MichaelHyman.jpgFor the second consecutive day, an article about important issues for community associations written by one of our firm’s attorneys appeared today in the Daily Business Review, South Florida’s only business daily and official court newspaper. The article by Michael L. Hyman focuses on a recent foreclosure case in which a condominium association was ultimately done in by its own initial pleadings stating that it was only entitled to a capped amount. His article reads:

In the case of Bank of America v. The Enclave at Richmond Place Condominium Association, Bank of America appealed the trial court’s decision that it was not entitled to the statutory “safe harbor” liability caps for past-due association assessments for foreclosing lenders. The Second District Court of Appeal reversed the lower court’s ruling, and it based its decision on the association’s own initial responses and pleadings from the onset of the foreclosure proceedings.

The appellate panel found that in its answer to BoA’s initial foreclosure filing, the association affirmatively pleaded:

“The mortgage which is being foreclosed is a first purchase money mortgage which was recorded after April 1, 1992. Pursuant to Fla. Stat. § 718.116, the plaintiff’s lien is superior to any title and interest to any condominium assessments, except for those unpaid dues, which are not to exceed six months’ unpaid assessments or one percent of the original principal balance of the mortgage, whichever is less.”

After BoA acquired the property, the association claimed it was entitled to more than $36,000 in unpaid assessments, interest and various fees. BoA responded by filing a motion to enforce the final judgment, contending that it was liable for only $1,421, which represented 1 percent of the original mortgage debt, the lesser of the two amounts.

The trial court found that it had continuing jurisdiction and could therefore address BoA’s motion, and it ruled that BoA was not entitled to the benefit of the safe harbor provision.

Michael’s article concludes:

In its appeal, BoA argued that the association is estopped from taking a position contrary to that which it affirmatively took in the underlying foreclosure proceeding. The appellate panel agreed, noting in its opinion:

“We conclude that the Association’s affirmative plea of entitlement to only the lesser of six months’ unpaid assessments or one percent of the mortgage debt was a waiver of any claim to a greater assessment figure.”

The takeaway for community associations and their attorneys from this ruling is very clear and extremely important. Rather than being so specific and referencing its own governing documents in the initial pleadings, associations and their legal counsel should use the initial pleading in response to a lender’s foreclosure filing simply to state that it would be entitled to the safe harbor amounts should those caps be deemed to apply.

In addition, if during the course of the proceedings the association and its attorneys determine that they plan to call into question the applicability of the safe harbor liability caps or the provisions of the governing documents, the association must withdraw or amend its related pleadings and affirmative responses prior to the final judgment and the issuance of an estoppel stating the amount that it seeks to collect.

Our firm congratulates Michael for sharing his insights into this important new appellate ruling for Florida community associations 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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JordanWeinkle.jpg JeffreyBerlowitz.jpg The firm’s Jeffrey S. Berlowitz and Jordan G. Weinkle 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 how bankruptcy and community association attorneys must work together in order to assess the strength of an association’s construction defect claim against a debtor company that files for an asset liquidation under the state’s Assignment for the Benefit of Creditors statute. Their article reads:

Unlike federal bankruptcy proceedings, with an Assignment for the Benefit of Creditors (ABC), the assignor, or debtor, company that elects to liquidate its assets in order to repay its creditors is able to do so in a more debtor-friendly state court proceeding in which they are able to select and appoint the assignee, who then serves in the role in which trustees serve in bankruptcy cases to oversee the liquidation of the assignor’s assets in order to pay secured creditors and unsecured creditors.

The ABC liquidation process typically takes the form of a private sale or auction in which creditors and parties of interest are notified of the sale and have the opportunity to present higher and better offers for the assets. Ultimately, the sale of the assignor’s assets must be approved by the state court.

While there is no “automatic stay” on pending litigation imposed upon the filing of an ABC, unlike a bankruptcy stay which is immediately in effect upon the filing of a bankruptcy petition, creditors of the assignor are essentially stayed from continuing their pursuit of claims because the comprehensive liquidation of the debtor’s assets makes it virtually impossible to collect on a judgment.

The most notable benefit of an ABC to the assignor company is the opportunity that the assignor’s principals have to buy back their assets under a newly formed entity, should that newly formed entity offer the highest and best bid for the assets.

With ABCs, the assignors can and often do negotiate the buy-back of their business assets via the liquidation or auction process through a separate entity, enabling them to stay in business with little interruption or disruptions whatsoever while diminishing their debts to pennies on the dollar.

Their article concludes:

As a result, we are now starting to see cases in which condominium associations and homeowner associations that either have pending construction defect litigation or have filed a notice of claim against developers, general contractors, subcontractors or other firms are being notified that their payouts will be determined via ABC actions in state court.

The ability to assess the strength of an association’s construction defect claim against a debtor company filing an ABC requires a unique blend of bankruptcy law and community association law knowledge.

