A Practical Approach to Collecting Association Assessments

Introduction
Collecting assessments is the life blood of community associations.  The Board of Directors has a fiduciary duty to collect assessments from owners.  If the board of directors fails to fulfill its fiduciary responsibility to ensure that assessments are received from all owners in a timely manner, it will, in many instances, be unable to carry out its other responsibilities in the administration of the association and the preservation, maintenance, and enhancement of the value of the properties.  Where assessment collection problems are widespread in an association, the board may be forced to delay or curtail needed maintenance or repair, causing property values to drop.

Adopting a policy which provides a systematic, disciplined approach to collecting delinquencies forms the foundation of a successful program for avoiding financial loss to the association as a result of owner delinquencies.  The board of directors can adopt a collection policy without special owner approval based upon the authority granted to it by statute and the association’s governing documents.  This article will explore the elements of a workable collection policy and the issues which a board and the association’s attorney should consider in framing and implementing a collection policy.

Rationale for adopting a formal collection policy
A number of goals may be served simply by the board’s adoption of a formal collection policy resolution.  A collection policy can educate owners about their obligations to the association and the consequences of failure to meet those responsibilities on time.  Owners who read a well-written collection policy will know what to expect from the board and will understand that the board is serious about dealing aggressively with non-payment of assessments.  Frequently, this information alone is the best deterrent to owner delinquency.  By initiating new collection programs with many associations, it has been our experience that merely adopting and publishing a tough collection policy often a cures a large percentage of existing collection problems.

A well-drafted collection policy provides a road map and checklist to guide the board and the manager in handling delinquencies.  It clearly sets forth a step by step process and specifies each individual’s role.  It also provides a mechanism for the exercise of discretion where unforeseen circumstances such as loss of employment, illness, or death of a wage earner call for compassion in negotiating a payment arrangement.  Where it is clear in advance what is to be done, by whom and when, there is no time or effort wasted in trying to figure out what to do next.

In addition, CCIOA at C.R.S. 38-33.3-209.5 requires all associations to adopt a final collection policy and specifies the minimum terms that must be contained within the policy.  As of January 1, 2014, all policies must state the following:

• The due date of assessments
• The date on which assessments are considered late
• The amount of any late fees and/or interest that will be charged on late payments
• The amount of any fee if a payment is not honored by a financial institution (the “NSF” fee)
• The circumstances under which an owner may make a payment plan and the minimum length of that payment plan, which must be at least 6 months
• How payments are applied to owners’ account
• The legal remedies available to the association to collect the unpaid assessments
• That a notice must be given to the owner before their account is turned over for collections

Consistent policy application improves outcomes
Adhering to the specified procedure in every instance of homeowner delinquency ensures the consistent, non-discriminatory and, predictable handling of collecting assessments.  This disciplined approach has been proven to enhance the timely collection of sums due to the association.  Consistent enforcement, backed up by a clear written policy, avoids or answers charges that the association is proceeding in a selective or discriminatory manner.  Such allegations by a delinquent owner can erect substantial obstacles to judicial enforcement of the association’s rights and, if proven, can defeat, or at least delay, the association’s recovery.

The collection resolution
A collection policy, like all policies adopted by the association board of directors, should be embodied in a proper resolution.  That resolution should specify the problem to be solved, the authority allowing such action, and a designation of the particular procedures to be followed and the circumstances under which they are required or permitted.  The collection policy may also be included in the association’s rules and regulations and contain the same provisions as a resolution.

Authority
The remedies an association is empowered to use will vary based upon the authority provided by the association’s governing documents and statutes.  Thus, particular care must be taken to ensure that any action which is specified in the collection policy is within the power of the association.  Where the board exceeds its power, it may open itself and the association to liability to the damaged owner, and may handicap the association in its efforts to collect assessments.  Such damage may not be limited to the failure to get the requested relief in the particular case.  For instance, if an association appears before the same judge in the future, its credibility may continue to suffer.

Contents Of Collection Policy
The collection policy should contain not only those provisions required by statute, but also a detailed progression of the steps which should be taken by the manager, treasurer, or other person who has the primary responsibility for collecting non-delinquent assessments.  Written and verbal communication with an owner should be made frequently and soon after an owner becomes delinquent to call attention to the problem and to seek a quick cure of the assessment default.  The sanctions imposed by the association, the remedies sought, and the tone of the contacts, should become more severe with each sequential communication.  For example, the steps may progress from a friendly phone call to a reminder notice to the imposition of a late fee, to notification of the owner’s lender, if allowed, then to turning the account over to legal counsel for legal action and filing of a lien.  See our article, Scorecard for Your Collection Policy, for more provisions that should be included in your policy.

