THE TEN COMMANDMENTS FOR BOARD MEMBERS OF ASSESSMENT COLLECTION
(and more on "Fiduciary Duty")
Delinquent Assessment Collections - Still a Hot Topic!
This E-newsletter is about delinquent assessments and collections. Yes, it's (unfortunately) still the hottest topic and biggest problem in many homeowner associations today. You can find out a lot more detail on each of the Commandments mentioned below, as well as an incredible amount of additional information, in the Primer on Assessment Collections that will be released between now and June 1. (You can preorder it now!) In addition, you can educate yourself about bankruptcies and foreclosures in HOAs and Condo Associations. Just visit the Webstore. You will also find a Primer containing forms for effective assessment collection practices. These are low cost tools geared to educate boards, practictioners, and homeowners who live in HOAs and Condos of the necessity of taking the assessment debt seriously.
This information is provided for the benefit of people who live in HOAs, serve HOAs, or serve on the Board. It is important to understand the difficulties Boards face in assessment collection, what their legal duty is, and the complicated nature of the laws in California related to just this ONE ASPECT of running a homeowners association. We hear many stories in the press about hard-hearted board members - and there are some, to be sure. But the question is, which Board is closer to fulfilling its fiduciary duty ... the one that is aggressive, or the one that is lax.
It is equally important for owners to understand the extent of their responsibility in paying assessment debt. Many do not understand that it is not exactly like a mortgage, in other words, you cannot simply "walk away" from it without recourse. Owners are wrapped up in their own tough stories. And they seldom understand the problem through the eyes of those volunteer board members who are just trying to do a service by assisting in the management of their homeowners association. It may feel like a dirty job - but someone has to do it!!
COMMANDMENT I: THOU SHALL COLLECT ENOUGH MONEY FROM THE HOMEOWNER MEMBERS TO FULFILL THE OBLIGATIONS UNDER THE GOVERNING DOCUMENTS. (Civil Code Section 1366 and 1366.1)
COMMANDMENT II: THE BOARD OF DIRECTORS SHALL PREPARE A BUDGET EACH YEAR, AND DISTRIBUTE IT TO ALL OF THE HOMEOWNER ASSOCIATION MEMBERS. (Civil Code Section 1365 & 1365.5)
COMMANDMENT III: THE BOARD OF DIRECTORS MUST PLAN FOR ALL MAJOR EXPENSES OF THE ASSOCIATION (Civil Code Section 1365 & 1365.5)
COMMANDMENT IV: THE BOARD OF DIRECTORS MAY NOT INCREASE ASSESSMENTS IN ANY GIVEN FISCAL YEAR WITHOUT APPROVAL OF THE MEMBERSHIP IF REQUIREMENTS OF THE BUDGET NOTIFICATION PROCESS ARE NOT SATISFIED.
COMMANDMENT V: THE BOARD MUST BE DILIGENT IN ITS EFFORTS TO COLLECT ASSESSMENTS FROM ALL OWNERS.
COMMANDMENT VI: THOU SHALL FOLLOW ALL TECHNICAL REQUIREMENTS WHEN ATTEMPTING TO COLLECT DELINQUENT ASSESSMENTS THROUGH THE LIEN AND FORECLOSURE PROCESS.
COMMANDMENT VII: THOU SHALL AVOID INCONSISTENT TREATMENT OF OWNERS AND SHALL NOT WAIT MORE THAN FOUR YEARS TO COLLECT ON DELINQUENT ACCOUNTS.
COMMANDMENT VIII: THOU SHALL NOT TAKE PROPERTY BACK OR PURCHASE AT FORECLOSURE AND "SKIM RENTS."
COMMANDMENT IX: THOU SHALL NOT APPLY PAYMENTS ON DELINQUENT ACCOUNTS FROM OWNERS TO COLLECTION COSTS, UNLESS ASSESSMENTS ARE ALL CAUGHT UP, OR UNLESS AN AGREEMENT IS REACHED BETWEEN THE ASSOCIATION AND OWNER.
