HOMEOWNERS ASSOCIATION DEBT COLLECTION: A BASIC SUMMARY
January 19, 2015 | Barna, Guzy & Steffen, Ltd.by: Karen Kurth and Timothy Erb
For most homeowners associations, owners of property within the association are bound to pay annual or monthly assessments to the association to cover common expenses incurred by the association to operate the association.
The amount and nature of the common expenses will vary depending upon whether or not the association is a condominium, attached town-home, detached town-home or single family home association. Such common expenses often cover costs incurred by the association related to insurance, maintenance, property management, and other costs incurred by the association to own or maintain common elements. The declaration, which is recorded against title to the property, not only typically requires each owner to pay assessments, but also specifies the items the association is to maintain, insure or otherwise address. These expenditures comprise the common expenses. The declaration may specify that each property owner is to pay an equal share of common expenses or some other allocation of common expenses which is based upon differences in square footage, architectural product or other similar rational distinctions. The declaration and/or statutory authority may also specify that the owner is also required to pay late payment fees and attorneys’ fees incurred by the association to collect the unpaid assessments and that such fees become part of the unpaid assessments owed by the owner. The board of directors is typically required by the declaration and bylaws to collect unpaid assessments on behalf of the association. However, being that there are multiple ways to collect unpaid assessments, most members of the board of directors benefit from having a basic knowledge of the different ways in which an association can collect unpaid assessments and when utilization of one method or the other may benefit the association.
When an owner defaults in the payment of assessments, not only is the owner personally liable to pay the unpaid assessments owed to the association but a lien also arises against the property owned by such owner within the association. The association typically has the option of either suing the owner personally for the unpaid assessments or foreclosing its lien. This article provides a brief summary of these two primary methods of collection of unpaid assessments.
LIEN FORECLOSURE
In Minnesota, most associations are afforded two different methods of foreclosing its lien. The association may foreclose by action, which involves commencing a lawsuit. Foreclosure by action is the more expensive and time consuming method of foreclosure. For these reasons, foreclosure by action is not typically elected by associations unless there is a substantially large amount of unpaid assessments, a title issue or some other issue by which the association would benefit from having a court determine the validity and amount of the lien. The other method of foreclosure, which is the focus of this article, is foreclosure by advertisement. Foreclosure by advertisement does not involve commencing a lawsuit and the foreclosure occurs without court oversight thereby reducing the costs incurred by the association and the time to complete the foreclosure.
An association lien is similar to a mortgage. If an owner fails to make payments as due according to the note/mortgage, the lender can enforce its mortgage against the property and force a sale of the property to recoup the amount owed to the lender. Similarly, if an owner fails to pay assessments when due according to the budget and assessment schedule adopted by the association, the association is typically authorized to enforce its lien against the property and force a sale of the property to pay the amount owed to the association. Foreclosure of a lien by advertisement involves published notice of the foreclosure sale in the newspaper, having the Sheriff conduct a foreclosure sale, and a redemption period, typically six months long commencing on the date of the Sheriff’s sale, during which the owner can pay all amounts due and owing to the association to stop the foreclosure. The association does not procure full legal ownership or possession rights until after the redemption period has expired. If the owner does not redeem the property by paying all amounts due and owing, the association becomes the owner of the property at the end of the redemption period subject to any tax liens, tax assessments, master association liens or the first mortgage, if any. Foreclosure of the lien by advertisement will typically take nine to twelve months to complete depending upon various circumstances.
Because the association’s lien does not have priority over tax liens, tax assessments, master association liens or first mortgages, if any, the benefit to the association of foreclosing its lien depends upon the amount of these liens with priority. Before foreclosing, it typically benefits the association to determine the amount of these liens with priority to determine if these liens with priority exceed the fair market value. If these liens with priority exceed the fair market value of the property then foreclosure of the lien in favor of the association would not likely be warranted if the association wanted to sell the property to recoup the unpaid assessments. Where the fair market value does not exceed the amount of liens with priority, the association can typically only attempt to rent the property to recoup the amount owed to the association. There are other factors that will affect the decision of a board of directors to foreclose the lien in favor of the association and the board of directors should consult with an attorney experienced with association lien foreclosure to determine whether or not lien foreclosure or a lawsuit, discussed below, is the preferable method of collection.
PERSONAL LIABILITY/LAWSUIT
In lieu of seeking recovery of past due assessments via lien foreclosure, an association has the option of obtaining a money judgment against the delinquent owner for all amounts due and owing to the association. Once the association obtains the judgment, it can pursue collecting the judgment through judgment collection tools such as garnishment and levy. Opting to seek a money judgment is likely to involve litigation and may be more expensive and time consuming for the association than proceeding with foreclosure by advertisement. However, in situations where there is insufficient equity in the property to cover the amount in arrears, it may not make sense for the association to foreclose as discussed above. In such situations, seeking a money judgment against the owner may be the most practical option. In this section of the article, we discuss options for obtaining money judgments against the owners and then briefly address collecting the judgment once it is obtained.
