Duty of loyalty

What counts as a conflict

The duty of loyalty is one half of every board member's fiduciary duty to the association. The other half, the duty of care, covers how carefully you decide; the duty of loyalty covers whose interests you decide for.

A conflict shows up whenever a director has a personal or financial stake in a matter before the board: a family member's company bidding on a contract, an ownership interest in a vendor, or a personal interest in how a dispute gets resolved. A trade body's model ethics code puts the underlying norm plainly.

"Serve the best interests of the association as a whole regardless of their personal interests."

Source: Model Code of Ethics for Community Association Board Members, Community Associations Institute

How a conflicted transaction stays valid

Having a conflict does not automatically void a deal. North Carolina's nonprofit corporation code, which many state HOA fiduciary rules track closely, defines the problem this way:

"A transaction with the corporation in which a director of the corporation has a direct or indirect interest."

Source: N.C. Gen. Stat. §55A-8-31(a), North Carolina General Assembly

A transaction like that stays valid through one of three paths: the board's disinterested directors approve it after full disclosure, the members approve it after full disclosure, or whoever defends it later proves it was fair to the association all along. California builds its own conflict rule on the same structure, applying its self-dealing statute to any contract a board or committee authorizes.

The exact wording of this safe harbor varies by state. Check your state's nonprofit corporation act and your own bylaws for how your association handles it.

When disclosure is not enough

Disclosing a conflict and stepping back from the discussion is often, but not always, sufficient. California bars a director from voting at all on six specific self-interested matters, regardless of disclosure: their own discipline, an assessment against them for common-area damage, their own payment-plan request, a foreclosure decision on their own unit, review of a change to their own unit, and a grant of exclusive use of common area to them.

Do not assume disclosure alone always clears you to vote. Ask whether your state or your association's conflict-of-interest policy treats your situation as one that requires full recusal instead.

Gifts, kickbacks, and getting paid for your service

The duty of loyalty also reaches money that never touches a board vote. The same ethics code's norm on vendor gifts:

"Decline gifts directly or indirectly from owners, residents, contractors, or suppliers."

Source: Model Code of Ethics for Community Association Board Members, Community Associations Institute

In most states this is a best-practice norm, not a law. Florida has made it a crime: a director who accepts a kickback from a vendor commits a felony and must be removed from the board. Florida also bars directors from being paid or otherwise financially benefiting from their service at all. Check whether your state treats vendor gifts as an ethics matter or a criminal one.