Options
These collection procedures, and their timing, may vary from association to association.  Some associations may require a reminder before levying a late fee.  Others use a progressively increasing late fee as the delinquency ages.  Another available remedy may be the acceleration of assessments which results in the entire unpaid annual assessment becoming due and payable immediately.  Still others suspend a delinquent owner’s right to use amenities or to exercise voting rights.  As stated above, associations wishing to use any of these tools should make sure that such use is authorized by either Colorado law or by their governing documents.

No matter what sanctions are chosen, these measures should be automatic and non-discretionary where payment or, in appropriate cases, a satisfactory agreement for payment is not received from the owner.  An association’s procedures should incorporate a mechanism for allowing the exercise of discretion in cases where circumstances merit special consideration.  Where discretion is to be authorized, steps should be taken to ensure that decisions are based upon well-understood and uniformly-applied principles, and are made in a fair and non-discriminatory manner.

Special consideration
The burden of requesting special consideration should be placed upon the owner who, for circumstances beyond his or her control, is unable to meet the assessment obligations in a timely manner.  The opportunity for an owner to request special consideration and enter into a payment plan to bring the account current should also contain time limitations so that an owner is not rewarded for delaying such request.  Under CCIOA, owners must request a payment arrangement or bring their account current within thirty (30) days of the notice.

Statutory Notice
Prior to turning an account over for collection the owner is entitled by law to receive notice.  The notice MUST include the following:

• the total amount due with an accounting of how the balance was determined (a ledger is the easiest way to satisfy this requirement)
• whether a payment plan is allowed and who to contact to set up a payment plan
• who to call and a phone number to get a current ledger to verify the balance, even if you are providing one with the notice
• the action the owner must take to cure the delinquency
• provide 30 days for the owner to cure

Turn over to attorney
Where the Board’s attempts to resolve the delinquency through written communication are unsuccessful, the manager or treasurer should be authorized and required to turn the account over to the association’s legal counsel.  This step should be automatic once a delinquency reaches a specified age (or amount) and after the statutory notice is given, without further action by the board.  The authority of the attorney to act for the association should be defined and sufficient discretion should be granted to deal with the particular circumstances presented by each case.  As always, the goal of the association is to achieve full payment quickly while minimizing added expenses for the association and the owner.

Role Of The Attorney
Associations should utilize a standard form for forwarding an assessment account to its legal counsel.  Providing and using a standard form helps to prevent mis-communication and helps control costs.  The form should, to the extent available, include the following:

• the name of the association;
• the name and phone number of its manager or contact person;
• the address to be used for communications regarding the account;
• the billing address for the association, if it is different;
• the owner’s name;
• the owner’s address;
• the owner’s mailing address, if different;
• the owner’s telephone numbers;
• the name and telephone numbers of any tenants if the premises is not owner occupied;
• any information which the association has collected with regard to the owner’s bank accounts;
• descriptions and license numbers of the owner’s vehicles;
• the name, address, and loan number of the mortgage lender on the unit;
• the name, address and telephone number of the owner’s employer;
• the prior notices given to the owner; and
• the terms of any payment arrangements whether completed or not.

If the association’s attorney does not already have a copy of the declarations of covenants, conditions and restrictions, bylaws, articles of incorporation and the association’s collection policy, these documents should be included with the completed standard form, along with:

• a ledger for the account showing all debits and credits from the time that the delinquent account was last current to the present time;
• a copy of any association lien which has been recorded;
• all correspondence relating to the delinquency or which might relate to a claim or defense by the owner against the association;
• all documents received by the association regarding a foreclosure against the owner or a bankruptcy by the owner; and
• if a special assessment is involved, a copy of the resolution approving the special assessment which encompasses the amounts and due dates of the assessment.