The analysis of the association’s construction defect claim against the debtor would not only take into account the merit and magnitude of the underlying claim itself but also the strength of the claim as it relates to the ABC.

The association counsel, together with experienced bankruptcy counsel, should review the number of secured and unsecured creditors of the debtor, its assets and liabilities, the priority that the association’s claim would take compared to the other claims, the amount that the association might recover through the post-liquidation payouts to creditors, and the practical nuances of an ABC in general.

Depending on how far along in the defect litigation the association may be when the ABC is filed, it is also important to consider whether the assignee will have adequate documentation regarding the association’s claim in order to effectively determine how much of the claim, if any, will be allowed.

They will typically consider all of the engineering reports and evidence of the defects, but they will also take into account the practical considerations of the total sum that the sale of the assets will generate and the sums that are due to other creditors.

An association may seek to resolve its claim with the assignee who has been engaged to liquidate the assets and make distributions on allowed creditor claims by reaching a settlement with them for an allowed unsecured claim in the ABC, staving off unnecessary attorney fees to prove the construction defect claim.

Our firm congratulates Jeffrey and Jordan for sharing their insights into this matter for community associations that file construction defect claims against defendants that resort to using the state’s Assignment for the Benefit of Creditors statute. Click here to read their complete article in the newspaper’s website (registration required).

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If it seems as if there have been more and more stories in the news recently about condominium association’s funds being stolen or misappropriated by either board members or property managers, it’s because it’s true. Many of the reports have been coming from Bob Norman of Local 10 News (WPLG), the ABC affiliate for Miami-Dade, Broward and the Keys.

Norman’s latest story aired on Aug. 28, and it can be watched below. The story discusses the arrest of the former property manager of The Waterway condominium in Hollywood, Fla., for the alleged embezzlement of $228,000 from the association.

The information uncovered by Norman for this report is similar to that of many other cases that he and other Florida journalists have chronicled over the last several years which appear to be a disturbing trend in condominium and homeowner associations. Board members should pay close attention to the business of the association in order to avoid becoming the next victim of an unscrupulous manager or director. As we have discussed in the past, a board member’s responsibility is not limited to simply showing up at meetings to vote. Recall that board members are charged with a fiduciary responsibility to protect the interests of the entire association and all of its members. This means being vigilant about the business of the association.

The association in this case broke one of the cardinal rules of association management by allowing the property manager to sign checks on its behalf. Board members should be the only individuals allowed to sign checks, and I typically recommend that at least two board member signatures be required. Looking at the supporting documentation, backup and invoices for those checks is also important.

In addition, associations should be diligent when hiring new managers including performing background checks and checking references. While individuals who have been convicted of a felony (whose residency rights have not been restored) cannot serve as directors, some associations even go so far as to run background searches on candidates or seated board members.

Associations should also request duplicate statements from their banks, and the statements should be sent to someone other than the person who is handling the bookkeeping. In addition, association accounts should be independently and professionally audited at least once per year.

By taking these and other precautions, associations can help to avoid becoming the victim of fraud, theft and embezzlement.

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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Insurance coverage and claims are often among the most confusing and troublesome matters that developers and community associations must address, and large claims involving serious property damage from any type of disaster will typically require the guidance and expertise of attorneys and public adjusters.

Florida law stipulates that associations must maintain insurance for all portions of the property as originally installed or renovated. However, the statutes exclude certain portions of the units from the insurance coverage which an association must carry, and they do not provide that associations’ insurance coverage must extend to the personal property of individual residents. As such, unit owners are responsible for maintaining their own insurance to cover damages to the floors, walls, ceilings, electrical fixtures, appliances, cabinets, counters and window treatments in their units.

In the event of a loss that will require the filing of an insurance claim, your first responsibility is to mitigate the damages and do everything in your power to stop it from getting worse. Leaks should be plugged and blown out windows should be boarded, but by no means should an association make any permanent repairs prior to an insurance claim being properly filed. Insurance policies will typically require that the carrier have the opportunity to have its representatives investigate the loss prior to any permanent repairs by the policyholder, as repairs made prior to the investigation may interfere with such right.

The claims process will typically begin with the filing of a formal incident report to the insurance carrier. Since these reports are often filed immediately following the loss, it is important that they be updated and corrected with new information on the extent of the loss as it becomes available during the claims process. Should a dispute arise, the carrier may point to a lack of notice of the extent of the damages, so it is vital for the report to be kept as accurate and up-to-date as possible. Additionally, association counsel and a qualified adjuster should assist associations in the filing of this report.

In addition to having the insurance carrier’s adjuster inspect the damage, it is usually also wise for the property to have its own independent expert conduct a thorough inspection. water.jpg This is especially true if there are any questions as to the cause and origin of the damage. Insurance carriers may not provide all of the information to their insureds from the reports that they receive from their own claims investigators, so it is typically very helpful for the property to have its own detailed analysis of the nature and extent of the loss.

