Association Collections and Bankruptcy - Info for Board Members

One of the biggest issues facing associations is the ability to collect from delinquent owners who have filed bankruptcy.   It is critical an association has an attorney experienced in creditor bankruptcy law in order to avoid waiving the right to collect those assessments from the delinquent owners, which often is thousands of dollars.  Below is some general guidance for associations:

• Whenever the association receives notice an owner has filed bankruptcy, immediately send the notice to the association attorney, who should file a claim with the bankruptcy court on behalf of the association.  Make sure the claim is filed.  For some reason not all attorneys file these claims on behalf of associations.

• The bankruptcy court issues an "automatic stay," meaning the association cannot contact the owner to collect a debt.  Leave the collections to the association attorney.

• Owners have a duty to pay assessments as they come due after filing.  If the owner does not pay, notify the association attorney, who can file a motion to lift the automatic stay.

• Bankruptcy does not mean the past due assessments cannot be collected. It simply means the association cannot go after the owner personally by garnishing wages or other collection measures.  The association can still foreclose on the property "in rem," meaning against the property only, not "in personam," which is against the person.

• Delinquent owners can strip the association lien in a Chapter 13 bankruptcy if the first mortgage exceeds the value of the property.  It is important for the association attorney to monitor the case and properly object to lien stripping.  There has to be a credible valuation of the property with a thorough survey.

• If the bankruptcy case is dismissed, the automatic stay is lifted, usually 15 days after the order is entered, and the association can pursue it assessments, interest, late fees, attorneys' fees and costs as normal.

Homeowner Beware -- the Changing Management Company

With the downturn of the housing market in the early 2000s many associations became more budget conscious and looked for community association management firms (CAMs) who would provide the same services for less money.  Over the years many associations have continued to change management companies as they try to find the right fit.  This has led to a bigger problem as a waive of homeowners become past due in their assessments as a result of sending payments to the former CAM firm.  Unfortunately, the associations are not responsible for homeowners sending payments to the wrong CAM firm and the responsibility is squarely on the homeowner.

The issue is the notice of a change of CAM firms and the change of address to send payments is sent to homeowners by the new CAM firm.  Many of us have become frustrated with the amount of junk mail we receive and tend to toss mail from companies we do not do business with and are unfamiliar to us.  A good many of these notices are tossed without the owner opening the letter.

My tip for staying out of collections with the association attorney is to make sure you open any letter you receive from any management firm.  Quite a few use "association management" or "community management" in their name, but quite a few do not.  If the homeowner does not send payment to the correct address it ends up being an expensive lesson because the homeowner is liable for all attorneys' fees, costs, interest and late fees.  Any payments submitted for less than the full amount are applied to interest and late fees first, then attorneys' fees and costs, with any remaining funds applied to assessments last.  If homeowner does not pay in full the homeowner will always be past due and subject to lien and/or foreclosure of your home.

Another tip -- do not try to circumvent the process by paying the association directly once you receive a letter from the association attorney.  This will only increase the attorneys' fees you owe.  The attorney will spend time communicating with the association about the payment and the homeowner will again be responsible for those fees.

Transparency in Community Associations

It's been quite the busy year so far, so I apologize my blog posts have been few and far between.  Trying to make a difference in Florida community associations is a major task, but comes with some rewards. Our firm was again a winner of the Florida Community Association Journal's Readers' Choice Awards.

The topic for today's blog is transparency.  Transparency is a good thing.  Associations should recognize if they want their members to pay their assessments on time, keep their property maintained and volunteer to help the community, then transparency is the place to start.  The Florida Legislature has started pushing for this with the recent legislative updates to the Condominium Act, Chapter 718, Florida Statutes, by requiring condominium associations with 150 units or more to have a website and post a good number of the official records on the website.  This statute has not been enacted in Chapter 720 governing homeowner associations, but maybe we will see this in the future.

