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Ariz. Biltmore Hotel Villas Condos. Ass'n v. Conlon Grp. Ariz., LLC - 6/23/2020

Arizona Court of Appeals Division One defines the limits of the procedural safe harbor in the Arizona Nonprofit Corporation Act (the “Nonprofit Act”) and holds that if a director discloses facts about one transaction, the safe harbor for that transaction does not extend to a later, distinct transaction even if the later transaction has a related subject matter or could loosely be considered a continuation of the earlier transaction.

An owner of several condominiums adjacent to a hotel also served as the president of the Board of Directors (the “Board”) of the condominium complex’s homeowners association, a nonprofit corporation.  A utility company provided parking to both the hotel and the HOA through two separate contracts.  In 2010, the HOA sued the hotel over parking access.  The HOA’s Board agreed for its president and his separate company to fund the litigation and, in exchange, to give him the rights to the parking if he were not reimbursed by the HOA.  Before the agreement was finalized, the president disclosed his conflict of interest and excluded himself from voting as required by the Arizona Nonprofit Corporation Act (the “Nonprofit Act”).  The lawsuit was eventually dismissed after the utility terminated its parking contract with the HOA.

In 2013, the HOA sued the utility for breach of the parking contract, based on a new proposal from the president.  Unlike the 2010 suit against the Hotel, the president did not recuse from the vote or disclose any conflict.  The president proceeded to hire a law firm to represent the HOA, which early in the case raised concerns about the merits of the HOA’s claims—a fact the president never disclosed to the Board.  In 2014, the Board learned of the law firm’s concerns and also discovered that the president was pressing the claims against the utility to vindicate his personal claims to the parking.  The Board removed the president.  

Later, the HOA sued the president for breach of fiduciary duty and other claims.  The trial court held the former president was insulated from liability related to the 2010 lawsuit because he complied with the disclosure and disinterested voting requirements of the Nonprofit Act but held that this insulation did not extend to the 2013 litigation.

The Court of Appeals affirmed as to everything except damages, holding that the former HOA president’s disclosure of the conflict for the agreement between his company and the HOA related to the 2010 lawsuit with the Hotel did not insulate under the Nonprofit Act him from liability for the undisclosed conflict in the 2013 lawsuit with the utility.  To hold otherwise “would insulate directors from damages for self-dealing based on stale, uninformative disclosures related to prior agreements and different acts or instances of conducting business.”

Judge Weinzweig authored the opinion in which Judges Perkins and Morse joined.

Posted by: Travis Hunt

Posted On: 7/29/2020