California attorney Tyler Berding writes in the April 2010 Executive Council of Homeowners’ (see note 1) ECHO Journal, “Bankruptcy Won’t Work,” about “the practical and legal reasons why associations almost never go into bankruptcy.” Essentially, Berding informs his readers that the HOA is communal, like a partnership, where all “partner-members” are responsible for the debts of the HOA “partnership”. Didn’t anybody tell you that before you bought your home? Or that your home is collateral for the survival of the HOA?
He correctly maintains that because the HOA has “deep pockets”, the pockets of its individual members, jointly and severally, the pursuit of a bankruptcy is not rationale. The judge will assess the remaining solvent homeowners to ante-up to pay all the debts of the HOA. One could say it’s one of those undisclosed pitfalls of HOA ownership. Pursuing individual homeowners who haven’t the means to bail the HOA out of its financial crises is just a fruitless undertaking by the members, who still do not want to accept the failure of the HOA legal structure to protect their individual assists. They have been blinded by the false propaganda of “the voice of the community” thinking that “community” means their own individual interests, and do not see the communal nature of their HOA membership.
Berding does not mention that the failure to budget for bad debts, a standard accounting practice, reflects poor management by the HOA board, and its advisors (although he admits to understanding the meaning of “assessments for bad debts” below). Failure by incompetent boards and its advisors to act in a prudent manner, as required under law, is another inherent fault, another deficiency, within the structure of the HOA concept.
You can’t be successful in mass merchandising HOAs and getting all those people to buy if you bring up these serious financial negatives. Or to get the legislatures and planning boards and local governments to enthusiastically support and encourage HOAs if you bring up any negatives, can you?
Here are some of Berding’s messages from the ECHO Journal:
Ironically, it is not unusual to find that an association’s largest “creditor” is itself. The failure, year after year, to make reserve transfers creates unfunded liability and makes it impossible for the association to effect repairs when the time comes. . . . . The fact that some owners don’t pay their share of what their association owes to a creditor is not enough. That seeming shortfall becomes an internal debt to the association, which is in turn simply spread again across all owners in the form of assessment increases or emergency special assessments, until the creditor is paid in full. The ability of an association to pay its obligations is as deep as the combined equity of all property in the community and the assets of all of its members. This makes bankruptcy not a feasible option for associations.
“For all of these reasons, a bankruptcy filing will not normally be considered a remedy available to a community association. There would have to be no equity available in property in the community, and each individual owner would have to file his or her own bankruptcy petition for that to be effective as against the association’s creditors. That’s simply not going to happen or ever be a permanent situation. As owners walk away from property and mortgage holders take it back, the banks become responsible for the next round of assessment shares to pay the creditor. Lender foreclosures wipe out mortgages and create new market equity in property. Owner bankruptcies, even if pre-petition assessment debt is discharged, won’t address post-petition rounds of assessments for bad debt as they’re spread across all owners. Shares may slowly contract and debts can be negotiated, but the principle that the obligation is shared by all remains.”
Notes (emphasis added)
1. The Executive Council of Homeowners (ECHO) is a nonprofit membership corporation dedicated to assisting California homeowners associations.
“The mission of ECHO is to advance the concept, interests and needs of homeowner associations through education and related services to board members, homeowner members, government officials and the professionals in the industry.”
Please pay attention to the contradiction in the mission statement of ECHO above. Do they speak for the homeowner members or for the HOA boards? Anyone with anyone knowledge of the legal structure of corporations understands the “class” distinctions between management and owners. With respect to HOAs, the attorneys are careful to state that the HOA attorney’s client is the HOA, as represented by the board through its president, and not the class of individuals who are owner-members. To state that the HOA board represents the interests of any individual homeowner, or even the entire class of owners is a false and misleading statement. The statutes and CC&Rs do not grant the HOA board the authority to represent the interests of the membership before public entities.
Its name is misleading and should read: The Executive Council of Homeowners Associations, ECHOA!