Some of the biggest complaints I hear from homeowners are about transparency --  the HOA will not provide them copies of the records, the records are not easily obtained, the HOA is hiding something.  Now I will be the first to admit this is a red flag for me and I suspect something fishy is going on with the money if the HOA is fighting too hard to keep the members from seeing the financials.  I also recognize some board members do not understand their duties, do not know what records to keep or how to keep them, which records can be disclosed and not disclosed, or how to set up a website to store the documents so members can see them without going through the certified letter, return receipt process.  Those are the HOAs I am eager to represent so I can train their board members on the right protocol.  

The homeowners need to understand the HOA has no duty to respond to a request to send copies to them.  There is a duty to provide access to the official records and allow the members to make copies at the inspection.  

Often this request makes even honest board members suspicious.  It's only natural to get defensive when a request is received and perceived as an attempt to catch you doing something wrong.  And board members make mistakes while homeowners tend to accuse them of intentional wrong-doing.  If everyone would just be respectful of each other and act in a civil manner a good number of these disputes would not even be disputes.

My advice is:

• HOAs put your official records on a website if possible or set up one of the free software applications like Google Docs or Dropbox to share documents with members.  Not only is it easier, but it takes out the possibility of confrontations if one side just can't be civil and respectful.

• Homeowners use the certified letter, return receipt in order to obtain access to records so that you document your request and everyone knows the deadline (10 business days from the date the receipt is signed).  Also, make your request clear and if possible exact.  Asking for "all official records" is your legal right, but it is creates some difficulties because the HOA may have boxes and boxes of records which you will have to go through and may be required to pay for a management person to assist in going through with you.  In addition, it comes across as a fishing expedition and like all fishing trips, you may have to keep casting lots of times before you get the fish you want.  If you are looking for a specific financial transaction, narrow down the description of your request.

• HOAs remember you cannot ask the homeowner why they want the document.

• Everyone keep in mind the HOA does not have to produce a document it does not have.  This means no creating special reports if the reports are not used in the normal course of running the HOA.  If there is a document the HOA should have and can reasonably obtain it without any undue hardship, then the HOA should get it after the first request so it is available should a second request be made for that document.

The Marketable Record Title Act ("MRTA")

There's been lots of discussions regarding the Marketable Record Title Act ("MRTA") lately with some of the most back and forth discussions coming from the Real Property, Probate and Trust Law ("RPPTL") section of the Florida Bar.  This piece of legislation is very complicated and it is nothing short of amazing how different facts can produce different legal opinions. 

Recently Chapter 720 of the Florida Statutes, also known as the Homeowners' Association Act ("the Act"), was revised to provide for a more expeditious process to file a Notice of Preservation.  The Notice of Preservation is done before the covenants expire against any lots, which is usually the 30th anniversary of the date the covenants were recorded.  Note the word "usually."  I'll get back to that later.

The Act also contains a section for revitalization of expired covenants, which is a whole different process from preservation.  Once covenants have expired against any lot a homeowners' association is left with only revitalization to try and breathe new life into the old covenants.

The hard part for most non-lawyers to understand is covenants can expire against just one lot, but not all the lots.  It's not as simple as saying the covenants are 30 years old and because no Notice of Preservation was filed, they cease to exist.  Covenants can be preserved in a number of ways, including a reference on a recorded plat by the Official Records Book and Page.  Covenants recorded on a plat in such a way do not expire which is why I used the word "usually" with caution.

Covenants can also be preserved in the chain of title to a lot by the recording of a deed which references the covenants by the Official Records Book and Page within the last 30 years.  This is why a title search is necessary before an opinion can be rendered whether or not the covenants expired against that particular lot.  

Once covenants have expired against a lot the HOA cannot enforce those covenants against that lot or usually cannot collect assessments from that owner. There's that pesky word "usually" again.  The exception to this rule regarding the collection of assessments would be very fact specific and based on a theory of unjust enrichment.  An example would be when an association owns the roads and the lot owner uses those roads to get to and from their home.  It would be unfair for the owner to use the roads but not be required to contribute to the repair and maintenance of those roads, which is called unjust enrichment.  The court would have to make such a determination based on the facts specific to that lot.