 Aloha and welcome to another edition of Condo Insider, Hawaii's show about association living. Many of our residents, maybe a third or more, live in an association and our objective in this show is to talk about issues that affect boards of directors and owners and how they can have a good home and have quiet enjoyment of where they live. One of the things I've heard over and over again for the years I've been in the management business is boards and what are their duties, they have a fiduciary responsibility, they have a conflict of interest and what is this all about you know homeowners and board alike are always yelling and screaming at each other about what these duties and obligations are. So I've invited one of our great attorneys in the association industry and a good personal friend of mine, Nalaan, to come and talk to us today about 514b and these issues of fiduciary duty and conflict of interest. So Nalaan, again welcome to our show. So glad to be here again, thank you Richard. Remind us again a little bit about your background, your family, how you've been in Hawaii, the firm you work for and some of your volunteer efforts like at CAI. I was born and raised in China. I came to Hawaii as a student and then went to UH Law School. After graduation I started my practicing condominium and community association representation and I moved a law firm, Mudo Oka and Rosenberg. We are one of the boutique firms in town specializing in representing associations. We handle their general matter consulting, you know dispute resolution for the board, for the association, other litigation, their covenant enforcement, debt collection, full closure matters. Yeah so it's been over seven years for now. And you're also on the CAI legislative action committee, correct? Yes. In fact you've been the past chairman of that I think, remember correctly. Yes, the former chair and this year's vice chair, yeah. And so what is the CAI elected legislative action? What is their role and what do they do? We basically represent, you know, the association industry. You know we lobby for the associations and the homeowners interest in the legislature. Also we try to, you know, keep all the members updated about what's going on in the association law field to educate all the board, the property managers and the homeowners. Well you know one of the things I hear not that often because I believe frankly that most boards want to do a good job. They're fair and they're equitable. They try to do the right things but I hear all the right time people say that's a breach of your fiduciary duty and I know 514b106 says that the board members are fiduciary. Yes. Can you kind of elaborate on that? What is what is the fiduciary and what are their obligations of the fiduciary? Right. So a fiduciary if you check the dictionary definition it basically means someone has to act on behalf of the other's interest. So that means you really need to subordinate your own interest to the other person's interest. So in the board director's role you owe a fiduciary duty to the association and all of its members. Not to a certain homeowner, not to a certain group of homeowner, it's to the association. It involves actually includes a bundle of duties you have to fulfill. So one of that is duty of good faith. So when you take action as a board you have to honestly believe the action you're taking is actually for the benefit of the association. A duty of obedience you have to make sure you manage the association's affairs in compliance with the statutes, with the project documents of your project. Duty of care which is we also call a due diligence. You basically act as an ordinary really prudent person would act in a reasonable way in similar situations. You try to gather information, do some investigation. You can rely on professionals. You got to make your own judgment in a reasonable way. And the most important one of course is the duty of loyalty. You owe your loyalty to the association. You cannot do like self-dealing. So basically when there is conflict interest you always make disclosure, make sure the disclosure is reflected in the board minutes, in the meeting minutes. I know that the statute itself refers to the fiduciary in the same manner as the law. I think it's 414d. Yes. What is what laws 414d and does it have any uniqueness to this as far as the finding of fiduciary? 414d is the statute governs non-profit corporations in Hawaii. There is a whole section regarding what the directors and officers duties and their care should be in functioning as the director or officer of a non-profit corporation. So basically the condo statute says you know if you fulfill those standards as specifying 414d you are covered. You will not be breaching your fiduciary duty. Basically it's a definition of the business judgment rule which the standard the court used to try to decide whether a board has breached his duty or not. So it can be said that at the fiduciary your job is to the association as a whole. Yes. Impartial and all the due diligence and all the things you said. But it's probably true that the owners themselves are not fiduciaries to the association. They're probably just owners right? They're all owners yes. They don't really have a under the law fiduciary duty to the association. Yeah. They may have interest in what is decided but they're not really fiduciaries as an owner technically speaking under the law. Yeah I mean under agency law I mean for example a managing agent it would owe a fiduciary duty to the association right as an agent person for relationship. Yeah. So the statute also goes to some other duties and obligations of the board. So let's just say I own a unit there and and I want I'm really angry and I want to get on the board and I have people of topology. Could I vote myself and my wife on the board? From one unit you can only there's only one representative allowed from each unit so you cannot have two representatives from the same unit be on the board. If I own unit 101 and that's all I owned I couldn't the association couldn't elect myself and my wife for unit 101 but if I owned unit 101 and 102 more than one unit then in fact in theory I could represent 101 and my wife could represent 102. You're right. I've seen some situations where unfortunately it can get out of hand where you maybe have a developer in a newly formed association that because they have unsold units may own 100 or 200 units remaining and during that proposition when they have to form the association they have control of the board because of the