Operating a Church or Religious Organization in Maryland and Handling Disputes
Religious organizations in Maryland, including churches, synagogues, and mosques, are typically structured as “religious corporations,” which is a special category of corporation that has been authorized by the State of Maryland. Certain hierarchical religious denominations, such as the Roman Catholic Church, the United Methodist Church, the United Presbyterian Church, and the Episcopal Church, have their own unique treatment under the Maryland Corporations Code. All other churches, religious societies, or congregations – regardless of sect, order or denomination — are subject to the provisions that I will summarize below.
To form a religious corporation, the adult members of the organization must elect at least four trustees to manage the affairs of the religious organization and prepare a written plan for the governance of the organization. Among other things, this plan document has to set forth the time and manner for the election and succession of trustees, and the qualifications for individuals to be eligible to vote in elections, and to be elected to office in the organization. It must then be acknowledged by a majority of the trustees. Once the written plan is in place, the trustees have to file articles of incorporation with the State of Maryland in order to establish the religious corporation, and the articles of incorporation must contain the written plan of the organization, in addition to other required information.
Once the religious corporation is established with the State of Maryland, the board of trustees manages the worldly functions of the organization, leaving theological matters and pastoral duties to the clergy or to the members themselves. The trustees manage the financial activities and assets of the organization in a similar manner as a for-profit corporation’s board of directors manages a business corporation. It is important to understand that it is the trustees (acting as a board) that own and manage all of the organization’s property and assets – not the clergy. However, unless the written plan provides otherwise, the senior minister of the church also serves as one of the trustees of the religious corporation, in addition to those trustees that were elected by the congregation.
Many of the same types of issues and disputes that confront for-profit corporations can also arise in a religious corporation, but in addition, religious corporations often seek advice in three areas that are somewhat unique to this sphere: (1) disputes over how elections are organized or held within the religious organization, (2) controversies over hiring or dismissing clergy, and (3) members of the congregation wishing to leave and form another church, synagogue, or mosque.
Disputes over congregation elections always have unique facts, but a central issue in such a dispute often is determination of who the members of the organization are that are permitted to cast ballots in an election. Although the statute mandates that the written plan set forth the qualifications for individuals to be eligible to vote in elections and to be elected to office in the organization, many plans are vague on this point. That can lead to uncertainty as to which of two or more rival church membership rosters of eligible voters is correct. The statute requires that, if a contest arises over the voting rights or the fair conduct of an election, those questions must be submitted to arbitration by a panel of three arbitrators, to be selected in accordance with the statute, who are members of neighboring churches of the same religious persuasion. There is no appeal from the decision of this three-arbitrator panel.
Controversies over hiring or dismissing members of the clergy are governed by the written plan of the organization, but as in the case of elections, some written plans lack precision on how this is to be done. Sometimes factions in the congregation are pitted against each other for or against the retention of a particular member of the clergy, and depending on the terms of the plan, this can lead to a decision by the board of trustees, or in some cases to a contested election of the congregation.
When members of a congregation decide to break off and form a new congregation, the act of leaving one congregation is relatively straightforward, but disputes can arise over ownership of real property or financial resources. Although the statute specifically allows members of a congregation to separate and form a new congregation, that does not mean that the splinter group will have any right to take real property or financial resources of the original organization with them.
Our firm can answer questions and provide legal guidance to churches, synagogues, mosques and other religious organizations related to their governance, legal rights and obligations. We also can assist those who wish to form a new religious organization, whether resulting from a division of an existing congregation or as a completely new organization. Please contact us at firstname.lastname@example.org or (410) 489-1996.
