HOA Personal Reimbursement

A Familiar Issue

The association incurs an expense or imposes a fine against an owner for common area damage or the violation of the governing documents.  Is the owner responsible?  How can the association collect the money spent as a result of “bad conduct” of the owner (or their tenant)?  Consider this:

Oren Owner is drunk.  Instead of waiting for the security gate at the entry of his development to finishing opening, he drives through smashing the gate.  The repair cost turns out to be $1,500.  Oren continues driving and parks his car on the driveway of his lot.  The car, having been smashed on the undercarriage, leaks oil causing a stain on the driveway.  Power blasting the stain away will cost $1,000.

Oren is blissfully unaware of all of this.  Instead, he continues partying with friends and some backyard dancing to loud rock ‘n’ roll until 4:00 a.m.  The board notices a hearing and imposes a $100 fine for the noisy behavior; a reimbursement assessment of $1,500 for the cost to fix the gate; and a $1,000 reimbursement assessment for the cost the association will (and later does) incur to power blast the driveway.

Oren is given notice of the penalties but ignores the manager’s request for payment.  Counsel is engaged.  She reviews the CC&Rs – including the enforcement, reimbursement assessment and lien provisions – and sends a formal demand letter addressing these issues.  The demand letter requests payment of $3,500 including $900 in legal fees (for the analysis and letter) and management fees (for preparing a previous demand letter and phone calls with the lawyer).  Oren responds saying, among other things, “No, I won’t pay.”

Breaking Down the Amounts Owed:

$1,500 Reimbursement assessment for amount paid to gate contractor to fix damaged gate on common area based on CC&R provision requiring owners to pay for damage they cause to common area
$1,000 Reimbursement assessment for amount paid to paving contractor to power blast the driveway necessitated by Oren’s breach of the CC&R provision banning driveways with oil stains
$100 Fine in an amount based on the “schedule of monetary penalties” arising out of Oren’s noisy behavior which unreasonably disturbs his neighbors thus constituting a “nuisance”
$900 Reimbursement assessment for legal and management fees the association incurred in curing the damage and dealing with the CC&R breaches.

These expenses, depending on the definitions used in an association’s CC&Rs, are variously called “reimbursement assessments,” “single individual assessments,” “personal assessments,” or other similar phrases.  Here, we are calling them “personal assessments” for convenience.

Rules: What the Civil Code says (or doesn’t say) (Civil Code section 1367.1(d))

As we all know, the law – and this will be true under “New Davis Stirling” effective January 1, 2013 as well – permits an association to impose and collect (by a lawsuit or nonjudicial foreclosure) “regular” and “special” assessments levied against all members.  It is also lawful to impose and collect personal assessments against a specific member but some of the rules are different.  In any case, no personal assessment (except a fine) may be levied in excess of the actual costs incurred.

Assuming the Governing Documents are written as broadly as the law permits – and the “original” set almost never is – the association can impose a personal assessment for the $1,500 spent to repair the common area gate.  That is just the first step in the analysis.  Next, we need to determine how that personal assessment can be collected.  Again, assuming the CC&Rs have all the enforcement tools possible, this kind of personal assessment can be collected like an unpaid regular or special assessment – by lawsuit or nonjudicial foreclosure.

The Civil Code is completely silent on whether the association can use these same remedies for collection of the $1,000 spent to eliminate the oil stains on the driveway or for the $900 paid to management and the attorney.

Finally, for the fine, there is a funky rule.  It says a monetary penalty (i.e. a fine) may not become a lien enforceable by nonjudicial foreclosure.  This is unclear because it does not appear to prohibit recording a lien and then suing in court to foreclose (instead of nonjudicial foreclosure).  It is doubtful that the amount of a fine will typically warrant a full-blown lawsuit for “judicial” foreclosure and it is very unlikely that a Judge will allow someone’s home to be taken away as a result of a fine for “bad behavior.”

