DCA Proposes New Association Regulations Including Fines & Penalties

On June 3, 2019 the New Jersey Department of Community Affairs published proposed new association regulations. A copy of the DCA’s summary and the full text of the proposed amendments and new rules can be found here:


The proposed requirements are granular, and the proposed enforcement and penalty provisions should be carefully considered by board members, managers, management companies and professionals.

If you desire to submit an opinion, your opinions on the proposed amendments and new rules must be submitted in writing by August 2, 2019 to:

Geraldine Callahan

Department of Community Affairs

P.O. Box 800, Trenton, NJ 08625

e-mail: Geraldine.callahan@dca.nj.gov

(fax) (609)984-6696

Some proposed sections of note include:

N.J.A.C. 5:26-8.9(h)3 which proposes that: “All ballots shall be cast in an anonymous manner.”

N.J.A.C. 5:26-8.9(h)4 which proposes that: “If the bylaws permit, and the association member consents, a ballot may be cast electronically if it is administered by a neutral third party and anonymity is maintained.”

N.J.A.C. 5:26-8.10(a)2 which proposes that: “When affordable units represent a minority of units in the development, the bylaws shall reserve a seat or seats on the executive board for election by owners of affordable units.”

N.J.A.C. 5:26-8.12(a)2 which proposes that: “The board shall provide a brief explanation of the basis for and cost entailed in the matter that is the subject of any binding vote and include the explanation in the minutes for the meeting.”

N.J.A.C. 5:26-8.12(e)2. which proposes that: “A vote taken at a closed meeting shall not be binding. If the matter requires a binding vote, it shall be taken at a subsequent open meeting in a manner that does not disclose any confidences.”

N.J.A.C. 5:26-8.14(e) which proposes that: “The Department may levy and collect fines and may issue penalties as set forth in N.J.A.C. 5:26-11. 1. For associations that are controlled by unit owners, the Department may issue cease and desist orders, may issue a monetary penalty, may transmit the case to the Office of Administrative Law, or may file and action in the Superior Court.”

Please contact me with any questions.

Francis J. McGovern, Jr., Esquire

In his article this morning, Inc.com journalist Justin Bariso highlighted Eagles’ Nick Foles’ team leadership style.  During the post-game Press conference, Foles said “I think that the big thing that helped me was knowing that I didn’t have to be Superman. I have amazing teammates, amazing coaches around me and all I had to do was just go play as hard as I could and play for one another and play for those guys…”.

Bariso’s application of Foles’ comments to corporate leadership generally is also applicable to Association leadership in particular.  Associations are administered, lead, by a team.  Each team member has a role.  The manager leads day to day by implementing the global policies set by the board.  The vendors: legal, financial, engineering and trades are called upon as needed to counsel and make specific things happen.

Too often today, management services have been bid down to unrealistic rates.  This leaves a leadership vacuum where a Board Member is compelled to step in as Superman/Wonderwoman, vendor expenses spiral as vendors struggle to fill the void, and the Membership loses its mind as things don’t get done in a timely manner.  Associations are real corporations, intimately impacting their Members’ lives.

Board members should not be Superman or Wonderwoman running the day to day affairs.  Instead, Management, suited to the task and paid its worth, should manage.  Team is what it’s about and, with the right team, everybody wins.  Justin Bariso’s article is available at Inc.com and Nick Foles’ post-game Press conference is available at Youtube.com.

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.

Senate Bill 3233/Assembly Bill A1425 from the 2016-2017 Legislative Session was signed into law by Governor Christie on January 16, 2018.

Unfortunately, per the Assembly Judiciary Committee Statement, and with very limited exception, “a municipality will only be able to require developers to post performance guarantees that cover improvements being dedicated to a public entity”.  One has to wonder where this legislation came from.  Presumably not the League of Municipalities as municipalities are in the best position to help associations and their members during build-out.  Especially with respect to typically-bonded items like grading and drainage, roadways, sidewalks and storm sewers.

