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Questions regarding compliance with the federal Fair Debt Collections Practices Act for the collection of community association assessments by property management companies have been a source of confusion in the industry for decades. Since the ruling in Harris v. Liberty Community Management, Inc., property management companies that fall within the exemption found in §1692a(6)(F)(i) of the FDCPA are not subject to the restrictions imposed by the Act.

The Act provides an exemption for persons or entities “collecting or attempting to collect any debt owed or due or asserted to be owed or due another to the extent such activity is incidental to a bona fide fiduciary obligation.” Liberty Community Management, as the property management company for Little Suwanee Point Community, was hired to provide management services for the association, which included the right to contract for the regular maintenance, repair and operation of common areas and facilities of the association, contract for utility services, purchase insurance policies, and negotiate the collection of assessments from delinquent homeowners.

Liberty, as the association’s agent pursuant to the management agreement, was also authorized to request, demand, collect, receive and invoice for all charges and assessments due to the association. Homeowners residing at Little Suwanee Point Community brought an action against Liberty claiming it was a debt collector which had engaged in unfair business practices when it sent late letters to homeowners who were delinquent in the payment of assessments.

After reviewing the facts presented and the exemptions set forth in the Act, the Eleventh Circuit held that Liberty was exempt from the requirements of the Act since the collection of past due assessments was incidental to its obligations to the association. Had the collection of assessments been central to Liberty’s fiduciary obligations to the association, it would be considered a debt collector as defined by the Act, subject to the requirements imposed therein.

Whether a property management company meets the requirements of the exemption is a question of fact for each individual case. If the collection of assessments is central to an association’s contract with its property management company, the company’s actions to collect the debt will fall within the meaning of term “debt collector” as defined by the Act, making it subject to the requirements imposed therein.

Our attorneys write about important legal and business matters for community associations in this blog on a regular basis, and we encourage association directors, members and managers to submit their email address in the subscription box at the top right of the blog in order to automatically receive all of our future articles.

LauraManningHudson.jpgFirm partner Laura M. Manning-Hudson wrote an article that appeared in today’s edition of the Daily Business Review, South Florida’s only business daily and official court newspaper, about the recent spate of decisions by the Second, Fourth and Fifth District Courts of Appeal with regard to whether the court in a mortgage foreclosure action retains jurisdiction to determine the amount of unpaid condominium and homeowners association assessments that a foreclosing lender must pay. Her article reads:

In July, the Fifth District Court of Appeal issued an opinion in Central Park A Metrowest Condominium Assoc., Inc. v. Amtrust REO I finding that the trial court lacked jurisdiction to decide a post-judgment issue – namely the amount of assessments owed by the foreclosing lender for the prior owner’s past-due condominium assessments. The lender’s complaint had averred that the condominium association “may claim some interest in or lien upon the subject property by virtue of [a] Claim of Lien.” The association answered the complaint and asserted a counterclaim for unpaid assessments. The appellate court, however, found that despite litigating the issue of past-due assessments in a counterclaim, the trial court did not have jurisdiction to determine the issue post-judgment where the final judgment merely provided that “[j]urisdiction of this action is retained to enter further orders as are proper including, without limitation, a deficiency judgment.”

For the Fifth DCA, the issue was not whether the assessments had been litigated in the underlying action, but whether the court had specifically retained jurisdiction in its final judgment to determine their amount.

However, in the two most recent opinions issued by the Second and Fourth District Courts of Appeal, the standards vary. But, there’s a lesson here.

In Citation Way Condominium Association v. Wells Fargo Bank and Leslie Linder, the Fourth DCA found that the lower court had retained jurisdiction to determine the post-judgment issue of past-due condominium assessments where “[t]he issue of unpaid assessments was raised in the underlying foreclosure action and the third-party purchaser, Fannie Mae, had a direct relationship with the plaintiff, Wells Fargo.”

Wells Fargo, as the servicing agent for Fannie Mae, had alleged in its complaint that “its lien was superior to any other claims against title and interest except for unpaid condominium assessments as provided in section 718.116, Florida Statutes.” Unfortunately, the opinion does not reference the language in the final judgment, but apparently it was sufficient basis for the appellate court to decide that the issue had been raised in the underlying action and therefore the lower court could retain jurisdiction.

