Florida Condo & HOA Legal Blog : Florida Condo Lawyer & Attorney : Becker & Poliakoff Law Firm : Condominium & HOA Law Blog

We have discussed bankruptcy issues over the years.  Desperate association leaders sometimes come to a conclusion that going bankrupt is the only way to resolve outstanding debt while continuing to operate the property.  Please refer to the following posts - they explain pros and con's of bankruptcy as well as some of the mechanics of the process:

Bankruptcy An Option for Financially Distressed Condos and HOAs:  At Least Five Community Associations in Florida have filed for Bankruptcy Protection and Relief. Reorganization through Bankruptcy Allows Communities to Restructure Obligations and Reduce Debt.

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?

The Spa at Sunset Isles Condominium Association, Inc. filed for bankruptcy protection in the summer of 2010.  The condominium was created by conversion of an existing property during the heyday of the real estate market.  Units sold in 2006 and 2007 for $250,000.

Not surprisingly, a few years later the association was not in a position to pay its expenses as a result of a number of delinquencies.  Close to half of the units were facing foreclosure by mortgagees and those owners weren't paying assessments.  The average mortgage debt associated with these units was over $200,000, but the units were only worth about $50,000 at that point.  Mortgage foreclosure cases seemed to be taking a long time to process - too long.  A good percentage of the cases were pending for close to 3 years and most of them were uncontested.  The lenders were authorized to continue these mortgage foreclosures by the bankruptcy court - so there should have only been a 2-3 month delay.  Were the lenders purposely dragging out the foreclosures in order to delay taking title to the properties?

If you're a regular reader of this blog you know that the association cannot force the lender to pay assessments until they acquire title as we explained in Association's Options to Push Bank Foreclosures Are Still Viable Despite Tadmore & Coral Key.   However, the rules change in bankruptcy.  Bankruptcy is federal law and this Court found that bankruptcy laws control over conflicting state laws.  That was good news to the association - it meant it could ask the Court to require the unit mortgagees to pay the association under a provision in the bankruptcy code that requires secured creditors to contribute to costs associated with preserving collateral.  Both units and common elements served as collateral for the mortgages.  Since association expenses were necessary and appropriate to preserve that collateral, the Court said it was appropriate to charge those lenders with expenses, regardless of the status of the mortgage foreclosure case. 

This is an interesting ruling but it doesn't mean that filing for bankruptcy protection is a good option for your association.  Bankruptcy is only appropriate in extreme cases and can only accomplish so much.  Read the links in this post to learn what considerations must be taken into account.  

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Most community association leaders are familiar with the fact that they have to hold off on collection activities (such as sending further demand letters, filing a lien or prosecuting the association's foreclosure case) when an owner files for bankruptcy protection. 

One important protection offered by the bankruptcy law gives the debtor "time to catch his/her breath" by stopping any and all actions by creditors against that debtor.  This "time out" is known as the automatic stay.  Creditors (whether secured or unsecured) cannot initiate or continue any actions designed to collect the debt included in the bankruptcy petition.  The creditor cannot begin or continue action with respect to:

1. lawsuits,
2. efforts to gain control of the debtor's property, 
3. perfecting or enforcing a lien, or
4. efforts to set-off the debt.

2010 changes to the condominium and homeowners' association acts gave boards of directors additional enforcement tools, including the right to suspend use of recreational facilities when the owner's debt is more than ninety (90) days past due.  The association can suspend use rights by corporate action in compliance with the procedures set forth in the applicable statute,  without filing any pleading or lawsuit in court, filing a petition for arbitration with the state or filing a Claim of Lien securing debt. 

So, the question becomes: can the association suspend use rights if the owner filed bankruptcy?  At least one bankruptcy Court said "no". 

An association in Miami suspended an owner's internet service and deactivated the key fob (or other entry device) for recreational amenities at the condominium pursuant to Section 718.303, Florida Statutes.  The owner immediately filed an Emergency Motion for Contempt in the bankruptcy court, claiming this action violated the automatic stay.  The Court agreed.  It held that suspension of privileges to use common areas was "in effect an act of coercion to compel the debtors to pay the past due association assessments".  The Court ordered the association to reinstate all privileges forthwith.

Associations need to consult with counsel to protect their rights as creditors in bankruptcy cases.  The association can participate in the bankruptcy proceeding to ensure the amounts claimed are correct and in some cases ask the court for permission to proceed with collection activities, especially if the debtor does not reside in the property. 

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Court Rules in Favor of Condominium Association After Lender Fails to Move Foreclosure Proceedings Along or Comply With Court Orders.   

