Community associations are nonprofit corporations, which are funded solely by dues/assessments paid by members. Unfortunately, when one member fails to pay his or her fair share, the rest of the members must make up the difference. As a matter of equity, it is simply unjust for the other co-owners—who typically have not done anything wrong or have no involvement in the defaulting co-owner’s failure to pay—to make up the difference. This article explores the role of the community association board of directors, the property manager and the association’s legal counsel in collecting against a delinquent co-owner.
1. Responsibility for Assessments/Dues
Pursuant to the association’s governing documents, or by statute, as in the case of condominiums [The Michigan Condominium Act, MCL 559.169], a co-owner is required to pay assessments/dues. The governing documents of an association often include the purpose or use of an assessment, the basis for calculating the assessment, payment procedures, collection procedures for delinquent assessments and the authority for levying fines, fees, and interest. Typically, if co-owners within an association are on notice of the consequences of nonpayment, the compliance rate for payment of assessments/dues will be greater. If an association waits until delinquency becomes a problem, it may be too late for the association to obtain a proportionate remedy.
2. Implementation of a Reasonable Collection Policy
A community association’s board of directors is responsible for the implementation, continuation and enforcement of collection actions. Directors cannot ignore delinquencies for a multitude of reasons. First, the board of directors has a fiduciary responsibility to attempt to collect on delinquent assessments/dues. Second, if assessments are not collected in a timely manner, it can jeopardize the association’s economic health and stability. Third, without a steady source of income, the association may be unable to provide essential services to the co-owners, thereby deferring necessary maintenance to roofs, siding, and other responsibilities. Therefore, it is important for the board of directors, with the assistance of its attorney, to create a reasonable collection policy which treats all delinquencies equally to avoid a claim for selective enforcement.
A formal collection policy is the foundation of a successful collection program in order to maintain necessary cash flows, reduce financial loss from owner defaults on assessment payments, establish and maintain reserves and present a sound financial picture to potential lenders for the association and/or a mortgage company for potential purchasers or owners refinancing their mortgages. Once the collection policy has been established, it must be communicated/disseminated to the co-owners and become part of the association’s governing documents.
A standard collection policy will set forth a firm due date for assessments [typically by the 1st of the month] and in the case of non-payment, the levying of a late fee [typically the 15th of the month]. In addition, a standard collection policy 1) outlines the steps to be taken by the manager or person responsible for collecting assessments when a payment is overdue, 2) allows for payment plans in cases of special need and financial hardship, 3) specifies when a delinquent assessment should be automatically referred to legal counsel once a delinquent account reaches a specified age or amount [typically no later than two months] to avoid any claims of selective enforcement and/or favoritism, 4) provides for the collection of any attorney fees and costs associated with collecting delinquent assessments and 5) addresses when the assessment of attorneys’ fees are incurred.
When establishing the collection policy, it is also important to make sure that your association’s collection procedures not only conform to state law, such as Article 9 of the Occupation Code on debt collection, MCL 339.901 et. seq., and the Collection Practices Act, codified in MCL 445.251 et seq., but federal statues, as well, such as the Fair Debt Collection Practices Act, 15 U.S.C. 1601 et seq., and provisions within the Bankruptcy Code, Title 11 of the United States Code, among others.
3. Involvement of Legal Counsel
Once the collection policy is implemented and a co-owner becomes delinquent for a specific amount of time, the matter should be tendered to legal counsel. The association’s attorney will evaluate the delinquent member, determine if there are assets and examine all of the various options for pursuing the delinquent member. After a thorough analysis, the attorney should advise the board members as to the best course of action. In order to effectively do this, it is essential that the association’s attorney has as much information available when the account is turned over such as a detailed breakdown of all activity on the account, the name(s), phone number(s) (if known), last known addresses, off-site addresses, names of all occupants and tenants, work addresses, and any other relevant information, copies of checks, money orders, etc., before proceeding with a collection action. If the association’s property manager is not yet involved in the matter, and often times the property manager is intimately involved, the attorney and/or the board should update the property manager regarding the board’s decision.