Perhaps the builders?  But won’t the lack of bonding just lead to more litigation by Associations directly?  In the past, often (but not always) defects in these items were corrected as part of the bond reduction/release process.  Suffice it to say, going forward, Associations and their members will have one less protection and will face greater challenges in making sure they get what they paid for.

Litigating against a community’s developer over construction defects and other issues is a long, slow and expensive process.  An average transition lawsuit can take between five (5) and seven (7) years to reach conclusion.  As if the glacial pace were not bad enough, if an association pays for its transition litigation “out of pocket”, attorney fees could cost $750,000 or more, even if the matter does not reach trial.  In addition to engaging an attorney, associations must hire forensic engineers, and often forensic accountants to substantiate their claims against the developer and numerous sub-contractors.  The cost of those forensic services can easily add another $200,000 to $600,000 to the cost of the litigation.  Therefore, the total average cost of transition litigation can easily range from $750,000 to more than $1,000,000.  In certain cases, the total cost of the litigation can substantially exceed $1,000,000.

Few associations can afford to spend such substantial sums on litigation, especially when recovery is not guaranteed.  Even those associations that could amass sufficient funds from the membership, to pay those costs, may prefer not to because increased assessments may be unpopular with the members.  Whatever the reason, over the last decade, contingent fee agreements have become a more popular option for transition litigation.

Most people have little to no actual experience entering into contingent fee agreements with attorneys. Instead, most people’s only familiarity with contingent fee agreements comes from movies and television where lawyers always seem to get paid a third (1/3) of whatever they recover for the plaintiff.  Unlike television, however, in New Jersey the Supreme Court adopted very specific rules and limits for how much an attorney may charge as a contingent fee for the majority of claims an association would pursue against a developer, and its sub-contractors.  Those rules are found in Court Rule 1:21-7.

As explained in Court Rule 1:21-7(c), in any matter where the association’s claims for damages are based upon the alleged “tortious conduct” of another (tortious conduct generally means civil wrongful acts, or an infringement of rights, that arise out of something other than a contractual agreement), a contingent fee arrangement may not exceed the limits set forth in the Rule.  The Rule lays out a five-tiered framework for calculating the contingent fee, where each tier establishes a ceiling on the percentage of the recovery the lawyer can charge the client as a contingent fee.

Under a tort-based contingent fee arrangement, the Association’s attorney may only collect:

  1. 33⅓% on the first $750,000 recovered;
  2. 30% on the next $750,000 recovered;
  3. 25% on the next $750,000 recovered;
  4. 20% on the next $750,000; and
  5. On all amounts recovered in excess of $3,000,000 the attorneys must apply to the Superior Court for a determination of a reasonable fee in light of all the circumstances.

It is also important to remember that, pursuant to Court Rule 1:21-7(d), the contingent fee is computed on the net sum recovered after deducting all disbursements in connection with the litigation, regardless of whether those disbursements were advanced by the attorney or by the client.  These disbursements include investigation expenses, expenses for expert or other testimony or evidence, and any interest included in the judgment pursuant to certain Court Rules.

An example of how to calculate a contingent fee for a hypothetical transition litigation should help put the application of these concepts and rules into context.


Association entered into a contingent fee agreement with Lawyer to sue Developer.  The contingent fee agreement was written in accordance with the limits set forth in Court Rule 1:21-7.  Association succeeds in its case and wins a $3,000,000 judgment against Developer.  Association paid a total of $500,000 to cover various disbursements spent in furtherance of the Association’s successful litigation.  Developer immediately pays the $3,000,000 into Lawyer’s attorney trust account satisfying the Association’s judgment in full.

Question:        How much does Association owe Lawyer pursuant to the contingent fee agreement?

