By Stephen M. Kirkland, Esq. (originally published in Spring 2002)

ASSEMBLY BILL 2289

Homeowners’ assessments are the lifeblood of any common interest development providing an association with ‘income’ by which to meet its obligations under the governing documents. However, virtually everyone involved with the management or operation of homeowners associations has encountered the problem of delinquent homeowners who fail to timely remit payment of those assessments.

California Civil Code Section ñ 1367 provides an Association with its remedies against delinquent homeowners. The so called “Non-Judicial Foreclosure” is, as the name suggests, a foreclosure action initiated against the property of the delinquent homeowner which is performed outside the jurisdiction of a court. Rather, the Association follows a procedure specifically delineated by the Civil Code beginning with notice to the homeowner of the debt and a demand for payment of the same. If payment if not received, the association may then record a delinquent assessment lien (“Lien”) against the subject property, which encumbers the title to that property preventing the owner from voluntarily conveying title to a third party. A recorded copy of the Lien is transmitted to the delinquent homeowner, who has thirty (30) days from the recording date of the Lien to cure the delinquency. If the homeowner fails to do so, the association may record a Notice of Default and Election to Sell (“NOD”) against the subject property. Upon doing so, the association formally initiates foreclosure on the property. It may then record a Notice of Sale, scheduling the date, time and place of a trustee’s sale of the property ninety (90) days after the NOD is recorded.

Associations generally determine when to initiate collection action against a delinquent homeowner pursuant to the procedure delineated in their collection policy. For example, the collection policy may require that an initial demand letter for payment will be sent when delinquent amounts are sixty (60) days or more past due. If the owner fails to respond, the non-judicial foreclosure procedure begins with the ‘pre-lien’ or ‘warning of lien’ letter. It is this decision as to when to initiate collection action that pending Assembly Bill 2289 (“AB 2289”) intends to remove from the hands of the association’s decision makers, and place in the hands of the legislature.

If enacted in its current form, AB 2289 would add the following language to Civil Code Section 1367: “(e)(2) A sale by a trustee may be used to enforce a lien only if the assessment imposed exceeds five thousand dollars ($5,000).” In other words, if the bill passes, an association would not be able to utilize the remedy provided by Civil Code Section 1367 unless, and until, the delinquent amount it seeks to recover exceeds five thousand dollars. Let us assume for the sake of argument that your association imposes regular assessments in the amount of $200.00 per month, and a homeowner fails to remit payment of those monthly assessments. Under the proposed language of AB 2289, the association would not be able to pursue collection of the delinquent amount through non- judicial foreclosure for twenty-five (25) months, until the delinquent amount due exceeded $5,000. Bearing in mind that the minimum time frame in which to complete a non-judicial foreclosure is five months, the association could conceivably wait two and a half years before the delinquency is cured. Few, if any, associations have the financial capability to afford the luxury of such a delay. To add insult to injury, notwithstanding the delinquent homeowner’s failure to provide the association with ‘income,’ the association remains obligated to perform its management duties pursuant to the governing documents. The potential, if not likelihood for a common interest development to be rendered insolvent due to its inability to compel payment of homeowners’ assessments seems patently obvious.

Associations do have an alternative means by which to pursue collection of delinquent assessments. Rather than proceed down the non-judicial foreclosure path, they may determine to file a lawsuit against the delinquent homeowner by which to obtain a personal money judgment. In the event AB 2289 is enacted as currently written, we anticipate associations will dramatically change their approach to collections from the currently favored non-judicial foreclosure, to collection by litigation. We can only speculate as to the ramifications of that scenario. First and foremost, the costs associated with the collection action would increase significantly. It is simply more time consuming, and therefore more expensive, to file a lawsuit against a delinquent homeowner, than it is to bring a non-judicial foreclosure action against them. Even if such actions were brought in the (comparatively-speaking) less expensive jurisdiction of small claims court, because an association may not be represented by an attorney in small claims court, the task of doing so is likely to fall to the property manager or a designated association representative. That person could conceivably become a full time small claims litigator depending on the magnitude of the association’s delinquency problem.

Furthermore, the increased burden on the resources of the California judicial system would have a devastating impact on an already overwhelmed system. By way of example, this office currently represents approximately six hundred (600) associations. If every collection action for an amount of less than $5,000 on which this office has initiated a non-judicial foreclosure was to become a lawsuit, the courts in the jurisdictions in which we represent associations would face the prospect of approximately one thousand (1,000) new lawsuits. When that number is multiplied by the approximately thirty thousand (30,000) common interest developments in California, one gets a sense of the volume of lawsuits which could potentially be filed. To say nothing of the subsequent impact and burden on programs such as the court ordered mandatory mediation programs. Such a situation would be, practically speaking, unworkable.

As of the date of writing this article, a proposed amendment to AB 2289 has been drafted and discussed by representatives of various interested entities. Although the proposed amendment eliminates the $5,000 monetary threshold, it imposes additional obligations on associations prior to initiating the collection process. The text of the proposed amendment was not available as of the date this article was written, however, this is a hot button issue of vital importance to the successful operation of common interest developments which we will diligently monitor. Stay tuned for updates in future newsletters. If you would like to get involved and voice your opinion on this matter, feel free to contact your legislator. You can find your representatives by zip code at the following site:

http://www.leginfo.ca.gov/yourleg.html

ASSEMBLY BILL 2417

Assembly Bill 2417 (AB2417), also pending before the California legislature, modifies the language of California Civil Code Section 1363.05, as that section pertains to adjournment of an open meeting to executive session. Under existing law, any member of an association may attend meetings of the board of directors except when the board adjourns to executive session to consider litigation, member discipline, personnel matters, or matters relating to the formation of contracts with third parties. If AB 2417 is enacted, discussion regarding the formation of contracts with third parties, such as landscape maintenance or security, would be held in meetings open to the membership. Speculating as to the rationale advanced to support this amendment, it could be argued that by holding these discussion in open meetings, the membership has a greater opportunity to provide input on the quality of service provided by an association’s current vendors, and the way in which the association spends the homeowners assessments. By being able to communicate their questions or concerns with respect to the association’s current or potential vendors, homeowners would feel more involved in the day to day operation of the association thereby negating the common homeowner complaint that “the Board does not communicate with the homeowners on how they spend our money.”

This is dangerous territory, however, because it may effectively negate the Board’s authority to conduct the business and affairs of the association. It is similar to electing a president of the United States, but forcing the president to conduct business at a town hall meeting after all citizens voice their concerns. It would be difficult and time consuming to conduct business in this fashion.

Conversely, holding discussions on formation of third party contracts in open session may result in a chilling effect on the free flow of information during the contract negotiations, as such negotiations are generally kept confidential to ensure that competitive bids are received. If vendors are informed of the amount and terms of their competitor’s bids, they simply need to undercut those bids, rather than provide the association with their best price, in order to win the contract. Thus, the association may be deprived of the benefit of a competitive, confidential bidding process.

These discussions also have the potential to become a new source of tension within the community, in that an association simply cannot please all of the people all of the time. Invariably factions will develop between those members who desire to spend more for a more comprehensive service, verses those owners who are more economy minded. While the ultimate decision as to who to contract with would remain with the Board under this Bill, this may be small consolation in the face of a contentious debate on who should clean the association’s pools. Again, stay tuned for developments on this proposed legislation.