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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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In my last 2 posts I discussed the dangers of failing to comply with the records retention provisions of Florida law. This post will touch on things the Association can do to limit its exposure.

First, the Association needs to ensure it understands exactly which records must be maintained by statute [§718.111(12) and §720.303(4)]. For example, I get many questions about whether the audio recording of Board meeting must be maintained. The truth is it depends. The recording must be maintained until such time as the minutes are approved and then it can be destroyed [Fla. Admin. Code 61B-23.002]. However, if there is a delay in approving the minutes, the recording must be kept as an official record and must be provided for inspection should such a request be made.

Second, in determining which records are to be retained, it is important for the Association to understand the “gray” area [§718.111(12)(15) and §720.303(4)(l)] set forth in each statute. In dealing with the gray area, the Association should consult with its attorney to determine what items fall within the gray area “catch all” as determined by the Legislature, Division and/or Courts.

Third, the Association needs to create a strict policy addressing where the documents are to be housed. The statutes provide for location limitations (Condominiums - 45 miles from the condominium or within the county in which the condominium is located; homeowners associations - within the state in which the HOA is located]) which are for the most part followed. The problem is that some Associations allow some of their records to be retained by their property managers, some by the Board members and others in a storage area on Association property. In these instances, it is usually difficult for the Board or even its manager to truly know where all the documents are such that full compliance with a records inspection request or discovery in a case is difficult to accomplish. A singular location needs to be chosen which allows the Association easy access to comply with a records inspection request or a discovery request in case. If this cannot occur as to the current year’s records, then a singular location as to the records of prior years should be created and a detailed list of where the current year’s records are maintained should be maintained by the Board and its manager for easy reference.

Fourth, the Association needs to create a policy through which it ensure that each time the members leave the Board that a full inventory of documents and the actual documents in the possession the former Board member is provided to the Association. In the spirit of being neighborly, the new Board should request the documents from the old Board members before contacting the Association’s attorney for assistance. If the records are not turned over however the new Board must seek legal assistance.

Fifth, whenever the records or a part of them are to be maintained by the management company, the Association with the assistance of counsel, should ensure the contract provides specific information as to what documents the company will be charged with maintaining and the manner in which the records will need to be turned over to the Association upon termination. The contract should also provide specific language regarding the repercussions to the management company for failure to turn over or otherwise improperly destroy or damage the documents of the Association. The Association’s attorney can help prepare the language for the contract to ensure these protections.

Sixth, the Association should ensure that if it suspects a set of documents will be or otherwise address the subject of a suit (threatened or filed) it should seek the advice of its attorney as to whether the documents must be retained or otherwise destroyed as part of the Association’s standard practice.

Seventh, the Association should create a policy which addresses destruction of records. This policy should address when a record is subject to destruction, who is responsible for the destruction and how it will be destroyed.

Please note that while no system is foolproof the key to its success is its ease. The easier the policy is to understand and follow the greater the likelihood it will be properly followed.
 

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As promised in last time, this post continues to address issues regarding an Association’s failure to comply with the statutory mandates of records retention. This post is a bit more intense as there are exceptions to consider.

 Spoliation/Presumption Against the Association in a Lawsuit/Arbitration
If the missing documents are important to a case regardless of who the opposing party might be (e.g., member, contractor, manager, etc.), the Court could find that the Association spoliated the evidence. This is a fancy way of saying the Association destroyed evidence. This finding could be issued regardless of the intent of the Association. After a finding of spoliation the Court could instruct a jury that if the evidence were not destroyed it would serve to show that the Association conducted itself inappropriately as it pertains to the issues in the case. In essence the Association is then burdened with having to show it did nothing wrong. This does not always work and a finding could be made against the Association such that it would loose the case. In addition to the presumption against the Association a Court could also sanction the Association with the sanction taking the form of the striking of pleadings (claims or defenses depending on the role of the Association in the case) in addition to a monetary fine (commonly referred to as a sanction).

