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HOA Boards: Don’t Write Off Delinquent Assessments of Owners or Their Foreclosing Lenders!

How one diligent homeowner association used the Bankruptcy Code to collect a large delinquent assessment.

By Janet Jackim


Janet Jackim


The Great Recession taxed homeowners and their owners associations alike, as owners who could no longer pay the mortgage also did not pay association assessments. Some defaulting owners sought financial refuge by filing for bankruptcy protection, and others simply abandoned their homes, but regardless of the owner’s actions the end result was the loss of substantial revenue to the association. Many associations wrote off those delinquencies and never pursued their owners or the lenders who foreclosed on the homes.

The goal of this article is to highlight avenues of legal recourse for owners associations that wrote off, or are still struggling to recover, unpaid assessments from delinquent owners, ex-owners, and lenders who now own or have control over the home. If your association has, or has written off, sizeable delinquent assessments, read below how one determined association was finally paid every penny owed. In sum, don’t write off these assessments without first carefully analyzing the facts and law; collection may be possible.

The Owners’ Bankruptcy Filing Stopped All Collection Efforts.

Mr. and Ms. Debtor filed for Chapter 11 bankruptcy relief in 2012, owing their homeowners association nearly $100,000 in assessments and their lender millions on a mortgage. (A Chapter 11 permits debtors to reorganize their debts and assets and pay debts over a period of time.[1]) Because of the Bankruptcy Code’s automatic stay provision[2], the association and all other creditors were prohibited, except with the court’s approval, from taking any collection actions on pre-filing (“pre-petition”) monies owed by the Debtors.

A Plan of Reorganization Provided Hope for Payment of Delinquent Assessments.

After months of court filings and hearings, Debtors’ Plan of Reorganization (“Plan”) was approved by their lender and the court, but without input from the owners association (first mistake). Debtors had no interest in keeping the home, so their Plan required them to deed it to their lender in lieu of foreclosure. The Plan also granted to the association a first lien on title to the home for the full amount accrued prior to the bankruptcy filing (referred to as “pre-petition” assessments). The Plan did not set a date for delivery of the deed or for payment of the unpaid pre-petition or post-filing (“post-petition”) assessments (second mistake).

While Debtors and their Lender Disputed Who Should Pay What, Unpaid Post-Petition Assessments Kept Growing.

Monthly post-petition assessments kept accruing, and pre-petition assessments remained unpaid. Title to the home remained in the name of the Debtors, although they had abandoned the home years before. Two years after filing, delinquent assessments were now nearly $200,000, and Debtors and their lender failed to reach an agreement on who should pay which portions of delinquent assessments (third mistake).

Court Intervention Was the Association’s Last Resort.

In mid-2014, Debtors delivered a deed in lieu of foreclosure to their lender for recording, to pass title to the home to the lender. But delinquent assessments remained unpaid and continued to grow (fourth mistake). Frustrated with the growing delinquency, the association turned to the bankruptcy court for assistance by filing a motion to require Debtors and their lender to perform the Plan pursuant to 11 U.S.C. § 1142.[3] The association claimed that the Debtors and their lender put the association in a position analogous to angry apartment creditors in Cohen v. De La Cruz,[4] in that the association had no choice but to ask for the court’s assistance in establishing its right to payment of assessments.[5]

Claiming that the Plan was a contract between the Debtors and their creditors that was being breached, the association asked the court to require compliance with Plan provisions by ordering Debtors and their lender to pay all assessments due pursuant to 11 U.S.C. § 1141 (a).[6] Additionally, the association argued that, under applicable State law, the recorded declaration (CC&Rs) and bylaws constituted contracts binding on Debtors and their lender.[7] The association also argued that Debtors and their lender, having breached their obligations to pay assessments, should pay the association’s costs of collection, including attorneys’ fees and expenses.

Tenacity in Court Yielded Recovery of All Assessments and Attorneys’ Fees.

The Plan and applicable state and federal law put the association in a good legal position for recovery. Pursuant to the Plan, the association had the first lien position on the home for pre-petition assessments, with the lender in second position. And, pursuant to Section 523 of the Bankruptcy Code,[8] post-petition assessments of an owners association are the responsibility of the debtor until he/she no longer has “a legal, equitable, or possessory ownership interest” in the home.

Applying the Plan and Bankruptcy Code § 523, the court looked at the timing of the Debtors’ 2011 abandonment of the home and the July 2014 date that they delivered the deed to their lender and found that there were three separate periods of assessments with separate obligations for payment:[9]

  • Pre-petition assessments. These were incurred prior to Debtors’ bankruptcy filing. The Plan granted to the association a first lien on title to the home. Under state law applicable to a deed in lieu transaction, where title passed voluntarily (not through foreclosure), the court found the lender solely responsible for payment of pre-petition assessments. Recovery: $100,000.

  • Post-petition assessments prior to delivery of the deed. These assessments were incurred after the bankruptcy filing and prior to Debtors’ delivery of a deed in lieu to their lender. Under applicable bankruptcy law,[10] Debtors remained liable for these assessments because they owned title to the condo until they delivered the deed. And, under applicable state law, the lender was also responsible for these assessments. Thus, the bankruptcy court found Debtors and their lender jointly and severally liable for these assessments. Recovery: $100,000.

  • Post-petition assessments after delivery of the deed. These assessments were incurred after Debtors delivered the deed to their lender. The court found the lender solely obligated for these assessments because, as of delivery of the deed, the lender had legal (recorded title), equitable (interest established by principals of fairness), and possessory (possession) interests in the home. Recovery: $30,000.

