Florida HOA Lawyer Blog

Never underestimate the power of the United States bankruptcy courts. As a much younger lawyer, I was amazed to learn that in a bankruptcy proceeding, rather than requiring a process server to serve the complaint upon the defendants, a debtor-plaintiff can actually serve their bankruptcy complaint on the creditor-defendants by U.S. First Class Mail! Yes, the bankruptcy court is full of surprises. A bankruptcy court might even be able help fix the unfixable, unanswerable problem: How can an association require a first mortgagee lender to pay assessments during the lender's own self-stalled foreclosure?

If you're following recent developments in the foreclosure courts, you already know that many lenders have stopped their foreclosures cold because they have no confidence in their very own mortgage documents. Apparently, with the securitization of mortgage backed securities, "Wall Street" failed to keep track of the actual mortgage documents. For analogy, imagine the paperwork that evidences each residential mortgage as a stack of paper six inches high. Imagine how many six inch stacks of paper can fit into a semi-trailer. Now imagine each semi-trailer full to the brim with these six inch stacks. Remember, each six inch stack represents only one mortgage. Think of the loaded semi-trailer as the hard asset upon which each mortgage backed security was created; one semi-trailer for each mortgage backed security that was created. With that in mind, imagine that the semi-trailer representing only one of seemingly countless mortgage backed securities, is bought and sold multiple times each day to multiple investors from all over world . . . every day for several years. What happened to the semi-trailers? Where are all of those loan documents that together comprise the mortgage backed security?

Recently, "60 Minutes" suggested that hundreds of thousands of loan documents were re-created by companies outsourced by our nation's largest lending institutions. These re-created documents are nothing more than forgeries. Any lawyer who knowingly forecloses a debtor based on fraudulent documents commits a fraud on the court, not to mention exposing their client to significant liability. Meanwhile, associations, large and small, suffer from a continued lack of assessment revenue from these stalled foreclosures.

For a time, upon proper motion, the trial courts were ordering stalling lenders to either move their foreclosures along or pay assessments. On appeal, the appellate courts reversed. Primarily, they held that where a remedy at law exists, the trial courts could not create equitable relief for associations. With that in mind, how can the lender ever be responsible to pay assessments before it finally acquires title to the property?

The answer, pending the financial strength of your association, might be a bankruptcy to reorganize the debts of the association. In these situations, a Chapter 11 bankruptcy might just be what the doctor ordered. Not only does it provide the restructuring of existing debts, but it allows the federal bankruptcy court to do what the state courts cannot. Specifically, under federal bankruptcy law, the court can order the secured creditor (in this case, the lender whose mortgage is secured by the property) to pay a "surcharge" during the reorganization.

As discussed in the recent United States, Southern District Bankruptcy Court case, In re the Spa at Sunset Isles Condominium Association, the federal bankruptcy "surcharge" can be implemented to require a lienholder (the lender) to be charged with the reasonable costs and expenses incurred by the debtor (the association) to preserve or dispose of the lienholder's collateral to the extent that the lienholder derives a benefit as a result.

The lender had argued that any order requiring it to pay the "surcharge" was improper because state law had already prohibited requiring the lender to pay towards the upkeep of the property prior to the time it acquires title to the property as a result of its own foreclosure. The bankruptcy court looked to Article VI of the United States Constitution, the Supremacy Clause, which provides that the laws of the United States "shall be the supreme law of the land and the judges in every state shall be bound thereby, anything in the Constitution or Laws of any state to the contrary notwithstanding." The court required the lender to pay their pro rata share of preserving the association's common elements.

Not every association is a candidate for a Chapter 11 bankruptcy. Pending the number of foreclosures in your community, the financial shortfall created by the debt, the association's cash on hand, the ability of the association to pay its debts, etc., a Chapter 11 bankruptcy may or may not be appropriate. Clearly, the necessary first step is consultation between the board and qualified bankruptcy counsel.

A couple of weeks ago I wrote an article for this blog that focused on the tactics that we are using to enable community associations to contend with unit owners who file for personal bankruptcy protection. For my first video as part of our new video series, I focused on one of the strategies that we have now been using with considerable success.

