Condominiums and Conflicts of Interest: How to interpret the rebuttable presumption

Reres_Kathleen

Kathleen Reres

The legislature recently amended Chapter 718 of the Florida Statues, relating to condominiums, to create a rebuttable presumption that a conflict of interest exist in certain situations.[1] A conflict of interest is a real or seeming incompatibility between one’s private interests and one’s public or fiduciary duties. Black’s Law Dictionary (10th ed. 2014).  For example, if a board member owns a landscaping company that provides services to an association, the board member’s private interest in obtaining a profit may be incompatible with the board member’s fiduciary obligation to choose a landscaping company that will provide the best service at the lowest price. If there is a rebuttable presumption of a conflict of interest, a court would start with the presumption that the relationship creates a conflict and the contracting entity or the officer or director would need to prove that the relationship does not, in fact, create a conflict of interest. If there is no rebuttable presumption, an officer or director may still have a conflict of interest, but the party challenging the contract or seeking to remove the board member would need to prove that a conflict exists.

Fla. Stat. §718.3027(1) now provides that a rebuttable presumption of a conflict of interest exists if any of the following occurs without prior notice:

  1. A director or an officer, or a relative[2] of a director or an officer, enters into a contract for goods or services with the association.
  2. A director or an officer…holds an interest in a corporation, limited liability corporation, partnership, limited liability partnership, or other business entity that conducts business with the association or proposes to enter into a contract or other transaction with the association.

Under, Fla. Stat. §718.3027(2) directors and officers must disclose to the board any activity that may reasonably be construed to be a conflict of interest and such activity must be properly noticed and put to a board vote. The activity leading to the conflict of interest should be listed on the board’s meeting agenda, and all contracts and transactional documents related to the activity should be attached to the agenda.  The director or officer or relative of a director or officer who has the possible conflict may attend the meeting and make a presentation to the board, but he or she must leave the meeting during any discussion, and during the vote to approve or disapprove the activity.  The remaining board members should then vote on whether to allow the officer or director to remain on the board while engaging in the activity (or while their relative engages in the activity) which creates the conflict. If the board votes against the proposed activity, the director or officer, or the relative of the director or officer, must notify the board in writing of his or her intention to withdraw from office or to withdraw their pursuit of the proposed activity.

Due to the recent enactment of Fla. Stat §718.3027, there is no case law construing the rebuttable presumption or providing examples of when this presumption applies. While it may be simple to determine whether an officer or director has contracted with the association, it could be substantially more difficult to determine whether an officer or director “holds an interest” in a company with whom the association has contracted.  For example, a director’s relative may be employed by a company that has contracted with the association but the relative may hold no ownership interest in the company. Another difficult question may arise if an officer or director owns stock in the parent company of an entity with whom the association has contracted.   If the parent company benefits in any way from the success of the company with whom the association has contracted, a member of the association could argue that the officer or director has a conflict of interest.  If difficult conflict issues are litigated, a court of competent jurisdiction may look at whether there is a direct financial benefit to the officer or director from the association’s contract or whether any benefit received by the officer or director is merely speculative.

A number of situations could arise where an officer or director has some relationship with a company that provides services to the association, but it is unclear whether the officer or director “holds an interest” in the company. We recommend that associations consult counsel regarding the specific relationship to determine whether action must be taken by the association to protect the validity of the contract and whether action must be taken by the officer or director to disclose the relationship.  In the absence of clear case law construing conflicts of interest under Fla. Stat. §718.3027(1), directors, officers, and the relatives of directors and officers should err on the side of caution and disclose any relationship that may arguably create a conflict of interest.

If you or your association is considering a potential conflict of interest and you have questions on how to handle the situation, please contact Kathleen Reres by email at kreres@slk-law.com or by phone at (813) 221-7167.

[1] There is no corresponding amendment in Chapter 720 of the Florida Statutes, relating to homeowners associations.

[2] “Relative” means a relative within the third degree of consanguinity by blood or marriage. § 718.3027(5), Fla. Stat.  Because we are dealing with a director or officer and not with the relative of a director or officer, we will leave out all other references to relatives.