Due Diligence in the Purchase or Sale of a Maryland Business
The term “Due Diligence” refers to a process by which someone contemplating the purchase of a business investigates that business in connection with the anticipated transaction. The seller in the transaction also may engage in some amount of seller-side due diligence when a sale is contemplated, though the seller’s efforts are typically far more limited than the buyer’s efforts, since the seller already has detailed knowledge about the finances and operations of its own company. The potential buyer’s due diligence efforts often are coordinated by an attorney representing the buyer, but it is common and advisable for the buyer to form a team of accountants, managers, consultants and sometimes outside experts, to participate with the attorney in the due diligence process. The scope of due diligence is dependent on the particular company and situation, but the goal must be to gather enough information about the acquisition target to make informed decisions about the contemplated transaction.
Due diligence is intended to identify problems with an acquisition target and the risks associated with going through with a transaction, but should also involve evaluation of the positive attributes of a contemplated transaction. If the acquiring company is interested in purchasing another company in order to fit a particular need or enter a new business area, then one area of due diligence should be to focus on whether the contemplated addition meets this need, and to what degree the desired outcome will be achieved by the transaction.
Comprehensively discussing all aspects of due diligence would fill an entire book, and this article is not intended to cover all aspects of an adequate due diligence process. Questions of scope and depth of due diligence depend on the particular transaction, on the nature of the seller’s operations and financial condition, and on the contemplated transaction terms. A central consideration in determining the extent of due diligence is thinking through the allocation of risk between buyer and seller. Both sides of a transaction will weigh the amount of risk each is willing to take, and a number of things will go into that assessment, including the sale price and the nature and strength of representations and warranties that will be included in the transaction documents. For example, a buyer might insist on a lower purchase price – all things considered – if its opportunity to conduct thorough due diligence is limited, and may be willing to pay more for a company if it is able to thoroughly conduct extensive due diligence. Likewise, the negotiated sale price may depend, in part, on whether the buyer receives strong and extensive contractual representations and warranties in the purchase contract. The converse also is true, from the seller’s perspective.
The nature of due diligence in a particular transaction is also strongly influenced by whether the deal is structured to be an asset sale, stock sale, merger, or sale of LLC member interests. The scope also depends upon whether the transaction is structured to have all due diligence completed prior to the parties signing the transaction documents with a simultaneous closing of the transaction, or to have the transaction documents signed first, followed by continued due diligence prior to closing to verify the accuracy of representations and the satisfaction of conditions for closing.
In the course of conducting due diligence, the buyer side of the transaction typically will issue an often-lengthy list of documents and data that it wishes to review, and also will seek access to the seller’s management, accountants, and perhaps key third parties. The produced documents and data are reviewed by the buyer’s due diligence team, which under almost all circumstance should contain buyer representatives in the areas of legal, accounting, and business operations. Within the legal area, often a senior attorney in a law firm representing the buyer will organize and coordinate the due diligence efforts, with less-senior attorneys and/or paralegals in the law firm doing much of the legal work. A similar allocation of workload also is often used with outside accounting firms representing the buyer for the accounting aspects of the due diligence review.
Purchasing or selling a business is not a simple process, even when the buyer and seller are relatively small companies. Acquiring a $1 million company is far less complicated than acquiring a $100 million company, of course, but I am sometimes surprised when the contemplated buyer or seller of a small- or mid-size company discusses a potential acquisition with me and has an expectation that its attorney can quickly read through a few documents and thereby adequately cover all the bases. In fact, even the simplest acquisitions of small companies require a significant amount of legal and accounting work. Having said this, there can be wide variations in cost depending on many factors, including the size and complexity of the acquisition target, the transaction terms, and selection of the right law firm to thoroughly perform all legal work necessary in an acquisition while still keeping costs manageable.
If you are contemplating the purchase or sale of a Maryland business, whether through asset sale, stock sale, or transfer of limited liability company member interests, our firm has the background and skills necessary to guide you through this process. Please contact Lewicky, O’Connor, Hunt & Meiser at (410) 489-1996 or email@example.com.
