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Lawmakers move to ban
nonjudicial foreclosures
ASSOCIATED PRESS
SACRAMENTO - A Senate bill to ban California's homeowner associations
from foreclosing on homes for unpaid assessments under $2,500 passed a critical
test Tuesday in the Assembly, increasing odds that associations may lose a
leading remedy to collect overdue assessments.
The Assembly Judiciary Committee voted 7-3 to
make associations use small claims court for small amounts instead of a
nonjudicial foreclosure process that critics say is abused by attorneys and
collection agencies and can ultimately lead to owners losing their homes. The
bill also lets associations continue posting liens -- legal rights to collect
when properties sell -- but no longer to foreclose on them for small sums.
"Our notion is that homeowners associations
are certainly entitled to their funds. They need the money and they need
enforcement mechanisms," said Sen. Denise Ducheny, D-San Diego, the bill's
author. "At the same time they need to look at other debt collection
procedures before they go to these extreme measures."
The bill, sponsored by the Congress of
California Seniors, would go into effect Jan. 1.
The legislation still allows associations to
foreclose nonjudicially or judicially on late assessments greater than $2,500,
but sets new rules to make it tougher. Among those rules, minimum bids for foreclosed
homes must be 90 percent of their appraised value, and residents would have 90
days after the foreclosure to get their houses back.
Ducheny introduced the bill after a Calaveras
County homeowners association sold the $285,000 house of retirees Tom and Anita
Radcliff last December for $70,000 -- over a $120 late payment. The
Copperopolis couple remain in the home while a lawsuit proceeds against the
association and its collection agency.
Ducheny's bill, and an identical companion bill
pending before the Senate by Assemblyman Darrell Steinberg, D-Sacramento, adds
new momentum to ending a longtime foreclosure practice that requires no
judicial oversight and has fallen out of favor among lawmakers since the
Copperopolis case. Both bills to ban foreclosures for small amounts of unpaid
assessments passed their respective houses of origin in May with unanimous
votes.
But opponents, including professional groups
that represent associations, property managers and trustees who preside over
foreclosures, were quick Tuesday to criticize the new bill.
"This will put a 700 percent increase on
the (small claims) court system, which would be a threat to the state,"
said Skip Daum, lobbyist for the Community Associations Institute, a national
group that advises associations.
Michael Belote, lobbyist for the California
Trustees Association, called the 90 percent minimum bid rule a "real
problem. That will actually encourage people not to pay their
assessments."
A majority of homeowners associations that
dominate much of Southern California and represent 60 percent of the state's
new homes and condominiums defend nonjudicial foreclosure as critical for
collecting assessments from their 3 million homeowners. California assessments
average $100 to $200 a month to cover costs of lawn care, street maintenance,
pools, security guards, tree trimming and roof replacements. Association
representatives say fewer than 1 percent of nonjudicial foreclosures actually
lead to lost homes, and that without the power to foreclose, late-paying
residents threaten the financial stability of entire neighborhoods.
Association lobbyists have also long maintained
that liens offer them little hope of recovering late payments.
But Marjorie Murray, lobbyist for the Congress
of California Seniors, told the committee that associations need a broader
range of tools, saying the bill "regulates the use of foreclosure and puts
foreclosure in its place."
Both bills must clear the Legislature by Aug. 31
and be signed by Gov. Arnold Schwarzenegger by Sept. 30 to become law.
The Supreme Court of Virginia recently issued an opinion Board
of Directors of the Colchester Towne Condominium Council of Co-Owners v.
Wachovia, N.C., et al., June 6, 2003 which could have significant impacts
on the non-judicial foreclosure of condominium liens by condominium
associations.
This case
involved an appeal of a trial court judgment that determined that the Virginia
Condominium Act Code § 55-79.84 and 55-79.39 through 79.103 require that the
proceeds from a non-judicial sale of a condominium unit by a unit owners'
association to satisfy a condominium lien, must first be applied to
satisfy the amounts due under a prior first Deed of Trust on the unit.
Non
Judicial Sales Prior to the Wachovia Decision
As many of
you know, since the General Assembly enacted the “non-judicial” foreclosure
procedures in 1997, many Associations have taken advantage of the same for
quick and decisive collection action. These sales were always advertised
and sold “subject to” the lien of the first Deed of Trust/Mortgage. The
Association would be paid first from the sales proceeds and then to inferior
liens. The buyer at the sale would obtain title to the unit but would have to
deal with the first trust lender by paying off the loan or working out some
other arrangement. However, such arrangements were solely the
responsibility of the successful purchaser.
The fact
that the Association was paid “first” was one of the primary benefits of the
non-judicial foreclosure process.
Non-Judicial
Sales After the Wachovia Decision
In the
cited case, Wachovia, the first trust lender, objected to the application of
the proceeds of the sale where that unit was sold subject to a Deed of
Trust and subject to all existing liens.
The Supreme
Court agreed with Wachovia. The Court ruled that any sale proceeds
obtained by an Association must first go towards the outstanding balance on the
first trust. As mentioned, this is contrary to the way non-judicial sales have
been conducted and, in our opinion, contrary to the plain language of the
statute (a strong dissent by three justices supported the position of the
association in the Wachovia case). Thus, absent significant equity in
the unit being sold, it is unlikely that the Association will receive funds
from the foreclosure to pay down its debt.
The “good
news”, if any, is that the Supreme Court did not strike down the non-judicial
foreclosure process. As a result, the arguments advanced in some quarters that
the process was unconstitutional as a taking without due process of law, appear
to have been silenced (at least for now). This should help legitimize
non-judicial sales in the opinion of important third parties (e.g., lenders and
title insurers) who have expressed some reservations concerning the legality of
such sales.
The
ultimate result of the Court's June 6, 2003 opinion is that Associations will
have to understand that sales pursuant to the non-judicial foreclosure process
may not result in the payment of the outstanding debt and the associated
expenses. However, we still strongly believe non-judicial sales are a
valuable tool in the collection process. Given the speed with which a
non-judicial sale can be scheduled (as opposed to traditional district court
action or judicial foreclosure) the process still applies heavy pressure on
delinquent owners to address the debt prior to the sale. A large number of our
non-judicial sales never end up on the auction block as the debt is paid or
otherwise resolved without the need for such action. Similarly, in many cases
the end result of divesting the debtor of title with the goal of getting a
paying owner onto the rolls of the Association may be seen as worth the
expense. In fact, our recent experience at foreclosure sales indicates that the
Wachovia decision may increase the interest by third party bidders in
condominium units, because now the purchasing bidder knows that the funds he is
providing for the purchase of that unit at the unit owner's foreclosure sale
will be applied first to pay off or pay down the first trust holder.
It is our
understanding there is currently a homeowners' association foreclosure sale
that will be appealed to the Supreme Court that will address this same question
with regard to homeowners' association foreclosure sales. At this time,
Board of Directors of the Colchester Towne Condominium Council of Co-Owners v.
Wachovia, N.C., et al only affects condominium sales.
By, Lella Amiss E. Pape, Esquire; Reese, Broome &
Diaz, P.C., www.rbdlaw.com