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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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On August 17, 2009, the Task Force On Residential Mortgage Foreclosure, created by the Florida Supreme Court, issued its final report on the "foreclosure crisis" affecting condominium and homeowners' associations throughout the state.

The full report can be viewed at http://www.floridasupremecourt.org/pub_info/documents/Filed_08-17-2009_Foreclosure_Final_Report.pdf

The following quote, taken directly from the report, succinctly sums up what community associations are presently dealing with. Here is what the Task Force said:  

 

Picture this: the biggest road out of town. Now imagine it is rush hour. In a thunderstorm. Add that it also a hurricane evacuation. A lane is closed due to construction delayed by budget impacts. Imagine the traffic jam.

The clearest description of the impact of the foreclosure crisis and the following recession on Florida's courts can be summarized by that picture. Imagine every car a case. The General Jurisdiction Courts of our State have a certain amount of judicial infrastructure, just like there is a certain amount of room on the road. There is a certain capacity of judges, of court staff, of clerks, of filing space, of hearing time, or courtrooms, even of hours in the day. Year in, year out, that capacity flexes with the caseload traffic to afford reasonable, prompt, efficient and fair justice.

The enormous increase in foreclosure filings has overwhelmed those resources in many circuits and represents a traffic jam that the infrastructure cannot meet in a timely and efficient manner without support and traffic management.

I would add to the above quote that at a time when the evacuation route is jam-packed with cars, imagine further that more and more roads are continuing to be closed as the traffic jam gets worse. Unfortunately, that's the scenario facing our courts when the Legislature insists on cutting funding of the courts. The largest expense of the court system is in personnel, so in a time of burgeoning foreclosure caseloads, the courts are actually being forced to lay off staff. Too many foreclosure cases and not enough people to handle them. Indeed, we hear the daily mantra from frustrated clients asking what is taking so long with these cases? Well, truly, this is a "perfect storm." The storm has caused a huge backlog in the court system which significantly delays the time it takes to complete a foreclosure lawsuit.

All is not lost, however. Associations need not sit idle on the sidelines once a mortgage foreclosure action is filed and seems to stall. Directors need to monitor these cases and can often, with the assistance of counsel, file motions with the court to force banks to either foreclose or pay assessments, ask for case management conferences where the court can set some deadlines for action, or the association might even notice the case for trial, which will force the bank to move forward. In fact, this tactic is working. Several judges in districts throughout the state have entered Orders requiring banks to take some action with their foreclosure cases and in some instances, pay assessments to the association during the pendency of the foreclosure.

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