Cherington Condo. v. Kenney (App. Ct. Md.)

 Filed: March 31, 2022

Opinion by: J. Leahy

Holding: The court held Appellee Heather Kenney’s claims before the Commission on Common Ownership Communities for Montgomery County (“CCOC”) sufficiently alleged that the Board of Appellant Cherington Condominium Association violated the business judgment rule by potentially entering into an interested transaction, which required a showing that the Board’s decision was fair and reasonable to the Association.

Facts: Appellee is a resident of one of the twelve, “garden-style” units within the Appellant condominium development. The remaining eighty-seven units are “townhouse-style” units. While all unit owners are eligible to serve on the Appellant’s Board, only townhouse-style owners served on the board in 2019, when the challenged budget was ratified. Appellee asserted that the 2019 budget violated the Association Declaration and Bylaws by requiring “garden-style” unit owners to contribute to the cost of maintaining outdoor spaces around the townhouse-style units. Included within the 2019 budget was an assessment increase of $47 per month for townhouse-style units, but a $112 per month for garden-style units.

Analysis: The Appellate Court of Maryland* reasoned that decisions of boards of condominium associations are subject to the business judgment rule, which is a “‘presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.’” Such presumption can be overcome if the person challenging a board’s decision can demonstrate either that the board acted by way of fraud or in bad faith, or if the person can show that a board member had a conflict of interest related to the board’s decision. If there is evidence of a conflicted transaction, the burden shifts to the board to show that the decision was “just and proper.”

In addition, the Court reasoned that the codification of Corporations and Associations Article § 2-419 did not fully supplant the common law on interested director transactions, though the section does provide a method for establishing a particular interested transaction is just and proper by way of disclosure of the conflict prior to a vote by disinterested board members on the transaction.

In the present case, the Court found that the board was comprised entirely of interested board members, as all board members were townhouse-style unit owners who all could benefit from the contract for landscaping which included costs only applicable to outdoor spaces around the townhouse-style units, but which would be subsidized by garden-style unit owners. The Court remanded the case to CCOC to make findings of fact related to the landscaping contract, including whether the contract was fair and reasonable in light of the interested director transaction rule.

 
* At the time this opinion was issued, Maryland’s intermediate court was named the “Maryland Court of Special Appeals.” However, the voters of Maryland adopted a constitutional amendment in the 2022 election that changed the name of Maryland’s appellate courts, such that this court is now called the Appellate Court of Maryland.
 
Full opinion here.