Unethical collection practices are often conducted right under your nose, under the guise of good legal practice. It’s the community association that pays the price, both literally (in the form of legal fees) and figuratively (in the form of reputation and legal headaches). Take a recent example of an association in Florida:
The Florida Bank Foreclosure ‘Gotcha’
Although Florida is considered a “Super Lien State”, technically speaking it is not. When a bank forecloses and takes title to a property within a Condo or HOA, the statutes dictate that the bank must pay the association the lesser of 12 months of assessments or 1% of the original first mortgage debt. There is no statute that states that the association’s lien takes priority in any amount over the first mortgage lien. This can be found in Florida Statutes 718.116 and 720.3085.
(c) Notwithstanding anything to the contrary contained in this section, the liability of a first mortgagee, or its successor or assignee as a subsequent holder of the first mortgage who acquires title to a parcel by foreclosure or by deed in lieu of foreclosure for the unpaid assessments that became due before the mortgagee’s acquisition of title, shall be the lesser of:
1. The parcel’s unpaid common expenses and regular periodic or special assessments that accrued or came due during the 12 months immediately preceding the acquisition of title and for which payment in full has not been received by the association; or
2. One percent of the original mortgage debt.
When a bank forecloses and takes title, this is what the association gets. If the bank takes years to foreclose, and often they do, it is a loss to the association unless they have the tenacity and intelligence to continue to follow the unit through foreclosure sale and recover the surplus proceeds, should any exist, in the event of a third-party purchaser, or pursue the third-party purchaser under the concept of “joint and several liability”, should the governing documents not be restrictive. In the event of the bank taking title, the association can also pursue the old owner for what was owed if the governing documents permit and usually, the governing documents will, but few community association attorneys even bother. They will most likely tell the board to “write off” the loss.
Wishful Thinking Doesn’t Change Legal Precedent
Enter one law firm, who will remain nameless who took the association’s money and changed this provision from the statutes to conform to what they want. They want the bank to be liable for all the past due amounts in the event the bank titles title to the property via foreclosure or deed in lieu of foreclosure, and not the “safe harbor” amount also known as the “statutory cap.” So, what did this law firm do? They changed the governing documents to contradict the statutes knowing full and well that the statutes overrule their changes. At times there is confusion as to what takes precedence, the governing documents or the statutes? It has been well established that the more restrictive will govern over the other. Here it is in living color:
I have no doubt that this law firm is familiar with the case of Coral Lakes v Busey Bank. This case in clear and plain language contradicts the actions of this association’s law firm.
What Would Motivate a Change Like This?
What is particularly disturbing about this change in the governing documents is that unethical collection practices like this do not serve the interests of the association. Rather, it’s nothing more than a strategy for the attorney to generate more fees for their firm. It does nothing for the association because if the bank comes and takes title, the association is still only going to receive the statutory cap, because the statute is more restrictive, and maybe a lawsuit on top of that (more fees for the attorney). The association paid to have their governing documents changed in a way that eventually will serve no purpose and possibly bring harm. The attorneys should have known better.
As a matter of fact, this may have the unintended consequences of hurting the association. What bank/lender would lend money to a purchaser if they did not know the limit of their liability? Besides, safe harbor provisions were enacted to entice lenders to lend into community associations after all.
Perhaps they did know better, and by changing the governing documents were able to manipulate the board of directors into taking the most drastic action when a unit owner is delinquent in their assessments. It could be that they are trying to force a property owner to default on their obligations to the bank by bringing an association/lien foreclosure. A very suspect way to generate more billable hours. This is not the way to collect delinquent assessments.
Unethical Collection Practices Harm More Than Just Your Reputation
Putting people out of their homes is no way to be bringing money into the association. This is how community associations get a bad rap in the press all the time. This is a cold and calculated strategy to enrich the law firm at the expense of a homeowner who should be engaged and reasoned with. Instead, it is a shameful land grab to force a bank foreclosure to recover the delinquent assessments. It doesn’t have to be this way. The law firm that crafted these unenforceable amendments to the by-laws has been contacted and asked to comment on their strategy. To date, they have not replied.
Community associations can take a more ethical approach to collections by engaging a specialized collection agency to work with their owners. A company that will not take a percentage of what they collect but rather charge through collection costs to the delinquent owner on a merit basis (if the collection agency does not collect from the delinquent owner then the association does not pay for the cost of collections). There may come a time to foreclose but it should not be the first move. Contact Axela Technologies for a free no-obligation collections analysis and investigate alternative strategies to your collection issues.