On Feb. 8, 2007, the Bank of New York filed a mortgage foreclosure lawsuit against a unit owner, naming the Moorings at Edgewater Condominium Association, Inc. as an additional defendant in the case.  The defaulting unit owner filed for bankruptcy on May 1, 2007, which resulted in an automatic stay of the foreclosure lawsuit.  The unit owner surrendered the property and was discharged from bankruptcy several months later.  The lender waited almost a year from the bankruptcy discharge to file its Motion for Summary Judgment, but never set that Motion for hearing, leaving the association in limbo.

Becoming quite frustrated as a result of the delay, the association hired Attorney Scott Petersen of Becker & Poliakoff's Sarasota office, who filed a Motion to Compel as a result of the delay.  The Court granted the association's Motion and Ordered the bank to move its mortgage foreclosure case along on or before June 29, 2009.  Remember, the unit owner surrendered the property, did not reside in the unit and did not contest the mortgage foreclosure action. 

After Bank failed to obey the Court’s Order, Attorney Peterson scheduled a hearing on an Order to Show Cause for September 24, 2009.  The lender attempted to file a Notice of Voluntary Dismissal to avoid the Show Cause hearing.  The Court ultimately granted the Order to Show Cause, ruling that the bank must pay regular and special assessments as a result of the inordinate delay.

After two months of non-payment, Attorney Petersen filed a Motion for Contempt when the Bank's attorney did not respond to correspondence.  The Bank argued the following as justification for its delay:

1. Owner’s bankruptcy;
2. Difficulties in service of process;
3. Countrywide’s Consent Judgment - implying the parties (owner and lender) were engaged in the loss mitigation process;  and
4. the Court’s Order of May 29, 2009 was illegal pursuant to F.S. 718.116 and the U.S. Bank v. Tadmore case.

The association countered with the following arguments:

1. The Owner’s bankruptcy case was discharged in 2007 and did not cause a 3-year delay;
2. The Affidavits of Service showed that service was attempted during an 8-day stretch from March 1-8, 2007 and then again on April 23, 2007, all of which were unsuccessful. The next attempt at service was June 12, 2008, which was successful, but there was no explanation for the intervening delay;
3. Countrywide’s Consent Judgment was filed Nov. 10, 2008, more than a year after the property was surrendered in bankruptcy and didn't even apply since the borrower (unit owner) abandoned the property; and (among other things)
4. The facts of this case were so egregious that sanctions were appropriate.

This victory for the association shows community leaders cannot sit back and wait for the bank to foreclose.  Moreover, there are many steps that proactive leaders can take now to guard against future delinquencies and to improve the association's position.

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Bankruptcy Court Finds "the Unit Owners are Not a Bottomless Well, From which Water May be Drawn Eternally With No Consequences" and Grants Maison Grande's Motion to Reject Unexpired Lease.

 As I mentioned in July in Bankruptcy An Option for Finally Distressed Condos & HOAs, the 99 year lease for certain recreational and parking facilities placed the most stress on Maison Grande Condominium Association's finances.   Owners of the 502 units in the oceanfront condominium enjoyed the use of the pool, the pool deck and the parking spots leased to the association, but simply could not keep up with the increasing rent, taxes, insurance and maintenance of these amenities.

Rent for the leased parcel in 1971 was $20,160 per month ($241,920 per year).  Now the association is required to pay $112,241 per month ($1,346,903 per year), regardless of whether all owners pay assessments on a timely basis.  The association reported that as much as 25% of its members were delinquent in payment of assessments and since many lacked equity in the units, they were also subject to mortgage foreclosure proceedings.

The bankruptcy court found that the decision to pursue bankruptcy and reject the lease was a "sound exercise of the Debtor's business judgment".   The decision contains a very comprehensive explanation of the business judgment rule, along with appropriate citations.

This is not the first time a Condominium Association pursued relief in the bankruptcy court.  In 1984 the court approved rejection of a 99-year lease, indicating that "the Court will not second guess the business judgment of [the] ... Board of Directors unless there is a showing that their judgment is clearly erroneous".  In re Condo. Ass'n of Plaza Towers South, Inc., 43 B.R. 18,22 (Bankr. S.D. Fla. 1984). 

The Order is apparently being appealed.  The parties in the case are expected to submit written argument and a hearing is scheduled for March 16th.

Is bankruptcy an option for your struggling association?  For more information please refer to the Questions & Answers previously posted on this site.

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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.

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Many readers have posted questions regarding the ability to collect rent from tenants.

It is important to remember that in all of the cases reported previously on this blog, the Court only appointed a blanket receiver to collect rent after the Association filed an action to foreclose its Claim of Lien.  Thus, the Association must pursue the collection procedures set forth in the Condominium Act (Chapter 718, Florida Statutes) or Homeowners' Association Act (Chapter 720, Florida Statutes).  It must send written notice of the delinquency to the Owner, file its Claim of Lien, notify the owner in writing of the intent to foreclose and then file its lawsuit, all before it can ask the Court to allow it to collect rental income. 

