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Subject: Discharging HOA Debts and Claims
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Author Messages
MichaelK11
(Texas)

Posts:432


07/23/2009 1:29 PM  
Can anyone tell me if a mandatory HOA in Texas can discharge debts through bankruptcy or dissolution, or if the Member homeowners are ultimately liable? Are claims against an HOA utlimately secured by equity in the Members' homes? Are bankruptcy courts allowed or required to transfer HOA some or all debts to the individual member homeowners? Is it practical for creditors and claimants to initiate collection action against individual (former) member homeowners, to sue them, or to step into the place of the HOA in order to collect? Can they do this if an HOA simply refuses to pay? Can they do this in the event of dissolution?

I am trying to understand the exposure of myself and other homeowners. The possibility of assessments is obvious; however, it is possible that the Membership may not agree to assessments, and the Board of Directors has pursued this on its own, without revealling the full cost and risk to most homeowners. The major assets of the HOA are common areas of limited value. Assume debt to the HOA lawyer and judgments exceed what they HOA gets from assessments and common area sales or foreclosures, and the HOA declares bankruptcy or simply dissolves. Are we liable as individual former-member homeowners for any remaining debt to our lawyer and/or judgments? Can this be collected from selected individual homeowners? Can it be levied directly upon all former-member homeowners equally (as an assessment) in the absence of an HOA? Can an HOA dissolve without a zero balance sheet?

This past year has seen a major dispute between the HOA and a member, regarding their construction of a retaining wall on a small strip of HOA property, over which the owner(s) of that lot have an easement. The dispute concerns the rights of the lot owner under the easement: the HOA says the easment specifies a right of passage/traversal, and they have no right to build a wall without HOA permission; and the homeowner says it is an exclusive use easement conveying all rights except ownership, and they have an obligation to build the wall to prevent erosion on the easement area and to support their own lot and home foundation. The easement area is positioned on a steep slope from the level of the lot down to a golf course pond.

This has become a very contentious and expensive dispute. The HOA's legal costs have skyrocketed. The defendant homeowners are a husband and wife who are both lawyers and own a law firm. They have asked for a lot of discovery (most of which they have not yet received), although they have not yet countersued (despite encouragment from the Judge to do so). The defedants obtained through discovery invoices from the HOA's attorneys totalling $74,000 from start through March 31st. From before start through mid-June, the HOA Board insisted that the total cost would be from $15,000 to $30,000 and insisted no more than $14,000 had been spent. At the July Board meeting, they announced that the cost through June 30th was over $90,000, of which $61,000 had been paid (mostly in the past month). They expressed shock and regret that our fellow homeowners have dragged us through this. (They have often referred to these lawyers, but never before as "fellow homeowners".)

The Board contends that most of the expense is behind us. I suspect that is only true if we settle quickly. They are unwilling to settle, and the defendant is also unwilling to stop. They contend that we are winning, but I believe the Court has consistently ruled against us and is beginning to get very annoyed with us. I suspect our legal costs could rise to $300,000 to $500,000. The Board has said repeatedly that the defendants are not entitled to collect their legal costs from us; but our Declarations of CE&Rs clearly state that when the HOA sues a homeowner, the prevailing party is entitled to collect their attorney's fees from the losing party. I don't know if that applies to lawyers pro se (representing themselves); but I think the defendants have already won the Declaratory and Breach of Contract actions, and attorney's fees are mandatory for Breach. So I think this could conceivably cost us up to $1M. If this lawyer manages to get a jury pissed off at us enough to send a message to HOAs to "leave people alone", then perhaps $2M or $3M. (Anything higher would probably get knocked down on appeal, but then our property values are in the pits for the durration of appeals.)

One of our Directors says he is an attorney. At our annual meeting, he told over 100 Members that he is an attorney and an expert in real estate law, and his advice is that we should continue this lawsuit and we will win. When asked, he said that we would collect our legal costs from the defendant and he could not collect his from us. He advised against stopping this suit, because then we would lose what we had put into it; but if we continued we would recoup our costs from the defendant.