Property Line Disputes, Adverse Possession, and Prescriptive Easements
Adjoining property owners sometimes dispute the location of their property line or property boundary – or discover that a neighboring structure extends across their property line. Neighbors also can find themselves in a dispute over easements, rights-of-way, or claims of trespass or nuisance. These controversies can take many forms, but in the suburban areas that are prevalent in central Maryland they often arise because of the misplacement of a fence, wall, trees, or shrubbery — or occasionally even a building being constructed on the wrong side of a property line. Neighbors also sometimes assert claims of nuisance or trespass when water run-off, or other water sources, are artificially diverted from one property onto another, or when noxious odors or noise from one property disturbs neighboring properties.
Our firm regularly assists clients in property line disputes. We help property owners obtain a survey to establish the exact location of a property line, and when necessary we also bring legal action to establish clear ownership of property, or to eject someone else from a client’s property. We also represent clients in nuisance and trespass disputes.
One interesting aspect of property line disputes – well-known to lawyers but often unknown to property owners – is that a person can obtain legal title to real property simply by occupying that property for long enough – if the circumstances are right. Although relatively rare, this legal concept – called “adverse possession” – can have important ramifications if a fence, wall or building has been in place long enough to bring the doctrine into play.
There are a number of elements that need to be present for adverse possession to apply, and this article is not a comprehensive discussion of the law in this area. In brief summary, to acquire ownership of property through adverse possession the person claiming ownership must be in actual possession of the parcel of property, and this possession has to be “notorious,” “exclusive,” and “hostile” to the record owner on the title of the property. All of these are legal terms of art that have been defined through past judicial decisions. The possession of the property must be under a claim of title or ownership, and in Maryland it must be continuous for at least twenty years. (Other states have different time periods for adverse possession). The party claiming adverse possession must prove all of these elements to a court in order to gain tile of property by adverse possession.
In addition to claiming outright ownership of property through adverse possession, it is also possible to be granted what is called a “prescriptive easement,” if the claimant has exercised transit rights across a property for a sufficiently long period. The elements for establishing a prescriptive easement are very similar to the elements for adverse possession, except the concept of the use being “exclusive” is different when it comes to easements. Easements may exist not only for the physical transit across land by people, animals or vehicles, but also for structures such as wires or pipes, above or below ground.
If you find yourself in a dispute with another property owner about the location of your property line, or regarding claims of easement, trespass or nuisance, I would welcome the opportunity to answer your questions and provide advice in these areas. Please contact me at firstname.lastname@example.org or (410) 489-1996.
Mechanic’s Liens Help Contractors and Sub-Contractors Get Paid
In Maryland, a mechanic’s lien statute gives contractors and subcontractors a powerful tool to obtain payment for materials and services. A mechanic’s lien is a means by which a person or company that provides labor or materials on a construction project can place a lien against improved real property, for the value of the unpaid labor or materials – but only if the requirements of the mechanic’s lien statute are strictly adhered to.
Maryland’s mechanic’s lien statute is complicated, and there are some important aspects to this legal remedy that contractors and subcontractors should always keep in mind: Any person or company that furnishes work or materials to a construction project under a contract potentially may establish a mechanic’s lien. Contractors, subcontractors and suppliers all can claim such a lien, regardless of whether they have a contract directly with the owner of the property, as long as the particular labor was performed for or about the subject building, and as long as the particular materials were for the subject building project.
A mechanic’s lien is only available for certain types of construction projects, however. Newly constructed buildings are subject to mechanic’s liens, though what exactly constitutes a “building” is sometimes an issue, because not every type of structure on land constitutes a building for these purposes. For construction projects that involve repair or renovation of existing buildings, a mechanic’s lien is only available if the project involves the repair, re-building or improvement of the building to the extent of 15% of its value. Condominium units and the common elements of condominiums are also subject to mechanic’s liens, but special notice requirements apply to condominiums.
A very important aspect of Maryland mechanic’s liens is a requirement to give written notice of an intention to seek a lien, in some circumstances, and strict time limitations apply to giving notice and bringing suit.
