Cherington Condo. v. Kenney

254 Md.App. 261

272 A.3d 852

CHERINGTON CONDOMINIUM

v.Heather KENNEY

No. 157, Sept. Term, 2021

Court of Special Appeals of Maryland.

March 31, 2022

Argued by: J. Bradford McCullough (Shirley M. Steinbach, Meaghan C. Murphy, Lerch, Early & Brewer, Chtd., Bethesda, MD), on the brief, for Appellant

Argued by: Matthew D. Skipper (Skipper Law, LLC, Crofton, MD), on the brief, for Appellee

Panel: Leahy, Zic, J. Frederick Sharer (Senior Judge, Specially Assigned), JJ.

Leahy, J. Conflicts between condo associations and their members are legend—ranging from the tragic, as when buildings collapse, to the trivial, as famously depicted on Seinfeld . ¹

While this case doesn't fall on either end of the spectrum, it presents an interesting legal issue for the parties, and condominium associations generally, at the intersection of the business judgment rule and the interested director transaction rule.

The Cherington Condominium Association ("the Association"), appellant in this case, governs a community of 99 residential units in Montgomery County. Eighty-seven of these units are townhouses, and the remaining twelve are "garden style" units in an apartment building. Heather Kenney, appellee, lives in one of the garden style units.

In January 2019, Ms. Kenney filed an administrative complaint with the Commission on Common Ownership Communities for Montgomery County, Maryland ("CCOC"), alleging that the Association's 2019 budget violated the Cherington Condominium Declaration and bylaws. Pertinent to this appeal, Ms. Kenney alleged that the Association's board of directors ("the Board") violated the community's bylaws by requiring all residents, including those like her who live in the garden style units, to contribute financially to the maintenance of outdoor spaces around the townhouse units (the "Lawn and Garden Areas"). The Board entered into a contract with AW Landscaping to carry out this maintenance. We refer to the Board's decision to enter into the contract with AW Landscaping as well as the assessments that it imposed in the 2019 budget relating to the Lawn and Garden Areas, collectively, as the "AW Landscaping Assessment."² Notably, all members of the Board lived in townhouse units.

The CCOC dismissed Ms. Kenney's complaint, concluding that the increase in assessments against the owners of the garden style units was authorized by the Association's declaration and bylaws. Ms. Kenney petitioned for judicial review in the Circuit Court for Montgomery County. Following a hearing on the record, on March 5, 2021, the circuit court issued an order and memorandum opinion in which it determined that the AW Landscaping Assessment was "self-interested" and remanded the case to the CCOC for further factfinding. The Association appealed and now presents this Court with one issue:

"Whether the circuit court erred when it ignored the business judgment [r]ule—and instead sua sponte applied an interested director transaction standard to the Board's decision to maintain the Lawn and Garden Areas—and then remanded the case to the CCOC for further proceedings, even though no evidence of fraud or bad faith had been presented at the [e]videntiary hearing already held by the CCOC?"

We conclude that the circuit court did not err. We hold that Ms. Kenney's initial showing that the Board members may have personally benefited from the AW Landscaping Assessment to the detriment of the garden-style unit owners (who were not represented on the Board) triggered the interested director transaction rule requiring the Association to show that the Board's decision was fair and reasonable. Because the CCOC failed to address the factual matters necessary to make this determination, its final decision was not supported by substantial evidence. Accordingly, we affirm the judgment of the circuit court remanding the case to the CCOC for further proceedings.

BACKGROUND

Administrative Proceedings

The Cherington Condominium Association is run by a board of directors which is comprised of members elected from among the residents of the community. Among the primary duties of the Board is the collection of monthly assessments from the residents of the community to pay for common expenses. Each year, the Board adopts a budget allocating funds to pay these common expenses.

