HOA bankruptcy and member liabilities

This Foxwood Hills HOA (SC)  bankruptcy event is every important for all to understand what’s going on.  I am offering my views based on the article and my knowledge of the bankruptcy procedure, which I have some familiarity.  The article also shows first-hand the liability attached to your HOA membership that comes under the heading of “joint and several liability” (J&S), mentioned several times in my materials.

Basically, the phrase applies to all members of a sued party in  a lawsuit whereby the total monetary damages can be collected from any one or all the members of the party. It’s like  a partnership where the debt can be collected from the partners who can pay to pay for all total debt when others cannot make the payment. 

Here, as I read the article,  we have the HOA unable to collect assessments from its members to cover its budgeted expenses, and so decided to apply a J&S policy and “tax” only the members who have not abandoned  or disowned their property — those who could pay. The plaintiff, Busbee, filed suit and said this isn’t right. Foxwood didn’t amend its CC&Rs to permit such unequal treatment of its members. There is no covenant for the HOA to do this.  In HOA-Land it would require a court order or member approval – yeah, right!

A bankruptcy is usually filed because revenues are less than monetary payouts and the prospect is dim in making the finances balance.  Under Chapter 11, as Foxwood filed, it submits a plan to make payments on its debt and is obviously a give and take negotiations between the creditors and Foxwood as the debtor. Detailed financials are submitted including who are the creditors and what money is owed the HOA, which is essentially the assessments not being paid by the members.

Here, as I see it, the HOA filed bankruptcy in anticipation of the outstanding lawsuit which could require not the payments from the members, but for Foxwood to pay back the alleged excessive dues collected by Foxwood.  The decision by the bankruptcy court rests on the outcome of the lawsuit as it needs a precise and legal statement of Foxwood’s financial status.

HOA debt and member consequences

From the April L.A. Times column, ASSOCIATIONS, by Donie Vanitzian — Can titleholders pay their share of loan directly to bank?  Here’s a peek.

HOA issue

Even with an annual income of more than $2 million, our association is in a big mess. There’s a several-million-dollar loan inclusive of our reserve account the association is paying off that has a variable interest rate currently at 6.85%. The association can’t touch the reserves because the bank says it’s garnisheed as collateral for the loan.

 The board says we have to pay this money back because the bank is holding our reserve account hostage. If it is borrowed and we can’t touch this high-interest money, can the association just give it back?

Response

 California homeowner associations cannot declare Chapter 7 bankruptcy and wipe out their debt. California appellate courts have ruled that because the association has an unending source of money — the titleholders — with which to pay its obligations, at most it can file for Chapter 11 reorganization. The court can order an association to make an emergency assessment against all the titleholders to pay off its obligation.