Anyone seeking a mechanic’s lien who does not have a direct contractual relationship with the property owner – for example, subcontractors, and in many cases material suppliers – must comply with notice provisions set forth in the mechanic’s lien statute. When this type of notice is required, it must be mailed by the lien claimant to the property owner within 120 days after the claimant performed the work or furnished the materials. There are a lot of nuances regarding when this 120-day period begins to run, and many court cases addressing this issue.
Separate and apart from giving any required notice of an intention to claim a mechanic’s lien, the actual petition seeking to establish the mechanic’s lien must be filed in the appropriate Circuit Court no later than 180 days after the work has been finished or the materials furnished. The correct parties must be named as defendants in the suit, and there are detailed requirements for what must be included in the petition that is filed with the court.
After a petition is filed with the court, there is a two-step process by which the court first reviews the papers that have been filed, and holds an initial show-cause process and proceeding to determine if there is sufficient cause to establish an interim mechanic’s lien. The court typically will set a bond for entry of an interim lien. If an interim lien is established, then in a second stage the court will hold a trial on the merits of whether the mechanic’s lien should continue thereafter, until satisfied. At any time after a petition to establish a mechanics lien is filed, the property owner can file a petition to have the property released from the lien upon the filing of a bond sufficient to protect the lien claimant. Once a lien is established, the lien claimant then has one year to file a petition to enforce the lien.
Mechanic’s liens can be a very powerful means for contractors, subcontractors and suppliers to ensure payment, but they are complicated. The Maryland mechanic’s lien statute differs from those of other states, and very strict time limitations apply to Maryland mechanic’s lien claims.
If you are a contractor, subcontractor or supplier seeking payment for labor or materials provided in Maryland, or if you are a Maryland property owner that has received notice that someone intends to assert a mechanic’s lien against your property, or has already petitioned the court for a mechanic’s lien, our firm can answer your questions and provide legal guidance. We have the depth of experience to provide detailed guidance related to Maryland mechanic’s liens, the Maryland trust fund statute, the Maryland Prompt Payment Act, and the Maryland Little Miller Act. Please contact us at email@example.com or (410) 489-1996.
Starting a Business in Maryland
If you are thinking about starting a new business in Maryland…Congratulations! There are many considerations to take into account when starting up a new business, and in this article, I am going to touch on a few of them.
With startup capital limited, you will need to determine what you reasonably can do on your own, and what tasks require the assistance of an attorney. Early on, you will need to determine what type of business entity makes the most sense for your enterprise – whether it will be a limited liability company, a traditional C-corporation, an S-corporation, a limited partnership, or something else. This decision can have tax implications, as well as other practical implications.
There will also be legal questions surrounding the choice of a name for your business – including compliance with trademark law. You don’t want to select a business name and invest a lot of money in branding, only to find out that another company owns the trademark rights to your chosen name, and can legally exclude you from using your desired business name.
Depending on the type of business structure you decide to use, in most cases there will be a formational legal document — such as articles of incorporation for a corporation, or articles of organization for a limited liability company. Typically, you also will wish to go beyond that organizational document to have a governing document for the entity – such as bylaws for a corporation, an operating agreement for a limited liability company, or a partnership agreement for a partnership. Particular types of business activities may need specific provisions to be included in the governing documents. For example, a partnership that is formed specifically to own real property may have different provisions than a partnership formed to operate a different type of business.
It’s also almost always a good idea to have an accountant, bookkeeper, and perhaps other financial advisors, lined up and available to work with you from the early stages of your business entity.
If your entity is going to hire employees, or retain the services of independent contractors, it’s very important that you follow all applicable requirements under state and federal employment laws and understand the circumstances under which independent contractors may be used.
This just scratches the surface of topics to consider in standing up a new business, and I encourage you to consult with an attorney who is knowledgeable about Maryland business law. Our firm has the depth of experience to provide this type of help, and we would welcome the opportunity to assist you. Please contact me with any questions, at firstname.lastname@example.org or (410) 489-1996.