However, in Grand Central at Kennedy Condominium Association v. Space Coast Credit Union, the Second DCA, citing the Central Park opinion, agreed with the association, concluding: “The trial court lacked jurisdiction because entitlement to assessments was neither litigated nor adjudicated and the trial court did not specifically reserve jurisdiction to determine the amount of assessments due pursuant to section 718.116(1)(b).” The underlying final judgment did not address the condominium’s assessments but merely “contained only a general reservation of jurisdiction.” Apparently, condominium assessments (pre- or post-judgment) were never considered in this case.

Laura’s article concludes:

As shown by these three rulings, the standard in each of the Second, Fourth and Fifth Districts varies as it pertains to post-judgment jurisdiction. While for some courts the issue depends on whether the assessments were litigated at the trial level (albeit, the extent of that litigation was not exemplified), for each of the courts the specific reservation of jurisdiction was key. In fact, the message could not be any clearer than it is in a footnote in the Second DCA’s opinion:

“This appears to be a prevalent issue in mortgage foreclosure actions to which homeowner or condominium associations are parties. In such cases, we would encourage the circuit courts to consider including in their final judgments specific language concerning the reservation of jurisdiction to address the issues of entitlement to and the amount of any unpaid assessments.”

Because attorneys typically submit proposed final judgments to the trial courts for consideration, these three opinions should serve as an instruction to practitioners to include specific language in their final judgments reserving jurisdiction to address the issue of unpaid assessments. Additionally, in order to ensure that the issue is “litigated” in the underlying case, association counsel should be similarly instructed to raise the issue of assessments (pre- and post-judgment) in their affirmative defenses to lender foreclosure cases.

For both the lenders and associations involved in foreclosure cases, it is almost always preferable that assessments be determined by the trial court as part of the foreclosure proceedings rather than via a separate action, thus saving the client both legal and court costs.

Our firm congratulates Laura for sharing her insight into these important new appellate decisions with the readers of the Daily Business Review.

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LauraManningHudson.jpgFirm partner Laura M. Manning-Hudson wrote an article that appeared in today’s edition of the Daily Business Review, South Florida’s only business daily and official court newspaper, about the recent decision by the Fifth District Court of Appeal in the case of Central Park A Metrowest Condominium Association v. Amtrust REO I. Her article reads:

As part of the condominium association’s apparent strategy to aggressively pursue its collections for the previous owners’ debts, the association issued an estoppel to Amtrust REO demanding the full amount of past-due assessments totaling more than $30,000.

In turn, Amtrust REO responded by demanding that the association apply the safe-harbor liability limits set forth in the state Condominium Act, and it also filed a motion to determine amounts due in the foreclosure action seeking to have the same judge who had entered the final judgment determine the amount that it now owed to the association. The foreclosure court considered the motion and ruled that the agent was entitled to the statutory safe-harbor limits, and the association appealed.

The Fifth District Court of Appeal agreed with the association’s position that the trial court’s order must be reversed because it lacked jurisdiction to decide a post-judgment issue that was not a part of the lender’s foreclosure case, to wit the amount which the agent owed to the condominium association for past due assessments.

Laura’s article concludes:

However, while the association won on the technical issue regarding the post judgment jurisdiction of the trial court, it apparently lost the argument that an agent or servicer of a first mortgagee is not entitled to the safe-harbor protections afforded under the Condominium Act. Section 718.116(1)(b), F.S., provides that the liability of a first mortgagee “or its successor or assignees” which acquire title to a unit by foreclosure is limited to the lesser of 12 months of assessments or 1 percent of the original mortgage debt.

The Fifth District opinion also concluded: “Although the trial court appears to have correctly interpreted the substantive law at issue, the trial court lacked continuing jurisdiction to issue a ruling on that matter.”

Accordingly, while the trial court’s decision was quashed due to lack of jurisdiction, the opinion appears to have interpreted that an “agent” or “servicer” is the same as a “successor or assignee” and is therefore entitled to safe-harbor protection.

If the association now continues to demand the full amount of past-due assessments owed on the unit, the agent/servicer will be required to file a new action to determine its rights. If that is the case, the servicer could very likely seek — and be awarded — its attorney fees from the association.

Our firm congratulates Laura for sharing her insight on this new appellate decision with the readers of the Daily Business Review. Click here to read her complete article in the newspaper’s website (registration required).