COMMANDMENT X: THOU SHALL KNOW ALL OF THE ABOVE.
Times are tough and the tribulations for Boards and owners alike go on and on ... however, that is no reason to ignore assessment delinquencies. If a Board does not fulfill its fiduciary duty, which includes the a duty to engage in diligent collections, and to recognize and deal appropriately with loss contingencies, then we may see a host of new claims against Associations and Boards involving the fiduciary duty aspect.
What is "fiduciary duty"? (And how can you "satisfy" it?)
Definition: "Fiduciary duty" is a legal requirement of loyalty and care that applies to any person or organization that has a fiduciary relationship with another person or organization. A fiduciary is a person that has agreed to accept control and/or manage-ment of assets belonging to another. Examples include an investment manager for a pension plan, a majority stockholder in a corporation to minority investors, members in a partnership, a banker to customers, an attorney to a client, a trustee to beneficiaries, or even a parent to a child. Most HOAs are incorporated. In HOAs the assets include the assessment stream and the "shareholders" are the members of the association. Corporate directors have a special fiduciary duty to their shareholders. They are accountable not only for the safekeeping of assets but also, in the case of HOAs and Condos, for diligent collection of, and efficient and effective use of those funds.
Duty of Loyalty: The duty of loyalty requires that fiduciaries act solely in the interest of the people whose assets the fiduciaries have under their control, rather than in their own interest. Fiduciaries must not derive any direct or indirect profit from their position, and must avoid potential conflicts of interest.
Duty of Care: The duty of care requires that fiduciaries perform their required functions with a high level of competence and thoroughness. In an HOA, collection of assessments is one the most important of all functions that must be accomplished. Of course what Boards do with the assessments is equally important.
In short, there is "fiduciary duty" imposed on all Board Members (in this case to be diligent about assessment collections) and failure to fulfill that duty might raise a legally actionable claim.
So what are some of the most important things to do?
1. Boards must budget accordingly, taking into consideration a decrease in assessment income and rising delinquency concerns, and these days, most if not all Boards should be anticipating and budgeting for losses through foreclosure and bankruptcy. One can see the obvious signs when the delinquencies start to increase in any HOA or Condo Association. Some practitioners advocate imposing special assessments right away to cover each loss that is unrecoverable; others suggest the analysis be made at the end of each fiscal year.
2. Boards should make sure that their collection policies and practices are consistent with the state laws, and that the required notices are being sent to Owners both annually, and in conjunction with any individual delinquency collection matter that is underway.
3. Boards should be seeking professional help with homeowner assessment collections, and help is available, even on a "no-cost" basis (where costs of collection are charged directly to homeowners without up-front costs to the association). Check out the various services available by procuring directories from CAI (Community Associations Institute - you can find your local chapter at caionline.org) or ECHO (Executive Council of Homeowners in San Jose). Ask about seminars and educational tools and opportunities while you are at it. And, don't forget about the educational Primers at the condoguru site in the Webstore!
4. Owners and Boards should understand that Associations may pursue lien and foreclosure and/or seek a personal judgment concurrently, until the loss is collected. If more owners knew this, they might do things differently. If more boards knew this, they might do things differently.
The Assessment Collections Primer is an important educational tool, about what can happen if you ignore the debt, and what options an owner has with regard to asking for meetings, leniency, payment plans, etc., and what actions will prove futile and may even be harmful. The new Assessment Collections Primer provides an overview on collections, and other Assessment Primers delve into much more detail with regard to the specific processes, and also the forms of foreclosure, the big special assessment, and bankruptcies.
It is always better to make decisions with a full understanding of the options and consequences.
By Beth A. Grimm, Attorney. A "service oriented" attorney and member of ECHO and CAI and various other industry organizations in California and nationally, host of the website www.californiacondoguru.com; two Blogs: California Condominium & HOA Law Blog, and Condolawguru.com Blog, and author of many helpful community association publications which can be found in the webstore on her site.