By: Ronald J. Barba
What are you collecting and Why does it matter?
Collections cases can vary depending on the nature of the assessments being collected. The most straight forward case involves unpaid common charges. There are other cases which require more documentation than an account statement before an action can be commenced. Cases involving the collection of fines present challenges unique to Boards and their attorneys. CIOA is very strict in its requirements involving the levy and collection of fines. Connecticut General Statutes Section 47-244 states that an association board may levy fines only after the owner has been provided notice of the violation and an opportunity to be heard. There are no exceptions to the law. Therefore, it is incumbent upon a Board to ensure that no fine is assessed against a unit owner prior to providing notice and scheduling a hearing for the offending unit owner.
Failure to follow the notice and hearing requirements of CIOA renders the collection vulnerable to attack. Courts are not willing to award associations for their failure to provide unit owners with basic due process. The subject of proper rules and enforcement would certainly take up a full article. Suffice to say that failure to follow the basic requirements of §47-244 will meet with defeat in the courtroom.
Go back to Zero.
When a unit owner is referred to association counsel for collection it is important that the arrearage be a reliable reflection of the owner’s account. One way to ensure that counsel has reliable figures is to provide an account statement which goes back to a point in time when the owner’s balance was zero. Showing a balance forward is extremely troublesome for the court when establishing the collectible debt at the time of judgment. Providing a “zero balance” statement can be a problem for associations that have recently transitioned from one property management company to another. While most companies are professional and accomplish the transfer of records in a timely and reliable manner, some leave incomplete records of payments resulting in account statements starting with a balance. Boards should be aware of this possibility when entering into new management contracts so that the contracts include provisions mandating the transfer of complete documentation.
Speaking of property managers...Increasingly, accounts that have been turned over to counsel for collection include a “transfer fee” payable to the property manager. These charges are appropriate as long as they are provided for in the management contract. It might be a good idea to include notice of transfer charges in the collection policy as well.
Set it and forget it.
Once an owner’s account has been referred out to the Association’s attorney for collection, it is best for the board not to involve itself in the matter. Too often, owners will reach out to sympathetic board members seeking relief from the collection effort. With the best intentions, Boards will veer from established collection protocols and thereby render the collection vulnerable. Some Boards accept partial payments without communicating as much to counsel. Such activity exposes association counsel to Fair Debt Collections Practices claims which can be costly.
Boards must keep in mind that they have retained counsel to deal with this very delicate and difficult issue. Permitting their attorneys to handle the collection eliminates the stress of direct confrontation with the unit owners. Allowing counsel to collect the arrearage is the most efficient avenue toward resolution. That is not to say that counsel will not and should not communicate debtor requests. Trying to manage the intricacies of Connecticut’s collection laws is best left to professionals. Once the account has been referred to counsel let it be resolved by counsel. A good lawyer will communicate with his or her board and provide regular updates. The merits of requested payment plans and other special dispensations can be discussed fully by attorney and client in executive session. If a board wishes to modify its position about a particular account, it will have ample opportunity to do so. A board should expect a periodic status of collections report from its counsel. Such a report will keep the board apprised of the progress (or lack of progress) in the various collection matters being prosecuted.
Join us next week for the third and final part of Challenges in Collections.
By: Ronald J. Barba
Anyone who has served on the board of a condominium association knows that common charges are the life blood of their community. Having spent long hours gathering information from vendors and looking to the future needs of the community, boards and their property managers struggle to adopt budgets which balance the financial obligations of the Association against the fiscal demands on each unit owner.
Over the years, the needs of common interest communities have evolved and intensified as capital improvement projects once the subject of a long range reserve study, now loom ominously close to indispensable obligations. Unfortunately, the challenges of collecting common charges from defaulting unit owners evolved with each “tweaking” amendment to the Common Interest Ownership Act have grown exponentially as well. From its original version in 1984 to its current form, the CIOA has become significantly more complex and that complexity has extended to collections. This article is designed to point out some of the common errors made by Associations when trying to collect against defaulting owners. So let’s begin at the beginning.
Failing to Prepare is Preparing to Fail
Passing an enforceable budget is unquestionably the most important aspect of the collection process. Boards should be wary of the timing and notice requirements of their documents and the CIOA before adopting any budget. Every year a Board must adopt a proposed budget for the common interest community. The board must present the unit owners a summary of the proposed budget including a statement of any reserves and a statement of the basis on which the reserves are calculated and funded. Along with sending the summary and statements, the board must schedule a unit owner meeting at which the unit owners may ratify the proposed budget. The statute requires that the meeting be scheduled with at least ten days notice but no more than 60 days notice.
Depending upon your individual declarations, the unit owner will ratify the budget if less than a majority vote to reject it. In those instances where the budget is rejected, the board may rely upon the last approved budget to set common charges for the unit owners. All too often, boards will omit a step on the way to passing a budget only to find the lien unenforceable when challenged in costly litigation.