Attorneys’ fees. In subsequent filings with the court, the association, being the “prevailing party,” was awarded its reasonable attorneys’ fees. The court based its ruling on the contract between an owner and the owner’s lender and the association, consisting of the recorded declaration (CC&Rs) and bylaws, which permit the association to charge an owner (including a lender stepping into the shoes of a former owner) attorneys’ fees to collect unpaid assessments. Recovery: $60,000.

Debtors and their lender have now paid all of the recovery amounts.

Tips for Recovering Assessments from Bankrupt Owners and their Foreclosing Lenders.

1. A Careful Analysis of Accounting for Assessments Can Increase Recoveries. When an owner files for bankruptcy protection, the date of that filing divides the debtor’s assets and liabilities into two critical periods: pre-petition and post-petition. Generally, in a Chapter 7 liquidation, pre-petition debts are discharged (meaning that the debtor is relieved of the debt). In a Chapter 11 or Chapter 13 reorganization, the plan of reorganization will provide for how, when and how much the debtor pays its pre-petition debts. But as to post-petition assessments, bankruptcy law provides that the debtor is responsible until title to and possession of the property passes to the lender (or is otherwise sold). Thus, the association’s accounting staff should divide the debtor’s account into pre-petition and post-petition periods to take advantage of the different treatments applicable to each period under the Bankruptcy Code.

2. The Board Should Not Automatically Write-off Unpaid Assessments. Even though an owner may have filed for bankruptcy protection, recovery of delinquent assessments may still be possible where:

  • The owner still resides in the property, and in that case post-petition assessments are due from the owner until the lender or another person acquires title to the property.

  • The owner has abandoned the home, and in that case post-petition assessments are due from the owner until the lender or other person acquires title.

  • The owner has filed for Chapter 11 or Chapter 13 bankruptcy protection and the plan provides for payment of assessments.

Thomas E. Reilly III (Hawaii HOA Collection Consultants, LLC) has consulted for associations nationwide in their pursuit of delinquent owners and lenders owing substantial assessments ($10,000 or more). He writes:

“Recoveries in the thousands of dollars represent exciting new-found monies to associations hard-hit by the recession. The tenacity of the association is key to recovering from owners and ex-owners and their lenders. Although sometimes complicated, the bankruptcy process should not be seen as an obstacle or a black hole to recovery. Rather, when a lender is involved, the probability of collection is greatly increased, given its deep pockets. And even when a bankruptcy is involved, the association has a right to seek post-petition assessments under the Bankruptcy Code. Bankruptcy courts are also likely to award attorneys’ fees to an association that pursues its right to payment of delinquent assessments.”

3. The Association Should Participate in a Bankruptcy Case. When a Chapter 7 case is filed, the association should determine whether the debtor still resides in the property; if so, assessments are still payable. When a Chapter 11 or Chapter 13 case is filed, the association should file a proof of claim with the court, particularly when:

  • unpaid assessments are substantial (in excess of $10,000);

  • the association is not listed in the debtor’s list of creditors filed with the court;

  • the debt is listed but the amount is incorrect; or

  • currently accruing (post-petition) assessments are unpaid.

A proof of claim puts everyone involved in the case on notice of the association’s claim for assessments. By filing a proof of claim, the association will be sent documents filed in the case, including the draft plan of reorganization and disclosure statement, each of which should be carefully reviewed for the proposed treatment of amounts owed the association. The association can object to the proposed plan treatment and propose an alternative treatment. Favorable treatment of the association’s claim can be negotiated during deliberations on the plan, including specifying the amount of the claim, due dates for payment of the claim, and actions required of the debtor to pay the claim.

4. Debtors and their Lenders Who Fail to Pay Assessments Can be Ordered to Pay. As the illustrative case shows, delinquent assessments can be recovered against debtors and/or their lender through the association’s involvement in the case. Because processes for recovery of delinquent assessments are complicated, the Bankruptcy Code is voluminous, and state laws vary, we urge HOA boards to seek the advice of bankruptcy counsel for a detailed analysis of the facts and applicable law as applied to a particular delinquency.

We wish you successful collections!


[1] 11 U.S.C. §§ 1101 et seq., also called the “Bankruptcy Code”

[2] 11 U.S.C. § 362

[3] See In re Harlow Properties, Inc. v. Palouse Producers, Inc., 56 B.R. 794, 796 (B.A.P. 9th Cir. 1985).

[4] 523 U.S. 213, 118 S.Ct. 1212 (1998)

[5] See In re Castle Home Builders, Inc., 520 B.R. 98 (Bankr. N.D. Ill. 2014), in which the court ordered a lender to pay debtor’s attorneys’ fees and costs ($35,000) for lender’s failure to comply with the confirmed plan and subsequent order (the court also ordered lender to pay actual damages of $100,000 to the debtor). “The evidence shows that for the months following entry of the Order Confirming [debtor’s plan], the Reorganized Debtor experienced continual delays and even resistance when requests were made to conform loan documents … to the terms of the Confirmation Order.” Id., p. 13.

[6] In re: Johnston, Case No. 2:01-bk-06221-SSC (Bankr.Ariz. 7/30/2009) (Bankr.Ariz., 2009), p. 10 (citing Miller v. United States, 363 F.3d 999, 1004 (9th Cir. 2004), citing Hillis Motors, Inc. v. Haw. Auto. Dealers Ass'n, 997 F.2d 581, 588 (9th Cir. 1993).

[7] See Pelosi v. Wailea Ranch Estates, 10 Haw. App. 424, 435-36; 876 P.2d 1320, 1326-27 (1994) (citations omitted).

[8] 11 U.S.C. § 523 (a) (16)

[9] Citing In re Burgueno, 451 B.R. 1 (Bankr. Court, D. Arizona, 2011)

[10] 11 U.S.C. § 523 (a) (16)