fact they have a large financial insurance they still have in my example 100 unsold units. Yeah for for developer controlled boards you know those directors officers who are you know affiliated with the developer they have to be make sure that they're clear there is case law clear stating regardless whether they have affiliation with a developer they also owe fiduciary duty to the association if they breach their fiduciary duty they will be held liable. Yeah I think which makes sense but for our listening audience it's important to know you may see more than one representative from a developer and that's somewhat common when they own such a large financial interest of unsold property but then in fact they still owe the same fiduciary duty to the board or they excuse me to the association outside of their personal interest with respect to the developer and so you were saying for example that the managing agent you know had the fiduciary duty what if I own a unit in a condo and I work for the managing agent and the owners want me to be on the board can I serve on the board as a owner of a unit who also was employed by the management company? You cannot be an officer that's prohibited by the statue you can be a member of the board but you know for example if there's the issues about the managing contract of course you've got it like recuse yourself you cannot vote on that you have to make disclosures like any other conflict interest transaction. So like summary was as they can you can serve on the board as an owner because certainly as an owner of a condo I'd have the same interest of protecting my property but it couldn't be the president vice president secretary treasurer as an employee of the management company correct? How about if I work for another management company for example I don't work for the managing agent that represents that association I still would be eligible to be an officer I would think because I'm not employed by the managing agent of the association. Not at the point but there's potential conflict there so you got to be careful yeah. Yeah I think careful is a key word we'll get into the conflict of interest kind of discussion surely well how about the resident manager can he serve on the board? No that's prohibited. And so what if the resident manager owned a unit can you serve on the board? Still cannot. So the resident manager no matter what whether he owns a unit doesn't own a unit he cannot serve on the board of directors. Yeah well that makes sense you know we're based on the needs now you know as you know board members have a great deal of authority I mean they control the association Monday they can authorize expenses. Can an association or a board let's say not the association but can the board say well we wanted John on the board be listened Seattle we're going to pay us travel expenses to Honolulu for board meetings every year. Well that's probably not reasonable but under the statute actually the statute allows a board director to attend a meeting you know by telephone or you know these days we have Skype you know you can see the person also listen to his speech at the same time on screen that's considered as if attending by person in person right yeah but you cannot allow a board like you know vote by proxy at a board meeting that's not allowed and if you know like every time there's a board meeting he has to fly over you want association to reimburse for the you know the the travel expense that's probably not reasonable I think. I think the statute actually says it could be done with a majority approval of all the homeowners. As long as the owners approve you're right. It actually refers to things such as travel directors fees per diem you know that if the owner's majority approve that at an annual meeting then in fact as possible although I have to tell you I've been doing it a long time I've never seen a volunteer director paid per diem or travel expenses the only exception which we're going to talk about briefly is that and there's been some debate about this is that the association is now involved in litigation and a director has subpoenaed to attend by a court to attend this this trial that in those cases it's probable that the association could pay the board members travel expenses I don't think it's a clear definitive ruling on that but most the attorneys I've talked to said look a court has ordered him to appear I date certain it's not for his personal benefit to go testify in trial but he's been subpoenaed in cases like that involving litigation there may be some reasonable exceptions a board could do to make sure the association protected because certainly his testimony may be very valuable to the association or very valuable certainly to the proceeding that he gets heard obviously someone subpoenaed him so that's kind of the one that's kind of in that quirky area for lack of a better word whether they can do it or not yeah if you consider him as any other witness I mean the expenses on that I may be considered a legal cause with which you there may be method you can recover that through the litigation you know right so yeah I know a lot of times shifting arbitration is construction defect board members they want them to attend that arbitration hearing right while they try to resolve it in the course of settlement discussions and the board needs that the arbitrator always order orders a person with authority to be president the arbitration that in those cases of the board had a fly their board member from Maui to Honolulu because the arbitration in Honolulu I think the word would be cautioned to the board and right tell them the best thing they can always do is put it in a minute and approve it and explain why they did it right because that way you have a record of their business judgment what they did but in general terms board members can't be paid for per diem or travel expenses unless they've got the guts to go and say to the to the owners in an annual meeting we want to pay this person for this reason I think the more common thing I see more often than not is whether or not the board at the end of the year doing a small Palhalla Christmas party whether that's considered part of the statute that they're all going to get together and go to some reasonable restaurant and have a glass of wine and thank everybody for the work they did this year whether they have to have owner approval for that I mean I've seen different people say different things about that you know but I think if they focus on putting it in the minutes and explaining