Tools

The bottom line is that the association can implement tools that will give it the ability to successfully bring a claim in court – small claims or Superior Court – or to use the same nonjudicial foreclosure procedures for all the expenses above except recovery of the fine.  For that, the “safest” course will be to sue the owner in small claims court.

Violations: The language in the Governing Documents supporting the violations must be clear.  In the example above, the CC&Rs must say that damage to common area caused by owners will be repaired at owner expense; that owners have a duty to assure that driveways are free of stains; and that excessive noise that unreasonably disturbs neighbors is banned as a nuisance.

Remedies: Likewise, the Governing Documents must clearly specify the remedies available for violations.  Again, in the above example, the remedies should include the right to incur expenses to make common area repairs; to use an easement to access an owner’s “separate interest” lot and to make repairs to the extent reasonably necessary to cure a violation; to engage counsel and management to enforce the Governing Documents; and to record a lien and use judicial or nonjudicial foreclosure or to sue to recover sums due.  “Liening” is not banned for the recovery of any sum due although the legality of use of a lien that simply “sits” on title to collect a fine has not been tested.  We do not recommend it.  Finally, if the association wishes to pursue an owner for the conduct of their tenants or guests, the authority for that should be specific, broad and clearly spelled out in the Governing Documents.

Due Process: The Governing Documents must give the owner an opportunity to address the “charges” at a hearing.  That means pictures and written evidence of the violation must be provided.  Copies of invoices of expenses already incurred (such as the gate repair) or of bids to be incurred (power blasting of the driveway) should also be given.  In some cases, it may mean that evidence of member complaints must also be given the owner against whom action is sought.  In cases where violations are objective – oil stains on a driveway or construction without committee approval – neighbor complaints probably do not have to be revealed.  In cases where the violations are subjective – such as moving violations or noise – the owner may have a right to know who is complaining and when.  In situations where the association plans to access an owner’s property, the possibility of doing so should be included in the notice of hearing.  The key in all due process notices is to give the owner, where appropriate, fair warning of what things will happen, and when, if violations are not dealt with.

Do not Forget the Rules Are Governing Documents: The authority to pursue the enforcement and collection described above must be found in the Bylaws and CC&Rs.  They should also be contained in operating and other rules.  For example, the assessment collection policy (that must be annually distributed) should provide for collection of personal assessments by the lien and foreclosure power in addition to recovery by a lawsuit for money damages.  The schedule of monetary penalties (which is typically distributed annually) should remind members that expenses incurred in enforcement of the governing documents are a penalty, which may be imposed.

So long as the governing documents are written broadly enough, and due process rights have been respected, the Association’s enforcement rights can be used with great effect.  The other important components – fairness and consistent enforcement – are key as well and should not be ignored in pursuing remedies.

 

Personal Reimbursement Assessments

 

A Familiar Issue

The association incurs an expense or imposes a fine against an owner for common area damage or the violation of the governing documents.  Is the owner responsible?  How can the association collect the money spent as a result of “bad conduct” of the owner (or their tenant)?  Consider this:

Oren Owner is drunk.  Instead of waiting for the security gate at the entry of his development to finishing opening, he drives through smashing the gate.  The repair cost turns out to be $1,500.  Oren continues driving and parks his car on the driveway of his lot.  The car, having been smashed on the undercarriage, leaks oil causing a stain on the driveway.  Power blasting the stain away will cost $1,000.

Oren is blissfully unaware of all of this.  Instead, he continues partying with friends and some backyard dancing to loud rock ‘n’ roll until 4:00 a.m.  The board notices a hearing and imposes a $100 fine for the noisy behavior; a reimbursement assessment of $1,500 for the cost to fix the gate; and a $1,000 reimbursement assessment for the cost the association will (and later does) incur to power blast the driveway.

Oren is given notice of the penalties but ignores the manager’s request for payment.  Counsel is engaged.  She reviews the CC&Rs – including the enforcement, reimbursement assessment and lien provisions – and sends a formal demand letter addressing these issues.  The demand letter requests payment of $3,500 including $900 in legal fees (for the analysis and letter) and management fees (for preparing a previous demand letter and phone calls with the lawyer).  Oren responds saying, among other things, “No, I won’t pay.”