In private conversation, unbeknownst to these many homeowners, he admitted that he is not a member of the TX State Bar Association, but stated he is a Member of the Indiana Bar. In fact, he has been suspended from the Indiana Bar since May 2007.

This Director states categorically that creditors and claimants against the HOA have no access to the equity in our homes -- that if unpaid, they cannot set liens or foreclose. Given this guy's track record, I'm inclined to take that statement alone as evidence of the opposite.

Any ideas or information about this?

Thanks in advance for comments and suggestions.
TracieS
(Colorado)

Posts:460


07/23/2009 1:35 PM  
Is your HOA incorporated as a non-profit (or other) corporation? As I understand it...NOT being a laywer (armchair or otherwise!), a homeowners association incorporates specifically to shield the members (owners) from personal liability.

Now...what does your INSURANCE company say? Do you have insurance for this type of thing?
SusanW1
(Michigan)

Posts:5202


07/23/2009 3:20 PM  
Ye Gads, whatever happened to mediation?

As an individual board member you will not be liable for damages. The corporation, i.e. the membership, are responsible for paying the bills. The board will have to come up with a plan to pay the bills.

MichaelK11
(Texas)

Posts:432


07/23/2009 3:40 PM  
That was not my question. I am not on this Board. I am asking if the individual member homeowners are eventually liable for the bills.

Not in the case where an assessment is properly levied, but in the case where the HOA does not pay, or the case where the HOA declares bankruptcy, or the case where the HOA dissolves.

As to mediation, the first thing the Court did (after insisting repeatedly that "I see no harm! Where is the harm?") was to order mediation. One grueling fifteen-hour session from 09:00 to 01:00. The Board officially says they are not allowed to discuss what happened in mediation and unofficially says the defendant homeowner refused to respond to offers of settlement. The defendant homeowner says that several offers were tossed back and forth, and they though they had an agreement at the end to essentially walk away. At the Board meeting several days later, the Board declined to relate this and did not execute it.
SusanW1
(Michigan)

Posts:5202


07/23/2009 6:23 PM  
The corporation is liable for the bills. Yes, the members make up the corporation, but are protected individually. Each member could be named in a lawsuit, but you are protected first by the corporation structure of the HOA.

MichaelK11
(Texas)

Posts:432


07/23/2009 7:05 PM  
I think you mean that if the HOA dissolves, its debts go with it; if it otherwise fails to pay, then only the HOA's assets (the common areas) could be siezed.

I would very much like to believe this, but it sounds too simplistic. It assumes that an HOA is legally just like any other corporation. Do you know if that is the law in your state, let alone mine?

I don't expect to get certified legal advice in a public forum, but I do hope to get several informed opinions. If an HOA works exactly like any other Corporation, then I think we are protected. Even if claimants could pierce the Corporate veil (shield?), then that would expose Directors, not homeowners who were not involved or fought against this.

However, if my state's HOA laws provide that an HOA cannot dissolve without a zero balance sheet, and/or that a claimant can step in place of the HOA and levie assessments directly, then I think we are toast if this goes much further.

Since this could cost me and my neighbors each many thousands of dollars, and since some may be unable to afford that, I would like to get more definite information.
SusanW1
(Michigan)

Posts:5202


07/23/2009 7:16 PM  
'However, if my state's HOA laws provide that an HOA cannot dissolve without a zero balance sheet,. . "


WHERE did you get that from?
of the assets to another party.



MichaelK11
(Texas)

Posts:432


08/04/2009 7:25 PM  
I think it works like this:

If you own shares in Microsoft and Microsoft goes belly-up, then your shares become first worthless and then void, but the creditors of Microsoft cannot come after you for debts.

However, your shares in a publicly traded corporation such as Microsoft may get you a dividend, but cannot impose upon you an obligation to pay assessments from Microsoft. Your share (membership) in your HOA confers on the HOA an ability to assess from you. That revenue stream and all the benefits to the HOA that go along with it are assets of the HOA, which a claimant can attach.

