Delinquent Assessment Collections by Homeowner Association Boards: Why Small Claims Court May Offer a Most Efficient Means to Collect – Article by R. Bruce Crowe, Esq.
It is likely not news to most homeowner association boards of directors that the economic downturn over the past couple of years has resulted in a substantial increase in the number of delinquent assessment payments made by individual members of many associations. The necessity for the boards to collect assessments is mandated because the funds necessary to operate the association and provide reserve money for long term repair and maintenance depends upon the income from the collection of these assessments. “Except as provided in this section, the association shall levy regular and special assessments sufficient to perform its obligations under the governing documents and this title.” West’s Ann.Cal.Civ.Code § 1366. It is no secret that when some owners fail to pay and become delinquent, the other members must struggle to pick up the slack unless and until the delinquent owners can be made to pay up.
The problem of delinquent assessments that go uncollected is further exacerbated by the limited remedies available to the boards of directors by which they can seek remedies against those non-paying members. The authority to collect assessments is part of the Davis-Stirling Act, “A regular or special assessment and any late charges, reasonable fees and costs of collection, reasonable attorney’s fees, if any, and interest, if any, as determined in accordance with Section 1366, shall be a debt of the owner of the separate interest at the time the assessment or other sums are levied.” West’s Ann.Cal.Civ.Code § 1367.1. The unpaid assessment is therefore a personal debt of the individual owner of the member property. Further, the delinquent owner is not permitted to claim as an off-set, a monetary amount that is in dispute between that owner and the association. “A system that would tolerate a [condominium] owner’s refusal to pay an assessment because the unit owner asserts a grievance…. would threaten the financial integrity of the entire condominium operation.”]Park PlaceEstates Homeowners Assn. v. Naber 29 Cal.AppAth 427, 431, 35 Cal.Rptr.2d 51, 53 (Ca1.App. 4 Dist.,1994). So,Californialaw makes it quite clear, the association is entitled to collect assessments.
Boards have several options to consider in collecting delinquent assessments. First, they can consider hiring an attorney and filing for a judicial foreclosure in the superior court in which the property is located. The problem with this approach is the holder of the first trust deed, the primary lender, is going to get notice of the proceeding and has a superior interest in the property that will almost certainly wipe out the association’s foreclosure attempt and leave the association stuck with an attorney bill on top of not collecting the delinquent amounts.
Second, the association can pursue non-judicial foreclosure, a process where there is no filing of a foreclosure lawsuit in superior court but, various notices are given and a sale date of the property announced where supposedly there will be bids taken and the property sold to the highest bidder. The serious problem for the board in taking the non-judicial foreclosure approach is the foreclosed owner is entitled to a redemption period and the holder of the first trust deed, the primary lender, can set aside the non-judicial foreclosure quite easily, again, leaving the board out the amount of the delinquent assessment.
The board may, and probably should, attempt to reach agreement with the delinquent owner to bring the past due sums current over a fixed period of time. If the board enters into such an agreement, it may be able to get the delinquent owner to pay up. Boards are often tempted to hire outside collection companies to handle their non-judicial foreclosure matters. The problem is that the charges by the collection agent for its costs can become excessive and burdensome on the delinquent owner because a large percentage of the “catch-up payments” are taken as fees by the collection agent. These collection companies often charge steep amounts for their services and bill those amounts to the delinquent homeowners, taking the money they collect from those homeowners as payment for their collection services while the board gets little or no income from what is collected. An association’s own management company can often handle the accounting and collecting of the delinquent owner’s payments under the terms of the board’s workout agreement (which should be in writing). Often, the management company charges substantially less than the collection company does.
The law allows outside collection and foreclosure services companies to charge for their services, but it is not clear when these companies are entitled to take those fees from the amounts recovered from the delinquent property owner. It is also a source of dispute between the boards and the collection/foreclosure agencies as to exactly when of if the agency is entitled to take its fees from the delinquent owners payment. “Statute prohibiting homeowners associations from imposing or collecting assessment or fee exceeding amount necessary to defray costs for which it was levied by its terms applied only to associations, and did not limit fees of associations’ vendors such as property managers.” Brown v. Professional Community Management, Inc. 127 Cal.AppAth 532, 25 Cal.Rptr.3d 617 (Cal.App. 4 Dist.,2005). To determine that, the board must negotiate with the collection company to get terms which are certain. Often, this last step is skipped and sadly, more often, there is no written agreement between the board and the collection company. For this reason alone, it makes good sense for boards to consider the third option of using small claims court to attempt assessment collection. Small claims court may offer an efficient way for the board to collect its delinquent assessments. The board can choose to have its management company file a lien on the delinquent owner’s property and it makes sense to do so. The board cannot foreclose the lien in small claims court, but it may get a judgment that can be enforced for a sum up to $5,000 against the delinquent owner’s personal property in various forms, including, but not limited to bank accounts, garnishment of pay and other forms of personal property. How does an association proceed to collect delinquent assessments in small claims court?
