Q&A:Property Manager's Office Usage a Conflict?

Q I am the president of a co-op. We had a full time employee as our property manager. I stress the words: full time. My predecessor had a son, who was allowed to go into business with our full time manager. Their company was a building management company and solicited other co-ops. But at the same time, they were using our management office, computer, xerox, fax, stamps, secretary, etc. During this time, our co-op was neglected. Is this a conflict?

—Annoyed President

A “Grounds for termination, maybe. A conflict, no,” says Princeton-based attorney Deborah S. Dunn with the law firm of Stark & Stark, which has offices in New York and New Jersey.

“The property manager, as an employee, has no obligation to the cooperative, other than that associated with a regular employee/employer relationship. The board member has various obligations imposed upon him by virtue of his position on the board. However, it is unlikely that any conduct here rises to a level considered to be a conflict of interest, such that he would have breached his fiduciary duty.

“The law imposes certain requirements, limitations and obligations on those who hold a position on a governing board, whether of a for-profit or not-for-profit company. In short, a member of the board must discharge his duties in good faith and with the degree of diligence, care and skill that an ordinarily prudent person in a comparable position would exercise under similar circumstances. This duty is commonly referred to as the ‘duty of care.’ In addition to having a duty of care, members of the board have a ‘duty of loyalty.’ That means that no director may undertake an act or omission, which that person knows or believes to be contrary to the best interest of the corporation or its shareholders in connection with any matter in which the board member has a material conflict of interest.

“A board member who conducts corporate affairs in a fraudulent or unconscionable manner, commits self-dealing in an intrinsically unfair transaction, or wastes corporate assets would be considered to have breached his fiduciary duty. Self-dealing occurs when a board member seizes a business opportunity presented to him that creates a conflict of self interest between the corporation and the board member. Board members have the right to rely upon the ‘business judgment rule.’ The business judgment rule provides a legal presumption that, absent self-interest or bad faith, any decision made by members of a board, if made with due care, is not vulnerable to legal challenge.

“Here, apparently the board was aware of the relationship between the property manager and the board member’s son, as well as the activities of both. The board exercised its judgment in permitting the activity and would probably argue that it received some benefit as a result. For example, maybe the property manager charged a lower rate than others in the business, or worked overtime, or was available on the weekends, and in exchange the board permitted him to conduct other business on the side or use coop supplies. If the board was unhappy with the services provided by the property manager or that the coop’s resources were being used for things other than coop business, the board was certainly able to sever the relationship, as it apparently did. In the end, without knowing more details, what you describe is not necessarily improper.”

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