The next phase typically involves the hiring of a mitigation contractor to conduct the necessary repairs. It is imperative for properties to use reputable contractors that are properly licensed and insured. Also, in order to help avoid any potential problems with the contractors after their work has commenced, it is advisable to have the property’s attorney review the contract prior to finalizing it.

Some of these contracts call for an assignment of benefits to enable the contractor to speak on behalf of the property to the carrier and receive the payments directly from the insurer. This may not be in the best interests of the insured. Bear in mind that the insurance company is not tasked with policing the quality of the repairs, so it is incumbent on the association to have its own experts conduct ongoing inspections to certify the work.

There are many aspects of the claims process that typically require the guidance of qualified professionals for associations and developers. Insurance carriers may require recorded statements, proof of loss statements, and examinations under oath to evaluate the claim and determine whether the extent of the loss is being exaggerated by the insured.

In addition, in determining the amount of coverage that will be provided for the claim, insurers may use different figures based on the replacement cost value, actual cash value and actual cost of construction. Experienced insurance attorneys and independent adjusters can help associations to force the carriers to properly categorize the costs for the necessary repairs and maximize the recovery.

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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For condominium associations and HOAs, effective governing documents are essential for their successful management and financial wellbeing. Association boards should regularly review their governing documents and bylaws to ensure their continued functionality and eliminate provisions that may have become archaic.

Deciding whether the documents and bylaws need to be amended can be difficult, and ratifying new amendments with the approval of the membership often presents significant challenges. Most governing documents include voting requirements for amendments stipulating that they must be approved by super majorities of two-thirds or three-fourths of the membership.

One of the best approaches for associations to take in reviewing and updating of their governing documents is for the board of directors to appoint a revision committee for the documents. The committee, which should work together with the association attorney, should review all of the bylaws and develop suggested changes as necessary.

Some of the most common provisions of the association documents which may benefit from updates include those pertaining to voting, collections, leasing and fining procedures. Many associations are implementing amendments to limit voting rights to members who are not delinquent in their financial obligations to the association, and some are addressing recent statutory amendments authorizing electronic voting. Other associations are incorporating amendments to maximize their ability to recover attorney’s fees incurred for collection efforts, ban short-term rentals using websites such as Airbnb and other online listing services, strengthen their ability to fine members who refuse to comply with the community’s rules, and address rules involving pets and the use of the community’s amenities by members who are in arrears to the association.

Once the committee has identified changes to the bylaws that it would like to propose, they should present them to the board of directors. If the board approves, the committee should then work on drafting the amendments with the association’s legal counsel to ensure their enforceability and the likelihood of their adoption.

Before the proposed amendments are put to the membership for a vote, they should be presented and discussed with the members during the association’s monthly meetings or in special meetings that are called expressly for the purpose of proposing and considering the changes.

In order to facilitate the adoption of proposed amendments, they should be scheduled for votes at times during which higher voter turnout is expected, such as during the annual meeting. The text of the proposed amendments should be included in the delivery of notice for the meeting and its agenda, and the use of limited proxies should be considered for those who cannot attend the meeting in person.

While the process for changing a community association’s governing documents can be difficult and tedious, it is unwise for associations to ignore outdated provisions in their bylaws or avoid implementing important changes that can provide significant benefits.

MichaelChapnicksrhl-law.jpgFirm partner Michael E. Chapnick 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 Second District Court of Appeal in the case of John and Annmarie Amelio v. Marilyn Pines Unit II Condominium Association. His article reads:

The appellate ruling . . . reversed the trial court’s decision to deny a mandatory injunction against the association. The Amelios filed suit for a mandatory injunction and damages against the association due to its failure to adequately address and resolve the problems caused by moisture seeping through the slab on which their unit sits.

The couple first noticed the excessive moisture in their residence in 2010 when it began to cause water damage to the unit and its contents. The association responded by bringing in a leak detection service, which determined that there was excessive moisture in the slab not caused by a leak.

The association retained an engineering firm in March 2011 to inspect the slab, and the firm recommended the installation of a moisture barrier over the slab and an exterior drainage system. It then took the association until December 2011 to hire a different engineering firm for the design and installation of the drainage system, which was not completed until more than a year later in early 2013. However, high levels of water intrusion and moisture continued to plague the unit.

The association retained the original engineering firm, which again recommended a moisture barrier, and it contracted with another company for the addition of the moisture barrier. Unfortunately, the barrier was not installed in accordance with the engineering firm’s specifications, and the concrete slab may have been too soft and powdery for it to be effective. The Amelios’ residence continued to be damaged by moisture intrusion, and it eventually became uninhabitable as the association refused to take any further action.

