CondoTalk: Collection of unpaid assessments

Associations are seeing record amounts of assessment liens being extinguished when a unit is sold at a judicial sale at the conclusion of a mortgage foreclosure. That doesn’t necessarily mean it’s the end of the road for the association in terms of collecting unpaid amounts due from a former owner.

However, associations need to carefully consider the facts and circumstances in each situation to evaluate whether it should consider seeking collection of unpaid assessments from former unit owners.

Collection of unpaid assessments from a former unit owner is generally accomplished in one of two ways. First, if the association already has a personal judgment against the owner (through, for example, an eviction action that went to judgment while still an owner), the association could attempt to collect on that judgment.

This is initiated by a legal proceeding to discover assets of the former owner. The proceeding is intended to develop information on employment and wages and assets (like bank accounts) that can be pursued. If the association has this information already, it could avoid the formal citation proceedings and pursue garnishment of wages or levy against a bank account.

Second, the association could pursue collection through a breach of contract lawsuit.

In general, the board should consider the following factors when making a decision whether to pursue collection of unpaid assessments from an owner whose unit has been sold at a judicial foreclosure sale:

Does the board know where the former unit owner lives, works or generally can be located? This information will be necessary so that a demand letter can be issued and, if necessary, a citation to discover assets, and/or a complaint and summons, personally served on the former owner.

Unlike an eviction action against a current unit owner, a citation to discover assets or a breach of contract action against a former unit owner requires personal service of the complaint and summons by the sheriff. If the former unit owner cannot be located, the citation to discover assets and/or complaint and summons cannot be served, a court would not obtain jurisdiction over the former unit owner, and the association could not pursue collection in this manner.

Does the former unit owner have sufficient assets from which to satisfy any judgment that the association has or may obtain?

In general, the foreclosure of an owner’s principal residence is an indication of insufficient assets. Usually, an individual will use their assets in order to “save” their home. However, a unit owner may have gone through some temporary economic downturn resulting from an illness or loss of job, from which he may later recover. Or, an owner who was “under water” may have simply made an economic decision to walk away from their unit. In such cases there may be, at some point, assets from which to satisfy a judgment.

There may be a greater likelihood that an investor owner has assets from which to satisfy a judgment, but this may not always be the case. In any event, the economic condition of the former owner should be considered to determine whether there are other assets (e.g. other property, wages from employment) from which to satisfy a judgment.

Has the former unit owner filed a bankruptcy petition? If an owner has filed a Chapter 7 bankruptcy, there may be insufficient assets from which to satisfy any claim of the association.

If the unit owner has filed a Chapter 13 bankruptcy, the association may receive some portion or all of the unpaid assessments through the bankruptcy proceedings. However, if a bankruptcy has been filed, the association could not proceed to collect any unpaid assessments without permission of the court.

The board should compare the size of the unpaid assessments sought to be collected with the cost of collection including attorney’s fees, costs and any necessary investigation time to locate a former unit owner and determine if he has sufficient assets.

Even though an association may be entitled, by contract or statute, to recover its attorney’s fees from the former owner, the exact amount to be awarded is a matter within the discretion of the court.

Before an association simply writes-off the amount of assessments due and owing from a former owner, the board should carefully consider the option of pursuing the former owner.

Ÿ David M. Bendoff is an attorney with Kovitz Shifrin Nesbit in Buffalo Grove. Send questions for the column to him at CondoTalk@ksnlaw.com. The firm provides legal service to homeowner associations. This column is not a substitute for consultation with legal counsel.