By Vincent B. Flor and Jonathan M. Mofsky
The collapse of the Florida real estate market is, at this point, old news, but community associations are still dealing with its aftershocks. Over the last five years, you’d be hard-pressed to find an association that has not had to deal with a bank foreclosing on a property in the association’s community. No one expected that the resulting crisis would last this long.
Communities often get served with bank foreclosure complaints when owners default on their mortgage loans. On top of that, when owners aren’t making their mortgage payments, they are also usually not paying community assessments. That being said, if a bank is foreclosing, an association is generally faced with budget shortfalls and other challenges in sustaining its community’s day-to-day operations. There are several facets to the current assessment-delinquency epidemic, but how and why should communities deal with this particular problem that has become so widespread?
By way of a background, associations are served, and named as defendants, in bank foreclosure cases because they have junior lien interests in the residence that is involved in the foreclosure. Condominium associations and HOAs are also included in bank foreclosure cases because community association statutes provide that a lender can limit its liability to associations when it takes title to a property via foreclosure if it holds a first mortgage and the association is included in its case. However, if a foreclosing bank fails to satisfy those statutory requirements and ultimately takes title to a property, it sits in the same general position as anyone else taking title to that property: the association can demand that the bank pay all past-due assessments, interest, late charges, attorney fees, and costs. It’s no surprise that banks try to take full advantage of the laws limiting their potential exposure to community associations.
Community associations should react to bank foreclosures by filing a response with the court. The most important reason to respond is so that an association is aware of, and asserts, its rights against the bank. First, there is some case law suggesting that a junior-lienholder, such as a community association, may waive rights when it fails to participate in, or defend against, a bank foreclosure case. Filing a response helps to dispel a court’s potential perception that an association has surrendered its legal rights by not raising or defending them, or by submitting to a default because it didn’t respond to the bank’s case. On the other hand, doing nothing could, among other things, cost a community its ability to enjoy valuable statutory protections, or to recover surplus money remaining in the court registry after a bank foreclosure sale.
Second, in deciding to address, and respond to, a bank foreclosure, an association has an opportunity to review the title to a property and gather a wealth of information to inform its collections decision-making process. Most significantly, a title review allows a community to determine whether a foreclosing bank actually holds a first mortgage on a property. If a bank is not foreclosing a first mortgage, then the association might (depending upon when the mortgage was originated) be able to assert a statutory right to recover all past-due assessments and related collections charges from the bank, should the lender wind up owning the property. If an association doesn’t know where a foreclosing bank stands in terms of mortgage priority, the community never gets a chance to avoid potentially needless losses from unpaid assessments.
Also, a title review in connection with preparing a response to a bank foreclosure can help a community association ascertain whether a property has equity, i.e., whether a property is worth more or less than the recorded mortgages and liens against it. A property with equity (net positive value) is much more likely to be purchased at a foreclosure sale by someone other than a bank claiming limited liability to an association. That knowledge can help a community decide whether to wait for a bank to foreclose and produce a new owner who is obligated to pay assessments, or to proceed with its own foreclosure efforts. If a property has equity such that a third party is more likely to buy it at a public foreclosure sale, the association might be well-served by moving forward with its own collections efforts (or bringing a cross-foreclosure claim in a bank’s case).
In responding to a bank foreclosure, an association can (and should) ask its attorney to establish a regimen of monitoring the bank’s case. Keeping track of a bank case’s progress puts a community in a position to make better budgetary forecasts, stay abreast of any changes in property ownership, and become aware of the potential availability of surplus funds to be recovered for a community’s benefit. Additionally, monitoring the case ‘s progress may reveal opportunities for an association to ask the court to force the bank to proceed with its case if there are unreasonable delays.
In addition, by responding to and monitoring these foreclosure cases, community associations can increase the likelihood that they will receive notice of owner bankruptcy filings. An owner’s bankruptcy filing can have a dramatic effect on the amount that an association can expect to recover on a delinquent account. For example, there is somewhat-recent bankruptcy law in effect which can give rise to an owner avoiding all pre-bankruptcy-petition assessments in the absence of a community association properly contesting such a result. Having notice of, and participating in, owner-bankruptcy proceedings increases the likelihood that a community gets a chance to fight against a total write-off of delinquent assessments.
Considering all of these benefits for community associations, our attorneys who focus on working with South Florida condominium associations and HOAs work with our clients to help them to respond to and monitor bank foreclosure cases. Filing a response, typically in the form of an answer substantiated by a title review, and monitoring a bank case is inexpensive relative to the amount of unpaid community assessments and the related charges in a given case. Doing nothing in response only cheats a community out of information and opportunities to assert its legal rights, better-manage its fiscal affairs, and minimize its assessment-losses.