May 28, 2009

Bankruptcy Basics - Filing a Proof of Claim

The rate of bankruptcy filings in Washington has accelerated recently. As noted last month in the Seattle Times, more than 7,000 people statewide declared bankruptcy in the first quarter of 2009, up 50 percent from a year ago. If a condominium or homeowners association receives a notice that one of its owners has filed for bankruptcy, taking quick action can minimize the damage that bankruptcy may inflict on the association’s budget.

A “proof of claim” is a document that creditors file in bankruptcy cases to provide notice that the debtor owes them a specified amount of money. Notices of bankruptcy filings sometimes state that there is no need for a creditor to file a proof of claim at that time. However, some bankruptcy judges have informally indicated to attorneys that practice in this area that a creditor should always file a proof of claim after receiving a notice of bankruptcy because the bankruptcy may be converted to another type that requires a proof of claim. Associations should not rely on delinquent owners to name them as creditors. If an owner does not list an association as a creditor and an association does not file a proof of claim, that association could lose the right to collect delinquent assessments once the bankruptcy has been concluded.

A proof of claim usually must be filed no later than 90 days after the date set for the meeting of the creditors. When filing a proof of claim, an association should list all delinquent assessments, late fees, interest charges, and collection-related attorney fees owed by the owner on the date the bankruptcy petition was filed. Assessments that become due after the bankruptcy petition is filed must be paid during the bankruptcy. If those post-petition assessments are not paid, an association may seek relief from the bankruptcy court, which could include payment of those amounts from the bankruptcy estate (if there are available funds) or permission to commence a collection action against the owner. In light of restrictions imposed by bankruptcy law, community associations should not attempt to collect delinquent assessments from owners that have filed for bankruptcy unless a court has authorized them to do so.

Submitting a proof of claim will often not be sufficient to protect an association’s interests after an owner has filed for bankruptcy. The association or its attorney may need to take additional actions to ensure that the association receives the funds that it is entitled to under the bankruptcy code. The proof of claim is important because it allows those steps to be taken if necessary.

May 22, 2009

Smoking in Common Areas - Permit or Restrict?

As the old saying goes, where there’s smoke there’s fire. Community association boards are sometimes confronted by the fire of owners’ anger when they are bothered by other owners’ cigarette smoke. However, boards do not have the power to prevent owners from smoking in their units and in the common areas unless there are restrictions on smoking in their associations’ governing documents (the 2005 Seattle initiative restricting smoking does not apply to condominium and homeowners associations).

A recent lawsuit in California illustrates how far some owners are willing to go to be free of cigarette smoke. The Oakwood Apartments permit smoking in the outdoor common areas of the complex. Melinda Birke, a five-year old girl who has allergies and asthma, lives at Oakwood. Secondary smoke in the outdoor common areas made her symptoms worse and contributed to her falling ill with pneumonia on three occasions. Melinda’s father asked the board to ban smoking in those areas, but it refused to do so. Melinda then filed a lawsuit against Oakwood alleging that the failure to ban smoking in the outdoor common areas constituted a public nuisance. Oakwood filed a motion to dismiss Melinda’s lawsuit. The court ruled that Oakwood “plainly has a duty to maintain its premises in a reasonably safe condition” and that Melinda could prevail if she submits evidence at trial that supports the elements of her public nuisance claim.

It is difficult to predict how a Washington court would rule if it was presented with the facts in the Oakwood case. The nuisance statute in Washington states in part that a failure to perform a duty is a public nuisance if it “annoys, injures, or endangers the comfort, repose, health, or safety of others” and “affects equally the rights of an entire community or neighborhood, although the extent of the damage may be unequal”. Given this broad definition of public nuisance, the outcome of the case would likely depend on how the court characterized the association’s duty to regulate the use and maintenance of the common areas. The fact that many associations’ governing documents contain a section prohibiting “noxious or offensive activities” and “conduct which may be an annoyance or nuisance” could also form the basis for a separate legal claim.

The Oakwood case demonstrates that condominium and homeowners associations which allow smoking in their common areas could potentially be subject to liability. As a result, boards may wish to consider amending their governing documents to ban or restrict smoking in common areas. The applicable laws in Washington give condominium and homeowners associations the general power to regulate the use and maintenance of common areas. Rules banning or restricting smoking in common areas can therefore be adopted by boards without a vote of the owners unless there are contrary provisions in their associations’ declarations or covenants.

May 15, 2009

Compliance with the Federal Pool and Spa Safety Act

I took a trip to Houston this week. As I was heading to the airport to catch my return flight, I glanced at the car’s thermometer. Ninety four degrees. Summer is apparently in full swing down there, but we in the Pacific Northwest will probably have to wait a bit longer for regular hot weather. Condominium and homeowners associations that have a pool or spa should use that time to evaluate whether they are in compliance with a recently enacted federal law that pertains to such facilities.

The Virginia Graeme Baker Pool and Spa Safety Act was enacted by Congress and signed by the President in late 2007. The goal of this legislation was to improve pool and spa safety by reducing the risk that powerful suction could trap a person underwater. The Act applies to all “public pools and spas”, and that term is defined by the Act to include pools and spas that are open exclusively to residents of a residential real estate development or other multi-family residential area. Condominium and homeowners associations are included within this general definition and therefore must comply with the Act’s provisions.

