In its January 29, 2018 decision captioned Indian Field at Hardyston HOA, Inc. v. Trudnos, New Jersey’s Appellate Division reaffirmed the common-sense concept that (with certain exceptions) bankruptcy only discharges a debtor’s personal debt, not an Association’s lien on the property. In doing so, the Court also affirmed a significant Association attorney fee award noting that the Debtor’s actions greatly increased the Association’s “expenses for what otherwise would have been relatively straightforward litigation to collect about $6,500 in overdue assessments”. We often pursue foreclosure as New Jersey’s Foreclosure Unit is processing cases more quickly and homeowners’ equity has often risen to the point where debtors will settle and pay rather than risk losing their equity. Foreclosure also remains a valuable tool in addressing non-paying vacant homes where the debtor has died or abandoned the home.
What happens when a unit is in collections and then upon a title search, we determine there is no mortgage on the property?
This is a common situation when the property was bought a long time ago, and the debtor recently fell on hard times or the debtor is a relative that inherited the unit from the deceased owner. Although the mortgage is paid, the debtor cannot pay their monthly maintenance fees.
The Association will most likely proceed with its collection efforts whether it be through a foreclosure against the debtor’s property or through a money judgment action against the debtor personally. A foreclosure’s end goal is to get to a sheriff sale, and likewise if there are no assets to collect on an outstanding money judgment, the end goal would also be a sheriff sale.
So, we are at the sheriff sale stage now, and there is no mortgage on the property! Before we actually go to the sheriff sale, we would advise the Association of all that needs to be taken into consideration to make an informed decision.
First, we would obtain a full title search to determine all docketed judgments, liens, and any tax sale certificates. If there are various judgments and liens on the property, and the Association is not interested in obtaining clear title, then the Association could bid at the sheriff sale the current amount owed. If a third-party purchaser successfully bids on the property, then the Association will be made completely whole. However, if no one bids, and the unit reverts to the Association, the Association can rent the unit until the holder of that lien or docketed judgment forecloses on the property. This can take a very long time, especially if the lien holder has not instituted any foreclosure action yet.
If there are docketed judgments and liens on the property, and the Association is interested in obtaining clear title, any judgment that is docketed, and any outstanding lien would have to be satisfied in order for the Association to gain clear title. If the unit is worth substantially more than the amount of the liens, or docketed judgments, satisfying those liens/judgments might be a good option for the Association since the Association can possibly become the outright owner, and will be able to sell the unit at the fair market value, reaping a substantial sum!
A cost/benefit analysis would have to be undertaken to determine whether it is in the Association’s best interest to gain clear title. Whether the Association is interested in obtaining clear title or not, the Association can potentially reap a lot of money by taking a unit without a mortgage to sheriff sale. The Association can either be made whole by being paid by a third-party purchaser or the Association can rent the unit pending the lien holder’s foreclosure action. If the Association becomes the outright owner, the Association can sell the unit at fair market value and reap the entire amount the unit is worth.
Along with associations’ ability to sell units by foreclosing on liens, they can also sell units to satisfy money judgments – if they can prove the owner has no other personal assets. A New Jersey court rule and statute both permit a judgment creditor to levy upon a debtor’s real property if the creditor cannot find assets to satisfy the judgment elsewhere. In other words, if the association sends an information subpoena to the debtor, performs asset searches and sends the Sheriff to the debtor’s property to inventory personal property, and there are no assets found that can satisfy the judgment, the court rules and statute allow the association to levy the debtor’s real property and sell it at Sheriff’s sale. At Sheriff’s sale, either a third party will purchase the property or ownership will revert back to the association and the association can rent the property.
This process was recently confirmed by the Appellate Division. On behalf of an association, this firm filed a motion to permit sale since no personal assets could be found. The motion judge denied the motion because there was an outstanding mortgage on the property and the judge felt that it would not be fair for the association to sell or rent the property and collect its judgment while the mortgagee was foreclosing. This firm appealed the motion judge’s decision and argued the matter before the Appellate Division. The Appellate Division reversed the motion judge’s decision in the unpublished opinion, Birch Glen Condominium Association, Inc. v. Boahene. We successfully argued that the outstanding mortgage on the property is irrelevant to the association’s motion. The Appellate Division agreed with this firm’s position that the motion judge erred by failing to base his decision on whether the association had taken adequate steps to try to satisfy the judgment out of personal property. The case was remanded back to the motion judge with instructions that the judge determine whether the association made reasonable efforts to located the defendants’ assets to satisfy its judgment.
