Reader Questions - Volunteer Means NO PROFIT

Dear Mr. Richardson,

A board member also owns several properties elsewhere. An HOA vendor told me that this director demands, and gets, ‘discounts’ from the vendor for work done on the director’s other properties. This is certainly ethically questionable as I perceive it to be a kickback. Is it illegal?

M.D., La Jolla

Dear M.D.,

Directors receiving compensation in return for their service on the board are no longer protected as “volunteers” under the Business Judgment Rule, found at Corporations Code 7231.5. This means that they could be held personally liable for board mistakes, without the immunity normally protecting directors under the Business Judgment Rule. The Rule protects volunteer directors acting in good faith, not profiteers.

A director receiving a financial benefit, whether directly in the form of cash, or indirectly in the form of free or discounted services, is also outside the immunity provided by Civil Code 5800, which provides that volunteer directors are personally immune if the association has prescribed minimum levels of directors and officers insurance. Directors receiving compensation from association vendors may well be outside this additional important liability protection for volunteers.

Directors receiving compensation from association vendors may also find the vendor contract could be voided by the association under Corporations Code 7233, if the compensation was not disclosed by the director. If the contract is voided, the compensated director might be held personally liable.

Civil Code 5350, added in 2014 to the Common Interest Development Act, for the first time lists certain prohibited conflicts of interest. Unfortunately, the list is too short, and does not cover directors voting on contracts in which they are financially interested. Fortunately, this section specifically states that the list is not exclusive, and hopefully the Legislature will at some point expand it to include this obviously improper situation of vendors compensating directors.

Directors owe fiduciary duties to the association and a moral duty to their neighbors. One fiduciary duty violated by the compensated director is loyalty – the director should be loyal only to the association, and not to the vendor. A director receiving compensation violates that duty. Another fiduciary duty is the duty of disclosure – a director who is secretly receiving benefits violates this duty. Directors violating their fiduciary duties in this manner also could be sued and forced to disgorge the secret benefit they received by virtue of their position as an association director.

Directors: Don’t kid yourself by thinking that the only “kickback” is money. Such improper benefits can take other forms, such as discounted or free work in the director’s residence (or elsewhere), free upgrades in the director’s residence, or expensive gifts. Turn it down – your integrity is more important.

If a vendor offers an expensive gift, don’t take it. If a vendor even hints of a benefit if they are hired, report it immediately to the board, which should then eliminate that vendor from future association consideration.

Directors should be serving their community, and not serving themselves. Otherwise, that director should be replaced. Any such conflict also should be immediately disclosed to the community in an open board meeting – and the dirty director should be asked to resign. The dirty vendor should be terminated, as the HOA should only support honest vendors.

Thanks for your question (and sorry this even comes up),
Kelly

Written by Kelly G. Richardson

Kelly G. Richardson Esq., CCAL, is a Fellow of the College of Community Association Lawyers and a Partner of Richardson | Ober | DeNichilo LLP, a California law firm known for community association advice. Submit questions to [email protected]. Past columns at www.hoahomefront.com. All rights reserved®.