themselves it's reasonable it's not some five-star dinner with thousand dollar bottle of champagne but something reasonable more times than not boards look at it as a working working session and not something that's for the personal benefit of a director where because we elected him he lives in Seattle that we're gonna pay his first-class airfare or rent him and yet or something to get here so there are some gray areas with regard to that type of an issue okay so we're gonna take a short break and we're right back to have more questions about conflicts of interest hello this is Martin to Spain I want to get you get excited about my new show which is humane architecture for Hawaii and beyond we're gonna broadcast on Tuesdays 5 p.m. here on think tech Hawaii looking to energize your Friday afternoon tune in to stand the energy man at 12 noon Aloha Friday here on think tech wait hi I'm Keeley Akina president of the grassroots Institute I'd love you to join us every week Mondays at 2 o'clock p.m. for a Hanukako let's work together we report every week on the good things going on in our state as well as the better things that can go on in the future we have guests covering everything from the economy the government and society see you Mondays on a Hanukako at 2 o'clock p.m. until then I'm Keeley Akina Aloha welcome back to condo inside ever sitting here with non-lon talking about board's duties primarily what is the fiduciary duty and we're gonna get into conflicts of interest in a minute I do want to again remind our viewers that we have a hotline 415-871-2474 if you're interested in calling in with a question but back to we talked about fiduciary and I had one little follow-up question on that we talked about directors without the homeowners approval can't get travel or per DM and those types of fees how about going to like seminars for CAI or HCCA Hawaii Council Community Association or attending a special course that may be of value to the board do they have to have kind of board spend money for education for board members yes as long as you know it's reflecting the budget as a line item the statue specifically allows that you know you think about it educating yourself to be competent to serve as a board that's for the best interests of the association right so the key words are it's gonna be a separate line item on the budget for director education whatever they want to call it and I would say that I know most of the industry organizations are focused on a lot more free education and so I think it's important that boards realize there are opportunities to learn their craft better and be a better director yes even if we have a CAI seminar for example it's a luncheon seminar partly subsidized by the real estate commission if the board approves it and they have a line item in their budget they that's perfectly acceptable to do that and frankly I would encourage more member or more board members to get involved and and learn these things with a lot of misunderstandings but now we know what a fiduciary is the law also says very clearly that's 514 b-125 f if you have a conflict of interest you have to disclose it and you cannot vote yes so what is the conflict of interest a conflict of interest there can be two situations one is you have a direct personal interest or you know a monetary interest that's not common to the other homeowners the second situation would be an indirect conflict interests for example if you serve in another entity as a partner as a director as you know trustee or some some some other position where you also owe fiduciary duty to that entity and then the association for example is doing in a business transaction with that entity a very typical example would be association seeking bids on landscaping company one of the board director happens to be you know a member of that company then apparently you have a conflict interest there so in both kind of situations under 414 d that's considered a conflict interest transaction you got to refrain yourself from voting on that I got to make disclosure beforehand before the other board director vote on it and reflect that in the board meeting minutes well let's just follow up on the landscaping example you gave so this board of member is a partner or owner or part owner in this landscaping company and they need to have a landscaping contract and the board is considering and they like his company the best because maybe it's at the best value the best price best reputation it doesn't prevent the other non-clad inflicted board members from voting and approving the contract no I mean if you have multiple bids and his company's bid is the best for the association the other you know disinterested board directors can vote for that and if that's the picked one you know it's a valid transaction and it's probably best they put in the minutes that the board is considered five bids and they recognize that director a has a conflict of interest but the board is voting to approve that contract because we feel it is the most qualified at the best value for the association and so the records are clear that they recognized it yeah that they made their business judgment that is still in the best interest of the association to select that vendor as the so a non-conflicted board members could certainly vote to you know to provide a contract to someone who may be in conflict you but the one I hear all the time is well you are a board member you can't vote for yourself at the annual meeting for reelection because you have a conflict of interest because you're voting for yourself or maybe even further that the board of directors because they're gonna vote back in fellow board members and owners have given them proxies as a board of director whole for example you can't vote your proxies for yourself that's a misconception I mean as you know just because you serve on the board doesn't mean you're right as a unit owner be taken away from you I mean you can still you know you know like you know exercise your owners right at the annual meeting to vote it like any other owner I mean if owners other owners give you proxy you can definitely vote on that there's just some like statutory provision you should be aware of that is if the association owns certain units in the building you cannot use that portion to vote for like to elect a board director or something there's pretty much on that and just for clarification for the association owns two or three units from a foreclosure yes those particular units they couldn't vote the proxy to reelect themselves yes