Bill BittenbenderPresidentABCPOA

St. James

Ed McCarronSt. James

Computers 4 Kids

Hans Wagner

River Run

Bonnie Braudway, Esq.

Craige & Fox, PLLC

Collection of Assessments

BONNIE M. BRAUDWAY, ATTORNEY

Assessments - The Basics Assessments are the driving force behind common interest communities

They are essential to the ongoing operation of the community and should be items regularly reviewed by the board

The power to assess derives from the declaration, bylaws, and statute NC Planned Community Act (N.C.G.S § 47F) NC Condominium Act (N.C.G.S. §47C)

Regular assessments – normal and recurring financial obligations which must generally be assessed at least once per year

Special assessments – for a specific purpose and generally on a one-time basis

Assessments are owed regardless of whether an owner utilizes the association’s amenities or not

Good Practices for Collection of Assessments

• Review your governing documents and understand their specific requirements. If you do not understand them or do not like them, talk to your attorney. They cannot be disregarded!

• Be familiar with the applicable statute (N.C.G.S. 47C/F-3-116)

• Have a written collection policy and follow it

• Act early

• Be consistent

• Be responsive

• Consider mutually beneficial payment options for delinquent owners• The board has a duty to treat owners fairly and consistently but can exercise business judgment and be

flexible with terms based on the individual situation

• Can be set up an any point in the delinquency

• Reasonable attorney fees and/or administrative fees can be included in the plan

Fair Debt Collection Laws• Federal Fair Debt Collection Practices Act (15 U.S.C. § 1692)• Unclear whether this applies to association boards, as there is no consistent

federal court ruling

• North Carolina Debt Collection Practices Act (N.C.G.S. § 75-50)• Prohibits: • Collection of a debt “by means of any unfair threat, coercion, or attempt to coerce”

• “Any conduct, the natural consequence of which is to oppress, harass, or abuse any person in connection with the attempt to collect any debt”

• Unreasonable publication of information regarding the debt

• Making any fraudulent, deceptive, or misleading representation in collecting a debt

• Otherwise using “unconscionable means” to collect a debt

• Violation entitles the debtor to recover civil penalties from $500 to $4,000 per violation

How to NOT Violate the NCDCPA

• Do not publish a list of unpaid owners • You cannot post a list of delinquent owners at the clubhouse

• Do not single out the delinquent owner by some special means • You cannot hang balloons on the doors of delinquent owners

• Do not contact the owner’s employer, friends, lender, family, etc.• You cannot contact the delinquent owner’s mortgage holder in an attempt to

get the bank to pay

• Do not discuss specific delinquencies with non-board members• Discussions regarding specific delinquencies should be handled in closed

executive session and not contained in minutes available for member review

• Do not make threats you cannot or do not intend to keep• You cannot send foreclosure demand letters when you have no intention of

actually filing foreclosure

Options When an Owner is Not Paying Assessments

• Late fees/Interest

• Claim of Lien

• Foreclosure

• Lawsuit

Late Fees/Interest• The Planned Community Act and Condominium Act authorize associations to “impose reasonable charges for late payment of assessments, not to exceed the greater of $20 per month or 10 percent of any assessment installment unpaid.”

• If the monthly assessment is $50, the maximum charge can be $20

• If the monthly assessment is $300, the maximum charge can be $30

• If authorized by the declaration, interest can also be charged

Claim of Lien: The Basics• Purpose:• Provides a security interest in the property which can be foreclosed • Prevents the owner from selling the property without paying to

have the lien released• Gets the owner’s attention

• The lien remains on the property until:• The debt is paid (generally including accruing assessments)• A superior lien is foreclosed• 3 years

Before Filing the Claim of Lien• An “Intent to Lien” letter must be sent by first class mail at least 15 days prior to filing the lien. This is in addition to any letters required by the collection policy. The letter must:• Inform the owner of the association’s intent to seek attorney fees and costs

• Inform the owner of the right to propose a payment plan

• Provide a specific contact person and phone number

• The intent to lien letter and claim of lien must be sent to: • The property address (unless there is no mail receptacle)

• The mailing address listed with the tax office

• Any other alternate address(es) the owner has provided

•The association must use “reasonable and diligent efforts to ensure … records contain the lot owner’s current address.”

Filing the Claim of Lien• If the owner does not pay after the intent to lien letter, the lien can be filed with the clerk of court in the county where the property is located.

• The lien affects only the property associated with the delinquent assessments. You cannot “lien” property not located in the neighborhood subject to the declaration.

• Once filed, a copy of the lien must be sent by first class and certified mail (return receipt requested) to: • The property address

• The mailing address listed with the tax office

• Any other alternate address(es) of which the association is aware

• Once the owner pays in full, the lien must be released.

Foreclosure of the Claim of Lien:

The Basics• The association can foreclose on the claim of lien and sell the property to collect the delinquent assessments.

• The foreclosure is by “power of sale,” similar to a bank foreclosure for default of a mortgage, and is presided over by the clerk of court. If the amount owed consists only of fines, late fees, and/or attorney fees, the foreclosure must be done in Superior Court before a judge.

• The Board of Directors must vote to foreclose on a claim of lien. The decision cannot be delegated to the attorney or manager, or be an automatic step in the collection policy.