Gross sum recovered:             $3,000,000

Less – Disbursements:            ($500,000)

Net sum recovered:                 $2,500,000

Contingent Fee Calculation:

  1. 33⅓% on the first $750,000 recovered           –           $750,000 x .3333 =     $250,000
  2. 30% on the next $750,000 recovered             –           $750,000 x .30 =         $225,000
  3. 25% on the next $750,000 recovered             –           $750,000 x .25 =         $187,500
  4. 20% on the next $750,000; recovered             –           $250,000 x .2 =           $50,000

Total Contingent Fee:           $712,500

Answer:          In this case, the Association owes Lawyer a contingent fee of $712,500.  In this example, Court Rule 1:21-7 did not require an application to the Superior Court because the net sum recovered did not exceed $3,000,000.

It is important to understand the limits the Supreme Court placed on the calculation of contingent fees because it can dramatically affect how much an association pays for these legal services.  For example, in the scenario described above, if the fee agreement simply provided that Lawyer would receive one-third (1/3) of the gross sum recovered ($3,000,000) Association would owe Lawyer a $1,000,000 contingent fee.  Not only would Association’s fee agreement violate Court Rule 1:21-7, the improper fee agreement would also result in Association overpaying Lawyer $287,500 for this litigation ($1,000,000 – $712,500 = $287,500).

Moreover, if the fee agreement simply provided that Lawyer would receive one-third (1/3) of the net sum recovered ($2,500,000), Association would owe Lawyer a $833,333 contingent fee.  This fee agreement would also violate Court Rule 1:21-7 and the improper fee agreement would result in Association overpaying Lawyer $120,833 ($833,333 – $712,500 = $120,833).  Either way, both improper fee agreements result in Association overpaying significantly for the legal services.

These examples demonstrate how easy it is for an association to overpay for legal services under a contingent fee agreement if the board of trustees does not take precautions to ensure the agreement complies with Court Rule 1:21-7.  The overpayment can potentially skyrocket in instances where the net sum recovered exceeds $3,000,000.   Furthermore, even if the agreement itself complies with the Court Rule, board members should also be vigilant to ensure that any contingent fee the association ultimately pays to the lawyer is calculated in compliance with Court Rule 1:21-7.

How can a board of trustees reduce the possibility the association is overcharged under a contingent fee agreement?

An independent attorney could review the contingent fee agreement for compliance with Court Rule 1:21-7.  As explained above, the Court Rule provides a very simple tiered framework for the calculation of contingent fees.  An independent counsel should have little difficulty determining whether the agreement the association is considering entering into, or already entered into, complies with the Court Rule.

In addition to reviewing the agreement for compliance with the Rule, when the litigation reaches conclusion, the association may also wish to have independent counsel review the calculation of the contingent fee for compliance with Court Rule 1:21-7.  Having independent counsel evaluate the actual contingent fee payment for compliance with the Court Rules should provide the board of trustees the greatest assurance that the association is not overpaying.

An association may benefit from having an independent counsel review the contingent fee payment at the conclusion of the litigation regardless of whether the association had independent counsel initially evaluate the agreement.  Court Rule 1:21-7 is very clear, “an attorney shall not contract for, charge, or collect a contingent fee in excess of the following limits.”  In light of this language, even if the Association voluntarily enters into a contingent fee agreement that does not comply with the Rule, the attorney is expressly prohibited from charging or collecting a contingent fee from the Association that is calculated in a manner that does not comply with the methodology established by Court Rule 1:21-7.

Contingent fee agreements are one option a board of trustees can consider.  With some relatively simple counsel and oversight, the board of trustees can ensure that their association does not overpay for the services the association receives under the contingent fee agreement.  Please contact our office regarding our contingent fee agreements or if you would like to have our firm evaluate an existing contingent fee agreement.

The information in this article is provided solely for information purposes. It should not be construed as legal advice on any specific matter and is not intended to create an attorney-client relationship. The information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based upon particular circumstances.  Each legal matter is unique, and prior results do not guarantee a similar outcome.