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JeffreyBerlowitz.jpgFirm partner Jeffrey S. Berlowitz wrote an article that appeared in today’s edition of the Miami Herald’s “Business Monday” about the recent decision by the U.S. Supreme Court in the case of Bank of America v. Caulkett. His article calls for changes to the bankruptcy code to eliminate lien stripping for community associations. It reads:

The Supreme Court ruling does not completely prevent homeowners from canceling second mortgages or other junior lienholders in bankruptcy. Debtors can continue to strip off second mortgages by filing for bankruptcy under either Chapter 11 or 13, which are financial reorganization forms of bankruptcy in which they must pay back creditors over a period of time.

For community associations, the ruling will direct the bankruptcy courts to conclude that the secured liens that associations file against units whose owners have not paid their association dues also cannot be wiped away by underwater homeowners in Chapter 7 bankruptcies. Homeowners and condominium associations in Florida have had to contend with record numbers of foreclosures during the meltdown in the housing market, and many owners of units in foreclosure have been filing for bankruptcy protection and using the same “lien stripping” provisions that were extinguished for Chapter 7 bankruptcies by this Supreme Court ruling to wipe away their association liens. This has resulted in significant shortfalls in associations’ finances that have had to be made up by all of the paying unit owners, who are essentially being forced by the delinquent owners to pay more than their fair share.

While the new ruling will benefit community associations by eliminating lien stripping for Chapter 7 bankruptcies, the ruling does not apply to the financial reorganization forms of bankruptcy under Chapter 11 and Chapter 13, in which lien stripping has been particularly abundant for Florida associations. This means that many associations might continue to see their right to collect from delinquent unit owners voided by the bankruptcy courts.

This Supreme Court ruling has shined a spotlight on the lien stripping provisions of the federal bankruptcy code like never before, and the time has come for our country’s lawmakers to take note of the fact that legislative changes are required in order to address the inequities that are caused by these provisions as they now stand. Lien stripping represents a huge windfall for homeowners who fall into foreclosure, fail to pay their association dues and are then able to eliminate 100 percent of their association debt by filing for bankruptcy. The associations maintain the property values of the residences for the benefit of the delinquent homeowners, who end up retaining their home free of their maintenance assessment arrears through their repayment plan approved by the bankruptcy court, and they preserve the collateral of the homeowners’ first-mortgage lenders. The fellow neighbors of the delinquent unit owner end up footing the bill, which in some cases reach six figures after years of nonpayment, while the debtor and their mortgage lender reap the rewards of a properly maintained property at no expense to either of them.

While the U.S. bankruptcy code is a federal law and the laws governing condominium associations and HOAs are state laws, the lawmakers from states such as Florida, which is the state with the most associations at approximately 46,000, should now consider changes to the federal bankruptcy code that would enable community association liens to take a higher priority. Due to the special role that the associations play in preserving the underlying collateral for home mortgages, their liens should either be exempt from lien stripping altogether or there should be some form of a surcharge against the first mortgage lender to force it to pay the association that is maintaining its collateral.

Our firm congratulates Jeffrey for sharing his insight into this important Supreme Court ruling with the readers of the Miami Herald and calling for the elimination of lien stripping against community associations by unit owners who file for bankruptcy. Click here to read his complete article in the newspaper’s website.

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JeffreyBerlowitz.jpgThe firm’s Jeffrey S. Berlowitz, who has focused much of his work on helping community associations to contend with unit owners who attempt to wipe away association liens by filing for bankruptcy, was quoted extensively in an article in today’s edition of the Daily Business Review on the implications of the recent ruling by the U.S. Supreme Court in the case of Bank of America v. Caulkett. The court ruled that homeowners who are underwater on their first mortgage cannot void second mortgages by filing for Chapter 7 bankruptcy, and the ruling also appears to apply to other secured lienholders including community associations.

The article reads:

Jeffrey Berlowitz is optimistic that within the risky realm of second mortgages, the Supreme Court’s ruling may help refresh the lending stream that dried up in the market crash.

“You may see second mortgages being extended if there’s equity,” said Berlowitz of Coral Gables-based Siegfried Rivera, which represents community associations.

Still, a divisive footnote in the decision suggests if only the debtors had asked the court to overrule its 1992 decision in Dewsnup v. Timm, the court would have obliged. Three justices didn’t join Thomas’ footnote, meaning they could be outvoted 6-3 if the right case came along.

Dewsnup rejected one form of lien-stripping. The footnote quotes Thomas’ concurrence in a 1999 opinion: the “methodological confusion created by Dewsnup has enshrouded both the Courts of Appeal and … Bankruptcy Courts.”

