HOA Boards: Don’t Write Off Delinquent Assessments of Owners or Their Foreclosing Lenders!
How one diligent homeowner association used the
Bankruptcy Code to collect a large delinquent assessment.
By Janet Jackim
The Great Recession taxed homeowners and their owners
associations alike, as owners who could no longer pay the mortgage also did not
pay association assessments. Some defaulting owners sought financial refuge by
filing for bankruptcy protection, and others simply abandoned their homes, but
regardless of the owner’s actions the end result was the loss of substantial
revenue to the association. Many associations wrote off those delinquencies and
never pursued their owners or the lenders who foreclosed on the homes.
The goal of this article is to highlight avenues of
legal recourse for owners associations that wrote off, or are still struggling
to recover, unpaid assessments from delinquent owners, ex-owners, and lenders
who now own or have control over the home. If your association has, or has
off, sizeable delinquent assessments, read below how one determined association
was finally paid every penny owed. In sum, don’t write off these assessments
without first carefully analyzing the facts and law; collection may be possible.
The Owners’ Bankruptcy Filing Stopped All Collection
Mr. and Ms. Debtor filed for Chapter 11 bankruptcy
relief in 2012, owing their homeowners association nearly $100,000 in
assessments and their lender millions on a mortgage. (A Chapter 11 permits
debtors to reorganize their debts and assets and pay debts over a period of
time.) Because of the Bankruptcy
Code’s automatic stay provision,
the association and all other creditors were prohibited, except with the court’s
approval, from taking any collection actions on pre-filing (“pre-petition”)
monies owed by the Debtors.
A Plan of Reorganization Provided Hope for Payment of
After months of court filings and hearings, Debtors’
Plan of Reorganization (“Plan”) was approved by their lender and the court, but
without input from the owners association (first mistake). Debtors had no
interest in keeping the home, so their Plan required them to deed it to their
lender in lieu of foreclosure. The Plan also granted to the association a first
lien on title to the home for the full amount accrued prior to the bankruptcy
filing (referred to as “pre-petition” assessments). The Plan did not set a date
for delivery of the deed or for payment of the unpaid pre-petition or
post-filing (“post-petition”) assessments (second mistake).
While Debtors and their Lender Disputed Who Should
Pay What, Unpaid Post-Petition Assessments Kept Growing.
Monthly post-petition assessments kept accruing, and
pre-petition assessments remained unpaid. Title to the home remained in the name
of the Debtors, although they had abandoned the home years before. Two years
after filing, delinquent assessments were now nearly $200,000, and Debtors and
their lender failed to reach an agreement on who should pay which portions of
delinquent assessments (third mistake).
Court Intervention Was the Association’s Last Resort.
In mid-2014, Debtors delivered a deed in lieu of foreclosure to their lender for recording, to pass title to the home to the lender.
But delinquent assessments remained unpaid and continued to grow (fourth
mistake). Frustrated with the growing delinquency, the association turned to the
bankruptcy court for assistance by filing a motion to require Debtors and their
lender to perform the Plan pursuant to 11 U.S.C. § 1142.
The association claimed that the Debtors and their lender put the association in
a position analogous to angry apartment creditors in Cohen v. De La Cruz,
in that the association had no choice but to ask for the court’s assistance in
establishing its right to payment of assessments.
Claiming that the Plan was a contract between the
Debtors and their creditors that was being breached, the association asked the
court to require compliance with Plan provisions by ordering Debtors and their
lender to pay all assessments due pursuant to 11 U.S.C. § 1141 (a).
Additionally, the association argued that, under applicable State law, the
recorded declaration (CC&Rs) and bylaws constituted contracts binding on Debtors
and their lender. The association
also argued that Debtors and their lender, having breached their obligations to
pay assessments, should pay the association’s costs of collection, including
attorneys’ fees and expenses.
Tenacity in Court Yielded Recovery of All Assessments
and Attorneys’ Fees.
The Plan and applicable state and federal law put the
association in a good legal position for recovery. Pursuant to the Plan, the
association had the first lien position on the home for pre-petition
assessments, with the lender in second position. And, pursuant to Section 523 of
the Bankruptcy Code, post-petition
assessments of an owners association are the responsibility of the debtor until
he/she no longer has “a legal, equitable, or possessory ownership interest” in
Applying the Plan and Bankruptcy Code § 523, the court
looked at the timing of the Debtors’ 2011 abandonment of the home and the July
2014 date that they delivered the deed to their lender and found that there were
three separate periods of assessments with separate obligations for payment:
Pre-petition assessments. These were incurred prior
to Debtors’ bankruptcy filing. The Plan granted to the association a first lien
on title to the home. Under state law applicable to a deed in lieu transaction,
where title passed voluntarily (not through foreclosure), the court found the
lender solely responsible for payment of pre-petition assessments. Recovery:
Post-petition assessments prior to delivery of the
deed. These assessments were incurred after the bankruptcy filing and prior to
Debtors’ delivery of a deed in lieu to their lender. Under applicable bankruptcy
law, Debtors remained liable
for these assessments because they owned title to the condo until they delivered
the deed. And, under applicable state law, the lender was also responsible for
these assessments. Thus, the bankruptcy court found Debtors and their lender
jointly and severally liable for these assessments. Recovery: $100,000.
Post-petition assessments after delivery of the
deed. These assessments were incurred after Debtors delivered the deed to their
lender. The court found the lender solely obligated for these assessments
because, as of delivery of the deed, the lender had legal (recorded title),
equitable (interest established by principals of fairness), and possessory
(possession) interests in the home. Recovery: $30,000.