Asserting Fraud Claims in Maryland
It’s common for clients to ask me whether they are a victim of fraud – either in a business transaction or in personal or family matters. The law of fraud in Maryland is complicated, with unique rules for pleading and proving a claim, and complex issues related to the measurement of damages. This article does not fully cover all of these issues, but I will discuss here some key points relevant to fraud claims.
Fraud is also sometimes called “intentional misrepresentation” or “deceit.” In this article I am only addressing civil lawsuits that assert claims of fraud, not criminal prosecutions for fraud. There are crimes arising from fraudulent conduct, but that is a separate (and also complicated) area of the law.
A civil lawsuit claiming fraud offers a remedy to someone who has been intentionally deceived by another’s representations about the existence of — or absence of — material facts, when that person relies on the false representations, was justified in doing so, and is actually damaged by doing so. It only constitutes fraud if:
- the person making the representation knew that the representation was false, or
- made the representation with reckless disregard for the truth.
A critical element of a lawsuit for fraud in Maryland is to prove that the defendant intended to deceive the plaintiff. This is referred to the “scienter” requirement for fraud.
The false representation involved in a fraud claim can be:
- an affirmative misrepresentation of fact,
- the concealment of fact,
- a partially misleading disclosure of a fact, or
- even a nondisclosure of fact, if there was an affirmative duty on the person to disclose that fact.
Fraud generally does not encompass statements of mere opinion, or promises that amount only to predictions about future conduct or events. A statement of opinion or prediction might provide the basis for a fraud claim if the defendant possessed special information or qualifications that enhanced the credibility of their statement, however.
When bringing a lawsuit for fraud in Maryland, a plaintiff is required to state in the complaint specific facts supporting each allegation of fraud. This is known as the requirement to “plead fraud with particularity,” and is a higher standard for pleading than in other types of lawsuits.
Another thing that distinguishes fraud from other types of lawsuits is that the plaintiff in a fraud lawsuit must prove each of the elements of fraud by clear and convincing evidence. This is a higher standard of proof than the preponderance-of-the-evidence standard that applies in most civil lawsuits.
In cases where a person discovers that he has been induced into a contract by fraud, that person can choose between two available remedies – to rescind the contract, and have the parties placed back in their positions held before the contract was signed, or to ratify the contract and seek monetary damages for the fraud. To seek rescission, though, the plaintiff is required to promptly ask for recission upon discovering the fraud, and then tender back the benefits received under the contract.
There are several complicated issues relating to the measurement of damages in a fraud case, with courts having flexibility in awarding damages based on the circumstances. The assessment of damages in a fraud case may include measuring how much was lost out-of-pocket due to the fraud, or sometimes by a benefit-of-the-bargain measurement. Damages for fraud can even include compensation for emotional distress, but only if the distress is reflected in some physical manifestation.
Although a claim of fraud may sometimes be based on improper concealment of a fact, when it comes to business relationships courts have struggled to determine what level of concealment constitutes fraud, and under what circumstances. Typically, businesses engaged in an “arm’s length” commercial transaction are not in the type of confidential relationship that can support a claim for fraud based on concealment. There could be exceptions to this general observation, however, if the parties on either side of a transaction also have a separate confidential relationship distinct from their business roles.
Beyond classic fraud, so-called “constructive” fraud can arise when a defendant owes an equitable duty to a plaintiff because they are in a confidential relationship – such as attorney and client, or guardian and ward. As with classic fraud, clear and convincing proof is required to prove constructive fraud.
Even when an intention to deceive is not present, Maryland law also provides a cause of action for negligent misrepresentation, when someone makes a material misrepresentation in a manner that is sufficiently careless, and that misrepresentation results in monetary damages, but the conduct doesn’t rise to the level of being deliberately fraudulent.
