Assessment Collection: Available Procedures

Assessment Collection: Available Legal Procedures
by Stanley Feldsott, Esq.

Three basic legal procedures are available for the collection of assessments. They are as follows:

	Personal action against the owner for money
	Judicial foreclosure of the assessment lien
	Foreclosure of the assessment lien by power of private sale

Each procedure has its own advantages and disadvantages. No single procedure is best all of the time. Different situations arise that suggest using one procedure over the others.

INTRODUCTION

In my opinion, judicial foreclosure is still, as a general rule, the preferred method of lien enforcement. In judicial foreclosure, an action is commenced with the filing of a civil complaint. If uncontested (which approximately 95 percent of the cases are), it terminates some 60 days later with a judicial order for the sale of the member's property and a provision for a deficiency judgment (personal judgment against the member) if the sale proceeds are not sufficient to totally satisfy the amount due plus the cost of the sale.

In a judicial foreclosure, there is a 90 day redemption period. Just recently this was made applicable to private sales. This means that for a period of 90 days after the sale, the individual can come in and pay off the entire delinquency, interest, all costs and advances and "redeem" (get back his property). This right of redemption actually works to the advantage of the association. Distressed property dealers generally shy away from sales that provide for a right of redemption. This leaves the association in a position where it and the owner can reach a complete resolution at any time.

ADVANTAGES AND DISADVANTAGES

One of the major advantages of the judicial foreclosure is that the sale occurs after a court order has been entered specifically providing for the sale. Contrast this with the private sale where the property is sold and then the propriety of the sale may then be litigated after the fact. It is this very sequence of events that produces a potential exposure to liability. Like all self help remedies, in private sale, first you act, then the court decides if you acted properly.

The major disadvantage to judicial foreclosure is that, as compared to the private sale, the judicial foreclosure is easier to contest. The owner need only file an answer. Of course, the prevailing party may recover attorney fees. Not too long ago, I had a case where the attorney fees awarded and paid (trial and appeal) were more than $60,000 in a suit over $3,000 in assessments.

Title companies are still reluctant to issue clean title policies on assessment foreclosure by private sale. Additionally, if a senior lien holder forecloses, the association’s lien is wiped out. In judicial foreclosure the association can still continue to pursue the personal obligation sued on as part of the complaint to foreclose. In private sale, you have to start over in small claims court.

If there is substantial equity in the property, a lawsuit to set aside the private sale or quiet title almost always follows. The association, one way or another, winds up in the lawsuit. The association will thus be drawn into a lawsuit where the court will undoubtedly try to find some way to set aside the sale so that the individual does not lose his/her home. In the last five years, we have been involved in approximately six of these. This is especially true when one considers that the "sale" was probably only for a few thousand dollars in unpaid assessments. In such a situation, most judges will view the remedy to be rather harsh and try to find some way to set it aside. Thus, the association becomes involved in expensive, multi-party, protracted litigation.

The intent of the assessment collection procedure utilized should be to collect the assessments with reasonable dispatch and minimal risk - not to cause an individual to lose his home or hundreds of thousands of dollars of equity. A procedure that exposes the association to significant liability should be used sparingly. Notice also that any right to a deficiency (personal) judgment is waived when the private sale procedure is utilized. What works best as a collection tool; a summons and complaint personally served on the homeowner or a notice of default received in the mail?

THE JUDICIAL FORECLOSURE

The appropriateness of the entire assessment process is potentially put at issue each time an action is commenced. Particular attention must be given to all documentary and statutory requirements. "Private sale" has become more popular over time. It is admittedly often an effective collection tool. However, I do not believe that risks to the association, coupled with the availability of judicial foreclosure, justify its use. The reluctance of many trustees to actually go to sale diminishes over time the effectiveness of private sale as a collection tool.

With jurisdiction for most judicial foreclosures now in limited jurisdiction courts (formerly municipal court) where even in contested cases, relatively quick trial dates are available, this is the vehicle of choice. The association can pursue the member personally or proceed to have the property sold pursuant to court order with minimal risk to the association. The 90 day redemption period gives the owner one last chance to pay costs and time periods involved are comparable to the "private sale" process.

