SwedelsonGottlieb was asked to prepare a letter to Governor Arnold Schwarzenegger and his staff setting out our issues and concerns regarding AB 2598. The following is our letter that went out to the Governor on September 21, 2004:
Governor Arnold Schwarzenegger
State Capitol Building
Sacramento, California 95814
Re: Veto AB 2598
Dear Governor Schwarzenegger:
We have been asked to provide you with some additional information regarding community associations, assessment collection procedures, and why AB 2598 is not good law.
By way of background, this law firm specializes in representing community associations. While the bulk of our practice is located in Southern California, the assessment collection division of our law firm, Association Lien Services, collects delinquent assessments throughout the State of California. We annually process more than 2,000 delinquent assessment matters. While a significant number of those assessment collection matters require the recordation of an assessment lien on the delinquent owners’ property, less than one percent (1%) of those matters actually goes to foreclosure sale. This makes sense; homeowners don’t want to lose their property to their homeowner’s association.
The non-judicial foreclosure procedure has been successfully used without problems for many years. AB 2598 is an over reaction to one unfortunate occurrence earlier this year in Calaveras County (where an association foreclosed on some delinquent owners who owed a $120 annual assessment). Despite what proponents of this bill have stated, there are no rampant problems with the assessment collection process (set out in the Civil Code) that justifies the major changes that are part of AB 2598. In fact, despite inquiry, we cannot find any other similar types of situations as occurred in Calaveras County.
AB 2598 provides that a community association may not proceed with foreclosure on a recorded assessment lien unless and until the amount owed on assessments is $2500. For many associations, that amount may not be accrued for 12 months and in many cases 2 years! Alternatively, the association may proceed to Small Claims Court, but may not record the lien, which secures the obligation.
Securing the obligation with a lien is critically important to community associations. Without the lien, a homeowner may transfer interest in the property to avoid the obligation to the association. You would be surprised how often this occurs. Further, by recording a lien an association is a secured creditor in a bankruptcy proceeding. We are sure this is not a surprise to your office that many seriously delinquent homeowners have financial problems and file bankruptcy. Unless the lien is recorded, the association is not a secured creditor and cannot recover the delinquent assessments.
As you have already been advised in other letters your office has received, if a delinquent homeowner does not pay their assessments, each of the other homeowners at the association must cover the shortfall to the association. If several homeowners do not pay their assessments, this only compounds the problem. AB 2598 protects the delinquent homeowner at the expense of all the other homeowners of the association who timely pay their assessments. This is not fair to all of the owners who do pay their assessments timely and who believed that the association would have expedited means of collection (per the recorded CC&Rs).
In March of this year, David Swedelson traveled to Sacramento to talk with the legislators and their staff regarding this proposed legislation. Shocking as it may seem, they were unwilling to discuss issues we had with their proposed legislation. The staff people that drafted this bill seemed to have no experience with the assessment collection process or community associations. They were certainly not experts in this area of the law. They refused to consider the matters we are addressing in this letter. Instead, they told us that if the assessments owed are below $2500, it is a matter for the Small Claims Court. They refused to consider the fact that because the assessments are an association’s sole source of income, the associations must have an expedited collection procedure to be able to pay their association’s expenses. They also refused to consider the fact that there are problems with collecting assessments in Small Claims Court.
Many Small Claims Courts favor the owner at the expense of the association and they will not consider the law. Small Claims Court has been called the “peoples’ court” on television, and for good reason. In the Small Claims Court, the judges are commissioners that sit as the trier of fact. They often fail to consider California law, either statutes or case precedent. Instead, they seem more concerned with what they deem is fair, even if what they deem is fair does not comply with California law.
For example, when an association proceeds to Small Claims Court, the delinquent homeowner will often state that they have not paid their assessments because the association has not fixed damage in their unit caused by a roof leak. This issue is dealt with in Park Place Estates v. Naber (1994) 29 Cal.4th 427, where the court held that an owner may not withhold assessments owed to an association on the grounds that the owner is entitled to recover money or damages from the association for some other obligation. The court held that the Davis-Stirling Common Interest Development Act establishes a strong public policy against allowing a homeowner to offset assessments against any other obligation allegedly owed by the association to the owner. Many Small Claims Court Judges ignore this case law. The Association then loses the case and cannot appeal. In many cases the association did not owe the owner any money nor did it have an obligation to repair the damage.
When an association sues the homeowner for the delinquent assessments in Small Claims Court, someone from the association has to appear in court. Many courts will not allow the manager to appear and will require that a volunteer board member take time off of work to appear in court. Although AB 2598 will now allow a manager to appear, to do so will result in an hourly charge for their time to be paid, not by the delinquent homeowner, but by the association.
Our guess is that if a homeowner’s association is required to proceed to Small Claims Court, it will have a fifty-fifty chance of prevailing. These are not great odds. If the association does prevail, it is the delinquent homeowner who has the right to appeal (an association has no right of appeal as the plaintiff in Small Claims Court).
The appeal means that the association is further delayed in collection, and is required to participate in a second court hearing. Many divisions of the Los Angeles Superior Court are taking several months to schedule Superior Court appeals. Even on appeal, the association still has a fifty-fifty chance of prevailing.
Even if the association does prevail, and obtains a judgment, it then has to collect the money. This is not an easy process and if the owner did not pay the $125 assessment, they likely do not have the money available for collection of the judgement. Foreclosure of the property on a judgment lien is almost virtually impossible (different procedures are provided for a judgement lien). The association must find some asset, whether it be a bank account, car, or the person’s wages to execute on. The collection process is time consuming. Even if the association is eventually successful, the association is delayed in collecting the assessments it needs to pay its bills. Keep in mind that a community association’s sole source of income is typically the assessments that it is diligently trying to collect.