Berlowitz said, “Thomas’ comments could lead us to believe the court could overrule Dewsnup down the road.” Then lien-stripping would be available in Chapter 7 cases, allowing debtors to void wholly unsecured mortgages. And partially unsecured mortgages could be stripped down to the property’s market value.

For now, Berlowitz is happily sharing the ruling with his condo board clients. They’ve been frustrated by homeowners who fail to pay their fees through months or years of foreclosure and bankruptcy while the association maintains the community.

“There’s such animus for the folks who aren’t paying while their neighbors are,” he said. “I had to explain to our clients this is the law, I’m not making it up.”

Our firm congratulates Jeffrey for sharing his insight into this ruling and its implications for community associations with the readers of the Daily Business Review, which is South Florida’s exclusive business daily and official court newspaper. Click here to read the complete article in the newspaper’s website (registration required).

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The firm’s Lindsey Thurswell Lehr wrote an article that appeared in today’s edition of the Daily Business Review, South Florida’s only business daily and official court newspaper, about the implications of the recent decision by the Fourth District Court of Appeal in the case of Pudlit 2 Joint Venture v. Westwood Gardens HOA. Her article reads:

. . . Pudlit had acquired two lots in the Westwood Gardens community via foreclosure, for which the association demanded payment for the past-due assessments that had accrued while Pudlit held the titles to the properties as well as all assessments due from the prior owner, as stipulated under Florida law.

Pudlit made the payment to the association but filed suit against the association seeking its money back by claiming that it was exempted from liability for the prior owners’ association debts due to the express language contained in the association’s own declaration of covenants, which read:

“The lien of the assessments provided for herein shall be superior to all other liens save and except tax liens and mortgage liens, provided said mortgage liens are first liens against the property encumbered thereby (subject only to tax liens). Sale or transfer of any lot which is subject to a mortgage as herein described, pursuant to a decree of foreclosure thereof, shall extinguish the lien of such assessments as to payments thereof which become due prior to such sale or transfer. No sale or transfer shall relieve such Lot from liability for any assessments thereafter becoming due or from the lien thereof.”

Lindsey’s article concludes:

The appellate panel found that the state law (Florida Statute §720.3085) could not impair or supersede a pre-existing declaration provision, as that would infringe on the prohibitions against the impairment of contract rights and freedom to contract under the state’s constitution. The appellate court found that as a successor to the mortgage holder, Pudlit is a third-party beneficiary of the HOA’s declaration and the protections which it provides.

The court also noted that the language under Chapter 720 of the Florida Statutes indicating that it is “not intended to impair such contract rights” that were “effective before the effective date of the act” made the existing law inapplicable in this case.

. . . In assessing the implications of this ruling, community association directors and managers should bear in mind that most associations do not have the restrictive language in their declarations nullifying a successor’s liability for the previous owner’s fees that was at issue in the Pudlit case. In addition, most association governing documents include a provision stating that all new state laws governing condominiums and homeowners associations are deemed to be expressly incorporated into their declarations.

However, this new appellate opinion, which is the first of its kind at the appellate level in the state, should serve as a notification to all community associations in Florida to review their declarations in order to determine if the language that was at issue in this case is found in their governing documents. If it is, they would be well-served to seek the guidance of qualified legal counsel in order to amend their governing documents through the membership meeting and voting process.

Our firm congratulates Lindsey for sharing her insight on this important new appellate decision with the readers of the Daily Business Review. Click here to read the complete article in the newspaper’s website (registration required).

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AEsteras.jpg MDeCastro.jpgBy: Awilda Esteras and Maryvel De Castro Valdes

In addition to the bills pertaining to construction defect litigation that our firm’s Georg Ketelhohn shared his insights on in previous articles in this blog as well as in a recent report in the Daily Business Review, another bill was recently introduced during the current session of the Florida Legislature that also presents significant concerns for community associations.

House Bill 611 (SB 736 in the Senate) aims to make major changes to the process, costs and effects of the estoppel certificates that are prepared by associations. Estoppel certificates are issued by associations, their attorneys or their property managers to provide the amounts owing to an association for a unit as of a particular date. Prospective buyers rely on the estoppel certificates to bind the association to the stated amount until the expiration date of the certificate.