The transition process involves an engineering evaluation of the Association’s common elements to determine if there are defects.  The engineer’s evaluation  typically identifies defects within the site improvements, for example, the landscaping, roadways, sidewalks, detention basins, etc.  These site improvements are often subject to performance bonds with the municipality.

New Jersey statute N.J.S.A. 40:55D-53 permits municipalities to require a developer to post a performance bond guaranteeing the construction of site improvements.  The amount of the performance bond is calculated by the municipal engineer and is intended to cover the cost of constructing the site improvements in the event that construction is not completed or completed improperly.  The developer is then required to post a cash bond, a surety bond payable to the municipality, or a combination of the two, in order to guarantee the construction of the required improvements.

As construction progresses, the municipal engineer will inspect each site improvement and issue a report stating whether it was constructed in accordance with the approved plans.  The municipality (typically a township council) will then decide whether to reduce or release the performance bond after taking the municipal engineer’s findings into consideration.  Each municipality enacts ordinances setting forth the requirements and procedures for the performance bond process.  Therefore the process may vary depending on the municipality where the construction site is located.

The Association’s transition engineering evaluation should be submitted to the Township Clerk and Township Engineer when received, because the Association wants to alert the municipality that construction defects have been identified in the site improvements before the developer’s performance bonds are released.  This way the Township Engineer will have the benefit of reviewing the Association’s engineering report, and the description of those defects, when deciding whether to recommend a reduction or release of the performance bond to the municipality.

Interestingly, in K Hovnanian at Lawrenceville, Inc. v. Lawrence Township Mayor and Council, 234 N.J. Super. 422 (Law Div. 1988) the court held that the Township Council could not refuse to release or reduce the performance bond where the Township  Engineer recommended doing so.  The court noted that homeowner complaints of defective soil and drainage conditions were not sufficient for the Township Council to deny the developer’s request for bond reduction.  However the court stated that the Township Council would have discretion to deny the request if confronted with competent evidence such as an engineering report.

What happens if an Association receives its transition engineering evaluation after the performance bond has already been released?

Some developers “refuse to consider” an Association’s construction defect claim for bonded improvements if the municipality already accepted the construction of the improvements and released the associated performance bonds.  Do not accept this disingenuous argument.  The Association may pursue claims against a developer, for the defective construction of bonded improvements, even if the items were subject of a performance bond and the municipality already accepted the construction and released the developer’s performance bonds for the improvements.

  1. First, submit the engineering report to the municipality anyway as there may be a maintenance bond in place.  Most municipalities require developers to post a two year maintenance bond once the performance bond is released.  The municipality may perform repairs or replace unacceptable improvements and charge the cost against the maintenance bond.
  2. Second, the Association may pursue claims against the developer for the defective site improvements because the Association is not a party to the performance bond agreement.  Instead, the bonding agreement is only an agreement between the municipality and the developer.  As a result, the Association is not bound by actions taken by the municipality or the developer, pursuant to the bonding agreement.
  3. Third, the municipal engineer’s report indicating that construction was completed in accordance with the plans is not binding on the Association.

The municipal engineer’s report recommending release of a performance is similar to the municipal construction official’s issuance of a certificate of occupancy.  In DKM Residential Properties Corp. v. Township of Montgomery, 182 N.J. 296 (2005) the New Jersey Supreme Court held that a municipal construction official had authority to issue notices of violation for failure to comply with the Uniform Construction Code to a developer for defective EFIS construction after the certificates of occupancy were issued by the municipality.  The court noted that the Code does not limit its enforcement after a certificate of occupancy has been issued.

By analogy, the municipality’s acceptance of a site improvement does not limit the Association’s right to pursue a claim against the developer for Code violations or other basis of construction defect.  The Association obtains its right to pursue construction defect claims against the developer by virtue of the contractual provisions of the Public Offering Statement, the contracts of sale between the developer and the various purchasers, and the Association’s other governing documents.  In addition to these contractual rights, the Association also has independent rights to pursue the developer, on behalf of the unit owners, for various tort based claims relating to the common elements. See Condominium Act, N.J.S.A. 46:8B-12, Siller v. Hartz Mountain Assocs., 93 N.J. 370, 380, cert. denied, 464 U.S. 961 (1983).