Michael’s article concludes:

The court found the requirement of irreparable harm satisfied by finding a violation of the Condominium Act and the condominium documents, but it went further and found that the irreparable harm was evidenced by the excessive moisture in the unit, the inability of the association to remedy the situation and the fact that the association had the exclusive duty to make repairs to the slab.

The frequently more difficult element to establish is that of having no adequate remedy at law. Citing Hiles v. Auto Bahn Fed’n., (Fla. 4th DCA 1986), the court stated, “If monetary damages would fully compensate a loss, then this element is not established.”

In reversing the denial of the request for injunctive relief, the appellate panel found that because the association had the exclusive right to remedy the problem and because until it did so the unit would continue to be damaged and uninhabitable, monetary damages would be inadequate to fully compensate the Amelios. Therefore, the unit owners had no adequate relief at law.

The association in this case had been advised from the onset of the problems with the slab in 2010 by its own legal counsel that it was responsible for the maintenance and repair of this component of the property. However, it failed to adequately rectify the problem, and now it will be forced to take immediate actions under the terms of the injunction while also facing the prospect of significant monetary damages to the Amelios.

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

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A recent article in The Boston Globe chronicled the case of a condo owner who earned rave reviews as a host on the vacation rental website Airbnb. He went to great lengths to accommodate the needs and whims of his guests, but apparently his willingness to oblige did not extend to his condominium association and fellow neighbors.

The unit owner was fined $9,700 for violating his condominium association’s rules against short-term rentals via the increasingly popular website, which allows users to list their residences for short-term rentals aimed at guests who desire more homey accommodations. The owner has retained an attorney to try to negotiate a lower fine, and he is quoted as saying that he “didn’t expect, as an owner, having somebody else in my own home would be a problem.”

Perhaps he should have known better, as most association’s covenants and rules prohibit short-term rentals, and some even include an application process with background checks for prospective tenants. Yet he and other unit owners are claiming ignorance of the rules after being hit with fines ranging anywhere from $100 to $1,000, depending on their associations’ bylaws, for each night that they have rented their units, according to the newspaper’s report.

With Florida’s countless luxury waterfront condominiums replete with investor-owned units that sit idle during large swaths of the year, the growing popularity of Airbnb and its rivals HomeAway and VRBO represents a potentially significant new problem area that should receive the attention of many association boards throughout the state. The prospect of a revolving door of short-term guests presents security and nuisance concerns, especially for condominiums, and the boards of the state’s condo associations would be well advised to review and possibly strengthen their covenants to specifically ban these types of rentals as well as ensure adequate enforcement provisions and procedures.

For those associations which are already contending with owners who are utilizing these websites for short-term rentals or suspect that it is taking place, their rules enforcement actions should begin with thorough investigations. In a non-confrontational and courteous manner, the property manager or board member should inquire with the new guests in the residences that are suspected of being rented as to the nature of their agreement with the unit owner and how they discovered the property. They should document their findings, and they should also research the websites to find and save the offending listings.

abnb.jpgArmed with this information, they can then move forward on two fronts: directly with the owner as well as with Airbnb or the website listing the unit. Airbnb includes in its terms and conditions for hosts that they must comply with the rules governing rentals in their communities, and the site reserves the right to purge any listings that it deems to be in violation of its terms. Presumably, the company and its rivals would be willing to consider the removal of listings by hosts that are in violation of community association rules, and one of my colleagues at our firm has learned of a case from a client in which Airbnb was contacted by the association and pulled a listing from its site after it learned of the rule violation.

In addition, associations should share the evidence that they have gathered of the rentals using these websites with their legal counsel, who can use the information to issue an immediate cease and desist letter to the unit owner and help the association to determine an appropriate enforcement mechanism. However, for unit owners who have already begun enjoying the rewards of their rentals, it is a safe bet that they will be reluctant to discontinue them.

For the ardent renters who will refuse to comply with these demands and continue to rent their residences, the association counsel should move quickly to file a Petition for Mandatory Non-Binding Arbitration on the rule violation with the state’s Division of Condominiums, Time Shares and Mobile Homes, administered under the Department of Business & Professional Regulation. The Division of Condominiums, through its Arbitration Division, is equipped to quickly and efficiently conduct arbitrations on disputes involving covenant and rule violations, and its final orders can involve both the issuance of injunctive relief (i.e., requiring someone to do or not do something), as well as requiring the non-prevailing party to pay the reasonable attorneys’ fees and costs of the prevailing party incurred in bringing the action to enforce the association’s covenants and rules.

In the new peer-to-peer sharing economy, Airbnb and the other websites enabling homeowners to rent their residences to short-term guests are here to stay and likely to enjoy continued growth in the years to come. The associations in Florida that wish to avoid these short-term rentals should act now in order to protect the interests of their members.

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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