If the association documents include due process procedures such as notice and a reasonable opportunity to respond prior to initiating any litigation, associations after consultation with the association’s attorney may pursue other options in conjunction with the notice and hearing schedule, such as the suspension of recreational privileges and turning off utilities. In addition, in condominium communities, associations have the ability to divert rent from a delinquent co-owner’s tenant for payment of delinquent assessments/dues. See MCL 559.212.
Often times, payment plans and work-outs for first time delinquents are appropriate. If the association takes an inflexible, hardline approach from the outset, such action may cause additional issues throughout the matter and may force the owner to default on their mortgage or to file for bankruptcy. A payment plan for a “first-time” delinquent will usually result in cooperation and creates goodwill with individuals that have a legitimate financial hardship. However, accepting a payment plan does not mean that you should accept less than the total amount due, including all fees and costs.
4. Collection Litigation
If the non-litigation options fail, there are two basic methods for recovery of delinquent assessments: 1) pursuing the owner’s personal obligation to pay all assessments when they become due while he or she owns the property and 2) the use of an assessment lien which runs with the property itself regardless of who owns the property, which can by foreclosed either judicially or by advertisement, if provided for in the governing documents for homeowner associations and statutorily by MCL 559.208(2) for condominiums. The type of foreclosure will depend on such factors as whether there are junior lien holders that a title company wants a court order of priority in order to issue a commitment, whether the co-owner will vigorously contest the foreclosure, whether there are renters in the unit or simply whether there is equity in the unit.
The owner’s personal obligation entitles the association to file suit for breach of contract against an owner who fails to pay his or her assessments. On the other hand, the assessment lien theory allows an association to file a lien against the property and then do one of three things: 1) wait until the property is sold to collect, 2) foreclose the lien and take the property to satisfy the amount owed, if there is equity in the property or 3) if it is underwater, to lease the unit/home after foreclosing on the lien, until, and if, the first mortgage holder forecloses. By waiting too long to turn over an account, an association may lose out if a mortgage foreclosure is filed against the unit or the owner goes into bankruptcy. In a foreclosure, the lender will assume ownership of the unit before the association has a chance to collect its money.
5. Obtaining Attorney Fees and Costs
With regard to recouping attorney fees and costs, the Michigan Condominium Act allows for condominium associations to recoup reasonable attorney fees and costs incurred for pursuing delinquent co-owners so long as the governing documents provide for this remedy. See MCL 559.206. Likewise, homeowner associations can also recoup reasonable attorney fees and costs incurred so long as the governing documents provide for their recovery and the association prevails in the action against the co-owner/member. All governing documents should include a provision for the recoupment of actual attorney fees and costs.
When determining the reasonableness of attorney fees incurred by the association, courts will often look to data contained in surveys such as the Economics of the Law Practice Surveys that is published by the State Bar of Michigan (https://www.michbar.org/pmrc/articles/0000151.pdf) to determine the fee customarily charged in the locality for such services and multiply the fee by the number of hours reasonably spent. Therefore, it is extremely important to ensure that the association’s attorney falls within the reasonable range set forth in the survey.
In addition, recent bankruptcy courts have held that delinquent homeowners are not liable for the fees and costs imposed by an association’s collection company if that company operated on a ‘contingency basis’ instead of a ‘fixed fee’ basis. Because the association was not responsible to pay the collection company’s fees directly, those fees were not costs ‘incurred’ by the association. Thus, it is important to review whether attorney fees are recoverable from the outset.
It is critical for the association’s board to continually review receivables and aggressively pursue the collection of delinquent accounts. Being proactive on delinquent accounts typically results in far fewer delinquencies and a shorter period of time co-owners are delinquent. While the association may have to recognize losses, with a firm collection policy in place and the prompt turnover of delinquent owners, the likelihood of collecting and reducing delinquencies increases dramatically.