Published in the ECHO Journal, August 2009
In the past year, I have had the “opportunity” to present collection information at Small Claims Court on behalf of two associations. In each of these cases, I had been involved in the billing and collection of monthly assessments including sending late notices, statements of account, etc. While many others, especially managers, have much more experience in small claims than I have, perhaps there is something in my experience that will be helpful as you pursue assessment collection.
Situation 1
Owner purchases unit and immediately falls one month behind. In addition, the owner pays less than the monthly assessment when payments are received. Late notices and statement of account are sent by the association. No response is received from the owner. A second month is missed and when the association assessment changes at the first of the year, no adjustment is made to the payment when the owner makes it. Still no response from the owner. The association is more than patient. This goes on for over a year. The Association files a small claims case. The owner is livid. He makes calls berating the manager, the board president and me, the accountant.
Both parties arrive at the small claims hearing. The association presents its accounting and the owner provides a response. The owner tells the judge that he doesn’t read mail that he receives from the association. This owner is highly educated and holds a professional license granted by the State of California. So the judge chastises the owner for not being responsible and then disallows the collection costs incurred by the association (manager time and accountant time) involved in collecting the debt. The judge makes this finding contrary to Civil Code 1367.1(d) which allows “reasonable” costs of collection. In making this finding, the judge requires that all responsible members of the association pay for the collection costs of those who are not responsible. As one of our manager members noted, going to Small Claims is a crapshoot—you have no idea how the judge will rule. The owner was dancing in the court house on his way out. He beat the association out of its collection costs. On the plus side, perhaps he has learned his lesson. He now pays the correct assessment on the first of every month and has been current for over a year.
Situation 2
Owner stops paying assessment after being consistently on time during the three years that he owned the property. A pre-lien letter is filed after owner is delinquent for two months. It is determined that the owner purchased the unit with no money down in 2004 and with the subsequent decline in real estate values, there is immediate concern in this 20-unit association that 5 percent of its income is no longer being received. After 4 months, some puzzling correspondence was received from the lender. It appeared that the owner had filed for bankruptcy, but the association had not been notified by the bankruptcy court. Calls and correspondence to the bankruptcy attorney and trustees went unanswered. I was trying to determine when the creditors’ meeting was. This meeting is where the creditors (such as the HOA) meet with the owner, attorney and trustee to discuss the owner’s financial situation, who is owed money and how the bankruptcy will affect debts owed. Though I had contacted the attorney and trustee before the creditor’s meeting, they did not respond and so the association was not represented at the meeting. After numerous calls, it was determined that a “clerical error” that no one would take responsibility for was the cause of the lack of notification. A P.O. Box number was misstated. In order to get any information about the bankruptcy, I had to go down to the US Bankruptcy Court in Santa Barbara and research the status myself.
My understanding of bankruptcy is that for an association with unsecured assessments, “pre-petition” assessments (those assessed prior to bankruptcy) are wiped out but “post-petition” assessments (those assessed after the bankruptcy filing) are still valid and owed by the owner while he owns the property. These assessments are the debt of the individual former owner if the property is transferred without the payment of past assessments.
The lender had removed the condominium from the bankruptcy proceeding. The lender proceeded with a foreclosure, but that did not occur until 13 months after the bankruptcy started. Lenders have been reluctant to foreclose HOA units because they become responsible for the assessments once foreclosure is complete. So in this case, the association lost the four months’ assessments prior to the bankruptcy filing but there remained the 13 months’ assessments prior to foreclosure.
A small claims case was filed after the foreclosure against the former owner. The bankruptcy attorney called me and stated that, since his client was bankrupt, the judge would dismiss the case and that his client would owe no money. It would be a waste of the association’s time to lose the case. I pointed out the difference between pre- and post-petition assessments to him to no avail.
The judge in this case was a “judge pro-tem”. A judge pro-tem is one of the area attorneys who provides this service to the court. This attorney has done so for 20 years. He listened to the association’s case and then asked the former owner for his position. The former owner stated that since he filed for bankruptcy and the bank had foreclosed, he owed nothing. The judge received documentation showing the bankruptcy date, the write-off of pre-petition assessments and date that the property was transferred back to the bank, leaving the 13-month post-petition period of ownership. The association won its case and now has a judgment. The fun part will be collecting the amount owed from the former owner.
While I was at the last hearing, there was another case involving an association collecting unpaid assessments. (I wasn’t a party to this hearing). The owner complained that the association had imposed a special assessment and that she didn’t see what the association had done with the special assessments so she wasn’t going to pay it (along with several months of regular assessments). The judge was not swayed and told her she owed the assessments.
More and more associations are incurring losses as a result of uncollected assessments. As noted earlier, more homes and units were purchased with no money down or with very limited funds. Many of these owners have no ability to pay assessments or simply have no desire to pay assessments, resulting in increased legal/collection and management costs and a redistribution of costs to the remaining owners. There is currently a 90-day moratorium on foreclosures by lenders in California from June 1 until September. This will delay the assumption of properties by banks and lenders resulting in more losses for associations because this will most likely add three more months of delinquent payments to the totals already owed by owners nearing foreclosure.
Michael Gartzke, an ECHO member, is a Certified Public Accountant with a large homeowner association practice in the Santa Barbara area. He is also the coordinator of the South Bay Homeowners Group with a membership of about 120 associations. He is a frequent contributor to the ECHO Journal.