Whether a claim for negligent misrepresentation is available can sometimes depend on whether there is a contract between the parties, or at least the risk of economic loss. The measurement of damages also can vary depending on whether the risk of failure to exercise due care gave rise to a threat of serious personal injury.
The broad theme here is that successfully proving fraud can complicated, and the brief discussion in this article does not fully cover all aspects of the subject. If you believe you may have been the victim of fraud, or if you or your company is being accused of committing fraud, I would welcome the opportunity to discuss these matters with you. Please contact me at email@example.com or (410) 489-1996.
Managers of LLCs Must Act in the Best Interests of the Company
A limited liability company (or LLC) can be a great way for small- and mid-size companies to structure their business. It provides asset-protection benefits like those of a corporation, but also allows the owners of the company to elect to structure the LLC as a pass-through entity for taxation purposes. Unfortunately, problems can arise when the manager of a limited liability company puts his or her own interests above the interests of the company – or acts in a way inconsistent with obligations owed to other owners of the company.
The Maryland Limited Liability Company Act doesn’t expressly describe the fiduciary duties that are owed by managers to the limited liability company that they manage – or the duties owed by each owner of an LLC to co-owners. Over the years, Maryland appellate court decisions have instead established a body of law on the fiduciary duties owed by members and managers to their companies and to fellow owners. Beyond abiding by these common law fiduciary duties, managers and members of a Maryland limited liability company also must adhere to the terms of the company’s Operating Agreement.
Maryland law recognizes different types of fiduciary duties. For example, there are fiduciary duties between trustees and beneficiaries of a trust, between corporate directors and corporations, between lawyers and clients, between guardians and wards, between agents and principals, and among partners in a partnership or members in a limited liability company. When it comes to business entities such as corporations, partnerships and LLCs, the basic obligations revolve around ensuring that corporate officers, managers of limited liability companies, and partners, act only in ways that advance the interests of the company, and not the individual interests of the corporate officer, LLC manager, or partner. Officers and managers can’t take actions that conflict with, or are adverse to, the best interests of their company.
For many years, there was uncertainty in Maryland law on whether a distinct legal cause of action was available to sue for a breach of fiduciary duty. In 2020, however, the Maryland Court of Appeals clarified the law in this area and expressly held that that a member or a manager of a Maryland LLC can be sued by other members of the company for breach of fiduciary duty, as an independent and free-standing cause of action. To sue for an alleged breach of fiduciary duty in Maryland, the complaining party must be able to demonstrate:
- that there is a fiduciary relationship between the person bringing the claim and the defendant;
- that this fiduciary duty has been breached; and
- that the complaining party was harmed by this breach.
Not every breach of a fiduciary duty is legally actionable, and not every breach of a fiduciary duty gives someone a right to sue for monetary damages. Some breaches of fiduciary duties can only be remedied by using a court’s equitable powers, such as through the issuance of an injunction by the court ordering the offending party to do something, or to cease doing something.
It’s common for clients to come to me describing situations that call into question whether the manager of a limited liability company may be breaching the fiduciary duties that he or she owes to the other owners of the company. From the company’s perspective, it’s important to ensure that decisions by company leaders are directed toward the interests of the company, and not solely to protecting the interests of individual members or officers. From the perspective of members in limited liability companies, I often hear from so-called “minority” members of LLCs – that is, members that do not control the company because they own less than half the ownership interests in the company – that the people controlling the company are acting for their own benefit, and not in the best interests of the company as a whole. The same complaint can arise in business partnerships. If you are facing a situation like this, I encourage you to consult with an attorney who is knowledgeable about the law in this area. There may be time limitations on asserting any claim, and it can be critical in some situations that injunctive relief be sought without delay.
Our firm has the depth of experience to provide detailed guidance in this area. If you have questions or concerns about the fiduciary duties owed by manages or officers of a Maryland limited liability company, I would welcome the opportunity to answer your questions and provide legal advice on these matters. Please contact me at firstname.lastname@example.org or (410) 489-1996.