Board Members are All Related to HOA Management Company

Hi Stephen,

It may be wise to verify whether or not the conflict of interest transaction is subject to equitable relief. If the HOA is a non-profit organization, it is subject to the Kentucky Nonprofit Corporation Act Section 273.219(1), which states that a conflict-of-interest transaction shall not be subject to equitable relief if:

• The material facts of the transaction and the interest were disclosed or known to the board (or a committee of the board), and the board or committee approved, authorized, or ratified the transaction; or
• The transaction was fair to the corporation.

Section 273.219(3) further states that authorization is effective if done by a majority vote of directors who do not have a direct or indirect interest in the transaction. However, authorization cannot be done by a single director. The authorization may also be delegated to a committee as long as no director appointed to the committee has a direct or indirect interest in the transaction.

The HOA may not have been able to meet the first condition because all of the board members have an interest in the HOA management company. Hence, the board may need to have proven the transaction’s fairness to the HOA. For further guidance, it may be helpful to consult an attorney.

In addition, the residents may ask the board to reconsider the contract with the management company. You may check the contract to see whether there is a termination clause that allows one of the parties to terminate the contract because of negligence or a failure to meet obligations.

If the board is uncooperative, the HOA residents may also recall the directors and conduct an election to replace the problem board member(s). Kindly review the governing documents to find out how the community may recall or remove board members.