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CCOC Decision Summary

#779 & 26-06, Susman v. Sussex House Condominium Association (May 18, 2007) (Panel: Fleischer, Kivitz, Negro)

The condominium owner (CO) filed two complaints raising numerous claims about the management of the condominium association (CA), and the Commission consolidated the complaints for a hearing in front of a single hearing panel.

As a result of a prehearing conference called by the panel chairman, and settlement negotiations entered into by the parties, the parties were able to reach an agreement on most issues, which they presented to the panel in the form of a Consent Order.The panel agreed to adopt the proposed Consent Order as part of the final Decision and Order in the dispute.

There were 3 issues left for the panel to decide at an evidentiary hearing:

1. whether the CA was required to itemize planned expenditures from its reserve fund in its budget for the coming year;

2. whether the CA properly spent reserve funds on certain major repairs without member approval;

3. whether 3 of the CA's new directors were properly elected to 2-year terms of office as a result of an amendment creating staggered terms.

The evidence at the hearing showed that the Bylaws required that all expenditures of over $7500 for "improvements" that were not specifically provided for in the budget must be approved by the majority of the membership; that all directors were elected for 1-year terms; that the board members were exempt from individual liability for their actions (except for willful misconduct or bad faith); that the CA must publish a proposed budget for the coming year that includes "an estimate of the total amount it considers necessary for the upkeep, repair and replacement of the common elements"; that the board proposed an amendment to the Bylaws that would create staggered terms for the directors, which was voted on at a membership meeting in January, 2006, but which did not receive the necessary total of votes until April, 2006 and not recorded in the land records until November, 2006; that in December, 2005 the board held elections under which the three candidates with the highest numbers of votes were elected to terms of 2 years while the two remaining positions were for 1 year each; that in 2005 the board approved major repairs to the elevator doors ($14,000), roof ($117,000), air handler ($8000), and pipes ($1480) although none of these items had been specifically listed in the budget, and all of which were paid for out of the reserve fund but none of which had been approved by a vote of the membership; the practice of the CA was not to identify proposed expenditures from its reserves when it drew up its annual budget although it did allocate funds to the reserves

The panel ruled that the practice of spending funds from reserves without itemizing those expenditures in the proposed annual budget was not a violation of law or of the Bylaws.Section 11-109.2 of the Maryland Condominium Act only required the CA to allocate a gross amount of money to the reserve fund and did not require the CA to itemize the planned expenditures from the reserves.The Bylaws also contained only general requirements and did not specify that the budget identify specific expenditures.Although the CA knew in advance it would be making some of the disputed expenditures and could have disclosed them in the proposed budget, and although a more detailed proposed budget would be useful to the members and not burdensome to the CA, "under the business judgment rule, the Panel is not free to dictate more detailed requirements to the Association".

The panel also upheld the CA's decision to make major repairs in 2005.The panel noted that Section 11-109.2(d) prohibited non-emergency expenditures that would result in a more than 15% increase in assessments without a formal amendment to the budget, and that "Montgomery County Code Section 10B-18's requirement for submission of a proposed budget at least implicitly requires the Board to keep within the budget once it has been approved (again excepting emergency expenditures)."Here the disputed expenditures caused a 30% increase in assessments and were not budgeted for in advance.However, the panel concluded that there was substantial expert and other testimony that the conditions involved presented genuine safety, health and property damage concerns.The panel inferred that the CA approved the expenditures on the basis of its authority to make emergency repairs, and held that under the business judgment rule the panel "is not in a position to second-guess the Board's decisions that the disputed expenditures were necessary."The panel noted that the Bylaws did require member approval of any "improvement" exceeding $7500 that was not specified in the proposed budget, and the Bylaws did not create any exception for emergency repairs. The Panel ruled that as to the disputed repairs in 2005, there was no practical relief that it could order, because the funds had been spent, the work could not be undone, and the boardwas exempt from individual liability.In addition, the Consent Order contained provisions to deal with this issue in the future, so that no additional action by the panel was necessary.

The panel held that the election of certain board members to 2-year terms was invalid.Although a proposal to amend the Bylaws had been published before the December, 2005 elections were held, the proposal did not obtain the necessary 2/3rds majority vote until April, 2006, and was not filed in the land records until November, 2006; the proposal did not state it was retroactive in effect to the date of the December, 2005 elections.Section 11-104 of the Condominium Act provides that bylaw amendments only become effective on the date they are recorded, the CA Bylaws state the same thing.The purported 2-year terms beginning December, 2005 for three directors were invalid and expired December, 2006.There were therefore at the time of the panel hearing 3 vacancies on the board, which should be filled at a special meeting.The elections for two 2-year terms in December, 2006 were valid because by then the amendment had taken effect.

The panel noted that because of its decision, the validity of all CA board actions between December, 2006 and the date of the special election it was ordering, were in question.However, the new board or the unit owners themselves could vote to ratify all the decisions in question.

The panel therefore issued the Consent Order requested by the parties and further ordered that the CA must call a special election within 30 days to fill the 3 vacant 2-year terms, and must refund to the CO one of her two $50.00 filing fees.

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