Wednesday, June 6, 2012

Protecting the Association When Banks Do (or Do Not) Foreclose

Thanks to Jeremy Stilwell, a partner in Barker Martin, with offices in Bellingham, for a deeply knowledgeable and engaging interaction with Forum members on this topic.

First, let's acknowledge that these kinds of matters are expert matters that are best guided and handled by association counsel, while preparing the materials so that legal action can be taken is a key task for the board.

Jeremy delivered an appropriate disclosure at the beginning of the meeting and further explained that he would never develop a Handy-Dandy Foreclosure Kit to sell to associations, because of the pitfalls and errors that can take place in this process that will defeat the association's ultimate goal.

Jeremy explained that condominium associations have a statutory lien on each unit based in their governing documents, and based in state law. See RCW 64.34.364. This is not to be confused with recording a lien, which gives notice to all third parties researching the real property records that a lien exists on the title. The board must decide when and how to record a lien against a unit owner's title. Recording a lien will be done correctly, if done by counsel.

Within the subject of collections and liens, Jeremy discussed debts, collection policies, and the lien statute of limitations. He wrapped up the lien topic explaining the board's responsibilities regarding extinguishing a lien once the debt is satisfied.

A collection policy is a formal board Resolution, usually prepared by association counsel, that protects the association and establishes actions to take when assessments are not paid. Given the consumer protection provisions in today's world, a Collection Policy is well-advised for every association. The Resolution sets forth the definitions for being in arrears, the steps that both the unit owner and the association take in order to satisfy the debt. Lacking such a formal, adopted and published collection policy, an association or its manager can fail in collecting past-due assessments, because of unintentional yet illegal collection procedures.

Discussions followed detailing the difference between voluntary transfers of title -- a market sale or deeded transfer, and involuntary transfers -- i.e., foreclosure, and how each type of title transfer operates relative to an outstanding lien.

An association receives notice of a judicial foreclosure -- this is rare and is usually based in a lawsuit, and a non-judicial foreclosure, which is evidenced by a Notice of a Trustee's/ Sheriff's Sale of a unit.

There's not much the association can do given a judicial foreclosure, except to review its budget to determine how it can continue to pay its bills with the reduction of this unit's assessment income -- if that's the case.

For a non-judicial foreclosure -- a bank-ordered sale of the property: a foreclosure -- the board can continue to pursue the debt. The debt is owed not only as its connected to/ secured by the unit, but the debt is also owed by the unit owner, personally. In this scenario, Jeremy advises ramping up collections according to the collection policy in place, and gleaning information about the unit owner. Where does the owner work? What are the bank accounts owned by the owner?

"A trustee's sale does not eliminate prior owner's personal obligation to pay amounts owed," he reported.

Usually a lender who forecloses is interested in selling or renting the unit. While the bank owns the unit, work to collect assessments from them: they are owed to the association. As well, ask the bank to keep up the unit, paying utilities, keeping the unit warmer than 52 degrees F, so that there is no risk of freezing pipes in cold periods. See your governing documents for owner's responsibilities for upkeep within the unit.

When the bank doesn't foreclose -- and the owner is not paying assessments, the association has several options: collections, small claims court, money judgement, foreclosure, or do nothing, which is not really an option.

The association must decide on a goal for the unit before beginning any action. Here are few scenarios:

  • Sometimes banks step up and pay the debt, to protect their interests. 
  • A new owner may take ownership subject to an existing mortgage. 
  • The association can take the issue to small claims court -- beware of being accused of practicing law if you appear as an association manager or a board member.
  • The association can file to collect a money judgement, which is less expensive and takes less time than a foreclosure process, and is limited by the owner's ability to pay.
The key is communication with the debtor.

If the declaration provides, the association can proceed with a non-judicial foreclosure. The unit owner is named by the judge in a receivership process, and it could be a trustee. The judge could order a Sheriff's Sale. There is with this type of foreclosure, a redemption period of 12 months, when the owner/ debtor can redeem title given satisfaction offered in the foreclosure process.

The situation may devolve into a bankruptcy filing, in which case the association may not continue collection activities. However, the association is owed assessments going forward from the date of any bankruptcy filing and can collect those monies if they are not paid.

Bankruptcy in a Chapter 7 filing discharges the pre-filing debts if there is a discharge. If there is no discharge, then the debt remains outstanding.

A Chapter 11 (corporate) or Chapter 13 filing include plans for reorganization and restructuring debt -- Jeremy advises that the association participate in the plan.

The last topic covered occurs when the developer doesn't pay assessments on units it owns, once the association begins collecting assessments. The association can treat this as a collection matter. If the developer sits on the board and the board discusses collecting developer's past-due assessments, the developer cannot participate in the discussion, that being a conflict of interest.

Bottom line, no association board or board member can wave assessments. But the board can work with an owner so that the owner admits that the assessments are due, establish a payment plan to catch the owner up on past-due amounts, and ask the owner to sign a Money Judgement that the association can file if payments are skipped, late or not made. How the association wants to negotiate the money necessary to satisfy the money judgement is up to the association.

Finally, here is a link to more details about Jeremy, including at the bottom, several cogent and accessible Articles and Presentations that he's delivered and published for owners that you will find useful.