Defining Good Faith
A new unreported Court of Special Appeals of Maryland opinion tacked the definition of bad faith in the context of the business judgment rule. Specifically, it is widely known in Maryland that absent fraud or bad faith, decisions to enforce made by boards of directors, whether right or wrong, are governed by the business judgment rule. But what constitutes bad faith?
The Court in Henry v. Guirand, et al. was left to determine that question when an owner sued an association that decided not to enforce against a neighboring owner who violated the association's covenants by planting and maintaining a "growing fence" higher than the height limit contained in the covenants. The owner contended that the association's decision not to enforce was made in bad faith because one of the board members, who participated in the discussion and eventually cast the deciding vote not to enforce, also had a "growing fence" that exceeded the height limitation contained in the covenants.
In defining bad faith, the court looked to a widely respected commentator's definition of good faith, which included:
- "... the absence of any desire to obtain personal benefit or a benefit for some person other than the corporation. Good faith is generally synonymous with the duty of loyalty or the duty of fair dealings:'
- "... a director may not approve an action that he knows is in violation of the law ... [or] apply an invalid provision of the corporation's bylaws to the detriment of a stockholder:'
In essence, bad faith is failing to act in good faith. In applying these principles, the court held that in this case the board did not act in bad faith because the board's decision not to enforce against an owner did not personally benefit or harm the board member who had the growing fence. By contrast, the court held that their decision may have been different if the question before the board was whether to enforce against all properties within the subdivision, which would have personally harmed or benefitted the board member in question.
Associations should keep the above principles as set forth in Henry v. Guirand, et al. in mind when making decisions, as courts now have concrete definitions to apply to cases revolving around bad faith. In addition to board members not obtaining personal benefit from decisions, as set forth in the second principle, associations should also ensure that they apply all applicable county, state and federal laws to their decisions.
Ruth Katz is a community associations attorney at Lerch, Early & Brewer in Bethesda, Maryland. She helps community association managers and boards with general condominium, homeowners association and cooperative issues like document interpretation and amendments, as well as with litigation, dispute resolution, covenant enforcement and delinquent assessment collections. She serves as a co-chair of CAI’s Maryland Legislative Committee. For more information about this legislation, contact Ruth at (301) 657-0188 or firstname.lastname@example.org.
This article first appeared in the May 2014 Quorum, the magazine of the Washington Metropolitan Chapter Community Association Institute.