On January 11, 2019, Ms. Kenney filed a complaint with the CCOC alleging that the budget adopted by the Board for 2019 violated the Association's declaration and bylaws. The monthly assessments for the Townhouse Units increased from $200 to $247—a 23.5% increase—whereas the monthly assessments for the Garden Units went from $240 to $352—a 46.7% increase. Among other claims, Ms. Kenney alleged that the expenses added against the Garden Units "are a clear sign of discrimination." And, of particular relevance in the instant appeal, she also alleged that the AW Landscaping Assessment violated the bylaws because the 2019 budget required all residents, including those in the garden units, to contribute to the maintenance of certain outdoor spaces around the townhouses. Specifically, there was a line item in the budget allocating $42,700 for "grounds/landscaping."³

In a memorandum of law filed in response to Ms. Kenney's administrative complaint, the Association asserted that "[t]he governing documents [of the Association] grant the Board the legal authority to authorize the Association to maintain ... all the landscaping in the community." In support of this assertion, the Association cited to Article V § 13(a)(v) of the bylaws, which authorizes the Board to elect to maintain the "Lawn and Garden Areas" within the townhouse units:

The Association may elect, as determined by the Board of Directors in its sole discretion, to maintain the Lawn and Garden Area within any one or more of the Townhouse Units, as provided below. The Board of Directors may elect, in its sole discretion, to assume such maintenance responsibilities with respect to the Lawn and Garden Area as the Board may deem necessary or appropriate, including, without limitation, responsibility for mowing, fertilizing, trimming, pruning, and/or otherwise maintaining the grass, trees, shrubs, and other planted materials, and any replacements thereof, as may be located within the Lawn and Garden Area.

The Association also cited Article V § 13(b)(i) of its bylaws, which states:

Except for the portions of a Townhouse Unit required or authorized to be maintained by the Association, each Townhouse Unit Owner shall be responsible for the maintenance, repair and replacement, at his or her expense, of such Townhouse Unit and all improvements therein and components thereof, including, without limitation, the following: ... all driveways, garages, patios, terraces, decks, balconies, landscaping, front, rear and side (if applicable) yard areas (except to the extent maintained by the Association) , ... and other components of such dwelling which are located within the boundary of such Townhouse Unit and/or in a Limited Common Element designated in the Declaration or on the Condominium Plat as being appurtenant to that Townhouse Unit and which serve that Unit and no other.

(Emphasis added).

The Association also noted that its declaration provides that "any portion of a Townhouse Unit which is enclosed by a wall, fence or other obstruction and which is not readily accessible to the Association, as determined by the Board of Directors in its sole discretion, shall not be considered a Lawn and Garden Area."

The bylaws state that the Association and its agents and employees "shall have an irrevocable right and an easement to enter the Lawn and Garden Area within any Townhouse Unit for purposes of maintaining [the] Lawn and Garden Area in accordance with the Bylaws."

The CCOC held a public hearing on October 22, 2019. Ms. Kenney contended that the terms of the Association's governing documents prohibited an increase in the assessment of more than 25% and that the Association did not adopt the 2019 budget in good faith. In presenting her case, Ms. Kenney called several members of the Board in order to ask them questions about documents that she had obtained through discovery. She asked Mr. Steven Wathen, President of the Association, about the language contained in the Association's contract with AW Landscaping that provided for services in "townhouse fronts, and accessible rear yards ." (Emphasis added). Mr. Wathen replied, "I read that as all common [areas]." Commissioner Staci Gelfound of the CCOC later observed, without challenge, that the landscaping contract did not split the services, so it was not possible to tell how much of the total $42,700 was spent on maintaining the front and accessible rear yards of the townhomes.

Mr. Wathen was also asked about the composition of the Board. He stated that during his tenure as president of the Board, there had never been any garden unit owners on the Board. He said that this was because no garden unit owners had ever nominated themselves as candidates for positions on the Board despite the fact that all members of the community had been invited to do so, including Ms. Kenney and the other garden unit owners.

The Association presented the testimony of Glenn Loveland, managing agent for the Association, who worked on preparing the 2019 budget for the Board's review. Mr. Loveland claimed that landscaping the front of the townhouse units was done "to maintain the uniform appearance throughout the community." Mr. Loveland claimed that there were no expenses in the budget (including, presumably, maintenance of the Lawn and Garden Areas) that were solely for the benefit of the Townhouse Units; rather, it was "primarily for [the benefit of] the community." Mr. Loveland also asserted that the budget was created in good faith, and that he believed the budget to be "in the best interest of the entire community."

The CCOC issued a written decision on December 17, 2019, in which it made the following findings of fact:

The Cherington

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