Practical advice:

  • It is often helpful to keep the lines of communication between the Association and the municipal engineer open because the Township can be a great asset by holding the developer’s “feet to the fire” and making sure the site improvements are constructed properly.
  • If the Association’s engineer identified construction defects after the bonds are released, the Association’s transition counsel should be armed and ready to dispute the developer’s contention that it is not responsible for site improvement defects once the municipality has accepted them and released the bonds.

Pending legislation of concern:

Finally, everyone should be aware of pending legislation that is attempting to limit the developer’s obligations for performance and maintenance guarantees under the Municipal Land Use Law (A1425).  The proposed legislation would only require a performance bond for those improvements that will be dedicated to the municipality after completion and a municipality would only be able to require a performance bonds for privately owned perimeter buffer landscaping. The proposed bill would remove the following improvements from the performance bond requirement: culverts, storm sewers, erosion control and landscaping.

This legislation, if adopted, would leave an Association with defective private roadways or storm sewers to fend for itself with regard to construction defects and removes the first layer of protection that was provided by the municipality and the performance bond.

The cost to remedy construction defects in these improvements can be substantial.  This proposed legislation does not benefit Associations.

On July 13, 2017, the State enacted P.L. 2017, Ch. 106 often referred to as the Radburn bill, a supplement to the Planned Real Estate Development Full Disclosure Act intended to ensure Condominium, HOA, and Cooperative elections are conducted in a fair and open manner.  The new Law contains important new procedural and substantive requirements for: (1) Membership Voting Rights; (2) Board Elections; and (3) Bylaw Amendments.  Management and Boards must navigate these new requirements carefully, else they may face costly challenges to the validity of Association elections and Bylaw Amendments.

Except for new notice and ballot rules for elections in Associations with 50 or more Units, the new Law became effective on July 13, 2017.  The new notice and ballot rules become effective on October 1, 2017.

1. Membership Voting Rights:

The new Law provides, “Membership in the association of a planned real estate development shall be comprised of each owner within the planned real estate development[.]”  N.J.S.A. 45:22A-43.1.c.  This means that except for owners not in good standing, all owners must be permitted to run for the Board and vote on Board elections and Bylaw Amendments, even if otherwise prohibited by an Association’s Governing Documents.

The new Law also creates a definition of standing to be applied in determining whether a member is eligible to run for the Board and vote on Board elections and Bylaw Amendments:

“Good standing” means the status . . . applicable to an association member who is current on the payment of common expenses, late fees, interest on unpaid assessments, legal fees, or other charges lawfully assessed, and which association member has not failed to satisfy a judgment for common expenses, late fees, interest on unpaid assessments, legal fees, or other charges.”  N.J.S.A. 4:22A-23.7.

Members who are compliant with a payment plan or who are actively disputing the charges in ADR or in Court must also be permitted to run for the Board and vote on Board elections and Bylaw Amendments.  N.J.S.A. 4:22A-23.7.

It is important to note the new good-standing requirements do not apply to revocation of other Membership rights, such as use of the amenities.  Good-standing clauses in Associations’ Governing Documents still control as to those rights, meaning many Associations will now have 2 separate tiers for members in bad standing.  For this reason, some Associations may decide to simplify the categories by amending their good-standing clauses to conform with the definition in the new Law.

The new also Law permits Tenants to run for the Board and vote on Board elections and Bylaw Amendments if both: (a) permitted to do so by the governing documents; and (b) granted the right either by the Unit Owner in writing or by historical practice of the Association prior to enactment of the new Law.  N.J.S.A. 4:22A-23.s.