If the Defendant homeowner in this lawsuit countersues and gets a $M judgment against the HOA, then the HOA has to pay. The HOA cannot simply go bankrupt or dissolve to discharge such claims, because the claimant can seize this revenue stream and thereby step in place of the HOA and levy his own assessments (and place liens and eventually foreclose on those who don't pay). Perhaps he could even do this if the HOA does not dissolve but just refuses to assess sufficient funds to pay.

I think that the provisions in governing documents that would lead a bankruptcy trustee or Court to levy assessments against homeowners of an HOA in Chapter 7 are simply the provisions that allow annual and special assessments.

If an HOA can increase annual assessments x% per year without consent of the Membership, then the claimant or bankruptcy court can simply levy such increased annual dues in geometric progression until they are astronomical and take everyone's homes. I'd like to think they could only do so until the debts have been paid, and not simply continue use of the revenue stream that they seized.

Can anyone tell me if this make general legal sense? General opinions, comments, suggestions?
JudyM5
(Ohio)

Posts:36


08/04/2009 8:18 PM  
Michael - Again, this is something that an experienced COA/HOA attorney needs to answer. However, since associations are legal corporations, it would seem likely that they could file for bankruptcy if they became insolvent. I would tend to think that it would be the "reorganizational" type of bankruptcy. A payment plan for the debts owed when the bankruptcy is filed would be worked out by the bankruptcy court and the association or the receiver for the association. These bankruptcy payment plans are usually spread out over MANY years and the payments are smaller than what the debtor would originally had to pay on a monthly basis.

Therefore, if worse came to worse, and the association had to file bankruptcy because of a large settlement from a lawsuit, the bankruptcy court would establish a budget that paid all the NECESSARY expenses. The court would appoint a receiver to collect monthly fees from the owners and to disburse that income to the current provider of services (trash, water, etc.) and make the scheduled monthly payment toward the lawsuit award.

Do you worry this much over everything that hasn't happened yet? You need to chill!! If you're this worried about this happening, I would suggest that you sell before it does, even if it means taking a loss. If you're not willing to do that, then worrying about it the way that you are is not going to stop the train wreck that you seem to think is coming.

Oh, here is some practical advice. Call YOUR insurance agent and ask them how much "assessment coverage" is included on your policy. If you don't have it on your policy, add it. If you don't think it's enough to cover the assessment that you think is coming, increase the coverage. The small amount that you pay for this additional insurance would be well worth the protection that it will provide you.
MichaelK11
(Texas)

Posts:432


08/04/2009 9:26 PM  
Chapter 11 may be a viable fall-back solution; however, this usually involves some debt reduction, where many unsecured creditors are paid pennies on the dollar. If we have one large judgment claim, which is effectively secured by equity in our homes, then he probably does not have to accept any reduction, and it is possible we may not even qualify for reorganization.
MichaelK11
(Texas)

Posts:432


08/05/2009 9:46 AM  
I think everyone who has a naughty BoD or a complaint in this forum should just move or chill. No worries -- it's just a F'ing house. ;-)

About adding assessment coverage to my homeowner's policy. It think it unlikely that an individual property and liability policy could cover HOA assessments, but I checked into that. My policy does contain $1000 coverage for assessment due to loss, and that is the only assessment coverage available. That means, if the HOA assess to pay for a loss on the common areas (for example, to cover their deductible or lack of insurance after a fire-related incident), then I am covered for the first $1000 assessed to me. However, it doesn't cover assessments for general budget shortfalls or various adventures of the BoD. Even if such coverage were available somewhere, I doubt an insurer would cover assessments related to a lawsuit that was in progress when coverage started, especially after the BoD announced intent to assess. I think that would apply to future (potentially larger) assessments, not just this first one.
SteveM9
(Massachusetts)

Posts:2869


08/05/2009 4:30 PM  
Yup, I'll never join an association ever again. These stories are crazy.
TracieS
(Colorado)

Posts:460


08/06/2009 6:22 AM  
You know, though, there are advantages! I don't pay for full home insurance, garbage, there's an automatic savings account in case my roof caves in...
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Forums > Homeowner Association > HOA Discussions > Discharging HOA Debts and Claims



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