Legal Tips – Foreclosure Actions: Why Should the Association Spend Money to Get Involved?

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Most property managers (and many board members) have, at some point, received some notice of foreclosure related to a unit within an association. Sometimes the notices go directly to the board or manager. Other times, they go to the association’s attorney. As if the situation weren’t already unpleasant enough (especially for board members, who must witness a neighbor’s foreclosure ordeal), once the association’s attorney is involved, he or she generally sends a letter to the board or manager recommending that the association voluntarily get involved in the foreclosure process.

Why is it that association attorneys pester their clients to have them file documents with the court, spending association money that it may well never recoup? You might be thinking: “That’s easy – lawyers like the extra work because they love money.” While you’re not entirely wrong about that, the real answer is that your attorney is doing his or her duty to ensure that the board members act as fiduciaries to protect the association’s financial interests.

So exactly how does getting involved in the foreclosure process protect the association’s interests? In short, doing so may help the association get money flowing back into the operating account as soon as possible. If the board decided to just ignore the foreclosure proceedings, it’s possible that it might be leaving association money on the table from multiple parties.

Here are a couple examples of how your attorney can help the association with foreclosure actions:

1. Obtain Surplus Funds Occasionally, when a unit is foreclosed upon, there is sometimes extra money available above and beyond what the foreclosing lender is owed. When this occurs, the association, which is oftentimes owed money (as individuals facing a foreclosure frequently stop paying assessments) can “get in line” to take a portion of those surplus funds. Doing so requires the association to retain its right to enforce its lien for the unpaid assessments, which means that the association must file an “answer” in the foreclosure proceedings. While filing the answer is an added cost that boards are generally reluctant to incur, if the value of the unit exceeds the amount owed to the foreclosing lender, it’s worth exploring the possibility of filing an answer in the foreclosure to keep the option of collecting surplus funds open. To be sure, surplus fund availability is the exception, rather than the rule, but it’s a lead the board ought to “chase down” to be sure. Also, remember that if there is not a surplus, most liens for unpaid assessments are wiped out by virtue of the foreclosure.

2. Monitoring the foreclosure and making recommendations – Even without the option of a surplus payout at the end of the foreclosure, having an attorney keep an eye on the foreclosure process (which can take up to a year) can be a benefit. First of all, if the board directs the attorney to file an “appearance” in the foreclosure (rather than an “answer,” which is the more expensive process), the attorney will receive all notices related to the foreclosure matter, allowing he/she to keep a tab on the timing and make recommendations for certain action that could benefit the association. Those actions might include filing a collection lawsuit on the unit (if it’s in arrears) to guarantee the association up to six (6) months of unpaid assessments from the first third-party purchaser, recommending leasing options for the unit (if the association has possession), or simply informing the board of the new post-foreclosure owner’s name to ensure that he/she/it begins paying assessments on time.

In summary, while boards and managers are often (understandably) reluctant to incur legal fees on foreclosure issues, trust that your attorney is recommending action for good reason. A notice of foreclosure is not the same as a final order of foreclosure. During the long period between the beginning of the foreclosure litigation through to the end, there may be a few actions the board should consider to protect the association’s financial interest.