The board is granted the authority to collect delinquent assessments in small claims court, “An association that seeks to collect delinquent regular or special assessments of an amount less than one thousand eight hundred dollars ($1,800), not including any accelerated assessments, late charges, fees and costs of collection, attorney’s fees, or interest, may not collect that debt through judicial or non-judicial foreclosure, but may attempt to collect or secure that debt in any of the following ways: (1) By a civil action in small claims court … The amount that may be recovered in small claims court to collect upon a debt for delinquent assessments may not exceed the jurisdictional limits of the small claims court and shall be the sum of the following: (A) The amount owed as of the date of filing the complaint in the small claims court proceeding.” West’s Ann.Cal.Civ.Code § 1367.4 So, if the amount of the delinquency is less than $1,800, small claims court is available to collect the debt and the board cannot use either judicial or non-judicial foreclosure.
A word of caution for the board, if the declaration (that is the governing documents for the association) does not specify or permit monthly installments to be paid by the members, there is a potential risk that an unpaid increment of a regular assessment is not in default until the end of the fiscal year. For this reason, the board should consider asking any attorney to review the documents and render an opinion as to whether monthly installments of an annual assessment obligation of a member can be collected prior to 12 months having elapsed since the account became delinquent. Small claims actions that seek to collect delinquent assessments are not subject to the alternative dispute resolution process under California Civil Code § 1369.510 so the board need not offer ADR prior to filing a small claims action to collect past due assessments.
A corporation cannot appear in court unless it is represented by a licensed attorney. There is an exception for this in a small claims action to collect delinquent assessments where the board of the association corporation is suing a member. The board can select a non-attorney board member or even choose to have an employee of the property management company appear in small claims court and present the association’s case.
Forms and instructions for filing a small claims lawsuit can be obtained from most of thecountywebsitesfor the superior court in each local county. The lawsuit should be filed in the county where the property is located. Special attention should be given to filing out and signing judicial council Form SC-l 09 which is the “Authorization to Appear” on behalf of the board. There is a box at the bottom which may be checked that specifically authorizes an agent, management company representative or bookkeeper for that association to appear in small claims court and present the association’s case.
Once the association gets a judgment against the delinquent owner and the clerk of the court enters that judgment on the court’s docket, the association can ask for a writ of execution from the court and present that writ to the county sheriff where the sheriff then can seize personal property and bank accounts of the delinquent owner to satisfy the debt to the association. The board should also consider recording an “abstract of judgment” in theCountyRecorder’s Office of the county in which the property is located and in surrounding counties. The purpose of the recording is to give notice that money is owed the association and in my experience, potential lenders considering whether to give credit to the delinquent owner will call and inquire whether the judgment was satisfied. I have had clients who have successfully collect judgments based upon the recording of an abstract of judgment.
Small claims court is not available to the association for matters involving most writs and other matters that seek orders in equity. It is not a forum that boards can look to for resolution of other types of disputes with owners such as CC&R enforcement or disputes over architectural guidelines, “views” from one’s property or other such matters. Using small claims as a more potentially direct means of getting some money from delinquent homeowners may be an attractive alternative to some boards.
In conclusion, an association board may be able to achieve a better result in its collection of delinquent assessments in small claims court that it may using the foreclosure options. And, if the board can succeed in getting a written work-out to bring past due amounts current with the delinquent owner, the board may be able to collaborate with its management company to collect the funds (instead of hiring a collection agency) and thereby not pay collection agency any fees either.
Article by R. Bruce Crowe, Esq. of Counsel with Nordberg Law Group, P.C. and he has been on his own ROA board for more than 20 years.
This article is for informational purposes only and is not intended nor does it provide specific legal advice to anyone. Readers should consult their own legal counsel regarding any and all of the matters addressed in this article and should not rely upon this article as any form of legal advice. This article shall not create an attorney client relationship with any person or entity whatsoever. No claim of copyright is made to government works.
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