Many of these associations are quite surprised when they learn that under Chapter 13 bankruptcy, homeowners can strip away any second mortgages or association liens if they are able to prove that they have absolutely no equity in the home. By submitting to the bankruptcy court a professional appraisal that says that the current market value of their home or condo is actually less than the amount that they owe under the first mortgage, they are able to use the "lien stripping" provisions under Chapter 13 bankruptcy to wipe out everything that they owe to the association or under a second mortgage from prior to the bankruptcy filing.

As you can well imagine, the use of lien stripping has grown quite a bit during the last several years with the meltdown in the housing market, and as a result we are working with a number of our association clients to help them to fight it. To learn more about exactly how we are helping our association clients to successfully contend with lien stripping by their members in bankruptcy, click below to watch my brief video on the matter and scroll down to read my article posted on Sept. 20.

The recent report in The Miami Herald stating that the number of South Florida homeowners who owe more on their mortgage than their property is worth remains above 400,000 was very disquieting for the thousands of community associations in the region. Many of these associations have already discovered that their members who file for Chapter 13 bankruptcy have the opportunity to wipe away their association lien and second mortgages or secured credit lines if they are able to demonstrate that they have no equity in their property because it is now valued at less than what they owe on their first mortgage. With so many homeowners underwater on their first mortgages in South Florida, the use of these lien stripping provisions under the bankruptcy code seems destined to continue to rise.

Thankfully for the associations, there is a strategy that we have been using with considerable success to enable them to fight back and avoid lien stripping. It hinges on the fact that the criteria in the bankruptcy code for lien stripping to take place essentially creates an all or nothing requirement for the debtor who is trying to show that they have no equity in the residence. If the association is able to demonstrate to the bankruptcy judge that there is even just one dollar in equity in the residence, then the debtor is unable to strip away the association lien or second mortgage.

The issue becomes a "battle of appraisers." Given that, we are counseling our association clients in these cases to obtain detailed professional appraisals based on recent comparable sales and the condition of the residence that show that it is worth more than the balance due on the debtor's first mortgage. We then submit the higher appraisal to the bankruptcy court, and in many of these cases we are able to reach a settlement to recoup some of the delinquent fees that would otherwise have been eliminated using lien stripping. In one recent case, the association was owed $28,000 and we secured a settlement for $17,000 to be paid through the Chapter 13 bankruptcy, marking a very successful outcome for the association in today's "debtor friendly" bankruptcy world.

The results, of course, will vary based on the amount that the homeowner owes under their first mortgage and the strength of the association's higher appraisal. However, we have certainly realized a great deal of success using this approach, and we plan to continue using it on behalf of many of our association clients that are facing the prospect of receiving nothing for what they are owed from prior to their member's bankruptcy filing.

With the recent proliferation of condominium foreclosures and owners becoming delinquent in their monthly assessments, many South Florida condominium associations are experiencing difficulties in paying their bills and have thus considered the bankruptcy option. While it's not the norm for condominium associations to file Chapter 11 bankruptcy, it is a recourse that has increased in the past several years, particularly in overbuilt markets such as Miami and throughout South Florida. The point at which associations begin considering bankruptcy relief is when the remaining owners in the community are forced to cover far more than their proportionate share of the assessments, resulting in even more owners falling delinquent. As a result, lawyers who focus on bankruptcy matters for condominium associations and homeowners associations have become an invaluable resource for these community associations that had traditionally been able maintain solvency and avoid bankruptcy filings.

One of the first such filings for a major Miami condominium association came in June of 2009 when the association for the 502-unit Maison Grande in Miami Beach filed a Chapter 11 petition. Others soon followed, as new properties were completed but the majority of their units remained unsold. Developers also began filing bankruptcies due to the state of the market, and now a number of properties are being turned over to their lenders as a result of these bankruptcy filings by insolvent developers. These include the Everglades on the Bay condominium and ICON Brickell in downtown Miami, and the Terrazas River Park and Village near Miami International Airport.

For the community associations for these and scores of other financially troubled properties throughout South Florida, it is imperative to work very closely with highly experienced attorneys who concentrate on bankruptcy issues. The community associations must consider the following: while associations are seeking mechanisms to test the bankruptcy laws, at first glance, it appears that Chapter 11 bankruptcy may not be available because associations are pass-through vehicles and not property owners. Difficulties arise for an association seeking bankruptcy relief, as typically an association does not generally find itself in a position where its liabilities exceed its assets, especially with its power to levy a special assessment in order to satisfy its debt. Bankruptcy is a costly endeavor and should be used as a last resort, given that the courts are inclined to review an association bankruptcy filing as dilatory and often disallow the filing.