The proposed bill intends to impose a maximum estoppel fee of $100 to $150, as opposed to a “reasonable fee” as the current law allows. Since the preparation of estoppel certificates can be highly detailed and labor intensive for experienced professionals, the newly proposed fee range is inadequate and may lead to increased management and legal fees that are passed on to associations for the preparation of these certificates, which in fairness should only be paid for by the buyers and sellers.

The bill also aims to eliminate the ability of an association and its agents to collect an estoppel fee prior to the closing of the sale of the underlying property by requiring that the estoppel certificate be paid from the proceeds of the sale. In addition, the proposed bill provides for extremely limited recourse for the collection of the fee should the closing never occur. Ultimately, the association may become liable for any fees that go uncollected.

flcap.jpgThe bill further proposes the reduction in the number of days that associations have to respond to estoppel requests from 15 days down to 10 days. In complex cases such as those that include fines levied against an account in addition to delinquent maintenance dues and/or litigation, the preparation of an estoppel certificate typically exceeds 10 days. According to the proposals found in the bill, associations that are unable or fail to meet the 10-day deadline will have effectively waived any claims for the amounts due that would have been provided in the estoppel certificate. This is an extreme measure that would seriously impact an association’s right to collect unpaid assessments.

Another important concern for associations is that the bill would require all estoppel certificates to be valid for 30 days from their issuance, and it prevents the association and its agents from collecting additional assessments or other costs that accrue within those 30 days. In the case where an estoppel certificate is being requested for a delinquent account in litigation, attorneys would either have to stay the case pending payment or would need to include additional attorney’s fees if there are pending matters to be addressed in the 30-day period from the issuance of the estoppel.

Lastly, the proposed bill would require a waiver language to be included in the estoppel certificate preventing the association from collecting moneys in excess of the amount set forth in the estoppel certificate.

For the professionals who prepare estoppel certificates for community associations on a regular basis, the measures that are being put forth in this bill appear to be drastically onerous. We encourage association directors, members and property managers to contact their state legislators to express their concerns and disapproval with this bill.

Click here to find the contact information for the legislators for your district.

As if collections of delinquent accounts were not already difficult enough for condominium associations and HOAs in Florida as the state recovers from the foreclosure crisis, a recent ruling by the Second District Court of Appeal has unfortunately created a new wrinkle that will require community association managers, directors and their legal counsel to pay close attention when accepting partial payment of assessments from owners. The court’s ruling in the case of St. Croix Lane Trust v. St. Croix at Pelican Marsh Condominium Association essentially now makes it a necessity for associations to consult with experienced legal counsel when they receive checks that are in any way endorsed as representing the full and final payment of assessments owed by the owner on whose behalf the payment is made.

Prior to this ruling, associations and their attorneys were guided by the 2008 ruling by the Third District Court of Appeal in the case of Ocean Two Condominium Association v. Kliger which held that associations cannot refuse partial payments of assessments made by or on behalf of owners. In its opinion, the court in Ocean Two further suggested that its conclusion might even apply in the event that the partial payment included a restrictive endorsement such as “Paid in Full” or “Full and Final Payment.”

However, in the St. Croix case, the unit owner’s attorney specifically wrote to the association attorney stating that the payment made by the owner in the amount of $840 was to be considered as the full and complete payment for the settlement of the account, which the association claimed was delinquent in excess of $38,000. While the association responded to the owner’s attorney by denying that the partial payment was the full and final payment of the amount owed, it accepted and deposited the check, applying the funds as a partial payment in accordance with Florida condominium law.

2dca.jpgDespite the previous ruling in the Ocean Two case, the appellate panel in St. Croix reversed the trial court’s ruling, finding that the association’s depositing of the check containing the above-described restrictive endorsement operated as an “accord and satisfaction,” resulting in a waiver of the association’s right to collect the remaining debt alleged to be owed by the owner.

This ruling appears to create a conflict with regard to the extent to which the appellate courts will consider the partial payment of assessments including restrictive endorsements to constitute an “accord and satisfaction” of a larger debt owed by the owner on whose behalf the partial payment is made. As such, it is possible that this conflict may ultimately be taken up for resolution by the Florida Supreme Court or may result in action by the state legislature.

In the meantime, associations should pay very close attention to any payments that are made with restrictive endorsements of any kind indicating that such payments reflect the complete and final payment of the amount owed to the association. Managers and directors presented with similar circumstances would be well advised to consult with experienced and qualified legal counsel before depositing such payments if they are not indeed for the full and final amount owed.