One of the few defenses available to a unit owner in a foreclosure action is to claim that the lien for common charges is invalid because the budget was not properly passed. A board must follow the formal requirements of CIOA in the adoption of the annual budget. Notice and disclosure provisions of the statute mandate formal compliance by Boards. Non-compliance opens each collection effort vulnerable to attack by savvy owners or their watchful attorneys.
Boards must determine how to handle defaulting owners as a standard part of its governance obligations. Some boards bypass this obligation all together and hope friendly nudging will work. Often this stand-off approach makes matter worse and results in owners getting so far behind they cannot recover. The Association loses significant sums which fall outside the priority or worse, outside the statute of limitations. I suggest a balanced firm position. Educating unit owners about their obligations and the consequences of failure is a good start. Providing written warning to those who fall slightly behind will re-enforce the obligation. When that fails, initiating formal collection efforts is appropriate.
Adopting a written collection policy is the best course of action for a Board. The collection policy is adopted after the Board considers many of the factors cited above and weighs those factors against the limited priority lien available to CIOA communities. CIOA mandates that before any collection of unpaid common charges is commenced the Board must either vote (at a duly noticed meeting) to refer the matter to the attorney for collection or it must adopt a written collection policy setting forth the contingencies leading to collection. A well-crafted collection policy which sets forth all of the factors triggering a collection action such as the timing, interest rates to be added, and the priority of payments made.*
The most important factor to be considered by Board is “time”. Since 2013, the priority lien enjoyed by common interest communities over first and second mortgagees was extended from six months to nine months. The extension of time was a trade off when banks lobbied successfully to require associations to provide sixty days advance notice before commencing a foreclosure action. As a result of these changes, boards must be more vigilant and organized to avoid losing common charges which fall outside the priority. CIOA prevents the association from commencing a collection action until the owner’s arrearage exceeds two months of common charges. Therefore, the minimum delay in commencing a foreclosure is now four months! For those who are math-impaired, it means that the Association has five months from the commencements of the lawsuit to obtain a judgment before unpaid common charges become uncollectible. Five months may sound like a long time, but courts move slowly and any wrinkle in the collection could postpone judgment weeks and sometimes months.
Join us next week for Part 2 of Challenges in Collections.
*There is some controversy about the nature of collection policies. Some argue that such policies are rules and must therefore be subject to notice and comment by the owners before being implemented. The other more convincing approach is to treat collection policies as internal business operating policies of the board. A careful reading of the definitions section of CIOA and recent case law on the subject should resolve the dispute although a case is currently an appeal before the Connecticut Supreme court which could potentially address the issue.
By, Ronald J. Barba
As part of our practice representing common interest communities in their collection efforts, we have to deal with unit owners who file bankruptcy owing substantial fees to the Association. Although the evidence is anecdotal, there appears to be a considerable increase in the number of bankruptcy filings in our cases. When trying to collect back common charges from defaulting unit owners, there are some important facts about bankruptcy that Association Boards should keep in mind.
When an individual files a bankruptcy petition, any and all collection efforts must cease. Filing a bankruptcy petition creates an automatic stay of any attempt to collect from the debtor on pain of contempt and possible fines and/or attorney’s fees. So, what can the Association do if the debtor is protected from collection efforts? We’ll get into that shortly, but it is probably a good idea to provide a small primer on the types of bankruptcy cases that are normally involved with Association collections.
The typical bankruptcy is known as a “Chapter 7” bankruptcy. It is an effort by the debtor to discharge his or her personal liability to repay all non-secured debt. Chapter 7 bankruptcies are very common and can take many months before the discharge is entered by the court, the estate is closed and the automatic stay lifted. The next most used type of bankruptcy petitions is the “Chapter 13.” Chapter 13 bankruptcies are designed to provide the debtor an opportunity to remove some debts and to pay the remaining debts over a five-year period. Typically, the debtor and his or her attorney will take six months to design a re-payment plan to submit to the bankruptcy trustee and court wherein the debtor pays a fixed amount to the trustee on a monthly basis. The trustee then disperses percentages of those funds paid to the various debtors named in the plan.
Does that mean that an Association must wait five years to be paid? The answer is yes and no. The debtor is able to include all of the common charge debt due and owing prior to the bankruptcy filing into the repayment plan, this amount is often referred to as “pre-petition debt”. While Chapter 13 debtors enjoy some relief from the pre-petition debt, they are still obligated to pay the ongoing common charges. It is also important to file a “proof of claim” early in the bankruptcy case as failure to do so can result in the Association’s debt losing its secured status.
Given the short window of priority that the common charges receive, Associations must consider moving quickly to obtain relief from the automatic stay. In Chapter 7 cases, the Association must be able to prove that the debtor failed to provide adequate protection of the Association’s interest or there is insufficient equity in the unit. The same bases apply to relief in Chapter 13 cases with the added claim that the debtor failed to make timely “post-petition payments” which provides creditors “cause”.
There are many other issues with bankruptcy that Association’s should know, but suffice to say the only mistake for an Association in this realm is to do nothing.