however if you have owners who gave the board of directors a proxy and they're now voting for election and they're just owners proxies are not this foreclosure proxy I just discussed there's nothing improper about them the general presumption the law is that the owner trusts the board to make the decision about who they ain't the most qualified and obviously if they're on the board they're gonna pick themselves probably that's not illegal and not a conflict of interest to vote no with other owners proxies yeah so let's just kind of take an in-between case you have a building 20 floors and there's six stacks six rows of vertical rows of condos and all of a sudden a major plumbing problem has occurred in stack number two and the entire stack number two affecting all 20 owners who live in stack number two has to be replaced because it's leaking and potential environmental problem and one of the directors lives in stack number two so it's not the work is being done just for his unit we're taking all the units of stack two and replacing them all because it's an environmental damage and they've got their bid they've got their experts saying we have to replace the stack and number two does that prevent the director in stack number two for voting to approve the contract to replace the pipes for all the owners of stack number two no because in this situation the personal interest is not uncommon to the other homeowners you know because the board you know they have the duty to actually well maintain the common elements to prevent damage to common elements or other units so it's probably also a emergency situation here so they got to take action it would be different you know if in your example there are like a two decks leaking at the same time if the board got to decide which stack got to get the first repair down then you know I can see there's the potential you know there's a conflict there so that director probably it's better for him to you know step aside just close and reflect that in the meeting minutes for smaller boards it could be an issue if you only have like a three person board the best way we recommend to our clients is usually you can set up committee by a fellow board disinterested board director and some unit owners so that they you know decide make a recommendation to the board what's the best solution in the best interest of association that way you address that a lot of times which is kind of what you said we see the problem come up it's not because most board members say well this I'll just because everybody knows that the stack two has to be here he said I'll just disclose I live in stack two and I'm not gonna but I abstain yes and method where comes to be a problem to be candid with you is when these small boards and to have a quorum they need to get the work done because it's an emergency and it's a common element problem this pipe to stack and so because they need to get the work done that director feels he's voting for a common repair of a common element and yes he happens to live there but the board owes him a duty as an owner just like they do all the other owners of stack number two so I guess the good advice I would say is if it's depending on the size scope and dollar value of the work and the emergency nature of it you then in fact ask your attorney or ask for a legal advice or ask for solutions for your management company how to best protect it because I go back to disclosure in the minutes explanation we made this decision because because that'll protect you the best of all with respect to that you know yeah we in doubt you know get professionals that that's how you get covered under the business judgment rule and not to talk about the dark side but you know I think it was a recent case of a timeshare organization with the president had a undisclosed conflict of interest on providing I think furniture to for these timeshare elements they want the furniture to be alike and so there's a degree of uniformity that he didn't disclose that he had a part interest and they got substandard furniture I think the court ruled that he had personal liability about three million dollars you know it was a big case so board shouldn't take this lightly but to me I most boards I know they want to do the right thing and having a thorough discussion not voting when you're gonna get some personal benefit out of this which to me is the conflict yeah in simple terms and making sure the minutes are very clear and irrational will provide you the greatest protection of anything you can do it's back to the minutes of disclosure with respect to those types of issues and so another one I heard to be candid with you is that they accuse the entire board of having a conflict of interest because they can afford the special assessment for the plumbing repair and the owners who couldn't afford the special assessment for the plumbing repair therefore you had a conflict because you could afford to make the repair and they couldn't make the repair I don't think that's a conflict of interest that's a very factual it could be a crazy business you know at times and but the general the general thing I tell everybody look business judgment disclosure review openness transparency bids scopes of work open discussion business judgment put it in the minutes and define what you did and why you did it that way yes that's a good practice and also we don't want to scare the board directors from volunteering on this position there are actually you know safe harbors in place to try to show to you from personal liability as long as you are not grossly negligent for example you have DNO you know insurance courage some of the project documents also have indemification clause in place to indemify you in those kind of situations but you know as a fiduciary you got to remember you know you got to do the right thing not just for your self-interest try to you know well let me thank you for being here we run out of time but the summary is we've had not long talked to us about this you have important obligations to the association as a fiduciary you have important obligations to avoid any conflicts of interest or even appearance of conflicts of interest in my book to make sure decisions made or in the best interest of the association in fair and equitable all so thank you for being here today we welcome you back next Thursday the condo insider although I'm wrong about that next Thursday's Thanksgiving turkey day so we're taking a day off and all us turkeys are gonna go eat turkey so anyway we'll see you in two weeks aloha