Here is an issue that comes up frequently:

  Assume the following:
- A bank has commenced foreclosure proceedings against a unit Owner but not taken possession of the unit
- The Condo association has liened the Owner for past due assessments
-The condo Owner has declared bankruptcy
-The Condo Owner has a renter in the unit & is collecting rent

Can the Condo association obtain a receiver to collect the rent to pay the association assessment?

A bankruptcy filing results in what is known as an "automatic stay".  This essentially stops all collection activity against the debtor. In Senate Report No. 95-989, the Judiciary noted:

The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors, stopping all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.

Generally when there is a foreclosure pending against a debtor in bankruptcy, the Court will require payment of post-petition obligations (assessment fees or mortgage payments).  If the debtor files under Chapter 11 of the Bankruptcy Code (reorganization), creditors (including the Association and/or the Lender) are prohibited from taking any action to collect past-due amounts.  However, these creditors may file a Motion for Relief from Stay in the event the debtor fails to keep ongoing obligations current.  While the automatic stay is in effect, the Association cannot take further action to collect any past due assessments or charges.  It cannot collect rent directly from the tenant (even if the governing documents provide that type of relief) and any rent collected may be deemed to be property of the bankruptcy estate.  Violations of the automatic stay are not taken lightly by bankruptcy judges.

Some communities have amended their governing documents to include an automatic "assignment of rent" when an owner falls into delinquency status.  The communities that are most successful not only amend the governing documents, but likewise require (through amendment or as part of the approval procedures) a tri-party lease addendum that includes this assignment.  The tri-party lease addendum creates a contractual relationship between the owner, the tenant and the association which is helpful in the event assessment payments from the owner fall behind schedule.  This document generally gives additional rights to the Association in the event the owner fails to control the conduct of the tenant (or the tenant's guests) as well.

All of these actions must be considered in light of the existing governing documents and in conjunction with analysis of the laws governing debt collection (especially when bankruptcy is involved).

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At Least Five Community Associations in Florida have filed for Bankruptcy Protection and Relief.

Reorganization through Bankruptcy Allows Communities to Restructure Obligations and Reduce Debt.

On July 8, the Daily Business Review reported about the Maison Grande Bankruptcy filing.  Maison Grande condominium owners are obligated to pay the developer over $100,000 per month for a 99-year lease of the pool and some other improvements.

Bankruptcy Attorney Aleida Martinez Molina of Becker & Poliakoff indicated that the bankruptcy code contains unique provisions which, in essence, give associations the upper hand in dealing with creditors.   According to the Daily Business Review, Maison Grande owes the developer almost $700,000, but the lawsuit filed by the developer is on hold while the bankruptcy court has jurisdiction.

There a various benefits to reorganization through bankruptcy proceedings:

• If the Association is facing lawsuits from several creditors in different venues, the bankruptcy court may have the power to shift the jurisdiction to streamline addressing each claim.
• The Bankruptcy Code includes provisions allowing debtors to assume or reject executory or unexpired leases, providing opportunities to renegotiate onerous provisions.
• A Bankruptcy filing will delay, and in some cases prevent, a creditor from seizing or garnishing bank accounts and will also delay cancellation or shut-down of utility services.

Many community associations are obligated under contracts initially entered into by the developer.  The Legacy Park Community filed for bankruptcy protection when it could not pay a cable bill in excess of $100,000, especially since it reported over $250,000 in lost (unpaid) HOA assessment fees not paid by the owners that lost homes due to foreclosure.

Presidential Golf Maintenance Association also recently filed for relief under Chapter 11 allegedly due to the fact that in can no longer maintain approximately 97.8 contiguous acres because they do not have sufficient funds. They filed to “restructure and evaluate other strategic alternatives.”

Attorney Molina strongly encourages any Association desiring to take advantage of relief that may be available through bankruptcy proceedings to only file with a clear understanding of its plan for reorganization.   

Judge Mark dismissed a  bankruptcy filing on the behalf of View West Condo Association.  View West had controversy with roofer who supplied services to the condominium regarding payment, quantity and quality of work performed and warranty of work.  The Court found:

There does not appear to be any purpose for filing a Chapter 11 plan nor any reason for the Debtor to stay in Chapter 11 other than Debtor’s counsel’s suggestion that this Court would be a more expeditious forum for litigating claims against third parties. That reason is insufficient if the litigation solely involves state law issues.

As a result of current economic conditions, bankruptcy filings may become more prevalent for community associations.  Please contact us if your community would like to discuss whether bankruptcy is a viable option.

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