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Bankruptcy Filing Doesn’t Discharge Association’s Lien

Posted on Author By Francis J. McGovern, Jr., Esquire

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.

New Election Law For Associations

Posted on Author By David W. Merritt, Esquire

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.

BANKRUPTCY – A Manager’s Quick Guide

Posted on Author By Francis J. McGovern, Jr., Esquire

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.

Show Me The Money – Collecting From Debtors

Posted on Author By Francis J. McGovern, Jr., Esquire

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.

Business Use Of Home Or Lot

Posted on Author By Francis J. McGovern, Jr., Esquire

Absolute Standard Versus Association Impact

May a Home and/or Unit within an Association be used for a business purpose and, if not, what would constitute a prohibited business use. Many Associations’ Master Deeds or Declarations contain provisions that purport to prohibit Association residents from conducting any business in their homes.

Twenty years ago conducting business at home was not as hot an issue as it is now.  Further, disputes regarding conducting business out of the home often involved activities that were easily identifiable as businesses for example, music schools and dentist’s offices.  However, the proliferation of personal computers, modems and fax machines combined with early retirements, corporate downsizing and alternative working arrangements for women and men with children increase the probability that residents will attempt to conduct some sort of business out of their homes.

As the following case examples demonstrate, covenants restricting use of units and/or homes to residential use are upheld almost without exception.

In The Four Hundred Condominium Association v. Gatto the court held that a restrictive covenant prohibited doctors from maintaining offices in certain areas of a condominium complex; in Diefenthal v. Longue Vue Management Corporation the court held that restrictive covenants banning commercial activities would be enforced although some commercial activities were acquiesced to by the adjacent property owners; in Greater Middleton Association v. Homes Lumber Co. the court held that a Covenant included in the majority of the deeds to lots in a subdivision over a period of forty-five years restricted the use of the lots to “residential purposes exclusively”; in Walton v. Carnigan the court found that when the restrictive covenant language is clear and unambiguous it will be enforced; therefore, operation of a day care center violated the restriction on commercial activity; in Fick v. Weedon the court found that Deed restrictions were not ambiguous in restricting use of the property to a private dwelling for one family, therefore, use of the property as a bed and breakfast violated the restriction and was enjoined; in Fox v. Smidt the court found that phrase “residential lot” in a subdivision indenture precluded the use of a building for commercial purposes, even though the building sought to be used as a warehouse had the exterior appearance of a residence; in Metzner v. Wojdyla the court found that a “bright line” rule should be applied to prohibit any business activity in a subdivision subject to a restrictive covenant providing that the property may be used for residential purposes only; in Gerber v. Hamilton the court found that enforcement of a restrictive covenant regarding home business depends on whether the residential character of subdivision is compromised.  In Gerber a beauty salon was prohibited; in Robbins v. Walter  the court found that the use of a residence as a bed and breakfast violated a covenant restricting use of lots to noncommercial use.

The above decisions do not involve decisions by New Jersey Courts.  However, New Jersey has long recognized and upheld restrictions limiting use to residential purposes.  This is demonstrated by the 1924 case of Dottsloff v. Hockstetter where the limitation of use to residential purposes was upheld and a corner grocery store was prohibited.

Though the above cases upheld restrictions against conducting business activity, they did not provide a framework for determining what constituted use of property for a non-residential or business purposes.  Instead, they applied a “we’ll know it when we see it” analysis.  However, two of the above courts did supply some guidance.  In the Metzner case a “bright line” rule was applied to prohibit any business activity in a subdivision subject to a restrictive covenant providing that property may be used for residential purposes only.  The Metzner Court tackled the analysis by evaluating the home owner’s actions.  For example, a major factor considered in determining whether the defendants were “conducting a business” was whether they accepted money for services. Since accepting money for services constituted “conducting a business” the home owners’ activity was banned.

However, through a more subtle analysis, largely arising because of specific governing document language, the Gerber Court analyzed restricted action by reviewing the impact the home owners’ activity had on the community.  Here, factors that the Court found should be considered when determining whether a resident was conducting a professional or prohibited commercial activity included:

  1. Whether the residential character of the subdivision is compromised
  2. Whether client visitation is required
  3. Whether the activity produced additional traffic, noise and activity

The way many documents are written, it appears that Courts could apply a “bright line” test and hold that any activity that is not strictly residential is prohibited as in the Metzner case.  This would eliminate the home/office fax/computer arrangement, even if it had no impact on the community.

However, New Jersey courts have read a reasonableness requirement into restrictive covenants and their enforcement.  See, Billig v. Buckingham Towers Condom Association I, Inc., 287 N.J.Super. 551 (1996).  It is likely that application of this “reasonableness factor” will cause courts to evaluate “doing business,” not by a “bright line” test but by more of a case by case “community impact” test using factors such as the three listed above.  This is even more likely in light of the growth of the internet, fax machines and computers.  Further, this “impact” standard frees the Association and its manager from the virtually impossible task of enforcing a “bright line” standard.  Rather than having to ferret out every home/office, the Association will likely only have to intervene where a community impact is created.

In conclusion, in enforcing ‘residential purposes only’ restrictions, board members should be aware that Courts may evaluate ‘conducting business’ by varied standards.  Until a clear decision is made regarding ‘conducting business’, associations must weigh the value of enforcing a ‘bright line’ standard for ‘conducting business’ and risk losing an action to enjoin the business activity against the value of enforcing a ‘community impact’ standard and risk being sued for failing to enforce the provisions of the governing documents.  In light of the technological progress and societal changes noted above, it is likely that courts will turn to a ‘community impact’ standard to determine what activities are prohibited in communities that restrict activity to residential purposes.

Coronavirus & Meetings

Posted on Author By Francis J. McGovern, Jr., Esquire

Among other things, the Centers for Disease Control and Prevention (the “CDC”) have noted that:

“Older adults and people who have severe underlying chronic medical conditions like heart or lung disease or diabetes seem to be at higher risk for developing more serious complications from COVID-19 illness.  Please consult with your health care provider about additional steps you may be able to take to protect yourself”.

The CDC website: https://www.cdc.gov/coronavirus/2019-ncov/ provides information on how the virus spreads, symptoms, steps to prevent illness, what to do if you are sick along with additional information and answers to frequently asked questions “FAQs”.  Go to the CDC’s website regularly for updated information.

The CDC advises that the virus is thought to spread mainly from person-to-person between people who are in close contact with one another.  Given this, until the CDC provides information that suggests otherwise, Associations, especially Age Restricted Communities, would be wise to minimize and avoid in-person gatherings.  Association meetings may be held via teleconference and similar arrangements.  These arrangements allow for remote participation by upwards of 1,000 people, far fewer than the typical Association meeting attendance.

Panic is never the answer, but Association members and managers must keep themselves informed.  Reasonable measures will allow Associations to continue to function while mitigating risk and perhaps assisting in fighting the virus.