2. Board Elections

The new Law establishes new procedural requirements for Board elections:

1.  All proxy ballots must contain the following disclaimer.  N.J.S.A. 45:22A-45.2.a.

Use of this proxy is voluntary on the part of the granting owner.  This proxy is voluntary on the part of the granting owner, and can be revoked at any time before the proxy holder casts a vote.  Absentee ballots are available.

2. If proxy ballots are permitted, then absentee ballots must also be made available.  N.J.S.A. 45:22A-45.2.a.

3. Associations must allocate election votes equally amongst the units unless the Governing Documents weight the votes based upon the size or value of each unit.  N.J.S.A. 45:22A-45.2(c)(9).

4. No more than 1 Trustee per Unit may serve on the Board.  N.J.S.A.  45:22A-45.2.f(1)(e).

For Associations with 50 or more Units, the following additional requirements apply, and become effective as to any election scheduled after October 1, 2017.

  1. No Trustee may be appointed without a Member election, unless to fill a vacancy due to resignation, death, failure to maintain qualifications or good standing, or removal by Membership vote.  N.J.S.A. 45:22A-45.2.f(3)(a).
  2. No Trustee shall be elected to a term of longer than 4 years.  N.J.S.A. 45:22A-45.2.c(1).
  3. Stand-ins with a valid proxy or power of attorney must be permitted to vote.  N.J.S.A. 45:22A-45.2.c(2).
  4. Associations must provide a first notice of the election at least 30 days ahead of the meeting notice, allowing the owners at least 14 days to nominate candidates.  N.J.S.A. 45:22A-45.2.c(3).
  5. All candidates in good standing must be included on the ballots if they were nominated by the deadline provided in the nomination notice, or if no deadline was specified, by the business day before mailing of the meeting notice.  N.J.S.A. 45:22A-45.2.c(4).
  6. Associations must mail a second notice of the election between 14 and 60 days ahead of the meeting, setting forth the date, time, and location of the meeting.  N.J.S.A. 45:22A-45.2.c(5).
  7. Unless prohibited by the Bylaws, the meeting notice shall include both a proxy ballot and an absentee ballot listing all valid candidates in alphabetical order by their last name.    N.J.S.A. 45:22A-45.2.c(5) & (6).

Election meeting notices may be sent electronically, but only if the Governing Documents permit electronic notice or the member agreed to accept electronic delivery.  N.J.S.A. 45:22A-45.2.c(5).

Smaller Associations with less than 50 Units are excepted from these additional requirements, although they must still hold fair elections, and should generally conform to the new notice requirements as the best practices recognized by the State.  N.J.S.A. 45:22A-45.2.b.

3. Bylaw Amendments

The new Law also enables Members to amend the Bylaws if the Governing Documents either don’t provide for such an Amendment, or if the Governing Documents require more than 2/3 of the Members vote to pass any Amendment to the Bylaws.  N.J.S.A. 45:22A-46.d(2).  In either of those circumstances, the following default provisions control:

  1. Members may amend the Bylaws by a majority vote of all Members in good standing.  N.J.S.A. 45:22A-46.d(2).
  2. The Members may call a Bylaw Amendment vote by petition signed by at least 15% of the membership.  N.J.S.A. 45:22A-46.d(2)(a).
  3. The Bylaw Amendment meeting must be held within 60 days of the Association’s receipt of the petition.  N.J.S.A. 45:22A-46.d(2)(b).
  4. The Association must revise the proposed Amendment to clarify any ambiguities and to conform with the other provisions of the Bylaws and with applicable laws.  Notice of the meeting, together with the proposed Amendment, must be sent to the Members at least 10 days prior to the meeting.  N.J.S.A. 45:22A-46.d(2)(c).
  5. If proxy ballots or absentee ballots are permitted by the Bylaws, then the Association must accept ballots submitted by mail, facsimile, and email up to 1 business day before the meeting.  N.J.S.A. 45:22A-46.d(2)(d).

