Q&A: Condominium and Homeowners Association Bankruptcy
The Maison Grande and other bankruptcy filings by community associations have spurred interest in reorganization of debt. Is bankruptcy an option for your cash strapped community? What issues do you need to consider? Bankruptcy Attorney Aleida Martinez Molina answers the following questions for community associations struggling with bills and bad debt.
CAN CONDOMINIUM OR HOMEOWNERS ASSOCIATIONS FILE FOR BANKRUPTCY? Yes. Under certain circumstances, condominium associations have successfully reorganized under Chapter 11 of title 11 of the United States Code, 11 U.S.C. sections 101, et seq. (“Chapter 11” and “the Code,” respectively). This phenomenon is not unique to Florida – there have been successful condominium association reorganizations throughout the United States.
WHAT IS A BANKRUPTCY IN THE CONTEXT OF A COMMUNITY ASSOCIATION? The first point to understand is that Chapter 11 is a reorganization process – not liquidation under Chapter 7 of the Code. As such, it can provide associations the protections of the automatic stay and other relevant Code provisions while allowing them to formulate a plan of reorganization to extricate themselves from the particular financial situation.
UNDER WHAT CIRCUMSTANCES DOES IT MAKE SENSE TO REORGANIZE? The Code has unique provisions which in essence give associations a more level playing field to negotiate with creditors. A number of associations find themselves with daunting contracts or leases which they might renegotiate or simply reject if able to do so. A reorganization could, under the appropriate circumstances, accomplish this goal. Another example is filing for bankruptcy protection in order to prevent a judgment creditor from seizing or garnishing bank accounts. An association with a judgment or upcoming trial could turn to a reorganization as a way to automatically stay the lawsuit/collection of the judgment and permit a realistic settlement. Finally, associations finding themselves threatened with the shut-off of service by utilities or other providers can, under certain circumstances, resort to reorganizations to temporarily prevent this drastic action.
WHAT IS REQUIRED FOR AN ASSOCIATION TO REORGANIZE? Proper authority from the Board and appropriate attorney fees and costs. In addition, an association should file a reorganization with a clear understanding of its exit strategy (i.e., a plan of reorganization).
COSTS ASSOCIATED WITH A REORGANIZATION: Reorganizations are not inexpensive and simple matters – filing fees to the bankruptcy court alone exceed $1,000. The debtors also need to pay quarterly fees to the United States Trustee while the reorganization is pending. Any debtor (association or otherwise) needs to contact competent counsel in time to prepare budgets and plan accordingly. It can and is done – even in dire situations where utility services are about to be interrupted. Counsel can advise how to properly prepare the necessary documents, authority and budget to reorganize under the Code.
WHAT HAPPENS TO ASSOCIATION RESIDENTS WHEN A COMMUNITY ASSOCIATION REORGANIZES? Ideally, nothing directly. If the association files with appropriate board authority and a reasonable game plan, the association should be able to function and provide the necessary services to the association property and residents.
WHO IS IN CHARGE WHLE THE ASSOCIATION IS REORGANIZING UNDER THE CODE? An association would file under Chapter 11 as a “Debtor in Possession”. As such, the Board of Director and/or Management Team in place prior to the filing would continue to operate as “usual”. The Association needs to understand that they would operate under a microscope – as any debtor/entity in bankruptcy is subject to the Bankruptcy Court’s jurisdiction and watchful eye all creditors, as well as the Office of the United States Trustee. As such, the Association need to provide proof of insurance, prepare detailed monthly operating reports and otherwise show it is able to continue its operation. Any reasonable indication that the board and/or management are or have acted improperly (usurping funds, etc.) could subject the debtor association to the appointment of a Chapter 11 Trustee or third party to take over the association’s operations.
HOW DO CREDITORS/THE WORLD FIND OUT ABOUT A FILING? When an entity files under any chapter of the Code, all creditors (the list provided by the debtor prior to the filing) will receive directly from the bankruptcy court a “Notice of Commencement”. If there is litigation pending, the debtor’s attorney files a “Suggestion of Bankruptcy” in the non-bankruptcy court proceeding – effectively placing that court on notice of the filing. In addition, bankruptcy filings – as any legal/court proceedings – are public filings.
HOW LONG DOES A REORGANIZATION LAST? Ideally, less than 10 months. Bankruptcy judges will seek to have the case dismissed if they see that no plan of reorganization has been filed or otherwise see no positive role for their court to play in the case.
Would your community benefit from reorganization? Please contact us to find out.
Manay older coondominiums have shared water. And with the way things are going it is unfair that the people who do pay there association dues have to pay more just to keep the water on. Is there anything that maybe the county or city can do, to put eveyones water into there own meter and relieve the association of one less bill to pay?
I have about 40 short sales in a Condominium Hotel in Sarasota. I now finally have a buyer for them and the Hotel just closed down and it appears they may be considering Chapter 7 Bankruptcy. Do you know what this does to the asset of the hotel room property owned by paying members of the COA?
Thanks,
Connie
I own a condo in Miami Beach. I just received an emergency letter from the board stating that their bank is seeking "default and foreclosure on the association" we have an outstanding $700,000 loan. 14 unit owners have stopped making payments. We had an assessment for this loan. I have made all assessment and association payments in full and on time but they are saying that the bank will take all of our units. I have a loan with my bank for pretty close to the full value of my unit. Also for which all payments have been made on time. I don't know what to do. Do I walk away? If the associations bank forecloses on my unit what happens with my bank/loan? Can they come after my for the full loan even though I no longer would have the unit? HELP!
Paul-
Your situation sounds similar to ours. We closed on Tues 10-12 on a condo, and then attended a community meeting on 10\13. The initial financials showed a reserve of 20K. We learned 10\13 that the association has 50 K in debt, owe over 9 grand a month and is only taking in appx 6 grand monthly. The water bill is on a payment plan, maintanence is non existant, pest contraol has been cancelled and the pool has become a cesspool of scum and mesquitos Of the 36 units , only 18 are current on HOA fees, some are as far past due as 13 months. The former president and other board members were removed using a lawyer, and we now have interim appointments. No one cares enough to show for meetings,and those that do are the ones who are delinquent!!!
Our answer,Run, don't Walk! Run as fast as you can!!!! We closed tuesday, and are putting it on the market again 2 days later!!!
Can the association collect working capital or some other type of fee when a unit is sold? As this would help offset the monies that are not collected due to foreclosures.
Thank you
DESPERATE - Long story short. Crooked developer converted apt. complex to condos in Tampa; lied about true condition, and serious damage has been incurred (water intrusion/infestation). He didn't fund reserves and has not honored the three-year warranty. Estimates of $6.5 - $12 million for structural renovation. Litigation is pending, but is costly and time consuming. Developer is loaded w/ $$$ and we have around 30% (of 272 units) who are no longer paying HOA fees and/or past special assessments. Current liability to HOA is reaching $500k. Increased HOA fees and new special assessments will surely add to that 30%, and quickly. I see no happy ending --- it's spiraling beyond anyone's control and there appear to be no good answers. By next year, we're likely to see 50% having walked from their responsibilities. Those of us remaining cannot possibly support this community, and it's continuing to deteriorate structurally. HELP!!!!