Baltimore Mayor Catherine Pugh self-published “Healthy Holly” children’s books and sold 100,000 copies to the University of Maryland Medical System, on whose board she sat at the time, making a “Healthy Haul” of $500,000. Pugh said that, since she resigned from the medical system board on Monday, she has returned the most recent $100,000 she received from UMMS, The Baltimore Sun reported Thursday. Earlier, an aide to Pugh stated the mayor had netted $100,000 from the deal after expenses. All this remains to be seen or, rather, audited. Pugh may discover that her repayment of $100,000 is only the beginning.
We have read a lot about whether a disclosure of this relationship was required under the city’s ethics rules, but that is, while not completely irrelevant, a smokescreen. Nor does it matter, much, that Pugh has resigned from the UMMS board of directors. None of this ends, or should end, the inquiry or stop the UMMS from acting to the full extent of its authority. Nor is this exercise in any way mooted by the proposals before the General Assembly to prevent self-interested director transactions at the UMMS.
These transactions already are controlled by law and by the UMMS’s own Corporate Compliance Policy, found on the UMMS website. The purpose of the policy, written in 2013 and updated in 2017, “is to preserve the public trust,” as well as “to avoid possible excess benefit transactions” and “to promote adherence with fiduciary duties.” The policy applies to all board members and to all employees of UMMS. In the section titled “2. Ascertaining Conflict of Interest,” subpart “A. Governing Board,” it is stated: “After disclosing the financial interest and all material facts … the person disclosing the Financial Interest shall leave the governing board while the determination of a conflict of interest is discussed and voted upon. The remaining board … members shall decide how to manage the conflict. … The Office of General Counsel is responsible for collecting and maintaining disclosures from all of the Governing Board(s) associated with” UMMS.
The policy was, on the basis of the evidence publicly available, violated by Pugh and by UMMS CEO Robert Chrencik. House Speaker Michael E. Busch sits on the UMMS board and stated that individual deals with board members, including Pugh’s, were not disclosed to board members. If true, the policy was violated, wholesale, because Chrencik stated that there were more deals with board members than just Pugh’s. He was quoted by The Baltimore Sun as stating: “These are business relationships between a trustee and an organization.” The failure to inform the board of directors of Pugh’s proposed contract was a violation of the policy and, through that, a violation of his fiduciary duty to UMMS.
Each board member who entered into a self-interested director transaction had an independent duty under the policy to report the transaction to the board and to step aside while it was considered. That is what the policy requires. If they did not fulfill their plain and easily understood obligation to UMMS, they, too, violated their fiduciary duty.
To continue: Because the board was deprived by the self-interested director of its right to consider the advisability of the contract so as “to avoid the possible excess benefit transactions,” the contract is voidable at the option of UMMS because it arose from the violation of a fiduciary duty. It may well be void ab initio because it was never approved pursuant to the procedures established by UMMS for approval of the contract.
Nor is the policy the only available avenue for recovery. Section 2-419 of the Corporations and Associations Article of the Maryland Code regulates interested director transactions, and it applies to nonstock corporations pursuant to Section 5-201 of the Corporations and Associations Article. In the absence of disclosure and authorization, approval or ratification of the transaction by a majority of the disinterested members of a board, “the person asserting the validity of the contract or transaction bears the burden of proving that the contract or transaction was fair and reasonable to the corporation at the time it was authorized, approved, or ratified.”
Put Mayor Pugh to her proof. Put all the directors who cut deals with UMMS to their proof.
The failure of the current board members to act immediately subjects them to a claim of a violation of their fiduciary duty. They are obliged to act now and not wait for the General Assembly to pass a new law. All the pieces are in place to hold everyone to task and to do so right now.
The attorney general should initiate an investigation of this charity. Brian Frosh states on his website that his office “is committed to helping Maryland’s nonprofit institutions locate the resources they need to build strong, well-managed, and responsible organizations, as well as ensuring that the Marylanders who donate billions of dollars each year to charities have the information they need to give wisely.” Get the information, Mr. Frosh.
This conduct on the part of this institution and the mayor of Baltimore is unacceptable.
Editorial Advisory Board members Ericka King and William Michaels did not take part in this opinion.
EDITORIAL ADVISORY BOARD MEMBERS
James B. Astrachan, Chair
James K. Archibald
John Bainbridge Jr.
Martha Ertman (on sabbatical)
Arthur F. Fergenson
Angela W. Russell
Debra G. Schubert
The Daily Record Editorial Advisory Board is composed of members of the legal profession who serve voluntarily and are independent of The Daily Record. Through their ongoing exchange of views, members of the board attempt to develop consensus on issues of importance to the bench, bar and public. When their minds meet, unsigned opinions will result. When they differ, or if a conflict exists, majority views and the names of members who do not participate will appear. Members of the community are invited to contribute letters to the editor and/or columns about opinions expressed by the Editorial Advisory Board.