Our community association attorneys will continue to monitor and write about the consequences of this ruling as they relate to the handling of partial payments that are made with restrictive endorsements indicating such payments to be full payments. We encourage association directors and members as well as property managers to submit their email address in the subscription box at the top right of this blog in order to automatically receive all of our future articles.

Would you be surprised to learn that an owner could walk away from his home, stop making mortgage payments, avoid all personal liability for debt on the property and still make nearly $100,000 after the property is foreclosed upon by a mortgage lender? Well, it can happen.

In a recent opinion released on July 23rd by the Third District Court of Appeal, the appellate court ordered approximately $99,500 in surplus funds to be returned to Miami residents Walter and Eider Pineda. The ruling reverses a trial court order which directed the funds to be applied as payment toward the balance owed to the first mortgage lender, instead of being disbursed to the Pinedas. A review of this interesting ruling reveals that it was more of a case of the foreclosure auction buyer (third-party purchaser) making mistaken assumptions rather than a novel legal argument, but nonetheless the result is a huge amount of foreclosure surplus going to the ex-owners of the property despite their non-payment of both the first and second mortgages.

The ruling by the Third District Court of Appeal reverses the trial court order which directed that the approximately $99,500 in surplus generated by the foreclosure sale to Nocari Investment, LLC, the third-party purchaser at the auction, be applied as payment toward the balance owed to the first mortgage lender, which was Wells Fargo Bank. Nocari, however, argued that it would be inequitable for the Pinedas to have the surplus funds since they filed for bankruptcy protection and received a discharge of their debt to the first mortgage lender. 3rd district court of appeal.jpg While Nocari believed that the surplus funds would be refunded back to Nocari and applied as payment toward the superior lien on the property, the appellate court sympathetically disagreed. The opinion reads, in part, as follows:

While we are sympathetic to Nocari’s equitable argument, the fact remains that distribution of surplus foreclosure proceeds is governed by a plain and unambiguous statutory procedure which clearly provides that the owner of record is entitled to the surplus proceeds. Where the legislature has provided such a process, courts are not free to deviate from that process absent express authority.

Neither the statutes nor the case law governing distribution of surplus foreclosure sale proceeds provides a mechanism authorizing a third-party purchaser to obtain the surplus. The statute is clear: the owner of record at the time of the recording of the lis pendens is entitled to any surplus proceeds . . . Nocari was neither an “owner of record,” an assignee of an owner, nor “subordinate lienholder,” . . . and thus was not entitled to any surplus funds.

While there was no community association involved in this case, the ruling highlights some important reminders for associations as well as third-party purchasers. For the community associations, the ruling should serve as a reminder of the importance for condominium associations and HOAs to preserve their ability to collect surplus funds generated by foreclosure sales. Community associations are often named as subordinate lienholders in mortgage foreclosure cases, and they should engage counsel to closely monitor the status of such cases, file appropriate responses to protect their interests and entitlement to surplus generated by the foreclosure sale, and file timely motions with the court so they are not barred from collecting foreclosure surplus. For the third-party purchasers, the ruling illustrates the importance of performing due diligence and working with qualified legal counsel in order to act with certainty and understand the complete ramifications of their bids at foreclosure auctions.

I, along with our firm’s other community association attorneys, work very closely with our clients on foreclosure cases and motions for surplus to ensure that their lien rights and ability to collect as subordinate lienholders are protected. We monitor and write about important legal and business issues affecting Florida community associations in this blog, and we encourage association directors, members and property managers to submit their email addresses in the subscription box at the top right of the blog in order to automatically receive our future articles.

Jeffrey Berlowitz - Siegfried law firm.jpgOur community association attorneys contribute articles on association issues to a number of publications on a regular basis. In the July issue of Florida Community Association Journal, the leading publication focusing on associations in the state, partner Jeffrey S. Berlowitz wrote an extensive article on the latest court decisions and legal strategies that are offering some relief for associations which are contending with unit owners who file for bankruptcy.

