December 2011 – An HOAleader.com reader asks: “One of our residents moved out of his house, but it’s still in his name, and he owes $2,000 in back dues plus attorneys’ fees. This person submitted a bid to do the snow removal. Some board members decided that since he is only the vice president of the snow removal company, they hired the company to perform our snow removal. Three people voted against the hiring, and four people voted to hire the company. I say this is 100 percent wrong, but I need something to support my feelings about this hiring.”
Work with the Owner?
Our experts have a mixed response to our reader’s situation. This case doesn’t raise as many red flags as other potential conflicts do for Nancy Polomis, a partner at Hellmuth & Johnson PLLC in Edina, Minn., who advises associations.
“The snow removal company and the vice president are two different legal entities,” explains Polomis. “If this is the best snow removal vendor, simply because the vice president personally owes the HOA money shouldn’t be a necessary reason to reject that vendor, and it may provide an opportunity to get those assessments paid. If board members met with a salesperson for that snow–removal company, they might never know the homeowner works for that company. This guy’s at least being on the up and up by disclosing it.”
“In addition, if the company doesn’t get that work, is it less likely the homeowner will pay those back dues because he won’t have income?” asks Polomis. “You may want to strike a deal, saying, ‘Bob, we’re willing to work with your company, but we have to get assurances that we’re going to get unpaid assessments paid.’ The owner may or may not have authority to strike such a deal if it benefits him personally. But now you know where he works.”
“The analysis would be the same if the homeowner were also the company owner, and there might be a better chance of getting him to say, ‘I’ll give you a better deal,'” Polomis notes. “As the company’s owner, he has the authority to do that. He can say, ‘We’ll do the first month for $200, and you can credit my account X dollars.’ When it’s a company, it depends on how much authority the homeowner has to take money out of the company’s pocket for his personal benefit.”
Others are More Conflicted
Our other experts recognize that the owner is only the snow removal company’s vice president, not its owner. But the hiring still makes them uncomfortable.
“I’d vote against it,” says Jenny Key, Austin, Texas–based Vice President of RealManage, a Dallas, TX based, association management firm that oversees properties in Arizona, California, Colorado, Florida, Louisiana, Nevada, and Texas. “It seems to me there’s a question about the owner’s ability to be responsible. So following the business judgment rule, the HOA would be better off not having any appearance of financial conflicts. It’s very likely the company doesn’t have any conflicts if the owner is just a vice president. But if for some reason, this business relationship doesn’t work out, owners could say, ‘You had a reason not to go with this company, and you did it, anyway.’ This business relationship could work out perfectly well, and it could not work out well.”
James R. McCormick Jr., a partner at Peters & Freedman LLP in Encinitas, Calif., who represents associations, agrees it would be great to make the hiring contingent on the association's getting paid back fees, but he thinks that's unlikely. “It's a valid reason to hire someone who's delinquent to say ' I'm going to hire you. You do the work, and when I pay you, I'll offset what you owe me,” he explains. “But the person is never going to agree to that.”
McCormick also argues that the failure to pay should be a red flag. “Now you’re paying someone who’s not paying you and who’s essentially told you you’re not very important to him,” he says. “If the owner doesn’t honor his current obligations, what’s to say he’s going to honor this new contractual obligation? It’s akin to people who live offsite and aren’t paying assessments even though they’re renting out their property. They’re showing they’re not going to pay you. Overall, it doesn’t pass the smell test. As word gets out, owners are going to question whether the board members are acting as proper fiduciaries for the community.”
Another expert has an even stricter rule. “The advice I always give my clients is that it’s just not prudent to hire any unit owner in the association,” says Bill Worrall, vice president of The Continental Group, which is based in Hollywood, Fla., and manages 1,300 condominium and homeowner associations totaling 310,000 residential units. “That could be perceived as a conflict, whether the owner is behind on fees or not. The owner could be a CPA, an attorney, or owner of a landscape company. Whatever the case, unit owners shouldn’t be doing business with an association in which they own a stake. It’s a poor decision, and I would advise it whether owners are behind in paying fees or not.”
Matt Humphrey is president of the Alameda, California-based HOAleader.com, from which this article was adapted.