• The Board of Directors will need to appoint a trustee to conduct the foreclosure. This can be the association’s attorney so long as the foreclosure is uncontested. Your attorney will provide a form for this.

• If the foreclosure is uncontested, the maximum amount of attorney/trustee fees that can be collected from the owner as part of the foreclosure is $1,200.

Steps in Foreclosure of the Claim of Lien

• Foreclosure demand letter • Notice of Hearing – A hearing is scheduled with the clerk of court and the notice is

served by the sheriff. If the owner cannot be served personally, service can be done by posting the notice at the property so long as there is due diligence to serve the owner by other methods (Fedex, Certified Mail) at all known addresses. • Hearing before the clerk – The clerk must find the existence of: (i) a valid debt, (ii)

default, (iii) right to foreclose, and (iv) notice to those entitled to notice. All other issues are irrelevant and these are the only issues the owner can contest. If found, the clerk will enter an order allowing foreclosure. • Sale – The notice of sale is published in the newspaper and posted at the

courthouse. The property is then auctioned to the highest bidder. The sale will stay open for 10 days for upset bids and continue for 10 more days until there are no additional bidders.

Things to Consider Before Filing Foreclosure of the Claim of Lien• Is this the owner’s primary residence or is the property occupied?• Has the owner abandoned the property? Is this an empty lot? • Why are they not paying? • The property is sold subject to superior liens - mortgages, IRS, property taxes, judgment liens. If there is no equity in the property, there will be no bidders! • Are you prepared to complete the process and actually sell the property if the owner cannot pay and there are no bidders?

What happens if there are no bidders?

• If the association chooses to do nothing, the action will end and the association will recover nothing.

• The association can generally bid on the property and take ownership.• The association does not pay itself, but must pay expenses and property

taxes• The association is not directly liable for the existing mortgage or superior

liens and does not have to make the payments, but the bank/senior lien holder will eventually foreclose if the lien is not paid. • The association can rent out the property and wait for the superior lien

holder to foreclose. The board must be prepared and understand everything that comes with owning rental property (insurance, taxes, liability, etc).

Lawsuit: The Basics• Instead of pursuing the property in foreclosure, the association can sue the owner personally in a lawsuit.

• A lawsuit should ultimately result in a judgment against the owner personally.

• The judgment:• A lien against the property (you already have this!)• A lien against other real property wherever the judgment is docketed.

The owner must pay to satisfy the judgment in order to refinance or sell the property.• Can be transferred to another county or state• Lasts 10 years and can be renewed• A judgment affects the owner’s credit

Lawsuit: Steps to Obtaining a Judgment

• Send a Demand letter • File a complaint - Generally filed in the county where the property is located. If

filing in small claims court, it must be filed in the county where the owner resides. • Serve the complaint – Can be served by sheriff, Fedex, or certified mail. You

need to be able to actually locate the owner. • Obtain a judgment – Once the owner is served, he/she has 30 days to file an

answer. If the owner does not do so, the association can get a default judgment. If the owner does file an answer, then the case will be heard by a judge. • Execution of the judgment – Once the association has a judgment against the

owner, the judgment can be sent to the sheriff for execution. The sheriff will attempt to recover the amount owed from the owner and can seize property (real or personal) to be sold at auction to pay the judgment.

Things to Consider Before Filing a Lawsuit

• Generally the process is simple, but, once filed, the association can lose control if the owner responds. If the owner answers or files a counterclaim, the association must respond. Litigation can be unpredictable and very expensive! • The judgment is junior to all previously filed liens. If the property has no equity or the owner has nothing, the association will recover nothing. North Carolina does not allow garnishment of wages and the owner is entitled to certain exemptions to protect property from being seized. • The judgment is only for the amount owed as awarded in the judgment (plus interest). It does not include future accruing assessments like a claim of lien.

What Happens When an Owner’s Bank Files

Foreclosure?• If the owner is struggling to pay their mortgage, they are more likely to stop paying the association.

• The bank’s lien is superior to the association’s lien. If the bank forecloses, the association’s lien will be extinguished.

• The new owner after a bank foreclosure is only responsible for future assessments from the date the upset bid period expires. This is typically 10 days after the sale date.

• The previous owner is personally liable for the delinquency, but this can be difficult to collect. If the owner has lost the property in foreclosure, they may be difficult to locate and may not have any other assets.

What Happens When an Owner Files Bankruptcy?

•Bankruptcy means STOP!!!! The owner is under the court’s protection through an automatic stay. Any efforts to collect the debt outside of the bankruptcy court are sanctionable by the court. Consult with your attorney!

• Bankruptcy discharges the personal liability for the assessments owed prior to the date the bankruptcy was filed. Whether these will be paid as part of the bankruptcy case depends on the type of bankruptcy and the debtor’s assets.

• Bankruptcy does not generally affect the owner’s obligation to pay future accruing assessments.

QUESTIONS?BONNIE M. BRAUDWAY, ASSOCIATE ATTORNEY*CRAIGE & FOX, PLLC701 MARKET STREETWILMINGTON, NC 28401(910) 815-0085WWW.CRAIGEANDFOX.COMBBRAUDWAY@CRAIGEANDFOX.COM

*THANK YOU TO HARRISON FREEDLAND, ASSOCIATE ATTORNEY, FOR HIS ASSISTANCE WITH THIS PRESENTATION.