Breaking Down the Amounts Owed:

$1,500 Reimbursement assessment for amount paid to gate contractor to fix damaged gate on common area based on CC&R provision requiring owners to pay for damage they cause to common area
$1,000 Reimbursement assessment for amount paid to paving contractor to power blast the driveway necessitated by Oren’s breach of the CC&R provision banning driveways with oil stains
$100 Fine in an amount based on the “schedule of monetary penalties” arising out of Oren’s noisy behavior which unreasonably disturbs his neighbors thus constituting a “nuisance”
$900 Reimbursement assessment for legal and management fees the association incurred in curing the damage and dealing with the CC&R breaches.

These expenses, depending on the definitions used in an association’s CC&Rs, are variously called “reimbursement assessments,” “single individual assessments,” “personal assessments,” or other similar phrases.  Here, we are calling them “personal assessments” for convenience.

Rules: What the Civil Code says (or doesn’t say) (Civil Code section 1367.1(d))

As we all know, the law – and this will be true under “New Davis Stirling” effective January 1, 2013 as well – permits an association to impose and collect (by a lawsuit or nonjudicial foreclosure) “regular” and “special” assessments levied against all members.  It is also lawful to impose and collect personal assessments against a specific member but some of the rules are different.  In any case, no personal assessment (except a fine) may be levied in excess of the actual costs incurred.

Assuming the Governing Documents are written as broadly as the law permits – and the “original” set almost never is – the association can impose a personal assessment for the $1,500 spent to repair the common area gate.  That is just the first step in the analysis.  Next, we need to determine how that personal assessment can be collected.  Again, assuming the CC&Rs have all the enforcement tools possible, this kind of personal assessment can be collected like an unpaid regular or special assessment – by lawsuit or nonjudicial foreclosure.

The Civil Code is completely silent on whether the association can use these same remedies for collection of the $1,000 spent to eliminate the oil stains on the driveway or for the $900 paid to management and the attorney.

Finally, for the fine, there is a funky rule.  It says a monetary penalty (i.e. a fine) may not become a lien enforceable by nonjudicial foreclosure.  This is unclear because it does not appear to prohibit recording a lien and then suing in court to foreclose (instead of nonjudicial foreclosure).  It is doubtful that the amount of a fine will typically warrant a full-blown lawsuit for “judicial” foreclosure and it is very unlikely that a Judge will allow someone’s home to be taken away as a result of a fine for “bad behavior.”

Tools

The bottom line is that the association can implement tools that will give it the ability to successfully bring a claim in court – small claims or Superior Court – or to use the same nonjudicial foreclosure procedures for all the expenses above except recovery of the fine.  For that, the “safest” course will be to sue the owner in small claims court.

Violations: The language in the Governing Documents supporting the violations must be clear.  In the example above, the CC&Rs must say that damage to common area caused by owners will be repaired at owner expense; that owners have a duty to assure that driveways are free of stains; and that excessive noise that unreasonably disturbs neighbors is banned as a nuisance.

Remedies: Likewise, the Governing Documents must clearly specify the remedies available for violations.  Again, in the above example, the remedies should include the right to incur expenses to make common area repairs; to use an easement to access an owner’s “separate interest” lot and to make repairs to the extent reasonably necessary to cure a violation; to engage counsel and management to enforce the Governing Documents; and to record a lien and use judicial or nonjudicial foreclosure or to sue to recover sums due.  “Liening” is not banned for the recovery of any sum due although the legality of use of a lien that simply “sits” on title to collect a fine has not been tested.  We do not recommend it.  Finally, if the association wishes to pursue an owner for the conduct of their tenants or guests, the authority for that should be specific, broad and clearly spelled out in the Governing Documents.