In these tough economic times, it seems no association is immune to the burden of vacant units. While failure to pay assessments is the most obvious problem, vacant units can introduce a host of other problems from squatters to burst pipes. While there is no quick fix or magic formula to correct the scourge of vacant units, there are steps that every association can take to ease and even eliminate the financial and maintenance burden vacant units can create.
If the association is willing to rent units, often the best option is to contact the owner of a vacant unit to see if they would consider signing a quitclaim deed or a rental agreement. A quitclaim deed transfers ownership of the unit to the association, subject to any mortgage or other liens on the property. A quitclaim deed offers two enormous benefits. First, the association can rent the unit and begin recouping the arrears that have been accumulating. Second, the association can monitor and control the unit and ensure that it does not become a health and safety hazard in the community. A rental agreement provides the association with the authority to rent the unit on behalf of the landlord and collect the rents. It offers many of the same benefits as a quitclaim deed, but without the permanency of actually transferring ownership. In either case, the association should ensure that the unit is in rentable condition – or can be made rentable for a reasonable cost – prior to entering into any agreements.
In New Jersey, a mortgagee who takes possession of a unit is responsible for pay ongoing assessments throughout its possession. If a mortgagee has taken possession of a unit, the association can pursue the mortgagee directly for unpaid assessments. It is a fact sensitive inquiry as to when a mortgagee has taken possession. Whenever it appears that a mortgagee has become involved with a unit, it is best to contact the association’s attorney to determine what options the association may have.
Beyond collections, vacant units also can create nuisances and even health and safety hazards. N.J.S.A. 46:10B-51 requires foreclosing mortgagees to maintain vacant and abandoned properties. While the mortgagee does not have to keep a property in pristine condition, it is responsible to ensure that the property does not become a nuisance or violate any state or local code. If a vacant unit is in disrepair, the association can demand that the mortgagee make the necessary repairs and, if it fails to do so, notify code enforcement who should then force the mortgagee to make necessary repairs and perform necessary maintenance.
Lastly, with the temperature continuing to drop, associations may be forced to take some maintenance and repairs into their own hands. If a vacant property has not been winterized by the mortgagee, every association with attached units should hire a plumber to winterize any vacant units. Pursuant to the Condominium Act, N.J.S.A. 46:8B-15(b), an association has the right to enter a unit during reasonable houses “to perform emergency repairs necessary to prevent damage to common elements or to any other unit or units.” Therefore, the association may step in to winterize properties in order to prevent the extensive damage that can be caused by a burst pipe. The association can also bill back the costs of the repairs to the unit owner. While this may seem like an added cost to the association, the cost of winterization is minimal compared to the costs of repairing the area surrounding a burst pipe, not to mention the inconvenience to the surrounding units. This same logic can be applied to other unit owner responsibilities, like a broken window or door. Keeping vacant units secure is the best way to protect the entire association and to prevent much greater costs down the road.
While vacant units are never welcome, they can be controlled and even become income generating assets if the association is proactive.
Bankruptcy is a court case where a person attempts to have their debts wiped out (a Chapter 7 Bankruptcy) or attempts to have the court force their creditors to be paid under a payment plan (a Chapter 13 Bankruptcy).
The Petition date is the date that the person files the bankruptcy papers (the Petition) with the bankruptcy court.
The petition date is also the date that the Automatic Stay takes effect. The automatic stay is like an automatic court order that orders creditors to stop pursuit of the person who owes the debt as long as the automatic stay is in effect. Judges will impose sanctions against those who continue to pursue people in bankruptcy when the automatic stay is in effect.
What should a manager do when a bankruptcy notice is received?
