Clarifications to the 2013 Northern California Law Seminar
By SwedelsonGottlieb, California Community Association Attorneys.
Attorneys from the law firm SwedelsonGottlieb and Association Lien Services (“ALS”) attended California Association of Community Managers’ (“CACM”) 2013 Northern California Law Seminar in January of 2013. One of the programs dealt with assessment collection strategies. We did not like everything that we heard. This post is intended to set out our thoughts and opinions which differ from the attorney speaker’s opinions with regard to assessment collection strategies.
We were motivated to write this post as we are informed that some attendees walked away from the session thinking that perhaps the law is different with regard to assessment collection in Northern California vs. Southern California. That is simply not the case. Assessment collection is mainly governed by California Civil Code Section 1366 et seq. This body of law is applicable to all California community associations. There is no difference between Northern and Southern California when it comes to the applicable law or procedures relating to assessment collection. We ought to know this, as we have been collecting delinquent assessments statewide for more then 20 years.
The speaker discussed different “low-cost collection practices.” To clarify, there are three methods for collecting delinquent assessments: (1) a civil action to obtain a personal judgment to collect the debt (in the superior court or small claims court); (2) a superior court lawsuit to foreclose on the recorded assessment lien and/or obtain a personal money judgment; or (3) commence the foreclosure process of the recorded assessment lien non-judicially. The third option is the option that ALS specializes in. In all three options, the goal is to collect the delinquent assessments. The first two options seek relief against the person, whereas the third option seeks relief solely against the property. The speaker indicated that associations should avoid costly assessment collection litigation. We agree completely. We assume, by that statement, that the speaker was then supporting non-judicial foreclosure, which is not litigation and not costly.
The speaker informed the audience to take three steps in pursuing collections: (1) have a clear and concise collection policy; (2) informative, early and frequent default notice letters; and (3) personal communications with the delinquent homeowner. We do not exactly agree with this. First, yes, it is important and mandatory to have a collections policy per California Civil Code Section 1365.1. With regard to number two, if your association has a policy of sending late notices, you should do so in a timely manner, and then begin formal collections. If your association sends late notices and never does anything about it (e.g., pursue formal collections), delinquent homeowners will likely remain delinquent, as they do not have any sort of deterrent to their non-compliance with the association’s governing documents.
Finally, with regard to number three, the communications are governed by statute. Specifically, California Civil Code Section 1367.1 requires that the association send the delinquent owner a pre-lien notice with statutorily required information contained therein. Only thereafter can the association record its lien. We do not recommend that the association engage in communications with the delinquent owner(s) unless and until they indicate that they want to talk. They receive several formal notices as part of the collection process, and if they are interested in resolving their indebtedness to their association, it is up to them to contact the association or its representatives or agents (like ALS).
The speaker also suggested that the association engage in alternative dispute resolution (“ADR”) with the delinquent owner. While the association is required to offer dispute resolution per California Civil Code Section 1367.1(c), we recommend that the association encourage internal dispute resolution (“IDR”) (where the board will meet and confer with the delinquent owner) rather than ADR (mediation or arbitration). IDR is less expensive and can be as simple as a hearing before the Board of Directors. ADR usually requires a paid mediator. And then there is the question as to what, if anything, there is to mediate, as in most situations, the owner has not paid because they do not have the money.
The speaker suggested associations engage in “strong litigation” when all else fails. We agree. Litigation should be an association’s method of last resort. Prior to engaging in litigation, the association should exhaust its other remedies, including non-judicial methods.
The speaker presented a chart outlining the collection options, their cost, time to complete and recovery. We found the chart to be lacking. First, in a sale pursuant to non-judicial foreclosure, one of two things happens: (1) the property reverts to the association as the beneficiary or (2) the property is sold to a third party. The latter situation is the goal. Second, even though the association can obtain a money judgment in small claims court, the association will not have full relief until it collects that judgment. It can collect the judgment via a bank levy, wage garnishment, etc. It’s not all that easy to collect from an owner that has no money. And once the association obtains the judgment, that owner is still a non-paying owner residing in their home. Generally, the association will only recover 50-70% of the judgment through collection agencies.
The speaker also mentioned that a lien impacts the owner’s credit rating. As most collection attorneys do not report to credit bureaus, this will seldom be the case.
With regards to short sales, the speaker said that the board needs to be ready to “compromise big-time or get nothing.” We disagree. The board should weigh and consider whether it should accept less than what is owed but realize that it is not required to accept less. In our experience, associations are not compromising “big time” as part of a short sale. While a short sale is better than the association foreclosing when there is no equity, this is only true to the extent that it saves the association time and money. If there is no equity in the property, the association is likely to obtain title to the property.
With regard to small claims money judgments, we strongly recommend recording the judgment as an Abstract of Judgment against the property in order to create a public record. The Abstract puts a lien on any land, house, or other building the debtor owns in the county where it is recorded. You can obtain an Abstract of Judgment (Form EJ-001) from the small claims clerk, and record it with the county recorder in each county where the debtor owns or may own real property. If the property is sold with title insurance, the debt will be paid out of the proceeds of the sale. The clerk charges a fee of $15 for issuing an Abstract of Judgment.
Finally, look to see if your CC&Rs have an assignment of rents clause that will allow the association to make a demand for the rents in the event that a leasing owner is delinquent. If you do not have one, consider an amendment to add one, as this can be an important component to the association’s collection strategies. Want to know more? Read an article by Joan E. Lewis-Heard, Esq. of SwedelsonGottlieb on how to perfect an assignment of rents clause.
Questions regarding assessment collection? Contact ALS at 800-825-5510.