Due Process: The Governing Documents must give the owner an opportunity to address the “charges” at a hearing.  That means pictures and written evidence of the violation must be provided.  Copies of invoices of expenses already incurred (such as the gate repair) or of bids to be incurred (power blasting of the driveway) should also be given.  In some cases, it may mean that evidence of member complaints must also be given the owner against whom action is sought.  In cases where violations are objective – oil stains on a driveway or construction without committee approval – neighbor complaints probably do not have to be revealed.  In cases where the violations are subjective – such as moving violations or noise – the owner may have a right to know who is complaining and when.  In situations where the association plans to access an owner’s property, the possibility of doing so should be included in the notice of hearing.  The key in all due process notices is to give the owner, where appropriate, fair warning of what things will happen, and when, if violations are not dealt with.

Do not Forget the Rules Are Governing Documents: The authority to pursue the enforcement and collection described above must be found in the Bylaws and CC&Rs.  They should also be contained in operating and other rules.  For example, the assessment collection policy (that must be annually distributed) should provide for collection of personal assessments by the lien and foreclosure power in addition to recovery by a lawsuit for money damages.  The schedule of monetary penalties (which is typically distributed annually) should remind members that expenses incurred in enforcement of the governing documents are a penalty, which may be imposed.

So long as the governing documents are written broadly enough, and due process rights have been respected, the Association’s enforcement rights can be used with great effect.  The other important components – fairness and consistent enforcement – are key as well and should not be ignored in pursuing remedies.

 

Collecting Assessment Debt

In a typical mortgage foreclosure, the foreclosing lender has a first-priority lien on the property, which means that the foreclosure extinguishes (or wipes out) any junior liens on the property. Junior liens are any liens that are put on the public record after the recording of the first mortgage. Examples include second mortgages or home-equity lines of credit, federal and state tax liens, judgments obtained by other creditors, and yes, HOA liens. The homeowner’s actual debts to those creditors are NOT erased by the mortgage foreclosure, but as junior-lien holders, they have lost the ability to collect their debts by enforcing their liens against the property.

If you are the holder of a junior lien when a foreclosure occurs, you generally have two options to recover the balance owed to you by the previous homeowner: You can file a lawsuit against the homeowner, or you can turn the account over to a collection agency.

Filing a lawsuit to collect a debt is fraught with uncertainty. You have to locate the homeowner at his new address, pay an attorney to file the lawsuit, go to court and obtain a judgment, and then try to collect on the judgment. Moreover, just because you are awarded a judgment against the debtor does not mean you get paid. It just means you can try to collect the debt by having the sheriff seize the debtor’s property, if any, and sell it at a public auction. The process of enforcing a judgment can be difficult. Besides, most people who just lost their home in a mortgage foreclosure are not likely to have significant assets at their disposal.

As for collection agencies, some of my HOA clients have used them in the past with mixed results. Using a collection agency usually doesn’t cost the HOA anything, since most of the agencies work on a contingent-fee basis, such that the collection agency’s fee is a percentage of whatever it collects. However, most HOAs just write off the bad debt following a mortgage foreclosure because the cost and hassle of pursuing the debt are usually not worth the effort.

It is nevertheless important for an HOA to have its lien in place when a property goes into a mortgage foreclosure (assuming, of course, that there are past-due HOA assessments). During and in the years following the Great Recession, there weren’t many investors bidding at foreclosure sales. As a result, mortgage lenders would “bid in” the amount that was owed on the mortgage (sometimes less) and take title to the property. These days, real-estate prices have rebounded, demand is up, and supply is low, and we see a lot more homes sold at foreclosure for more than what is owed on the mortgage. When this happens, there are “surplus proceeds” available. This is the amount of money left over after the mortgage and foreclosure expenses have been paid. The lender typically pays these surplus funds into the Clerk of Court. Thereafter, the former owner and other creditors whose liens were extinguished can petition the court to have those funds paid over to them. The court must pay the liens in the order of their priority, to the extent funds are available, with any remaining funds paid to the former owner. With an improved economy and real-estate market, the odds for getting paid through surplus proceeds remaining after a mortgage foreclosure are better than they were a few years ago.