One overlooked and underused method of obtaining a money judgment against a debtor which merits some discussion is a Confession of Judgment. A Confession of Judgment is a document whereby the debtor, in this instance the homeowner in arrears, admits or “confesses” that he or she owes a certain dollar amount to the association. The Confession of Judgment is frequently entered into in conjunction with some kind of a re-payment agreement wherein the debtor agrees to make payments on the debt. If the debtor defaults on the scheduled payments, the association, which is holding the signed and notarized Confession of Judgment, pays the filing fee and files the Confession of Judgment with the district court of the county where the debtor lives. Once those steps are completed, the district court will enter judgment in the association’s favor against the debtor/homeowner and the association will have an actual money judgment upon which it can collect. While the Confession of Judgment can be a fairly simple way to obtain a judgment, it only works where the homeowner does not dispute the amount owed and is willing to enter into the Confession. Moreover, Confessions of Judgment are governed by Minnesota Statute as to form and strict compliance is necessary for an enforceable Confession of Judgment. An association considering using a Confession of Judgment would be wise to consult with an attorney.
The next option for obtaining a money judgment against the homeowner is filing a lawsuit. A lawsuit can be filed in district court or in conciliation court. The statutory limit for conciliation court claims in Minnesota is $15,000 so the majority of claims for past-due assessments should fall below that limit thus allowing the association to bring its claims in conciliation court. Conciliation court is much faster and far less expensive than proceeding in district court. Additionally, conciliation court is intended to be a simple process that can be navigated by litigants without the necessity of retaining an attorney. As such, we generally recommend associations bring claims for past-due assessments in conciliation court unless the amount due is considerably greater than $15,000. Commencing action in conciliation court involves paying the filing fee which varies county to county but is currently between $70 and $80 (as compared to a $322.00 filing fee on average for an action in district court) and filling out a Statement of Claim articulating the basis for the association’s claim and how much is sought. The court clerk will provide the hearing date and time which will generally be approximately forty-five days out. In an action brought in district court, it may take up to a year to get a trial date. The association will need to serve the Statement of Claim on the homeowner. Trials in conciliation court are much less formal than in district court and the association, as the plaintiff, has the burden of proving the basis for homeowner liability and the amount owed. While it is not necessary to be represented by an attorney in conciliation court, any litigant can opt to seek representation and have an attorney appear on their behalf. If the association elects not to have an attorney assist it in presenting its case, it is important to prepare its case such that it presents its testimony and exhibits in a clear and concise manner. The presiding Judge or Referee will usually issue his or her decision in a day or two. Once the decision is issued, the actual entry of judgment is stayed for twenty days allowing either party to “appeal” the decision by removing it to district court. To remove the case to district court, a party need only file and serve an affidavit of good faith and pay the $322.00 filing fee after which the action becomes a regular action in district court.
Once the association has obtained its order for judgment, whether in conciliation court or district court, it is necessary to take the steps to docket the judgment. If the judgment was obtained in district court, the judgment creditor, the association in this instance, files an Affidavit of Identification which serves to identify the judgment debtor (the homeowner) and the judgment creditor (the association). When docketing a judgment received in conciliation court, the association must file the aforementioned Affidavit of Identification and also must pay a fee to have the judgment transcribed from conciliation court to district court. Currently, the fee is $42.00. Docketing the judgment is a crucial step for multiple reasons. First, in order for a judgment creditor to avail itself of the legal means to collect its judgment, such as garnishment and levy, the judgment must first be docketed. Second, once the judgment is docketed it becomes an automatic lien upon any real property the identified judgment debtor owns in the county where the judgment is docketed. Third, if the judgment debtor owns real property in a county other than where the judgment was obtained, the creditor can file an Affidavit of Identification, pay the transcription fee, and have the judgment transcribed into any additional county where the debtor owns real property at which point the judgment becomes a lien on that real property. The judgment lien can be a powerful tool particularly when a debtor seeks to sell or re-finance real property that is subject to a judgment lien.
After docketing the judgment, the association can commence with activities to collect on the judgment. This process involves discovering and identifying the assets of the debtor/homeowner. The various methods that can be engaged to discover assets and collect on judgments is an expansive topic and beyond the scope of this article. However, the simplest way to discover the existence and location of a debtor’s assets is to send an Order for Financial Disclosure form that can be obtained from the court or can be issued by an attorney licensed to practice in Minnesota. The Order for Financial Disclosure form orders the debtor to identify assets such as bank accounts, real property and personal property and also requires the debtor disclose the identify of his or her employer. Armed with a Financial Disclosure form completed by the debtor\homeowner, the association can proceed to garnish on bank accounts and wages, as well as levying on personal and real property. Garnishment and levy and execution are governed by statute and highly technical procedures. An association that gets to this point should retain an attorney to guide them through the process.
A final consideration for associations seeking to obtain and collect money judgments on delinquent homeowners is bankruptcy. While a discussion of the bankruptcy laws is beyond the scope of this article, the association should be aware that a debt created by past-due assessments will likely be extinguished if the homeowner files bankruptcy. The debt does not have to be reduced to judgment in order to be extinguished and, as such, any association should always consider the possibility a homeowner might file bankruptcy when considering its collection remedies.
SUMMARY
The board of directors typically benefits from discussing these differing collection remedies with an experienced association attorney that can evaluate the particular issues facing the association and advise the association if pursuing collection of the unpaid assessments through a lawsuit is preferable to lien foreclose. Please contact Timothy Erb at 763-783-5126 or Karen Kurth at 763-783-5168 to discuss collection remedies afforded homeowner associations.