Condominiums (and to a certain extent HOAs) are “creatures of statute.” Every year, in almost every state, new laws and new court cases can change the dynamic of how a community association can collect delinquent assessments. This article will cover some examples of the more significant cases to impact condo debt collection coast to coast.
This article is not intended to be legal advice–please consult your attorney for questions about condo and HOA debt collection laws specific to your state.
Lesson to be learned: Read the governing documents and the law very carefully before you refuse to pay assessments.
This case out of California helped define what we now call the “duty to pay” for assessments.
Bear Creek Master Association had a tract of land slated to be built into 8 condos, managed by the Parlan L. Edwards and Gloria Renico Edwards Family Trust. These condos were unbuilt, and the Trust refused to pay assessments on the units due to the fact they had not been built yet, despite the Trust’s agent exercising their voting rights by proxy, having parking stickers throughout the community, and various other demonstrations of ownership.
The Trust’s primary contention was that California law specified that assessments must be paid on a condominium, but these units, hot having been built yet, did not qualify. The association contested that the CC&Rs stated that once the first unit in the subdivision was sold, the entire subdivision was subject to assessments. The court agreed.
According to California law, “A condominium is an estate in real property consisting of an undivided interest in common in a portion of a parcel of real property together with a separate interest in space, the boundaries of which are described on a recorded final map, parcel map, condominium plan or other document in sufficient detail to locate all boundaries thereof.” Essentially, as long as a space has been defined as a condominium with maps and plans, it IS a condominium. The court ruled that the assessments were valid and the Trust had a duty to pay them.
Justice served, but at what cost to the association? While in extreme cases such as this one, it may be necessary to take extreme legal actions, these actions come at great cost to the community in terms of time, personnel resources, and legal fees, not to mention the attempt to collect the original amount owed.
Lesson to be learned in this case: The law won’t always be on your side.
This case comes from my home state of Florida, and although the poor decision made has since been corrected, it had a great impact on condo debt collection that lessons can be learned from today.
In 2008, Spiaggia Ocean Condominium Association foreclosed on 5 delinquent condominium units and took title to the units. Investment company Aventura Management LLC purchased these apartments from the bank, and the association expected that they pay what was owed in past due assessments from the original owners based on the doctrine of joint and several liability.
The investors took the community association to court, arguing that though they agreed with the doctrine, they asked that the court consider the association an owner as they had taken title prior to foreclosure completion. Therefore, the association should be considered one of the parties liable for the past due assessments. Aventura also argued that their obligation to pay assessments in joint and several liability scenarios was from when the association took titles, not from the amount owed before the foreclosures. The court sided with the association and ordered the investors to pay what was owed.
Aventura took it to the appeals court, where something completely unheard of happened: the court handed down the decision that when an association forecloses on a unit, they essentially are the unit owners and take on the responsibilities of a new buyer–including paying past due assessments on the unit.
This decision changed the game for the condo debt collection process in Florida. It undermined the entire point of the joint and several liability doctrine. Associations foreclose in an effort to defend security interests. With this ruling, if a purchaser came along, they (the new purchaser) would be NOT jointly and severally liable for the past due assessments as that obligation would fall upon the association as they (the association) were legally considered the owners.
The ruling was absurd, and as a result, associations did not want to foreclose because they would lose the opportunity to recover all their money in a sale.
In the judgment, the court said, “Aventura Management could only be responsible for unpaid assessments dating back to when Spiaggia took title at its own foreclosure sale; it cannot be held liable for the unpaid assessments of the original owner. The trial court therefore erred in holding Aventura Management jointly and severally liable with the prior two owners.”
Upon appeal, the court reiterated the district court’s decision citing another similar case, Park West Professional Center Condominium Ass’n v. Londono, 130 So.3d 711, 712 (Fla. 3d DCA 2013)
If you took a civics class in high school (or watched the news in the last few months), you may be familiar with the legal doctrine of “Stare Decisis,” which is a legal doctrine of determining points in litigation according to precedent. Since it is a doctrine and not a rule, precedent can be changed. Legal rights recognized and reiterated in subsequent cases are precedents but can be changed by taking away that right.
The Florida legislature, realizing that this would place an undue burden on associations, added legislation to “codify the law” (in essence, write protections for associations who want to foreclose and still recover their past due assessments from a previous owner). Here is how Florida state statute NOW defines an association’s position regarding association foreclosures:
718.116(1)(a) A unit owner, regardless of how his or her title has been acquired, including by purchase at a foreclosure sale or by deed in lieu of foreclosure, is liable for all assessments which come due while he or she is the unit owner. Additionally, a unit owner is jointly and severally liable with the previous owner for all unpaid assessments that came due up to the time of transfer of title … For the purposes of this paragraph, the term “previous owner” does not include an association that acquires title to a delinquent property through foreclosure or by deed in lieu of foreclosure.
So ultimately, justice prevailed, but it did not come from the halls of justice but rather from the duly constituted legislative body. Bad judicial decisions can be rescinded by legislative codification, and in this case, that is how a bad court decision was repaired to serve the public interest regarding condo debt collection.
Lesson to be learned in this case: the Fair Debt Collection Practices Act (FDCPA) does NOT apply to non-judicial foreclosure proceedings.
Finally, the mother of all court decisions that affect community association collections. This case, originating in Colorado, went all the way to the United States Supreme Court.
In this case, the law firm McCarthy & Holthus LLP was hired by the association to collect past due assessments from a homeowner, Dennis Obdusky. The firm sent a letter to the homeowner advising him of their intent to foreclose. The homeowner responded with “a letter invoking a federal Fair Debt Collection Practices Act (FDCPA or Act) provision, 15 U. S. C. §1692g(b), which provides that if a consumer disputes the amount of a debt, a “debt collector” must “cease collection” until it “obtains verification of the debt” and mails a copy to the debtor.” The law firm responded by initiating a non-judicial foreclosure. Obdusky then sued on the grounds that the firm had violated the FDCPA.
The case asks and answers the question: Does the Fair Debt Collection Practices Act apply to non-judicial foreclosure proceedings? And the answer was a resounding NO. This was a unanimous decision voted upon by all nine justices, and it read as follows:
“A business engaged in no more than non-judicial foreclosure proceedings is not a “debt collector” under the Fair Debt Collection Practices Act (FDCPA), except for the limited purpose of § 1692f(6).”
In essence, the Supreme Court of the United States decided that a non-judicial foreclosure is not an act of debt collection. Rather, it is an act of “security interest enforcement,” and an attorney is not obligated to follow FDCPA protocols and safeguards.
While this doesn’t hurt the Board or the association directly, it puts your homeowners, your neighbors, at risk. This is yet another instance where legal does not mean ethical. Is this how you want to treat the members of your community association who become delinquent? Do you wish to deny them the rights under the debt collection statutes? Are you prepared to step in and take away a person’s home for want of a few hundred or even a few thousand dollars?
Ethical Collection is the Axela Difference for Condo Debt Collection
These cases affect not only how condo debt collection is handled, but they also give us lessons on what we can and cannot rely on legally when it comes to doing the right thing. Foreclosure isn’t just disruptive for the homeowner being foreclosed upon, it can also be disruptive and legally costly for the association.
The best way to collect on unpaid assessments is to avoid foreclosure and legal proceedings altogether and work with the homeowner to pay their assessments. It’s better for the homeowners, and it’s better for the association.
We at Axela Technologies believe that everybody needs to pay, but not everybody should be foreclosed upon. We feel that it is always best “to work it out and not to put them out.” Call us today for a free, no-obligation collections analysis and review of our process, costs, and technology.