Evidence Used Against Association in a Lawsuit/Arbitration
If the Association retains records past the time mandated by the statute could this could also work against the Association. The Association should create a succinct procedure for destroying records which exceed the 7 year retention required for most records. The only exception to this is if a case is already pending against the Association or if the Association believes a case could be filed against it on a specific issue which is the subject of the records which are subject to destruction. The Association should speak to its attorney if it is not certain if this “exception” applies at any given time.

Knowing there is a rule and an exception is great but not understanding why they are important does not help the Association at all. The problem with keeping records past the mandated time when the exception is not present is that at time those records could show the Association did something inappropriately. For example, assume the governing documents require a 75% member vote to be amended. In 2000 the Board put an amendment prohibiting the over-night parking of motorcycles at the Association up for a membership vote. The Association voted to pass the amendment by 73% but due to a counting error it was believed the full 75% vote had been obtained. Based on the error, the amendment was recorded and became a part of the Association’s governing documents. In 2009, a new member of the Association begins parking his motorcycle over-night at the Association. The Board makes a demand which the member refuses to comply with and legal action is taken. As part of discovery, the Association is asked to produce all records regarding the amendment of the documents. The Association having not discarded any of its records since its creation in 1980 produces all records to counsel who is required to produce those records to the member. The ballots and voting materials show the vote was 73% and the amendment never passed. The Association looses its case and could have to pay the legal fees and costs incurred by the member in defending against the case. On the other hand if the records had been properly destroyed (1 year for the ballots and 7 years for all other pertinent records) there would have been no way to show that the vote was not the 75% mandated by the governing documents, the amendment would have been upheld and the Association would have prevailed.

You may ask, why the records were produced if the Association was not required to keep them? Simple, once the Association determines records pertinent to a case were not discarded, it cannot then destroy them as this could lead to a claim of spoliation. The Association can also not ask its counsel to destroy the records or otherwise refrain from producing them as that would result in an ethical violation of the rules governing attorney conduct which could result in both a claim of spoliation against the Association and disciplinary action against the attorney.

Do not despair remember I promised that the third post on this issue would give Associations guidance on how to limit their exposure. 

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You may be wondering why such a simple topic is being addressed in a blog after all isn’t records retention 101 the first thing an Association Board and its managers learn? The truth is I have found that many times the Association simply does not follow the statute and this can cause problems. I have had Boards tell me that former Board members or the prior management company did not return all the documents; the e-mails communicating with the managers were not kept; the final version of a document sent to the members was not kept; or we have documents dating back to the beginning of time. In many instances, the Board simply shrugs off the issue. The truth is not properly maintaining the Association’s records could result in:

• Statutory Fine
• Division Investigation
• Spoliation/Presumption Against the Association in a Lawsuit/Arbitration
• Evidence Used Against the Association in a Lawsuit/Arbitration

In this post, I will address the first 2 items above; the next 2 will be addressed in my next post and the one after that will touch briefly on things the Association can do to ensure statutory compliance.

Statutory Fine
Whether a condominium or a homeowners association, both statutes which govern the retention and inspection of your records permit a fine to be levied against the Association for failure to timely produce records requested in an inspection. [§718.111(12)(c) and §720.303(5)] If the Association is not properly maintaining its records then each time a member asks to see the “missing” records the Association would be unable to produce them for inspection. In that instance, the Association has exposed itself a fine of $50 per day fine (up to the statutory cap) in damages to the member. There is also nothing which prohibits the same member from asking to see the records over and over again turning the Association’s non-compliance with the statute into a money making venture. This risk continues until the missing records fall outside the statutorily mandated retention period.

Division Investigation
A condominium member could file a complaint with the Division claiming the Association is not in compliance with the Condominium Act. An investigation by the Division is never welcome as there could be other issues the Division uncovers as part of its investigation which the Association was not even aware of. Assuming no other violations are found, the Association could still be subject to a fine imposed by the Division for the failure to properly maintain its records.
 

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