First, immediately notify the association’s collection attorney and provide the attorney with copies of any bankruptcy documents received so that the association will temporarily stop collection efforts and will not be sanctioned for violating the automatic stay.
Modify the bookkeeping for the unit. Set up one account to keep track of Pre-petition accruals (fees etc. that accrued prior to the petition date). Only payments received from the Chapter 7 or Chapter 13 Trustee should be applied to the pre-petition accruals. Set up a second account to keep track of Post-petition accruals (fees etc. that accrue after the Petition date). Only payments received from the unit owner after the petition date should be applied to post-petition accruals.
A bankruptcy notice will typically be provided which will indicate the type of bankruptcy case filed and whether it appears that assets will be available for payment of pre-petition accruals. If the notice indicates that assets are available, a Bar Date should be indicated on the notice. The Bar Date is the deadline for the association to submit its Proof of Claim to the court so that the association may receive some of the assets available from the bankruptcy. In bankruptcy, the bar date deadline is very serious and failure to file a proof of claim on time will typically result in loss of the claim.
The proof of claim is typically prepared by the association’s attorney. The proof of claim specifies the amount of the pre-petition accruals and the property that secures the amount owed. Typically the association’s attorney also prepares and files a notice of appearance which advises the court that the association intends to participate in the case.
In a Chapter 13 case the association attorney may also file an objection to confirmation objecting to the plan that the unit owner has proposed for paying off the pre-petition accruals (usually over a five year period). If an objection is filed the attorney will have to appear at the Confirmation Hearing (A hearing before the Judge and/or Chapter 13 Trustee where the plan and the objections to the plan are reviewed). If the court and the Trustee find the plan satisfactory, the plan will be confirmed and will bind those included in it.
How can an Association proceed against a non-paying unit owner if a bankruptcy is filed?
Obtain Stay Relief by filing a stay relief motion with the bankruptcy court. The usual basis for this motion is that the unit owner has continued to fail to pay post-petition accruals or the bankruptcy was filed in bad faith. If this motion is granted, the association will be able to continue pursuit of the unit owner. However, if the unit owner dismisses his bankruptcy case and then files another one, a new automatic stay takes effect and the association’s collection efforts are stopped again. After serial filings, the association may apply for Prospective Stay Relief. If the association obtains a prospective stay relief order, the association may continue to pursue the unit owner even if a new bankruptcy is filed. Note that, even if stay relief is granted, if a plan is confirmed, the plan will bind the association.
Often, prospective stay relief is the ultimate goal because serial filings for the purpose of delay are common. Though hard cases generate attorney fees in obtaining prospective stay relief, associations should discuss this option with collection counsel because, if the association does nothing, non-paying unit owners will be happy to live for free and mortgage companies cannot be counted upon to aggressively obtain stay relief and finalize foreclosure. If the association obtains prospective stay relief, the association may foreclose and have the unit owner removed from the unit. This may not generate money for the association but it will help expedite turnover of the property to a new paying owner. Many associations rent units during the period from the association’s foreclosure sale to the bank’s foreclosure sale. Lastly, in a chapter 7, the case is typically closed quickly. Once closed, the stay is gone and, though personal liability is discharged, the lien on the unit survives and may be foreclosed. This is why pre-petition accruals should not be automatically written off, even in a chapter 7.
“Interest” and “late fees” are different things. Governing documents may provide for interest and/or late fees. Judges are sensitive to the difference. Judges will not allow interest if only late fees are authorized in the governing documents and judges will not allow late fees if only interest is authorized by the governing documents.
Judges essentially conclude that “late fees” only accrue on late payments while “interest” is charged on a continuing balance. Many management companies are not set up to accrue interest; nevertheless, posting late fees (if not authorized by the governing documents) is improper.
Late fee postings are particularly troubling when late fees are compounded because of a single missed or late payment. These “late fees” should really be interest on the continuing balance.
Chances are your Association doesn’t have spare money lying around. Chances are your Association has five or more “regular debtors” – the ones who are on the arrearage list year-in and year-out. Chances are that, since the recent recession, 10% of your budget and/or 10% of your homes are in arrears. Chances also are that some debtors have abandoned their units and the Board has had to deal with frozen pipes, mold, vandalism or all three.
