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July 19, 2012

Convoluted Thinking in Annapolis

Frank R. Goldstein

In recent years, Maryland’s highest court, the Court of Appeals, has bent over backwards to be pro-consumer, at the expense of what statutes expressly say and years of business practice.


Here are two examples.


MRA Property Management, Inc. v. Armstrong, Sept. Term 2007, April 30, 2012, involved the sale of condominium units in the Tomes Landing Condominiums in Cecil County. The sale of condominium units are real estate transactions governed by the Maryland Condominium Act.


The plaintiffs in MRA Management bought their units in Tomes Landing between 2000 and 2004 from previous owners; that is, the transactions were re-sales, not direct sales from the developer of the condominium. The Condominium Act requires that in re-sale transactions the seller of a unit must provide to a potential buyer a re-sale package which contains certain prescribed documents, such as the condominium declaration, by-laws and the budget. The re-sale package in the MRA Management case contained all of the information required by the Condominium Act.


But the Maryland court, for the first time, found that condominium sales are not governed just by the Condominium Act, but said the Maryland Consumer Protection Act also applies, notwithstanding that condominium sales are real estate, not traditional consumer, transactions. And under the Consumer Protection Act, said the court, the association’s budget should be examined at trial, since the plaintiffs were alleging that the budget did not adequately disclose costs associated with known defects in the building.


Thus, the court made two unusual findings: (1) the association and the property manager, not just the seller, might have liability to the purchaser in a re-sale; and (2) the budget was not just a budget adopted by the board at an open meeting with owners but was also a disclosure document which could be used by third parties for litigation purposes.


The condominium law is not the only one in which the Court of Appeals seemed to be interested in ignoring legal precedent and practice in order to obtain a consumer-oriented result.


As to limited liability companies, you might think that the Maryland statute was perfectly clear:


“Except as otherwise provided by this title, no member shall be personally liable for the obligations of the limited liability company, whether arising in contract, tort or otherwise, solely by reason of being a member of the limited liability company.”


The only exceptions mentioned in the applicable title pertain to rendering professional services. Therefore, if a limited liability company (an “LLC”) owns property, and someone is injured on that property, allegedly because of a condition on the property, maybe the LLC has liability. But not a member of an LLC! The statute says clearly that a member, that is, an owner, is not personally liable for LLC obligations “whether arising in … tort or otherwise….” No personal liability, right? Just like a stockholder of a corporation is not liable for the obligations of the corporation.


Wrong. Or, at least, maybe wrong. The Maryland Court of Appeals apparently does not approve of what the LLC statute says and has come up with an end run around it.


In Allen v. Dackman, 991 A.2d 1216 (2010), the court held that an individual member of an LLC could be held personally liable, that is, the limited liability shield could be pierced under the Baltimore City Housing Code. The reason given: The individual who owned the LLC could control it and thereby control the property where the tort occurred.


The court also held that the trier of fact should be provided the opportunity to see whether the member was personally involved in the alleged tort. In reaching this tortured decision, the court overruled two lower courts: the Circuit Court and Court of Special Appeals.


There is an old legal maxim that some people consider a cliché. But it is true here. “Hard cases make bad law.” The plaintiffs in Allen alleged that, as minor children, they suffered lead paint poisoning during the period they resided on the property. And during that one-year period that the defendants owned the property, they instituted litigation to have the plaintiffs, who were occupying the property illegally, removed.


It is probable that the only defendant with deep pockets was the individual member of the LLC. The only way for the plaintiffs to have access to whatever assets the individual member owned was to pierce the limited liability veil, which the court permitted them to do. In so doing, the court jeopardized the viability of the Maryland limited liability law.


As a Marylander, I have often been concerned about the competition between Maryland and Delaware as jurisdictions for organizing a business. One of the principal reasons so many companies are organized under Delaware law is the consistency of sensible decisions by the Delaware courts.


The language of the Delaware statute providing limited liability to members of a limited liability company is almost identical to the language of the Maryland statute. And yet there is no Delaware case comparable to Allen, nor is there likely to be one. Advantage Delaware.


By now perhaps we should be getting used to courts using strained logic to reach desired results in cases. Chief Justice John Roberts’ recent opinion in the Affordable Care Act decision is a good example. Nevertheless, that is not the way they teach you in law school that cases are supposed to be decided.


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