Q&A: Conflict of Interest?

Q I live in a co-op in Bergen County, and have a question regarding the separation of co-op administration and outside business concerns. Recently, several shareholders (including myself) noticed that one of our board members, a realtor with RE/Max, is listing and selling units in our building in the local newspaper. Isn’t it a conflict of interest to have someone sitting on the board, attending interviews with prospective buyers, and profiting by the sales of units via commission?

—New Jersey Shareholder

A According to David J. Byrne, Esq., an attorney with the Lawrenceville office of the law firm of Stark & Stark, “New Jersey law has not yet set the precise judicial standard of review with respect to actions or in actions of cooperative directors. However, the Business Judgment Rule (BCL) has been held by New York and New Jersey courts to govern the actions or inactions of directors of condominiums and homeowners associations. I suspect that this standard will eventually be applied to a cooperative board of directors.

“Pursuant to this standard, a board has fiduciary duty to a cooperative’s shareholders to preserve those shareholders’ interests and rights. That board must act in compliance with the co-op’s bylaws and proprietary lease, and free of fraud, self-dealing, and unconscionability. That board must act reasonably and in good faith.

“The BCL would likely be applied to the director’s actions here. So long as this director is acting in good faith (it’s considered difficult to prove otherwise), the director’s actions are protected. Only through a consideration of more specific facts (i.e., whether the director is disclosing his/her position, the circumstances of his/her role in admission decisions or votes, his/her role in and/or influence on that co-op’s admissions committee) can it be determined whether this dual role constitutes a fiduciary duty breach. Ultimately, the BCL maintains a very high threshold of protection for directors such that establishing a violation is very difficult.

“In conclusion, the simple dual role described in this Q&A does not, in and of itself, constitute a breach of the director’s fiduciary duty. The conduct of the director in these roles is determinative.”

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