Individual aspects of these requirements also control as default provisions if an Association’s Bylaws are not sufficiently clear on the procedure for amending the Bylaws.  N.J.S.A. 45:22A-46.d(2).

Finally, the new Law grants Boards the power to amend the Bylaws directly where either: (a) the Amendment is necessary to comply with the law; or (b) the Members are given notice and opportunity to reject the proposed amendment.  N.J.S.A. 45:22A-46.d(5).  If at least 10% of the Members oppose a Bylaw Amendment that is not necessary to comply with the law, then the Board cannot pass the Amendment.  N.J.S.A. 45:22A-46.d(5)(b).

Given the vast diversity of language in New Jersey Condominium, HOA, and Cooperative Governing Documents, application of the new Law will create many novel conflicts and issues that will have to be analyzed and resolved on a case-by-case basis.  Boards should be encouraged to review their Governing Documents with the Association’s attorney to identify and head off any such issues ahead of the Association’s next election or Bylaw Amendment.  Failure to conform with the new Law and resolve any conflicts ahead of time may result in an invalid Membership vote, putting the Board in the politically embarrassing position of having to void the results and administer a second meeting.

McGovern Legal Services, LLC, is thoroughly familiar with applying New Jersey’s ever-shifting laws and regulations to a wide range of Governing Documents and circumstances.  If Management or the Board have questions about how to administer elections or Bylaw Amendments in light of the new Law, anticipate Membership challenges and unrest at the Association’s next election, or struggle with reaching quorum to hold an election or amend the Bylaws, then the attorneys at McGovern Legal Services, LLC, would be pleased to assist your Association.

In an October 21, 2016, published decision titled In Majorca Isles Master Ass’n, Inc., 560 B.R. 824 (Bankr. S.D. Fla.) (“Majorca Isles”), the United States Bankruptcy Court awarded a Florida Master Association with an incredible $16.3 million judgment against a developer and its appointed trustees, in what the Court described as a “modern day story of David and Goliath.”  Setting aside the transition aspects of the case, the decision provides an excellent guide for boards and property managers – particularly those involved with master associations – facing issues of poor record keeping and conflicts of interest.

In Majorca Isles, developer D.R. Horton appointed trustees to sit on both a master association (the “Master”) and its five subsidiary associations (the “Subsidiaries”).  The Master was responsible for shared property and services, including swimming pools, clubhouses, parking areas, landscaping, gate facilities, security guards, and cable television.  The various governing documents of the Master and the Subsidiaries condominium associations provided:

  1. Each unit owner was personally obligated to pay assessments to the Master;
  2. The Master was empowered to impose, liens, late charges, and attorney’s fees on delinquent unit, and to bring foreclosure and money judgment actions against the individual owners;
  3. The Master was required to maintain complete and accurate records as to assessments paid by each individual owner;
  4. The Master could choose to delegate its assessment collections to the Subsidiaries, in which case the subsidiary associations were to pay the master assessments in full prior to the Subsidiaries’ expenses.

Despite these requirements, beginning in March 2006, the Master collected assessments from unit owners without creating any financial records of the assessments.  Then, in October 2007, the trustees determined to collect the Master’s assessments by “bulk billing” the Subsidiaries.  As a result of the bulk billing, the Master continued to create no financial records for individual owners.

As the great recession set in, revenue dropped and nearly half of the Master’s unit owners became delinquent.  The trustees, sitting on both the Master and Subsidiary boards, decided to cut funding to the Master in favor of the Subsidiaries, removing amenities like security personnel, home alarm monitoring, and cable television.  Facing growing delinquencies, the Master sought the assistance of a collections law firm in September 2009.  The firm, after reviewing the governing documents, advised the trustees: (1) the Subsidiaries were prohibited from paying their own expenses prior to fully funding the Master; (2) collections were made impossible by the lack of financial records; and (3) owners would likely be able to successfully defend against any collections actions due to the trustee’s non-conformance to the governing documents.  The trustees wrote off their attorney’s advice as “just a legal opinion”, and quietly abandoned attempts to recover the unpaid assessments.

