By: Christina Baine DeJardin
Collecting assessments has never been an easy job. There are pitfalls lurking around every corner and innumerable requirements waiting to be missed. To ensure a clean foreclosure process, extreme diligence and care must be taken. In the wake of the Huntington Continental Townhouse Association, Inc. v. Miner case, this job just got tougher.
For years, most association’s standard practice was to reject partial payments.. In the Huntington case, this industry standard was toppled.
In the Huntington case the homeowner failed to pay assessments and a lien was recorded. When the homeowner failed to respond, the board decided to foreclose on the property and retained legal counsel to institute a judicial foreclosure action. After the lawsuit was filed, the homeowner proposed a payment plan and tendered a $2,000.00 check. The homeowner was provided a payment plan agreement but never signed it and subsequently missed two payments.
The homeowner’s later attempt to tender regular monthly assessments were returned by legal counsel as partial payments. The homeowner then tendered a cashier’s check for $3,500.00 to the board president who told the homeowner that it would be applied to the account balance. However, again, legal counsel returned the check as a partial payment.
The trial court found that the homeowner owed the association monies and that the association had complied with all statutory requirements to foreclose on the lien. The homeowner timely filed a Notice of Appeal with the Superior Court Appellate Division, which reversed the trial court. The case was then transferred to the California Court of Appeal to address a single question: are homeowners associations required to accept partial payments from a delinquent homeowner. The Court of Appeal’s answer was yes.
The Court of Appeal heavily relied upon the language in Civil Code Section 5655 when making its decision. This section states:
Any payments made by the owner of a separate interest toward a debt described in subdivision (a) of Section 5650 shall first be applied to the assessments owed, and, only after the assessments owed are paid in full shall the payments be applied to the fees and costs of collection, attorney’s fees, late charges, or interest.
The Court of Appeal held that associations must accept partial payments and must apply those payments to assessments first. This published decision of the Court of Appeal is binding on all associations in California.
What is the fallout?
Associations that adhered to the prior industry standard must now change their procedure for handling partial payments. Collection Policies may have to be revised. Management companies, law firms and other collection entities will need to create partial payment letters. Partial payment checks that contain language stating “payment in full” or “accord and satisfaction” should not be accepted.
The Huntington case mandates that partial payments must be applied to assessments first. However, the Court did not indicate whether they had to be applied to the oldest debt first or could be applied at the association’s discretion. By determining, in advance, which assessments will be “paid” an association may preserve its foreclosure right.
Civil Code Section 5720 prohibits foreclosure to collect a debt unless the delinquent assessments total at least $1800 or are more than 12 months old. If a partial payment is applied to the oldest debt, the 12-month clock will move forward, possibly adding months to the foreclosure process. If a partial payment does not drop the delinquent assessment amount below $1800, an association can still proceed with foreclosure.
Unfortunately, some homeowners will manipulate the Huntington holding to remove foreclosure as an option for associations by paying just enough to avoid triggering the foreclosure thresholds. This could leave associations holding the bag on the late fees, interest and collection costs. While a lien can still secure these amounts, much leverage is lost against the delinquent homeowner absent a sale, refinance, or some other external pressure.
Another casualty of the Huntington case is Civil Code Section 5658, which allows a homeowner to “pay under protest.” If a homeowner disputes an amount owing and the amount falls within the small claims court jurisdiction, the homeowner may pay the full amount under protest and file a small claims action to recover the disputed amounts. Under Huntington, this “burden” to recover amounts in dispute shifts to the association. A homeowner can arguably choose not to pay amounts in dispute, which most often consist of late fees, interest and, collection costs. If the foreclosure thresholds are never met, the board must decide whether to spend more money to file a small claims or superior court action to collect them.
What can associations do?
Associations still have the option to file a lawsuit against delinquent homeowners. For current owners, a lawsuit often brings no finality to the problem and the association may have to file consecutive lawsuits to secure ongoing debt. Further, there is always the specter of bankruptcy to wipe out those judgments.
Associations can still suspend rights and privileges. Deactivating FOBs, bulk cable accounts or gate clickers, if permitted, is good practice to attempt to gain compliance.
Are there any silver linings?
One silver lining is that the Court of Appeal has sanctioned the acceptance of partial payments throughout the foreclosure process. Arguably, associations can now accept partial payments without jeopardizing their collection actions.
Another silver lining is that associations may not have to budget for so much “bad debt.” While the number of delinquent homeowners will not drastically drop as a result of Huntington, the amount of the bad debt might decrease since associations may receive more income.
While the Huntington ruling does complicate matters, associations should not abandon the foreclosure process altogether. It is critical that associations consistently record liens to secure delinquent assessments, late fees, interest and collection costs. However, boards must be educated about how this holding impacts the foreclosure process and what options they have if a homeowner manipulates the system. It is also critical that management companies and law firms implement the proper procedures and training to deal with partial payments.