Please also keep in mind that without assessments, the association cannot pay for the vital services it provides to its homeowners. This may include utilities, water, insurance, maintenance, management, etc. Who is supposed to make up this deficit if homeowners don’t pay? The remaining homeowners, of course!
The only real option for associations (if you do not veto AB 2598) is to proceed with non-judicial foreclosure once the delinquent amount is $2500. Is delaying the process until the amount owed is $2500 really going to change the end result? Not really. The proponents of AB 2598 will likely still have issues if an association initiates foreclosure to collect $2500.
At many associations, the assessments owed are $100 to $150 per month. Should community associations have to wait two years to begin the foreclosure process? We do not think this is fair or appropriate.
The Court of Appeal in the Park Place case (cited above) made some interesting comments regarding assessments in their reported opinion. The court, in its decision, referred to various statutes regarding assessment collection, including Civil Code Section 1366, and 1367, and stated that:
“These statutory provisions reflect the legislators’ recognition of the importance of assessments to the proper functioning of condominiums in this state. Because homeowners associations cease to exist without regular payment of the assessment fees, the legislature has created procedures to quickly and efficiently seek relief against a non-paying owner.”
The legislators referenced are obviously those of the past. AB 2598 is a product of legislators that were perhaps not in office when Civil Code Sections 1366 and 1367 were adopted based on the legislature’s acknowledgment that community associations need a quick and efficient process to collect delinquent assessments. AB 2598 would end the current quick and efficient process. Legislation enacted in 2003 already requires additional notices and a longer notice period. There is no rash of problems with the foreclosure process that requires AB 2598. The legislature is being shortsighted and overreacting; it’s up to the Governor’s office to recognize what is in the best interests of the majority of citizens in the state.
AB 2598 also requires that an association enter into some form of alternative dispute resolution (ADR) with a delinquent homeowner if requested. The Civil Code now allows for ADR if a homeowner requests it, and deposits the amount of the assessments plus an additional amount to cover attorney’s fees and costs. This procedure was implemented to eliminate the potential that homeowners would abuse and delay the process. AB 2598 will now allow homeowners to abuse the process by demanding ADR, even if the only issue is the amount of assessments they owe. This will provide homeowners with an ability to arbitrate or mediate their “disputes” with their association, complaints that perhaps their association is not budgeting for (i.e. expenses, etc.) or properly maintaining the common area. This proposed ADR process will be time consuming, expensive, and will eliminate the quick and efficient ability of an association to collect assessments that are needed to pay the associations’ ongoing expenses.
AB 2598 also requires a “drive by” appraisal before an association can actually foreclose on homeowners’ property for non-payment of assessments. The language in this code section is not workable. At a foreclosure on an assessment lien, potential buyers are bidding on the amount of the lien, not the amount of the property. If the amount of the delinquent assessments, interest, late fees, costs and attorney’s fees are $3,000, the opening bid will be $3,000, without any recognition as to the value of the property. Potential bidders are not going to bid up to sixty five percent (65%) of the value of the property at a foreclosure on an assessment lien; they are going to bid based on the value of the lien and equity in the property. They recognize that they will take the property subject to all senior encumbrances. AB2598 fails to recognize the mechanics of the foreclosure process.
In the case of Wilton v. Mountainwood HOA (1993) 18 Cal.App.4 565, the Court of Appeal ruled in favor of an association with respect to a litigation privilege, ruling that the litigation privilege would attach to the recording of an assessment lien. The Court’s ruling is relevant to AB 2598. The Court concluded as follows:
“The litigation privilege attaches to the publication of the assessment lien even if the homeowners association has not decided, at the point the lien is filed, that it will pursue a judicial foreclosure, even if the lien is ultimately enforced by private sale. To conclude otherwise would make the privilege hinge upon factual inquiries and which remedy the association intended to use, and might lead associations to resort to judicial foreclosure in every case simply to avoid the risk of tort liability. There is no reason to flood the courts with such cases. The legislature has given homeowners associations a remedy of private sale, and we must avoid deterring the use of that remedy while at the same time protecting associations access to the courts for the purpose of judicial foreclosures.”
It is interesting that the Court of Appeal in Wilton also stated:
“We do not share appellants’ concern that our decision will prompt, associations to file a flood of fraudulent assessment liens against our neighbors, but should that occur the legislature is free to limit the litigation privilege for such liens as it has recently done with respect to lis pendens.”
That case was decided in 1993. There was no flood of fraudulent assessment liens then, and there has not been a flood of fraudulent or inappropriate assessment liens recorded on delinquent homeowners now. Nothing has occurred that justifies the legislature’s reaction, or in this case, overreaction, to a situation which isn’t even a problem. AB 2598 is motivated by individuals who have a problem with the community association concept. They seem to distrust how the associations are governed and the powers asserted by the association’s board.
AB 2598 will hurt more than help senior citizens and all of the citizens of California. It will undoubtedly require that associations increase their budgets to make up for the shortfall in the income that will likely occur as a result of homeowners who are not being compelled to timely pay their assessments. Absent a flood of problems, we are urging you to veto AB 2598.
Our firm, along with other experts in the industry are ready, willing, and able to meet with legislators to come up with legislation which is more sensitive to all citizens, while addressing the issues that concern the legislators and proponents of AB 2598. AB 2598 was an overreaction, was not well drafted and does not deal with the realities of California law or community associations in California. Again, we urge you to veto AB 2598.
DAVID C. SWEDELSON, ESQ.
SANDRA L. GOTTLIEB, ESQ.
BY: SANDRA L. GOTTLIEB