Wednesday, February 2, 2011

Are your association funds and property at risk?

Who can sue your association and why?

Basically, anyone who has come into contact with your community either through a contractual relationship, an injury or other dispute and wants his or her day in court. This could mean the roofer who wasn’t paid in full, the party guest who fell on the pool deck or the former accountant with unpaid invoices. We have already discussed that the fees for some services that permanently improve a property such as a new roof can be collected via the placement of a mechanics’ lien; many others, however, cannot.

Let’s say the association asks its accountant to perform a forensic audit which costs $15,000. The association is not satisfied with the result and decides not to pay the accounting invoice. The accountant becomes upset and decides to sue for his fees and wins a money judgment. Now what?

Even though certain creditors may not have the right to file liens against real property owned by an association, most if not all of an association’s assets are at risk in the event a creditor secures a money judgment against the association. The process for enforcement of a judgment is called “execution”. An execution can be levied on land, tenements, chattels, goods, corporate stock, equiteable interest under security agreements and even bank accounts.

What does this mean in practical terms? If the creditor in this example obtains a money judgment, he may garnish the association’s bank accounts (including reserve accounts) and even get the sheriff to take the association’s personal property such as lounge chairs, lobby furniture, computer(s) in the association office, etc. Essentially, a sheriff can take property that belongs to the association and place it in storage or the sheriff can secure the property in question wherever it may be located. Once a sheriff levies on the property, the Sheriff has the right to sell the property to the highest bidder at auction.

In addition to levying on personal and real property, a judgment creditor can attempt to obtain money in the Association’s bank account. Thus if a judgment creditor knows where the association does its banking (and most vendors will, having received prior payments), then all of the association’s funds, including reserves, are at risk. Once a bank is served with a writ, all funds in its possession in the amount of the judgment (plus more) are immediately frozen. An association can find itself unable to utilize funds in its accounts when they are desperately needed.

Finally, in certain instances, especially with homeowners’ associations, real property (such as a clubhouse) which may be owned in fee simple may also be subject to execution and/or judicial sale. Once again, if a sheriff levies on real property, an auction can be held and the property awarded to the highest bidder. Unlike individuals who can “judgment proof” themselves by holding title to property with a spouse or claiming head of household status, most of these exemptions do not similarly apply to corporate entities.

Experience has taught that many associations are truly unaware of how vulnerable their funds and other assets are in the face of a money judgment. This underscores the need for every association to ensure that they are making wise decisions when it comes to vendor relations and other areas that are fraught with potential for disputes.

This work by Donna DiMaggio Berger, Esq. is licensed under a Creative Commons Attribution-NoDerivs 3.0 Generic License.

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