Communications with owners after turn over
Once an account is turned over to the association’s legal counsel for collection, it is critical to counsel’s success that all further communications between the association and the debtor be handled directly between the association’s attorney and the owner, or the owner’s attorney.  Owners will often try to go around the association’s attorney by appealing to the sympathy of their neighbors on the board.  Such contact should be met with a standard response, “I’m sorry, but association policy prohibits me from discussing this matter with you.  Please work it out with our attorney.”  This insulates board members from improper pressures.  It also allows the attorney to be the “bad guy” rather than the neighbor.  Most importantly, it avoids inconsistent and conflicting communications between the board and owner, the potential for misrepresentations by an unscrupulous owner regarding “agreements” made directly with the board, and the undercutting of the attorney’s authority and effectiveness.

Attorney actions
Upon receipt of an account for collection, there are several steps that a prudent attorney should take before contacting the debtor. The order in which these steps are performed and the combinations may vary from association to association.

1. Title research.  First, the attorney may verify with a title company or the county assessor’s office that the record title to the property is in the same name or names that the association believes it to be.  More often than one would expect, this inquiry may reveal that there are co-owners who are jointly and severally liable for the assessment obligation, or that there has been a transfer of title that has not been reported to the association.

Search of the title records may also reveal that a senior lender has initiated a foreclosure proceeding against the property.  Although a junior lien or such as the association is entitled to notice of a foreclosure, if the association’s lien is not of record at the time that notice is given, the lender may be unaware of the lien or not have an address for notice.  As a result, this title search may be the first notice to the association.

1. O&E Report.  Second, the attorney should obtain an ownership and encumbrance report (O&E) from a title company.  This O&E report will provide the attorney with the document placing the current owner in title to the property, as well as copies of all encumbrances, such as deeds of trust and liens, against the property.  This information may be helpful if a foreclosure action is considered by the association.
2. Bankruptcy.  Third, if there is information indicating that the owner may be involved in a bankruptcy proceeding, a prudent attorney should also check the records of the U.S. Bankruptcy Court in the district where the owner resides before taking any collection action. The filing of a bankruptcy imposes an automatic stay against any debt collection efforts against the debtor.  An automatic stay prevents the commencement or continuation of any court proceedings against the debtor that may affect the debtors estate.

Because collection proceedings involve monetary claims against the debtor, such proceedings are automatically stayed.  Violation of that stay is illegal and such violation is considered in “contempt of  court,” even if the violator does not have notice of the bankruptcy.  During the bankruptcy proceeding, the debtor is under the protection of the bankruptcy court and any proceedings against the debtor may not be pursued without the court’s permission.  Violators of the automatic stay have incurred substantial contempt fines from the court.

1. Verify the debt.  Finally, the attorney should verify that the assessments which are claimed to be due have been properly levied by the association.  This includes verifying that they are authorized by the association’s governing documents and that all required procedures necessary to validate the assessment have been followed.  Failure of the association to comply with procedures mandated under either the applicable statute or governing documents may invalidate the assessment and any collection efforts.  Such procedures may require, for example, the publication of the budget and the calling of an owners’ meeting to review the budget or the providing of notice and an opportunity for a hearing prior to levying a fine.

Collection options
After verification of assessment validity, the attorney will probably send a demand letter to the owner to inform him/her of the amount that is owed and that legal action may ensue if the amount is not paid.  If there is no response to the demand letter, the next step is to commence a lawsuit against the owner for the assessments owed to the association.  Often several courses of action are available to the association.  The association usually has the option to sue the owner personally for money judgment, foreclose the association’s lien for assessments resulting in a judicial foreclosure, or have a receiver appointed to collect rent on a property, if applicable.  It is the role of the attorney, in consideration with the board, to consider the facts and circumstances of each case and recommend an appropriate strategy for proceeding.

Where the amount of the delinquency is small, it will usually be advisable to sue for a money judgment rather than commencing a judicial foreclosure.  Courts are often reluctant to grant any relief – including foreclosure – which will deprive an owner of his or her home for minimal defaults.  Foreclosure actions are generally substantially more expensive than actions for money judgment.  Where a delinquency is small, foreclosure costs and fees may be out of proportion to the amount of the delinquent assessments.  When this happens, a court may refuse to award the full amount of the association’s attorney’s fees.

Money judgments may be particularly attractive where an owner is employed, or where the association has kept a record of the owner’s bank account information from past payments.  In these instances, the owner’s wages or bank account can often be garnished relatively quickly and inexpensively to collect on the judgment.  Garnishment involves the issuance of a court order after a judgment, which requires a bank, employer, or other creditor of the defendant, to withhold and turn over to the court, for the benefit of the association, any money in its possession.

