The Most Important Thing Any Association Does

The Most Important Thing Any Association Does

By Brad M. Barna

I will often ask clients what they think is the most important thing that common interest community associations do. Many will say maintaining desirability via maintenance of common areas. Others will say the provision of amenities is most important or that the protection of a common aesthetic by regulating architectural design is the primary purpose of their association. These are all important functions of community associations but selecting them as the most important action that an association takes ignores a fundamental reality and something they all have in common: they require funds.

The association is generally responsible for providing maintenance, repairs, and other services to benefit the community.  Assessments sustain operation of an association’s affairs, pay for upkeep of facilities on common areas/elements, and enable the association to provide a variety of services to its members.  Non-payment of assessments by several owners can have negative consequences on the community as a whole and cut into an association’s budget and cause a crisis for community-supplied services.

The association is, ultimately, a business tasked with carrying out its purposes for the benefit of its community, all of which requires funding. The association’s board of directors is responsible for ensuring the association’s financial health and that it possesses sufficient resources to fulfill its responsibilities pursuant to the association’s governing documents and applicable law.  To this end, one of the most important functions of the association is collection of assessments owed so that it possesses money to pay for its obligations. Without proper funding and collection of assessments, common areas/elements can become unkempt, amenities can degrade, and enforcement of violations of the covenants and design standards may fall by the wayside.

Accordingly, one of the most important decisions for a board is what to do when owners aren’t paying assessments timely.  Fortunately, there are a variety of avenues for an association to pursue collection of assessments. The remedies which an association utilizes may be limited by applicable law, and the methods for collection should be consistent with the association’s governing documents and any applicable rules or resolutions, such as a collections policy, adopted by the board.

The remedies available for most associations come in two general forms: 1) administrative; and 2) legal.

Administrative Remedies:

On the administrative side, the most common remedies related to collections are those having to do with suspension of rights and privileges. For example, if the association’s governing documents establish sufficient authority under applicable law, an association may suspend an owner’s right to use association facilities and/or services for delinquencies greater than 60 days (subject to the provision of certain notice and due process requirements under applicable law and/or the association’s governing documents). Many governing documents further provide the association with the ability to suspend voting rights or the right to hold office based on delinquencies to the association. Associations with pool facilities that have the authority to suspend use rights often have remarkable success in bringing accounts current right before pool season as owners scramble to ensure that they’ll have access for the summer. Similarly, associations may be able to suspend an owner’s right to park on the common area. Lastly, if a member’s home is going to a sale, the association can include information on any outstanding assessments owed in the disclosure packet or resale certificate and those should be paid at closing.

Legal Remedies:

On the legal side, associations’ governing documents and applicable law provide two main options to secure and collect delinquent assessments: (1) assessment liens to secure debt owed against the owner’s unit or lot; and (2) lawsuits to secure the debt owed against the owner personally.

Assessment liens are recorded in a municipality’s land records, attach to the owner’s lot or unit, and are a cloud on title until paid or otherwise satisfied and released. Liens can be a relatively cheap and effective way to secure assessment debt owed against a property and protect the association’s interests (often a lien will be voluntarily paid by the owner or through the proceeds of the sale of a property so that the owner can convey clean title to a purchaser).  If traditional efforts to collect funds are unsuccessful and the circumstances are right an assessment lien may also form the basis for the association to foreclose on an owner’s property (whether or not foreclosure on the lien is recommended, however, would be a fact specific inquiry and depend on many factors; foreclosure is discussed in more detail below).

Lawsuits are filed in the applicable court against the property owner personally and can result in judgments that are actively collectible through writs and garnishments. Under Virginia and D.C. law, an association that has a judgment against a current or former property owner for amounts owed can file a garnishment to collect the amounts awarded by the court to the association. The two types of garnishments with which associations typically have the most success are bank garnishments and wage garnishments. Bank garnishments involve the association (or its legal counsel) finding a bank account for the owner and then asking the court to issue an order that the bank hold all of the owner’s funds so that they can be applied to the judgment. Similarly, for a wage garnishment, pursuant to a request by the association, the court can order the owner’s employer to hold part of the owner’s paycheck and apply those wages towards the judgment. Additionally, if the owner is receiving rental income from the property, the association can file a rent garnishment and request the court order a tenant to pay rent to the court instead of the owner, with the court then paying those funds over to the association to be applied towards paying the judgment.