JUDICIAL FORECLOSURE TYPICAL TIME LINE
PROCEDURES	TIME FRAME
Order homeowner’s “grant deed”	Receipt of the “grant deed” occurs 7 days after the initial order is placed.
A current “grant deed” must be obtained for the purpose of correctly identifying the homeowner in question.
Prepare Notice of Intent	The homeowner is allowed 30 days to respond to the Notice of Intent.
This document serves to inform the homeowner of the impending threat of foreclosure. The document also references the amount due to settle the matter.
Prepare Summons, Complaint and serve homeowner	If the homeowner is personally served with the Summons and Complaint, the homeowner then has 30 days to respond. If the homeowner receives substituted service, the homeowner has 40 days to respond. If there is no response, then legal action will continue.
The Summons and Complaint initiates the lawsuit. The Complaint defines the transgression and explains to the court the validity of the claim.
Prepare Notice of Lis Pendens	A one week lapse is allowed for the recording of the document.
The Lien and the Lis Pendens further secures the Association’s position.
Prepare Request for Entry of Default	A 30 day lapse occurs before we move on with legal action.
In the event the homeowner does not file an answer with the court, which occurs approximately 95% of the time, this document must be filed with the court in order to secure a judgment against the homeowner. In this document, the various charges and costs accumulated to date will be outlined for the court.
Prepare Declaration in Lieu of Personal Testimony	A 30 day lapse is expected to receive this document back from the management company.
This declaration is prepared for the review of that individual responsible for the association at the management company. The declaration itself will, at once, corroborate what has already been stated in the complaint and what will be said in the judgment package.
Prepare Judgment	60-90 days must expire before further legal action is taken.
The Judgment package will reiterate what has already been stated in the complaint, as well as give a detailed account of all monies accrued since the complaint was filed. Essentially, when entered, the Judgment will have aligned the association with the law. Therefore, the claim will be judicially justified and payment of any amount cited in the Judgment will be ordered by the court.
Sell Property, Garnish Wages, and Place a Levy on Bank Account	60-90 days from the court filing of the Judgment must expire before proceeding with these legal options.
Since a court rendered Judgment has been obtained, the association may select to procure the services of the County Sheriff’s office for the purpose of garnishing the homeowner’s wages, to place a levy on a bank account or to sell the real property. The three procedures are all effective methods of delinquency recovery.

The requirements and procedures prior to lien recordation for judicial foreclosure are identical to private sale but see Civil Code §1367.4.

SMALL CLAIMS COURT

This type of action also commences with the filing of a complaint (claim in small claims court) and, if not contested, ends about 60 days later with the granting of a judgment for money. Because a personal judgment extinguishes the assessment lien, this procedure should be utilized with care. The better practice would be to combine the personal action with a judicial foreclosure, if available, and then "elect" what you want at the time you are ready to enforce the judgment.

No attorneys
Management company appearances
Judge Pro Tem
Trial de Novo

BANKRUPTCY
INTRODUCTION

For our purposes, there are three types of bankruptcies that I will address. These are bankruptcies filed under either Chapter 7, Chapter 11 or Chapter 13 of the Bankruptcy Act.

As to all three types of bankruptcies, an automatic stay of all proceedings against the debtor is automatically issued by the Federal District Court upon the filing of the bankruptcy petition. This prohibits any and all further collection efforts of any kind or nature (phone calls, letters, liens, suits, foreclosures, etc.) without first obtaining permission from the bankruptcy court. In general, the bankruptcy court will only permit a creditor to proceed against an asset (in our situation the unit) upon proof to the bankruptcy court that there would be no prejudice to any of the debtor’s other creditors. In most cases, the attorney’s fees involved in seeking relief from the bankruptcy stay re assessments is cost prohibitive. About the only real benefit that can be achieved by such a proceeding, if successful, is to get the bankrupt owner off title and someone else on title. The first trust deed holder on the unit will sometimes pursue this route since they usually have a much larger investment in the property then what is owed the Association and their foreclosure, as a matter of law, wipes out the Association’s lien. The Board would need to take a long, hard look at the economics of the situation before electing to expend attorney’s fees in an attempt to obtain relief from the automatic stay and permission to proceed with a foreclosure.

The differences in the types of bankruptcy:

Chapter 7:
This is commonly referred to as a wipe out bankruptcy. Non-exempt assets of the debtor, if any, are sold and the assessment obligation as of the date of filing the petition is discharged or “wiped out”. A proof of claim has to be filed by the Association in the bankruptcy court, and the one file that was turned over to us (Sugiura) was already in bankruptcy. Accordingly, we did all that could be done which is file a claim on behalf of the Association with the bankruptcy court. We have been advised by the trustee that there is equity in the unit and he is attempting to sell the property. What the trustee is able to sell the property for and what portion of the proceeds will be available to satisfy the obligation to the Association as well as when this sale actually occurs are all matters over which we have no control.

Chapter 11 (reorganization) and Chapter 13 (wage earner plan):
These both operate essentially the same. The Chapter 11 is for corporations and the Chapter 13 is for individuals. Under these chapters, the debtor files a plan with the bankruptcy court which, if approved by applicable percentage of creditors, results in a payout typically over three years of the various debts of the debtor in existence at the time the petition was filed. The debtor must make payments to the trustee who then distributes the payment to the various creditors who have filed a claim. Here again, the Association must file a claim in the bankruptcy court.

Post petition obligations which accrue i.e. monthly assessments after the filing of the Chapter 11 or Chapter 13 petition must be paid by the debtor or the Association can move to have the Chapter 11 or Chapter 13 converted to a Chapter 7 or dismissed. Under the plan filed by the debtor, the obligations payable to the creditors is not always 100 cents on the dollar and can be a function of what the creditors would receive if the Chapter 11 or Chapter 13 was converted to a Chapter 7.

ACTION TO TAKE

Unless directed by the bankruptcy court otherwise, the Association should, in all bankruptcies, file a claim. If an assessment lien has been recorded then the Association is a secured creditor. If a lien is not recorded, the Association is an unsecured creditor. If money is to be distributed by the trustee in bankruptcy, being a secured creditor is generally better.

Periodically monitor the case. Know what is going on.

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