By: Ronald J. Barba
Now comes the lawsuit.
After all the warning notices from the association and demand letters from counsel, the collection turns into a foreclosure matter. The sixty-day notice requirement having elapsed, a complaint is drafted and served upon the unit owner(s), mortgagees and other lienors. The rules of practice set forth the timing of pleadings, defenses, discovery, and judgment. Competent counsel will make every effort to minimize the time it takes to obtain a judgment so as to protect the association’s nine-month priority lien. Unresponsive owners will be defaulted and mortgagees will file pleading to protect their respective interests.
Just prior to moving for judgment, an appraisal of the unit is ordered and sent to the court. Counsel communicates with the association’s property manager to obtain up to date account information and the execution of an affidavit in support of the association’s claim for monies. For self-managed associations, it is critical to establish early in the process which board member(s) will be responsible for providing account information. Any confusion or delay could adversely affect the association’s interest.
The type of judgment to be obtained by the association is dependent largely upon the amount of equity that exists in the unit. In this context, equity is the value of the property minus the total amount of liens against it. If a unit is worth $100,000.00 and there is a $50,000.00 mortgage lien on the title, the equity in that unit is $50,000.00. A unit having little of no equity will likely be subject to a “strict foreclosure”. One with equity of any significance will be subject to a judgment of foreclosure by sale. In a strict foreclosure the court assigns “law dates” by which defendants must redeem their interests (meaning pay the debt). If no defendant redeems, the association becomes the titled owner of the unit and may dispose of it as it deems appropriate. A foreclosure by sale is somewhat more involved in that it involves the appointment of a court-appointed “committee” to facilitate the public auction of the property.
But what about the banks?
Conspicuously missing from the description of events in the collection process is mention of how banks behave when one of its borrowers’ defaults on their common charge obligation. Standard loan documents (Note and mortgage deed) usually attach a separate document called a “Condominium Rider”. Contained with condominium riders are provisions which empower the lender to take steps it deems necessary to protect its interest in the unit should the borrower default in the payments to the association. One commonly used method of protection is when the lender, having been duly advised of the debt, elects to pay the arrearage on behalf of the unit owner.
Banks will attach the amount paid to satisfy the debt to the mortgage debt. It is not uncommon for banks to take this step multiples times where recidivist defaulting owners are involved. Banks may elect to pay early or at any point in the collection process. Any bank wishing to pay on behalf of its borrower must pay all that is owed in order to settle the case or satisfy the judgment. In some instances, lenders will opt to redeem their interests on their law date. In such a case, the lender’s liability is limited to the priority debt plus attorney’s fees and costs. Any common charges or other charges not included in the priority debt are then rendered uncollectible by the association.
So too would the association be limited in its recovery in a foreclosure by sale. After a successful sale, the proceeds (totaling the nine-month priority, attorney’s fees and costs plus committee fees and costs) would be paid first to the association. Any amount in excess of the priority debt would then go to satisfy the first mortgagee’s debt and then the second mortgagee’s debt, if applicable. When there are funds remaining after satisfying the priority debt, the committee and the first and second mortgagees, the association could claim the balance of its debt from the remaining sale proceeds.
After having read the above, it should not surprise the reader that the collection process is a complicated matter fraught with pitfalls and risk. Common charges are the life blood of any common interest community. Every board should fully appreciate the importance of a firm, but fair system that ensures the financial health of the association. With proper planning and a familiarity with the process, boards can better serve their communities.