Of course, without information regarding where the owner banks or is employed and whether the debtor rents or resides in the property, the ability to successfully garnish a judgment is limited. In such cases, the remedy of debtor’s interrogatories is available.  For debtor’s interrogatories, the court will order the debtor to appear before the court and answer under oath questions related to the debtor’s finances. Using the information found in those responses, the association may be able to locate viable assets of the debtor, such as bank accounts and real or personal property, that provide options for collection on a judgment through garnishments or levies.

Writ of Fieri Facias (“Attachment” or Sheriff’s Levy) is a document filed with the court that requests authorization for the sheriff to “seize” and auction off the debtor’s personal property to satisfy a judgment. This method of collection requires some personal knowledge of the debtor and his possessions – e.g., does the debtor own a nice car? Does the debtor have expensive electronic equipment in his house?  It can be effective in obtaining payment from a debtor under certain circumstances and, at a minimum, may convince a debtor to find the money to pay the debt rather than deal with the sheriff’s office (or marshals’ office) and the potential sale of personal property.

Foreclosure on a timely perfected assessment lien(s) may be advisable for an association when the circumstances are right. Given the potential costs associated with a foreclosure and the likely possibility of the association not being made whole at the end if the property either does not sell at foreclosure or sells for less than the cost of the association’s secured interests, plus those of lienholders standing in higher priority than the association, and the costs of the foreclosure action. In many cases foreclosure may not be a cost-effective option. Some notable concerns are that foreclosure candidates may lack sufficient equity to make the foreclosure process worthwhile, may have title problems, or may not be in good enough condition (or otherwise sufficiently desirable) to attract worthwhile bids from prospective purchasers.  In addition, recent changes made to applicable law during the pandemic have made foreclosure of properties more difficult for creditors.

We typically recommend taking a two-pronged approach to collections involving both timely filing assessment liens and seeking judgments via lawsuits. Assuming that the debt is high enough to make it cost-effective, such an approach best protects the association from an owner’s bankruptcy and from foreclosures by any other lienholders. This is because liens will typically give an association secured status in bankruptcy – which will prioritize payment on their claim – but can be susceptible to being wiped out in a mortgage foreclosure. On the other hand, judgments obtained via a lawsuit may be discharged by an owner’s personal bankruptcy, but if not discharged in bankruptcy, the judgment will survive mortgage foreclosure, meaning that the association can pursue the former owner for any amounts that weren’t paid from foreclosure proceeds. Unfortunately, in the rare instance where an owner goes through both foreclosure (and its interests are not fully or partially paid) and bankruptcy in quick succession, the association may be out of luck in collecting amounts owed and be best served by writing off the former owner’s account.

While collection of delinquent assessments may not be what the Board wants to focus on or put at the top of its meeting agenda, ensuring that sufficient funds are coming in to cover anticipated expenses is vital and important to ensuring the smooth and efficient functioning of the association.  It is also important to remember that, in regards to recouping the costs of liens and lawsuits, an association’s recorded governing documents as well as applicable law may provide sufficient authority for the court to award an association the costs, including attorneys’ fees, associated with collection action and those with authority who request stand a good chance of recovering some or all of the costs incurred.

We hope you find this information helpful and, should you have any questions or be interested in hearing more about our firm’s approach to collections, please contact us. _____________________________________________________________________________________________________________________________________

Legal Disclaimer: The information in this article is not intended to be legal advice. Legal advice must be tailored to your specific facts and circumstances and your association’s governing documents.  Neither this post nor the CWMEB Journal is intended to be a full and exhaustive explanation of the law in any area, nor should it be used to replace the individualized advice of your legal counsel.

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