The Act requires the installation of a certain type of cover over all public pool and spa drains. It also requires the installation of a second anti-entrapment system (such as a safety vacuum release system, a suction-limiting vent system, or a gravity drainage system) if a public pool or spa has a single main drain. Operators of public pools and spas with “unblockable drains” (defined by the Act to mean drains that a human body can not sufficiently block to create a suction entrapment hazard) do not have to install a second anti-entrapment system but must still install the drain covers specified in the Act.

Public pools and spas that operate year-round were required to comply with the Act by December 19, 2008. The U.S. Consumer Product Safety Commission (the agency charged with enforcing the Act) has taken the position that seasonal public pools and spas that are currently closed must be in compliance with the Act on the day that they reopen in 2009. Additional information regarding the Act’s requirements can be reviewed at

The tragedy of a preventable drowning death and the resulting civil liability for such an event could have a devastating impact on a community. Condominium and homeowners association boards should ensure that their pools and spas are safe before allowing the summer fun to begin.

May 8, 2009

Collection of Delinquent Assessments - Understanding Your Options

Martial arts students are taught to hope that they will never need to use their skills to harm others. However, they are also instructed to use those skills quickly and decisively when the situation calls for it. So it is with the collection of delinquent assessments in condominium and homeowners associations. Boards should understand the nature of the collection powers contained in their associations’ governing documents and provided by Washington law, and should use those powers to address delinquencies before they get out of hand.

A foreclosure action against the property is a collection option that is almost always available to community associations. This method can take two forms – judicial and non-judicial. In judicial foreclosure, the association files a lawsuit against the owner and entities that hold liens on the property that seeks a court order that the property must be sold by the county sheriff to satisfy the owner’s debt to the association. Most community associations have the ability to pursue judicial foreclosure. In non-judicial foreclosure, the association directs a trustee to sell the property after providing notice to the owner and to entities that hold liens on the property. Community associations do not have the right to pursue non-judicial foreclosure unless their governing documents specify that they have this power.

A personal lawsuit against the owner is another collection option that is usually available to community associations. This method can be pursued in small claims court (which allows a board member to present the case) or in superior court. If a judgment is obtained against the owner, the association will then need to attempt to garnish the owner’s wages or assets to satisfy the debt.

Terminating the utilities that serve a property following the provision of proper notice is a third collection option that is sometimes available to community associations. However, this method is only available to a condominium association if the condominium was created before July 1, 1990 and if the condominium’s declaration specifies that the association has this power. Condominium associations can not terminate utilities to a unit due to a delinquency if the condominium was created after July 1, 1990. The Washington law governing homeowners associations does not mention termination of utilities in response to past due assessments, and those associations’ governing documents typically do not provide for the use of that power.

Intercepting rent from an owner’s tenant is a fourth collection option that is sometimes available to community associations. The Washington laws governing condominium associations states that they are entitled to the appointment of a receiver to collect rent during foreclosure actions. Many condominium declarations also give the association the authority to demand that tenants submit their rent payments directly to the association when owners are delinquent without taking additional legal action, and in some cases those declarations state that the association may take legal action to evict tenants that fail to submit rent payments as directed. The Washington law governing homeowners associations does not mention rent interception or the appointment of a receiver to collect rent, and those associations’ governing documents are usually silent with regard to those matters as well. Homeowners associations may be able to use the Washington law governing receiverships to collect rent from tenants during foreclosure actions.

Every community association board needs to understand what tools are at its disposal to extract funds from delinquent owners. If the board examines the association’s governing documents and is disappointed that one or more of the options discussed above is not present, then it should consider an attempt to amend those documents to provide for broader collection powers.

May 1, 2009

Compliance with Fannie Mae and FHA Condominium Lending Standards

Mortgage giant Fannie Mae and the Federal Housing Administration (FHA) are major sources of money for individuals seeking to purchase or refinance condominium units. If a condominium association does not meet their lending standards, owners will find it more difficult to sell and refinance their units, which may have an adverse impact on the value of all units. Condominium boards should therefore take several key lending standards into account as they manage their associations' affairs.

The number of condominium units that are occupied by their owners is one important standard. The FHA requires that at least 51% of the units be owner-occupied before it will approve a loan. Some mortgage insurers will reject applications if less than 70% of the units are owner-occupied. Boards should take these restrictions into account when evaluating the number of rentals in their associations and whether to amend their declarations to restrict the number of units that may be rented.

The number of condominium units that are delinquent in the payment of monthly assessments is a second important standard. Fannie Mae requires that no more than 15% of the units may be 30 days or more past due. Fannie Mae has recently clarified that it will work with lenders who request waivers when a particular project exceeds this 15% threshold, and that exceptions are typically granted if the project can sustain itself with 15% or more of the units delinquent. However, there is no guarantee that lenders will request such exceptions or that they will be granted, and high delinquency rates will at a minimum make obtaining a loan more complex. Boards should take this restriction into account when evaluating their collection policies and how to deal with delinquent owners.

The amount of funds set aside for maintenance of the condominium is a third important standard. Fannie Mae requires that at least 10% of the association's operating budget be reserved for "capital expenditures and deferred maintenance". Boards should take this restriction into account when evaluating their associations' budgets.

Bringing a condominium association into compliance with these lending standards will promote both the short-term financial health of the association and the long-term financial health of all unit owners. It may not be an easy goal to accomplish, but the potential benefits make it worth the effort.