Control of the master board turned over to the unit owners in January 2011.  Lacking records necessary to collect delinquencies, and unable to pay its expenses, the Master became immediately insolvent and filed Chapter 11 Bankruptcy, bringing it under the jurisdiction of the Bankruptcy Court and to the attention of Barry Mukamal, a bankruptcy trustee.  Mukamal, in what the Court described as an “extraordinary” service to the Master, recreated seven years of assessments records “from scratch,” and successfully pursued the developer and its trustees for a $16.3 million judgment.

Importantly, the Court found the individual trustees breached their fiduciary duties to the Master.  In doing so, the trustees managed to satisfy almost every major method for undermining the business judgment rule protecting fiduciaries: (1) acting despite a direct conflict of interest; (2) acting contrary to specific terms of the governing documents establishing their authority; and (3) disregarding the specific advice of qualified professionals such as legal counsel.  The Court concluded the trustees were personally liable to the Association for over $3.8 million for, among other things:

  1. $750,000 in delinquent assessments made uncollectable by the failure to institute a collection program, the failure to collect from the Subsidiaries, and the disregard of advice from outside counsel;
  2. $200,000 to recreate the Master’s financial records due to the failure to create or maintain adequate records; and
  3. $867,066 for unilaterally removing security services and cable television amenities, thereby favoring the Subsidiaries and the developer.

Majorca Isles must be read in the larger context of the trustees’ roles as employees of the developer, as among other things, the trustees were therefore not protected by any indemnification clause in the governing documents.  While the egregious conduct in the case would likely fall outside of a traditional indemnification clause, it is also likely the Court would have been more sympathetic to elected volunteer trustees.  Additionally, the Court’s decision, applying Florida statutes and common-law, can only serve as persuasive precedent in New Jersey.

Nevertheless, the decision drives home that trustees and property managers owing a fiduciary duty to a condominium or homeowners association can be sued for failing to create accurate and complete financial records, failing to establish a meaningful collections program, and failing to provide advertised amenities.  In particular, trustees and property managers should strongly consider abstaining from decisions where any of the following apply: (1) a direct conflict of interest splits fiduciary duties between a master and subsidiary association, or between an association and some third party; (2) the action, course of conduct, or lack of action contradicts the governing documents; or (3) the decision contradicts the advice of the qualified professionals such as engineers and legal counsel.

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.

Eric Koehler, Vice President of Falcon Drone Services and Fran McGovern from McGovern Legal Services along with Access Property Management presented the benefits of using drones in community associations on Wednesday April 12. The demonstration was open to both board members and property managers in the Hills Communities. All were excited to see how the new technology worked. The presentation provided a demonstration of the drone in use. All participants were encouraged to provide comments and questions.

Highlights of Drone Technology

Eric Koehler explained that drones are amazing pieces of technology. They allow community associations the ability to survey their communities in a cost effective way. A drone makes it easier to survey roofing projects, check gutters, and examine roads among other things. The technology of the drone allows for a more effective and efficient way of viewing the community. This technology allows the property manager, contractors, and board members to review the video on their own time.

Privacy is Important

A privacy oriented homeowner may have questions about drone usage. The community association treats the footage collected like any other site inspection or photograph that is taken while on site. All information collected would not be distributed or made public. Fran McGovern explained the legal aspect of using drones, expressing that it is important that homeowners are notified prior to the usage of drones, just as they would be during any other project. Continual updates from the community manager will provide homeowners with the times and dates of all activity.

Community associations are also very interested in keeping their interests safe and secure. The association must be sure that it maintains the rights to all data that is collected when using the drone. In addition, the association will ensure that the drone operator retains the proper insurance to indemnify and hold the association harmless like any other vendor.

The popularity of drones is increasing. As the technology advances, community associations can grow along side of it by adopting smart usage policies and encouraging a safer, more cost effective way to survey their community.