Declarant bankruptcy

Started by RayC4 • 8 replies • 2160 views

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RayC4 (Virginia)
Posts: 173

Posted:

A developer (and declarant) declares bankruptcy rather than 'finish' what was planned and promised in his subdivision. The subdivision has always been under declarant control as per the CR&R's (i.e. voting scheme, etc). Does the declarant necessarily lose control of the HOA due to the bankruptcy? What if only a handful of Lots were now occupied, and there are not enough homeowners to comprise a new BOD let alone a full membership?

MatthewW4 (Arizona)
Posts: 500

Posted:

Ray,

The current lot owners should start asking a lot of questions, the most important of which is what would you like to see happen? Do you want an HOA and, if so, what do you want it to do?

Along with that, someone needs to start digging through recorded deeds. In my part of the country it is a common practice for a developer to partner with a land owner. The land is held in trust until the developer sells a lot, at which time a deed is recorded. No sale means no deed. You need to see if deeds are recorded for those unsold lots.

I take a position that is not supported by any case law or statutes known to me: If no deeds have been recorded on the unsold lots, those who do have deeded lots/homes now represent 100% of such owners and are free to amend or abolish the declaration as they see fit. I am also of the opinion that this situation applies regardless of whether the declarant has filed for bankruptcy or whether he is still in business selling lots.

Declarants take control even when they have no lawful right to do so simply because the buyers know no better and they assume the developer has deep pockets to defend himself. The situation described by Ray is one where the developer was all show and no dough.

AllisonD (Florida)
Posts: 449

Posted:

Was the subdivision relinquished in the bankruptcy or was it a reorg?

RayC4 (Virginia)
Posts: 173

Posted:

Quote:

Posted By MatthewW4 on 08/01/2013 2:56 PM
Ray,

Do you want an HOA and, if so, what do you want it to do?

The land is held in trust until the developer sells a lot, at which time a deed is recorded. No sale means no deed. You need to see if deeds are recorded for those unsold lots.

In our case the Developer and the landowner are the same. And we haven't much choice in whether we want an HOA. The residents have some shared utilities infrastructure which cannot be changed -- hence the need for the HOA.

Allison, the bankruptcy has not happened as yet. We anticipate it prior to year-end, and I'm trying to get out ahead of it planning-wise.

TimB4 (Tennessee)
Posts: 21,059

Posted:

Ray,

The members need to get organized. The declarant can (but might not) give control to the membership early. If they do this prior to bankruptcy, it will help. Otherwise, whomever purchases the decalarant owned properties in bankruptcy will become the new declarant.

You should also take steps (and I'm not sure what they would be) to have the performance bond transferred to the Association (at the very least in order to fund Reserves). You should consult with an attorney to see if this is even possible.

Hope this helps,

Tim

RayC4 (Virginia)
Posts: 173

Posted:

Quote:

Posted By TimB4 on 08/02/2013 3:38 AM
Ray,

The declarant can (but might not) give control to the membership early. If they do this prior to bankruptcy, it will help. Otherwise, whomever purchases the decalarant owned properties in bankruptcy will become the new declarant.

Tim

Tim, thanks. The pickle we'll be in is: who's going to pay to complete the amenities (infrastructure)? The HOA may take control, but then a very few residents would be saddled with some big-time development costs.
Alternatively, if a new 'declarant' comes in, presumably he'll pay for the improvements, but the members do not gain control...

The moral: NEVER be among the 'first in' buyers in a declarant-controlled situation. Geez Louise...!!!

TimB4 (Tennessee)
Posts: 21,059

Posted:

Quote:

Posted By RayC4 on 08/02/2013 8:42 AM

Tim, thanks. The pickle we'll be in is: who's going to pay to complete the amenities (infrastructure)?

Hopefully the performance bond would be enough to pay for this.

RayC4 (Virginia)
Posts: 173

Posted:

Quote:

Posted By TimB4 on 08/02/2013 10:43 PM

Posted By RayC4 on 08/02/2013 8:42 AM

Hopefully the performance bond would be enough to pay for this.

Tim, if a bond was out there we wouldn't have such a problem. The bond, if any, was released long ago. I do not know the circumstances (only that the County officials are pretty slovenly around here). In Virginia, is this "bonding" a state or local matter? And where would 'rules of the road' be documented?

TimB4 (Tennessee)
Posts: 21,059

Posted:

I believe that it is a County issue (but I'm not sure)

It could be that the performance bond was only for item x (example roads/drainage) which was completed (thereby allowing the release of the bond). Now you are looking at having item y (exampleL pool, clubhouse) completed which the city didn't require a bond on.

If this is the case, you should check with an attorney to see if another builder that obtains the properties from bankruptcy would be required to complete the promised amenities or if they could change that agreement.

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