Q: Our board is foreclosing on a condominium unit within our homeowners’ association. One of the board members is considering bidding on the unit when it goes for public sale at the courthouse. Is it considered a conflict of interest for a board member to profit from a foreclosure decision that he was a part of?
A: Being a good lawyer, I am going to take what you thought was a simple question and make it complicated. Your situation actually involves two principles of the law governing nonprofit corporations: fiduciary duty and conflicts of interest.
North Carolina law, as set forth in the Nonprofit Corporation Act, provides that a director must discharge his duties as a director (1) in good faith; (2) with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and (3) in a manner the director reasonably believes to be in the best interests of the corporation.
If a director performs his duties in compliance with this statute (N.C.G.S. 55A-8-30), he is not liable for his actions taken as a director. Unfortunately, it’s not always easy to determine whether a director has met these standards for any particular act.
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The board’s enforcement of its delinquency policy, such as the filing of liens for unpaid dues and foreclosures, should be consistent, uniform, based on established objective criteria, and should not depend upon whether a director may foresee a ultimate benefit as the result of a foreclosure.
Strictly speaking, if all the association’s foreclosures are done in this consistent and objective manner, the director would likely be deemed to have acted in good faith, with the care an ordinarily prudent person in a like position would have exercised under similar circumstances, and in a manner he reasonably believes to be in the best interests of the corporation, even if he planned to bid at the foreclosure sale of the property.
The second part of your question is whether the director’s bidding on the home at the foreclosure sale constitutes a conflict of interest. North Carolina law defines a director “conflict of interest transaction” as a transaction in which the director has a direct or indirect interest.
However, even if the foreclosure could be considered a “transaction,” and if the director does have an interest in the transaction, it is not void if (1) the facts of the transaction and the director’s interest were disclosed to the board or a committee, which approved the transaction; (2) the facts of the transaction and the director’s interest were disclosed to the members, and they authorized the transaction, or (3) the transaction was fair to the corporation.
The issue is whether the director had a direct or indirect interest in the transaction at the time the board voted to proceed with the foreclosure filing.
If the director knew at the time the board vote was taken that he might be interested in bidding, then he arguably had an indirect interest – and I say indirect because, since foreclosure sales are public auctions, anyone can bid and this director would have no more control over the outcome of the sale than anyone else choosing to bid on the property.
Regardless, if this director knew at the time that he might be interested in bidding at the sale, then he should have disclosed this fact to the other board members before the vote was taken and abstained from voting.
As a general rule, transparency and full disclosure are critical for nonprofit board members. Even if a director’s action may not technically fall outside the fiduciary duties set by law for directors or present a conflict of interest, the mere appearance or suggestion of a director having a personal interest in an action taken by the board will raise suspicion and distrust in members.
If you suspect that any particular action might be questioned by the association members or other directors, the action should be fully disclosed to and approved by the board and/or the members, or the action should be avoided.