Articles Posted in Assessments

*New Case Law

Collecting delinquent assessments remains one of the more challenging and frustrating aspects of a homeowners association’s (“HOA’s”) operations. Once a delinquent file is forwarded to a HOA’s collection company or law firm, industry practice has been to reject any partial payments made by the delinquent homeowner (i.e., to reject any payments that do not cover all of the delinquent assessment amount, including late fees, interest, collection costs, etc.) that have accrued on the homeowner’s account. That approach has been based upon the language set forth in Civil Code Sections 5655 and 5720. Civil Code Section 5720 allows for a HOA to foreclose on a delinquent assessment lien only where the delinquent assessment amount is $1,800 or greater, or are more than 12 months delinquent. Civil Code Section 5655, however, sets forth the way in payments made by a delinquent homeowner must be allocated (i.e., first to the delinquent assessment amount, then to collection fees, late charges, etc.).

Accordingly, if a homeowner is allowed to make a series of partial payments that must first be applied to the delinquent assessment amount, the homeowner could structure a way in which to avoid foreclosure of his property (i.e., through keeping the delinquent assessment amount under $1,800 or under 12 months delinquent), while not paying all or any of the amounts necessary to cover the HOA’s collection fees and costs it has incurred in connection with the homeowner’s delinquency. This would ultimately place the HOA in a difficult position of having to incur more collection fees and costs solely to collect the unpaid collection fees and costs which the HOA has already incurred. Thus, collection companies and firms have traditionally rejected partial payments in order to avoid this problem–especially in light of the absence of any language in the Civil Code explicitly requiring HOAs to accept partial payments. If the homeowner desires to provide partial payments, the only opportunity to do so would be pursuant to a payment plan executed between the homeowner and the HOA.

However, a recent decision from the Fourth District, Division Three, of the California Court of Appeal has indicated that HOAs do indeed have an affirmative obligation to accept partial payments notwithstanding the concerns referenced above…

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In October of 2012, we blogged about a United States Bankruptcy Court case that addressed the proper interpretation and effect of Civil Code Section 5650 allowing for a HOA to recover delinquent assessments, along with “reasonable costs incurred in collecting the delinquent assessment, including reasonable attorney’s fees.” In sum, the Court ruled that the delinquent homeowner was not liable for the fees and costs imposed by the HOA’s collection company that was operating on a contingency basis. Because the HOA was not responsible to pay the collection company’s fees directly, those fees were not costs “incurred” by the HOA which the HOA was legally entitled to recover from the delinquent homeowner. We then predicted that the case may affect the terms under which collection companies contract with HOAs, especially those companies that operate on a contingency (“no-cost”) basis.

Another case currently being litigated in Northern California is addressing this same issue. Though the case is still pending, a recent order issued by the United States District Court, N.D., California illustrates the how the courts may be trending with regard to the fees and costs imposed by collection companies that contract with HOAs on a contingency basis:

“Although no California appellate court has directly addressed whether, as here, a third-party vendor acting on behalf of a HOA can lawfully charge a delinquent homeowner fees not incurred by the HOA, the aforementioned authorities prompt a conclusion that [the collection company’s] right to impose debt collection fees against [the homeowner] extends no further than the [HOA’s] right to do the same….[the collection company’s] fees apparently are neither incurred nor paid by the HOAs that contract for the company’s ‘no-cost’ services. If California law nonetheless entitled [the collection company] to impose the fees of its choosing against homeowners…the company would wield unchecked power to extract a cascade of fees and costs from a HOA’s delinquent members.” (Emphasis added).

There has been a string of recent court cases illustrating how now, more than ever, HOAs and collection companies are being scrutinized for their collection procedures. HOA Boards and managers should be cognizant of the legal requirements with regard to assessment collection, and how deviations from those requirements may expose the HOA to liability. Tinnelly Law Group is proud to provide its clients with access to comprehensive, attorney-supervised assessment collection services through the use of its affiliate, Alterra Assessment Recovery.