The article discusses the “lien stripping” provisions of the bankruptcy code and how associations can respond:

With regard to associations, most owners who file for Chapter 13 are striving to save their home from foreclosure. However, what is becoming more prevalent with bankruptcy filers who reside in community associations is the taking advantage of a debtor friendly component of the bankruptcy laws affording a debtor the right to “strip off” second mortgages, lines of credit and association liens in the event that the debtor evidences to the court that the value of their unit is less than the amount due on their first mortgage. If successful, then the unit owner may receive the benefit of a complete avoidance of an association’s lien claim in the amount that existed as of the date of the bankruptcy filing; ultimately a remarkable benefit to a debtor and a potentially harsh outcome to the community association.

. . . Associations should be well advised that an owner’s intentions to lien strip an association claim does not mean that the association cannot challenge or object to the owner’s effort to avoid the association’s lien. My colleagues and I have assisted associations in overcoming lien stripping efforts by debtor owners notwithstanding the debtor-friendly law supporting lien stripping. This is accomplished by countering the owner’s value of their home with an appraisal procured by the association which demonstrates that the value of the unit at the time of the bankruptcy filing was greater than the amount due under the owner’s first mortgage. Simply stated, this is an “all-or-nothing” deal: If the bankruptcy court determines that the unit maintains even just a single dollar of equity, then the owner will be required to cure all arrears due to the association over the life of the bankruptcy plan. Should the court find that the unit is underwater and lacks equity, then the owner will be in a position to carry out the bankruptcy plan to strip off the amount due to the association as of the day in which the bankruptcy case was filed. Given the risk associated with going before the bankruptcy court in this all-or-nothing lien stripping venture, wherein the bankruptcy judge will make a finding on the unit’s value that will inure entirely to the benefit of either the association or the debtor/owner, often the parties will amicably resolve the matter wherein the association agrees to accept a portion of the arrears paid through the bankruptcy plan by the debtor/owner, as opposed to having the association’s lien avoided entirely. However, should the matter proceed to a valuation hearing before the bankruptcy judge, no matter the findings of the court, an owner remains liable to the association for all regular monthly maintenance assessments as well as any special assessment that come due after the day the bankruptcy case was filed.

flcaj_logo.jpgJeffrey also writes about recent rulings that preclude bankruptcy lien strips from being extended to subsequent buyers:

Additionally and as a related event connected to the craze of the foreclosure crisis in South Florida over the last several years, associations are finding that investors (a/k/a “third-party buyers”) are positioning themselves to purchase units in foreclosure. Florida Statutes governing associations provide that a “subsequent owner” is liable to the association for the prior owner’s outstanding maintenance obligations. Notwithstanding, these third-party buyers who purchase a unit out of foreclosure that was formerly owned by an individual who filed for bankruptcy relief have creatively argued that they should get the benefit of the prior owner’s bankruptcy discharge or, in certain circumstances, the prior owner’s avoidance of the association’s lien via the lien stripping action and, therefore, are not liable to the association as the subsequent owner for the prior owner’s liabilities that were released through the bankruptcy case.

Those arguments have failed. Recent court decisions favor associations that lose certain of their lien rights against bankrupt owners and then attempt to collect the past-due assessments from the subsequent buyers of the properties. In a case that was decided by one of the local bankruptcy judges in the Southern District of Florida earlier this year, the court determined that even if an owner strips off a condominium association lien because the unit lacks equity and that individual is ultimately released from their pre-bankruptcy personal obligations to the association, the subsequent owner will not receive the benefit of the prior owner’s lien strip and will remain liable to the association for the prior owner’s unpaid assessments that were due at the time title to the unit transferred to the subsequent owner. In other words, no matter what a unit owner in bankruptcy accomplishes in their bankruptcy case with respect to their liability for association assessments, nothing can impact a subsequent owner’s personal liability for the unpaid assessments and nothing in the prior owner’s bankruptcy impacts the association’s right to pursue payment from that subsequent owner.

Similarly, in a case in which I represented a community association, a successful third-party purchaser at the prior owner’s foreclosure sale argued in state court that it was not liable for the prior owner’s unpaid assessments because the prior owner filed bankruptcy and received a personal discharge from his monetary obligations to the association. The new owner asked the court to give it the benefit of the prior owner’s bankruptcy discharge and the resulting avoidance of the prior owner’s personal liability to the association for unpaid assessments. I successfully demonstrated to the court that the bankruptcy discharge had no legal bearing on the statute assigning liability for past unpaid assessments to the new subsequent property owner. The court concurred and issued a summary judgment in favor of the association and ruled that the subsequent purchaser does not receive the benefit of the prior owner’s bankruptcy discharge.

Click here to read the complete article.

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