HOA Bankruptcy?

Mark,

Having never gone through it, I can't say for sure.

There have been discussions on here about the developer going bankrupt and the interest is sold to another developer. However, I've never seen any discussion about what happens if the Association itself goes bankrupt.

I expect that one option would be for the Court to mandate a special assessment on the membership to pay some if not all of the bills.

Typically, an association doesn't go bankrupt, the owners do.

What are we talking about? An association that has huge loans and cant meet the payments and is thinking of bankruptcy OR an association that no one wants to deal with?

Mark,

Well, well. Something does not compute here at all. You just do not ‘switch’ from a condominium to HOA. These are totally different types of ‘legal ownership’ as recorded on your Warrantee Deed. Such a ‘switch’ would be legally quite complicated and involve at the very least new property survey, rewriting all deeds changing all Association documents and possibly even starting new corporation. I am not even sure it can be done. Are you talking townhouses? It may be in your best interest to find out what happened, exactly.

‘Now many of the homeowners are faced with HUGE repair bills for what amounts to neglectful repair/maintenance practices by the previous management company.’

Mark,
If the ‘old’ Management Company did not comply with the contract and/ or did something funny and it can be proved you may have a case. Also, please check your ‘Employee Dishonesty Insurance’ to see if it covers a management company.. it should. It may not be a bad idea to check your insurance policies anyway to determine if you are insured as a condominium or HOA.

Being a bankruptcy attorney in MD, I see nothing that would preclude an incorporated HOA from filing a bankruptcy under Federal law, be it a 7 or 11. Of course different ownership interests, assets, liabilities, revenues etc... would impact each case filing differently and be case specific, an incorporated HOA would have the right to reorganize in 11, or liquidate in 7, although would not have the right as an individual for a discharge of debt.

Interestingly, however, if the HOA was record owner of say common land, and say several acres, could a 7 Trustee force the sale of common land in apparent contravention of whatever local ordinances or deed covenants exists? I would say not, but that's not 100 % without the review of the relevant documents. I would think if the HOA could not dispose of common land then, neither could a trustee, since a trustee in bankruptcy steps into the shoes of the corporate debtor. But there still could be other assets involved that could be liquidated for the benefit of the HOA's creditors. Since no discharge could be entered, a 7 would simply be used to tidly satisfy creditors from existing HOA assets and put an end to creditor inquiry and the constant haranguing of the HOA's officers.

11 could be used to strike deals with the HOA's creditors and reorganize a debt laden HOA.

Any bankruptcy action would have to be approved by a resolution of the Board of Directors of course.

Regardless, rules may differ from state to state. You should always seek local counsel's advice of whether or not Bankruptcy is right for an HOA. You should not interpret this post to mean anything other than a general comment on the eligibility of an incorporated HOA in filing for bankruptcy.

Tony Aquia
410-234-0100
[email protected]
Maryland

I am not an attorney but my understanding is that a COA/ HOA can't go "bankrupt" because owners, by law, are responsible for the financiang of the association regardless of the cost. With owners owning seperate units and the common areas owned as a whole, how do you seperate the two ? All owners wouldn't qualify for bankruptcy.
Bad management is no excuse because the board is there to supervise the management company, approve budgets and to protect the finiancial interets of the association.If a previous board didn't do their job and the owners didn't pay attention to what was going on then you have learned a very valuable and difficult lesson about owning in a HOA.
I agree with Melissa that an option might be to place the association under conservatorship. That would be a last resort and should be considered only if the association simply can't get the finances in shape. Placing the asssociation in conservatorship would put a third party in control.
I think consulting a lawyer knowledgable in HOA/ COA law would be a good idea.

We are a home owners association, we were a condominium association. We did switch. New covenants were registered with the state on January 2nd 2009. We are detached condominiums that are now called "homes." That is exactly what happened.

Pre-switch, "Condo" owners submitted work orders to the old management company. These work orders were not completed before the switch over to a HOA. Now, "home owners" are owners of the homes from the exterior of the wood to the remainder of the home. When these were "condos" the owners were only owners from the interior paint and in. The old management company is gone and the new one is here. The association does not have enough money to repair all of these homes. The owners feel they are entitled to have the work work done that orders were submitted for before the switch. No money? Bankruptcy.

Not enough of money in the reserve funds does not mean ‘bankruptcy’. Also, NO management company, even with the owner’s consent, can change the legal ownership of the units. ou may be misinformed. The only way we can be of help, if at all, is to compare the original covenants with amendments. What do you mean by ‘these work orders were not completed?’ What in the world is 'work order'?

PetunkaM if you do not know what I am talking about, how do you feel you can help me? I mean no disrespect and this is not trying to be snarky but what I have said here is what has and is happening with my HOA so if something so trivial as a "work order" needs an explanation for you I feel my problem might be out of your range. Thank you for your concern.

Mark, it seems like there are several issues we are trying to deal with here. I don't understand how you could switch from Condo to SFH or any other form without actually rewriting all the deeds of trusts. What happened to common elements that were previously owned by all owners? Who owns them now?

But as far as bankruptcy goes - why would you consider doing it? You normally file a bankruptcy to protect yourself and possible some assets from creditors. What are you trying to protect your HOA from? Lets say someone want's to collect money from the HOA? if you don't have money - you don't pay. They may chose to go to court but it will do them no good as HOA doesn't have any assets that can be taken. If there are no money it doesn't matter what judgment one might have - there is still no money to collect.

A HOA is funded by it's owner's FOR it's owners. If it doesn't have enough money, then it cuts out expenses, raises dues, or has a special assessment. You want to pay for a project then ALL pay for the project. No need to file bankruptsy unless you are being pursued by a debt. Don't create debt won't be a debt. Create a debt (work order) raise the money to pay for it.

A HOA works much like a poker "kitty". All put in, but the whiner takes all...

Petuna,

typically, a work order is an authorization (form) used by a company to direct a certain work activity. Many companies run on work orders... without one, not even a light bulb gets changed. In the basic form, it is a written request, signed by someone with authority to do so, to commit funds/personnel/equipment to do an activity.

Petunka:

work orders are more prevalent that what you might imagine. Especially in companies/situations where budgets are thin it is a way of prioritizing what is truly important and needs to be done as opposed to what can wait or doesn't need to be done. We use them, basically any employee with an issue contacts my department, upon investigation if we feel it needs to be done and we can't do it we issue a work order to a third party. We are the only ones authorized to issue orders and the third party knows if it doesn't come from us and they do the work then they work for free.

Depends on how your contract is written and the size of your association and all the ins and outs of it. It is another layer that could be viewed as unnecessary but also could be viewed as practical.

For us the BOD tells the MC what they want done and the PM issues a work order to their maintenance staff with specifics and they come and perform the work according to the work order, or if it is a large job we get bids and work orders are not involved.