Academy/Board Authority & Fiduciary Duties
Self-dealing
When a board member's own interest gets mixed into the association's decision.
Self-dealing is when a board member has a personal or financial stake in a decision the board is making, such as steering a contract to their own company, and that interest could reasonably affect their judgment. It is not automatically illegal. Disclosure and approval by disinterested directors or members can sometimes cure it, but in some states certain self-interested votes are barred outright, no matter what is disclosed.
What makes a decision self-dealing
Self-dealing is not limited to obvious kickbacks. It covers any transaction where a director's personal interest sits on both sides of the table: hiring a spouse's landscaping company, approving a contract with a business the director partly owns, or voting to waive a fine against themselves. North Carolina's nonprofit corporation code defines the category plainly.
"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, North Carolina General Assembly
A transaction meeting that definition is not automatically void. What decides whether it stands is whether the board handled the conflict the right way, covered in the duty of loyalty lesson.
Disclosure and approval can cure it, sometimes
Most state nonprofit corporation codes use the same basic structure: a self-interested transaction survives if the director's interest is disclosed and a majority of disinterested directors approve it, if disclosed and the disinterested members approve it, or if the transaction was simply fair to the association regardless of process. North Carolina requires that board-level approval come from directors with no stake in the outcome.
"The affirmative vote of a majority of the directors on the board of directors (or on the committee) who have no direct or indirect interest in the transaction."
Source: N.C. Gen. Stat. § 55A-8-31, North Carolina General Assembly
Some states go further and take the choice away entirely. California bars a director from voting on six specific categories of self-interested matters, including their own delinquency payment plan or a foreclosure decision on their own unit, even if they disclose everything first. Check your own state's statute and see Disclosing conflicts for how the disclosure step actually works.
Self-dealing forfeits the board's usual protection
Boards normally get real deference from courts under the business judgment rule: a reasonable, informed, good-faith decision is not second-guessed just because it turned out badly. That protection depends on good faith, and self-dealing is treated as the opposite of good faith.
"Does not protect directors who engage in fraud, self-dealing, unconscionability, and similar conduct" because such conduct is "incompatible with good faith."
Source: The Business Judgment Rule and Common Interest Communities, Colorado Bar Association
That is the practical stakes of a conflict handled badly. A cured conflict is just a contract. An uncured one is a director exposed personally, with none of the usual legal cover.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
The board's landscaping contract goes to a company owned by the treasurer's spouse. The treasurer never mentions the connection and votes yes. What is the legal problem?
A California board member wants to vote on their own request for a payment plan on overdue assessments, after telling the board about the debt. What happens under California's rule?
A board approves a contract that personally benefits one director. The director later argues the business judgment rule should shield the decision from a lawsuit. What is the likely outcome?
Sources
- N.C. Gen. Stat. § 55A-8-31, North Carolina General Assembly
- D.C. Code § 29-406.70, Council of the District of Columbia
- Cal. Civil Code § 5350, California Legislature
- Cal. Corp. Code § 7233, California Legislature
- The Business Judgment Rule and Common Interest Communities, Colorado Bar Association
- Model Code of Ethics for Community Association Board Members, Community Associations Institute
Board Authority & Fiduciary Duties
Next, learn exactly when a disclosed conflict means you have to leave the room: Recusal.
Whether disclosure alone is enough to save a self-interested vote, whether certain votes are barred outright, and what counts as a disqualifying interest all vary by state statute and by your association's own conflict-of-interest policy.