Collapse of HOA
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COLLAPSE OF HOA

QUESTION: Most of the owners in our 12-unit association stopped paying their dues. The board is not holding meetings and the management company terminated the account. The insurance has not be paid, the landscape, trash, etc. are not serviced as the vendors haven't been paid. At this point I think the intent is for all the owners to stop paying dues. Do you know what happens next?

ANSWER
: What you describe is quite serious. Corporations cannot operate without boards of directors.

  • Personal Exposure. Without insurance, all owners are personally exposed if someone is injured in your common areas. Each member could be sued and there will be no insurance to defend them or to pay any judgment. Each owner would need to pay out of pocket for an attorney and each could be liable for the entire judgment (joint and several liability).

  • Suspended Corporation. Your association has probably had its corporate status suspended, which means it cannot defend itself against lawsuits.

  • Deferred Maintenance. Deferred maintenance will accumulate, leading to more expensive repairs, as well as water damage and mold in the common areas, which means more litigation.

  • Director Liability. In addition to owners being vulnerable to litigation, directors from the last board of record could be sued for breach of their fiduciary duties for resigning without appointing replacements.

  • Market Values. Finally, the market values of your units will plummet to the point of being unsalable. Sellers must disclose to potential buyers the true state of your association's affairs, and who in their right mind would buy into your association?

Chapter 7 Bankruptcy. A Chapter 7 bankruptcy by your association would likely not be granted. Under this particular filing, a company goes out of business and a trustee is appointed to sell the company's assets to pay off debts. Associations have no assets of any significance to sell, and the common areas cannot be sold. Moreover, an association cannot realistically go out of business--someone has to maintain the common areas and associations are created specifically for that purpose. Finally, the court can simply impose a special assessment to raise the funds necessary to pay the association's debts. (O'Toole v. Kingsbury Court.)

Chapter 11 Bankruptcy. A Chapter 11 bankruptcy (reorganization) is possible if an association has debt and needs time to repay it. The federal bankruptcy court fashions a repayment plan which would likely include a special assessment against all owners to raise funds to pay those debts. It resolves debt issues but does not address the association's lack of management.

Receiver - Custodian. Another option is for one or more members of the association to petition the superior court to appoint a third party (a receiver or custodian) to manage the association as provided for in Code of Civil Procedure §564(b)(9). The receiver would have the power to run the association, including the power to assess the membership for all costs needed to pay for operations. The downside is that there are no restrictions on the size or frequency of assessments imposed by the receiver. The membership would have no say in what services were provided, what was repaired or when, or how much is paid for operations and repairs. All of that would be in the hands of the receiver. Moreover, the receiver would likely special assess the membership to pay for his/her services.

Recommendation: You should immediately seek legal counsel to determine your best course of action. A court-appointed receiver may be the quickest way to limit your exposure, especially since the association has no insurance. If the membership were smart, they would promptly restart association operations.

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.

Adams Stirling PLC