Attorneys’ fees. In subsequent filings with the court,
the association, being the “prevailing party,” was awarded its reasonable
attorneys’ fees. The court based its ruling on the contract between an owner and
the owner’s lender and the association, consisting of the recorded declaration
(CC&Rs) and bylaws, which permit the association to charge an owner (including a
lender stepping into the shoes of a former owner) attorneys’ fees to collect
unpaid assessments. Recovery: $60,000.
Debtors and their lender have now paid all of the
Tips for Recovering Assessments from Bankrupt Owners and
their Foreclosing Lenders.
1. A Careful Analysis of Accounting for Assessments Can
Increase Recoveries. When an owner files for bankruptcy protection, the date of
that filing divides the debtor’s assets and liabilities into two critical
periods: pre-petition and post-petition. Generally, in a Chapter 7 liquidation,
pre-petition debts are discharged (meaning that the debtor is relieved of the
debt). In a Chapter 11 or Chapter 13 reorganization, the plan of reorganization
will provide for how, when and how much the debtor pays its pre-petition debts.
But as to post-petition assessments, bankruptcy law provides that the debtor is
responsible until title to and possession of the property passes to the lender
(or is otherwise sold). Thus, the association’s accounting staff should divide
the debtor’s account into pre-petition and post-petition periods to take
advantage of the different treatments applicable to each period under the
2. The Board Should Not Automatically Write-off Unpaid
Assessments. Even though an owner may have filed for bankruptcy protection,
recovery of delinquent assessments may still be possible where:
The owner still resides in the property, and in
that case post-petition assessments are due from the owner until the lender or
another person acquires title to the property.
The owner has abandoned the home, and in that
case post-petition assessments are due from the owner until the lender or other
person acquires title.
The owner has filed for Chapter 11 or Chapter 13
bankruptcy protection and the plan provides for payment of assessments.
Thomas E. Reilly III (Hawaii HOA Collection
Consultants, LLC) has consulted for associations nationwide in their pursuit of
delinquent owners and lenders owing substantial assessments ($10,000 or more).
“Recoveries in the thousands of dollars represent
exciting new-found monies to associations hard-hit by the recession. The
tenacity of the association is key to recovering from owners and ex-owners and
their lenders. Although sometimes complicated, the bankruptcy process should not
be seen as an obstacle or a black hole to recovery. Rather, when a lender is
involved, the probability of collection is greatly increased, given its deep
pockets. And even when a bankruptcy is involved, the association has a right to
seek post-petition assessments under the Bankruptcy Code. Bankruptcy courts are
also likely to award attorneys’ fees to an association that pursues its right to
payment of delinquent assessments.”
3. The Association Should Participate in a Bankruptcy
Case. When a Chapter 7 case is filed, the association should determine whether
the debtor still resides in the property; if so, assessments are still payable.
When a Chapter 11 or Chapter 13 case is filed, the association should file a
proof of claim with the court, particularly when:
unpaid assessments are substantial (in excess of
the association is not listed in the debtor’s
list of creditors filed with the court;
the debt is listed but the amount is incorrect;
currently accruing (post-petition) assessments
A proof of claim puts everyone involved in the case on
notice of the association’s claim for assessments. By filing a proof of claim,
the association will be sent documents filed in the case, including the draft
plan of reorganization and disclosure statement, each of which should be
carefully reviewed for the proposed treatment of amounts owed the association.
The association can object to the proposed plan treatment and propose an
alternative treatment. Favorable treatment of the association’s claim can be
negotiated during deliberations on the plan, including specifying the amount of
the claim, due dates for payment of the claim, and actions required of the
debtor to pay the claim.
4. Debtors and their Lenders Who Fail to Pay Assessments
Can be Ordered to Pay. As the illustrative case shows, delinquent assessments
can be recovered against debtors and/or their lender through the association’s
involvement in the case. Because processes for recovery of delinquent
assessments are complicated, the Bankruptcy Code is voluminous, and state laws
vary, we urge HOA boards to seek the advice of bankruptcy counsel for a detailed
analysis of the facts and applicable law as applied to a particular delinquency.
We wish you successful collections!
 11 U.S.C. §§ 1101 et
seq., also called the “Bankruptcy Code”
 See In re Harlow
Properties, Inc. v. Palouse Producers, Inc., 56 B.R. 794, 796 (B.A.P.
9th Cir. 1985).
 523 U.S. 213, 118 S.Ct.
 See In re Castle Home
Builders, Inc., 520 B.R. 98 (Bankr. N.D. Ill. 2014), in which the court
ordered a lender to pay debtor’s attorneys’ fees and costs ($35,000) for
lender’s failure to comply with the confirmed plan and subsequent order
(the court also ordered lender to pay actual damages of $100,000 to the
debtor). “The evidence shows that for the months following entry of the
Order Confirming [debtor’s plan], the Reorganized Debtor experienced
continual delays and even resistance when requests were made to conform
loan documents … to the terms of the Confirmation Order.” Id., p. 13.
 In re: Johnston, Case No.
2:01-bk-06221-SSC (Bankr.Ariz. 7/30/2009) (Bankr.Ariz., 2009), p. 10
(citing Miller v. United States, 363 F.3d 999, 1004 (9th Cir. 2004),
citing Hillis Motors, Inc. v. Haw. Auto. Dealers Ass'n, 997 F.2d 581,
588 (9th Cir. 1993).
 See Pelosi v. Wailea
Ranch Estates, 10 Haw. App. 424, 435-36; 876 P.2d 1320, 1326-27 (1994)
 11 U.S.C. § 523 (a) (16)
 Citing In re Burgueno,
451 B.R. 1 (Bankr. Court, D. Arizona, 2011)
 11 U.S.C. § 523 (a)