Corporations need an exit strategy in Chapter 11 bankruptcy, and it is presently unclear how an association having trouble covering basic monthly services could reorganize. Generally, associations have nothing to "sell off" in a bankruptcy reorganization plan, except common areas such as a lobby or a recreational facility. Therefore, the "jury is still out" with respect to whether bankruptcy could benefit an association, as the association's assets consist of the property's common arrears and its ability to assess individual unit owners. Associations may be better off negotiating with their creditors and achieving an out-of-court restructuring plan.

As with other South Florida law firms that focus on representing condominium associations and homeowners associations, our firm is working very closely with several community associations to help them to explore their options involving bankruptcy filings. I have focused on guiding both debtors and creditors through bankruptcy proceedings for much of my 20-year legal career in South Florida, and my experience has proven to be an important resource for many of our community association clients.

The recession and slow pace of economic recovery have taken a heavy toll on the finances of individuals in South Florida and throughout the country. With many finding themselves forced to file for bankruptcy, the wave of personal bankruptcies has exacerbated the financial difficulties at condominium associations and HOAs that were already struggling with their collection efforts due in large part to the foreclosure epidemic. As a result, the community association lawyers in South Florida at our firm and throughout the state have been working closely with their clients to help them to contend with unit owners who seek bankruptcy relief.

Typically, there are two types of personal bankruptcies that unit owners may file: Chapter 7 and Chapter 13. When an owner files bankruptcy, the "automatic stay" is triggered upon filing which requires that all collection efforts by any of the owner's creditors must immediately cease. That means if an association is in process with a lien foreclosure action at the time when the unit owner files bankruptcy, then the foreclosure action must come to a halt unless and until the bankruptcy court authorizes the foreclosure to be reinstated during the pendency of the bankruptcy case.

In Chapter 7 bankruptcies, the unit owners will either stay current with their payments to their mortgage lender and the association in order to keep their residence, or they will cease making their payments and give up possession and title to the residence to their lender. If the owner is delinquent at the time of the filing for bankruptcy, then the association may request what is called "stay relief" from the bankruptcy court in order to either proceed with or commence a lien foreclosure action against the unit. However, the bankruptcy filing will prevent the association from obtaining a money judgment against the owner if the owner receives a Chapter 7 discharge of his or her debt to creditors. For an individual to receive a discharge of his or her obligations in a Chapter 7 bankruptcy, the process takes approximately four months. However, should the owner attempt to remain current with the obligations to the association in order to maintain ownership of the unit, once the discharge is entered, the "automatic stay" against collection actions is removed and the association may undertake a lien foreclosure and collection action against the owner should the owner become delinquent in payment post-discharge.

In Chapter 13 bankruptcy filings, the process is designed to afford the owner the ability to "catch up" and save their home by curing all arrears due to their mortgage lender and the association through a repayment plan. Usually, the repayment plan lasts five years and the owner is required to cure the arrears within the five year plan and pay all of the regular monthly maintenance and special assessment payments that come due after the date of the bankruptcy filing. The five year plan proposed by the owner must receive court approval.

An important and perhaps difficult note for associations in the Chapter 13 process is what is commonly referred to as "lien stripping." If the owner's unit is determined by the bankruptcy court to have a value less than what is owed to the first mortgage lender, then Chapter 13 allows the owner to "strip off" and avoid all junior mortgages (second mortgages and/or home equity lines of credit) and any association lien that existed of record at the time of the bankruptcy filing. While this appears as a harsh result to associations, the one element in the association's favor is that the owner must pay all maintenance and special assessment payments that come due from the date of the bankruptcy filing forward. In other words, despite the avoidance of the junior liens, if the owner elects to retain ownership of the residence, then the owner must start paying the monthly association fees and mortgage payments going forward from the date of the bankruptcy filing.

For the community associations with unit owners who file for Chapter 7 or Chapter 13 bankruptcy, it is essential that they work with a qualified and experienced bankruptcy attorney who can guide them through the collections process for these individuals. Our attorneys will continue to monitor and write about community association matters, and we encourage you to submit your e-mail address in the box on the right in order to automatically receive all of our future blog posts.