Our job is to get non-payers out, get vacant units occupied and get cash flowing. We do this in one or more of the following ways. Unless you want to increase the bad debt expense line item in your budget year after year, you should be pursuing one or more of these methods:
- Payment Plans/Settlement Agreements.
- Amnesty Programs.
- Membership Privilege Suspension (Pools and Parking Too!)
- Money Judgment Lawsuits.
- Bank Account Levies.
- Wage Executions.
- Rent Levies.
- Lien Filing.
- Foreclosure Lawsuits.
- Receivers in Aid of Execution.
- Rent Receivership.
- Rent Sharing Agreements.
- Mortgagee In Possession Lawsuits.
- Quit Claim Deeds.
- Sheriff’s Sales Based on Foreclosure or Money Judgment Suits.
We give presentations, throughout New Jersey, on various collection techniques, including those listed above. Please contact us if you would like to schedule a free collection presentation for your New Jersey Home Owners Association, Condominium Association or Co-Op.
Community Associations fight the spread of COVID-19 where people live. Associations must not be stopped from collecting the assessments they need to keep up the fight. Senate Bill S2330 sponsored by Senators Joseph P. Cryan and Nellie Pou; and Assembly Bill A3908 Sponsored by Assembly Members Mila Jasey, Verlina Reynolds-Jackson and John McKeon had been listed for votes in the Senate and Assembly on April 13, 2020.
To the great relief of Condominiums, Co-Ops, and Homeowners Associations throughout New Jersey, neither the Senate nor the Assembly voted on these bills on May 13, 2020. These bills have however re-surfaced. And, at least for the moment, they do not contain Senator Pou’s proposed Amendment that would remove Association-crippling Section 3. A copy of Senator Pou’s proposed amendment may be viewed by clicking here: Senator Pou’s proposed amendment
The Assembly version, A3908, is scheduled for hearing before the Assembly Commerce and Economic Development Committee on Thursday, May 7, 2020 at 11:00 AM. The Senate version, S2330, is scheduled for hearing before the Senate Budget and Appropriations Committee on Thursday, May 7, 2020 at 1:00 PM. The Senate and Assembly Bills are identical for the time being. A copy of Senate Bill S2330 may be found by clicking here: https://www.njleg.state.nj.us/2020/Bills/S2500/2330_I1.HTM
The Committees would have taken your oral testimony on A3908 and S2330, by telephone and/or video but a deadline for submitting the required SBA Committee Registration Form was set as 3:00 pm on May 5, 2020 so it seems that the late notice will effectively exclude telephonic or video testimony. You may however still submit written testimony via e-mail to OLSAideSBA@njleg.org. Your e-mails will be included in the committee records and distributed to the Committee members. Please reference the bill numbers and Committees you are submitting your comments to in the e-mail Re: line.
Without amendment, the proposed legislation will cripple Association cash flow. It will make it more difficult or impossible for Associations to perform their critical functions. It will make it more difficult or impossible for Associations to pay the individuals and small businesses Associations employ.
Assessment revenue is the lifeblood of every Condominium, Co-Op, and Homeowners Association. To a degree, the crisis has already hobbled collection efforts.
We have advocated forbearance agreements and encouraged flexibility. We continue to do so.
Please e-mail the Assembly Commerce and Economic Development Committee members: Gordon Johnson, Robert Karabinchak, Robert Auth, John Catalano, Nicholas Chiaravalloti, John DiMaio, Aura Dunn, William Moen, Annette Quijano and Verlanda Reynolds-Jackson and the Senate Budget and Appropriations Committee members: Paul Sarlo, Sandra Cunningham, Dawn Addiego, Nilsa Cruz-Perez, Patrick Diegnan, Linda Greenstein, Declan O’Scanlon, Steven Oroho, Teresa Ruiz, Troy Singleton, Michael Testa, and Samuel Thompson and request that these bills not move forward without Senator Pou’s amendment removing Section 3. You may find your legislators by clicking here: https://www.njleg.state.nj.us/members/legsearch.asp