Evaluating settlement offers
While the immediate payment of all sums due is the most desirable settlement result, this may not always be possible.  To ensure that the owner(s) will be able to pay the sums due, settlements may call for payments over a period of time.  A stipulation for judgment or payment agreement should be used to document any settlement agreement and installment payment plan.  A stipulation for judgment is a document signed by the owner which, unlike a normal contract, may provide the basis for entry of a judgment against the debtor without a trial.  A stipulation specifies an exact amount that an owner must pay by a specific date that is agreed upon by both parties.  Thus, if the owner does not comply with the stipulation requirements, the association can automatically enter judgment against the owner.  After judgment is entered, the association may garnish the owners’ wages and bank accounts.

A stipulation for judgment serves several purposes.  First, it minimizes later opportunities for misunderstandings about the agreed payment dates and amounts.  Second, it ensures a quick result if an owner subsequently defaults and it is necessary to reduce the association’s claim to judgment.  Finally, it minimizes out-of-pocket expenses for the association since it results in a judgment without an actual trial.  In essence, a stipulation for judgment is an efficient tool with many benefits to the association.

After a bank forecloses
Where a bank or other lender with a senior lien has foreclosed on the unit, the only option open to the association will be a personal judgment against the prior owner for money due.  However, under Colorado law, the association has a super lien equal to six months of assessments.  This super lien has priority over all deeds of trust executed after July 1, 1992 against the property.  Therefore, even if the senior lien has been foreclosed, the association can generally collect its super lien by contacting the foreclosing party.  Similarly, where an owner has little equity in his or her unit due to a senior mortgage encumbrance, foreclosure by the association will in most cases be unproductive.  However, there may be reason to proceed with a foreclosure even with the low equity.

The association’s foreclosure option
Foreclosure may be the recommended technique where an owner has had repeated delinquencies.  It may also be advisable if the amount of the assessment obligation is over $1,000.00, and the owner’s equity in the unit is substantial.  Where the property is rented by the owner or vacant, the association may, as part of the foreclosure, have a receiver appointed to rent the property and apply the net rental receipts against the assessment liability pending the foreclosure sale.  Further, the rapid initiation of a foreclosure action of the association’s super lien may be sufficient to bring about a cure of the delinquency by the lender, or to allow the association recovery of its assessments at a foreclosure sale.

Foreclosure may also be the preferred alternative if an owner lives out of the state or country and the association wants to limit its costs and enhance its chances of collecting the delinquent amount.  An action for personal judgment may be brought in the jurisdiction in which the property is located, but if the owner lives out of state or in another country, garnishment may be difficult if the owner does not maintain a bank account in the state.

Foreclosure may be the only remedy available to the association if an owner has no other assets or income, or has gone through a bankruptcy.  An action for money judgment may not be brought where the owner’s personal debt to the association for assessments which became due before the bankruptcy petition was filed has been discharged by the bankruptcy court.  This occurs unless the owner signs a reaffirmation agreement in which he or she agrees to pay the debt, even though not personally liable, to avoid foreclosure of a lien on the unit.  If an owner remains in the unit and has reaffirmed the mortgage, but does not reaffirm the assessment obligation, the association will be limited to recourse against its lien on the unit through a foreclosure.

When to consult your attorney
If, as a board member reading this article, your repeated reaction has been, “That sounds good, but we can’t do that in our association,” then your board may want to consider consulting the association’s attorney about your options for amending your governing documents to provide the association with authority to adopt a collection policy.  A good set of collection remedies can make both the association’s job and its attorney’s job, much easier.  It can also maximize the likelihood of a successful recovery of both the assessments and the costs of collection.  The following are some suggestions to consider.

