—there is a danger in hiring unlicensed, untried contractors. And it’s equally important to hire a reputable contractor, even if he or she is related to someone on the board. And don’t ever hire contractors without vetting their credentials and making sure they have proper insurance coverage. Nepotism, however, well intended, is one of the most difficult conflicts of interest a board can face. 

Many Faces of Conflict 

As Mark B. Levine, executive vice president of Excel Bradshaw Management Group, LLC, a management firm in Carle Place, further explains, conflicts of interest for board members reaches far beyond the family affair. “A conflict of interest can arise if a board member is involved with a company that is considering being hired, has a personal relationship with a vendor, or is impacted directly with a decision that is being considered by the board at the time (as opposed to a decision that will affect all on the board).”  

And being “impacted directly with a decision” often means having a financial interest in the transaction. Dennis H. Greenstein, a partner at the law firm of Seyfarth Shaw in Manhattan, provides some examples: “If the building is seeking bids on a new roof and a board member owns an interest in the roofing company; or if a board member is selling his or her apartment and wants to participate in all board discussions of the sale, interview the buyer and vote with the board on whether or not to accept the purchaser; or if a board member is a real estate broker offering apartments in the building and obtains a buyer for said apartment, then wishes to discuss with the other board members the purchase application, interview the buyer, and vote on whether or not to approve the sale.” 

These are all incredibly dicey situations, and they might also seem incredibly obvious—but it's sometimes hard to see the forest for the trees, especially if there seems to be financial gain or savings for the whole building. 

Board members might think, “Well, I don’t love the idea of letting Richard’s company paint all the common spaces, but it’s going to save us so much money! And what’s the worst that could happen?” 

Murphy’s Law tells us that if anything can go wrong, it usually will. Richard’s employees could botch the job and the board could be dragged into a long, drawn-out litigation with him and his company. 

Don't Go There

Greenstein points to some legal safeguards to avoid these situations. “New York State Business Corporation Law (often just called the BCL) requires that all board members act in good faith in the performance of their duties, and to exercise the degree of care that a prudent person in a like position would use under similar circumstances.” And Levine advises actually speaking with an attorney who specializes in condo and co-op board business to help you and your board steer clear of sticky situations. 

Outside of legal help, there are questions boards can ask themselves before hiring a contractor or doing business on behalf of their association that can help them avoid conflict of interest problems.

“A board would want to make sure that it is an arms-length transaction,” explains Levine, “that none of the board members have a relationship (personal, financial or otherwise) that can affect the decision. It would be the best practice that in choosing to work with a contractor that is directly related to a board member in some way (if it’s absolutely necessary), that the board member in question not be involved in any of the related board discussions. In the case where a bid form is used, it is also a good practice to have a blind bid, with all bids due on the same day to ensure fairness of competition between all of the parties.” 

And he continues, “A board member should never be granted any favors for working with a specific contractor. And these can be in the form of kickbacks, free work on their apartment or use of a vacation house—just to name some common examples.”

Similarly, Levine says managers can also help their client boards avoid conflicts of interest by providing sound, objective advice, and working as the mediator by “proactively advising the board when a potential conflict may arise and how to navigate around them. If a board member owns an air conditioning company and the board is soliciting bids for that type of work, it may be a better idea to use the expertise and knowledge of the board member in question to advise on the bids that are received, rather than having that board member bid on the job, themselves.”

If there is a discussion relating to a complaint by or against the board member’s unit, he says, the manager can advise the board to hold the discussion without the shareholder present so that the board can have an open and honest discussion without fear of reprisal for speaking openly.

Conflict Comes Home

Even with all these precautions, a board might find itself dealing with conflicts on a small or large scale. If so, even if it is something seemingly as small and inconsequential like using a cleaning service that is owned by a resident’s sister—you might wonder if this is still harmful, even if nobody gets 'caught' or no damage is done. Greenstein, however, explains that this behavior is still troubling and could “cost the building money, such as expending legal fees if someone challenges the enforceability of a contract, claiming it should be nullified, or for claims that the board breached its fiduciary obligations. In addition to expending legal fees, the insurance companies defending the litigation could drop the building’s insurance after the claims are resolved or raise the premiums going forward.”

And when you hired Cousin Tommy, you didn’t mean to create a disaster for your building and your board. It was all done in good faith and you were only trying to help. 

Levine though cautions to take his earlier advice. “It would be best practice for that board member to take their hat out of the ring and act as an expert while dealing with other companies in a similar profession. Staying out of the picture, monetarily, will leave the conflict of interest at the door.”  

Greenstein goes even a step further suggesting, “Terminate the employment of the family member and have a policy instituted that the board is prohibited from hiring anyone who is a family member of any board member, and prohibit them from working at the building.” 

Sayonara, Cousin Tommy—see you at Christmas.

Rebecca Fons is a freelance writer and a frequent contributor to The Cooperator.  

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