Collection Policy And Provisions

• Definition of Assessments.   Unless your state law includes a broad definition of assessments, your declaration should do so.  A satisfactory definition encompasses not only monthly and special charges against all units for common expenses, but also special charges which may be levied against a particular unit, such as late fees and interest, costs of collection, fines, fees, and damages caused to the common elements.  These charges should be covered by the association’s lien, as well as by any extraordinary remedies for collection which are contained in the declaration and statute.
• Extra-Judicial Remedies.  The association should give thought to providing remedies without having to go to court in its collection policy, such as the right to collect rent from the tenant of a delinquent owner, and the right to evict that tenant if he or she refuses to make the payments.  This type of provision, commonly referred to as a rental intercept clause, should also provide that the payment by the tenant to the association will be credited against the tenant’s obligation to his or her landlord.  A provision which allows the deprivation of utilities to a unit should require adequate notice to both the unit owner and the occupant, and should be used with discretion to avoid causing damages substantially greater than is intended.  In conjunction with the right to collect the rent from a tenant, there should be a promise of continued utility service by the association to a cooperating tenant.  If an association is reluctant to sever the electrical or water service to a unit, perhaps the termination of cable television would be less objectionable to the association.  From our experience, it can have the same sort of results without the potential for creating a health or safety hazard.
• Security Deposit.  Where an owner has a history of delinquency, the ability to collect a security deposit equal to three months estimated assessments may provide an association with an additional measure of protection.  If such a deposit is authorized by the Association’s governing documents and has been collected, such deposit should not be considered as an advance payment of assessments.  It should also not serve to delay the initiation of collection action of non-receipt of future payments.  It should remain on deposit as security against the association’s ultimate failure to collect the sums due.
• Late Charges/Interest.  The association’s governing documents should provide the board with the authority to impose late charges and/or interest on delinquent accounts, although late charges are allowed by state statute.  The board should have the power and discretion to set the rates for these charges, subject to any applicable usury laws.  A rate which is applicable in the absence of board action should also be specified.  In many instances a flat rate late fee will be preferable if the amount of the delinquency is small and the costs of calculating and collecting minimal amounts of interest is disproportional to the amounts received.
• Receivership.  A receivership provision may also be advantageous where the association is foreclosing on its lien.  The appointment of a receiver is particularly useful for dealing with owners who are pocketing the rent on the unit but not paying any obligations.  A receivership provision should provide for the appointment of a receiver and should give the receiver the authority to use the rental proceeds to cover the costs of the receivership, and to apply any additional funds to pay the sums due the association.  Associations do have the right to an appointment of a receiver by statue.  However, outlining this right in governing documents can be a deterrent to delinquencies in and of itself.
• Acceleration of Assessments.  The ability of the association to accelerate the assessments against a unit for the coming year may make it more economical to bring a collection action.  This remedy, however, is one which can backfire against the association in the case of a subsequent bankruptcy or foreclosure.  The ability to decelerate the assessments in such an event is also an important protection against loss of future assessments which should be included in the governing documents in case the prior acceleration is no longer in the association’s best interests.
• Costs and Attorney Fees.  Because most delinquencies are small amounts and the substantial potential costs of collection can exceed the original assessment amounts, it is critical to the interests of the association that it have the ability to recover its costs of collection, including attorney’s fees.  This right is granted by statute but it should definitely be included in the governing documents.  The provision should be broad enough to ensure that the association is entitled to charge its costs to the owner as an assessment even if the collection activities do not result in a suit being filed or a judgment being entered.  In addition, costs and fees incurred in connection with execution on a judgment or the collection of a judgment in another state should be expressly provided for.
• Super Lien.  One of the most valuable tools which an association can have for collecting assessments is the “super lien.”  The super lien is a concept which originated in the Uniform Condominium Act, and is also incorporated into the Colorado Common Interest Ownership Act (CCIOA).
• The super lien provides for a limited six-month priority for the association’s assessment lien over the lien of a first mortgagee.  Thus, when an owner who is in financial trouble stops paying both the mortgage and the association assessments, and the lender forecloses, the lender will be forced to pay the association six months of back assessments from the proceeds of the foreclosure.
• Communication.  Lawyers should also educate judges on the need and importance of collecting assessments.  Judges need to understand that unlike bank and retail collection cases, associations are involuntary creditors which cannot stop providing services to the debtors.  The failure of an owner to pay has a direct negative effect on the living arrangements of other people, not on profits.  With this knowledge, judges should be more sympathetic to the co-owners than to the debtor.

Conclusion
The collection of unpaid assessments is one of the most important responsibilities of a board of directors because assessments are the lifeblood of the association.  The development of a comprehensive collection policy can assist the association in educating the owners, deterring delinquencies and efficiently and effectively handling delinquencies.