December 2011 – A HOAleader.com reader reports that his new HOA management company wants to change the wording in the HOA’s 10–day demand letter so the HOA would get an automatic judgment, not a lien, when a home owner doesn’t pay. What’s the difference? And do state laws allow that?
Judgments & Liens Explained
What’s a lien, and what’s a judgment? “A lien is a manner by which to collect against a property, and a judgment is a manner by which to collect against a person,” explains James R. McCormick Jr., a partner at Peters & Freedman LLP in Encinitas, Calif., who represents associations.
The management company is probably interested in getting a judgment because it’s enforceable without having to take another step. If an HOA files a lien against a property, it must then file a lawsuit to foreclose on the lien, which takes time and costs money.
The drawback of a personal judgment, however, is that it’s not secured by anything; a lien is secured by the property against which it’s filed. “You can get your judgment, but how are you going to collect it?” asks Jenny Key, Austin, Texas–based Vice President of RealManage, Dallas, TX based, association management firm that oversees properties in Arizona, California, Colorado, Florida, Louisiana, Nevada, and Texas.
“The advice we give our boards when they ask us about personal judgments is that we’re not in favor of them,” says Key. “Boards are taking a secured obligation and turning it into an unsecured obligation, and collection rates are fairly low on personal judgments. You also have to pay a bill collector, whose fees typically include keeping 50 percent of what you’re seeking to collect. It seems like a much safer strategy to keep the lien.
“It’s true that a judgment will affect an owner’s credit, which some boards feel is the way to go,” concedes Key. “Board members see new cars in an owner’s driveway and think if they hit the owner’s credit, he’ll pay. But many delinquent owners are probably already getting dinged on their credit. There may be a little personal humiliation there—maybe the owner won’t get that Best Buy card approved—but does it really make owners pay? I’ve not seen personal judgments have much success in making people pay.”
Truly a State–Specific Issue
There are twists on the laws of liens and judgments in just about every state. “In Minnesota, the obligation to pay assessments creates a lien, but it also creates a personal obligation,” explains Nancy Polomis, a partner at Hellmuth & Johnson PLLC in Edina, Minn., who advises associations. “So you can get a personal judgment for unpaid HOA fees.”
In addition, in some states a personal judgment can be filed against a debtor’s property, essentially turning it into a lien. “In California, a judgment can, if it’s filed, act as a lien on a property as well,” says McCormick. “We have to file what’s called an abstract of judgment in every county we want it to be effective, and then it acts as a lien on the property for 10 years. I had one association that had obtained a judgment because an owner had sued the association, but the association ended up with a $30,000 judgment against the owner. The HOA filed its abstract of judgment. About seven years later, the owner wanted to refinance, and he ended up paying the HOA about $70,000 because of fees and interest. He should have paid the judgment earlier!
“Even so, I tell my associations that even if they’re going to obtain a judgment against an individual, they should also place a lien on the property, anyway,” adds McCormick. “It protects the association if the property is sold or transferred because you’re more likely to be paid.”
Ask for a Judgment in Advance?
The question our reader poses is whether it’s permissible for her management company to ask owners to consent to a personal judgment if they don’t pay HOA fees. Again, that depends on state law.
“I don’t believe you can waive your due process and say, ‘I’m agreeing that you can obtain a judgment against me,'” says McCormick. “I haven’t seen it tested in California, but I don’t think it would pass a reasonableness test if it were in a governing document.”
An automatic judgment would also be out of bounds for Minnesota HOAs. “Can you get an automatic judgment in Minnesota?” asks Polomis. “No, you’d have to go through the steps of getting a judgment because owners have a right to assert any defenses they have to your claim.”
But don’t confuse a judgment with a confession of judgment, which is another collection tool. Let’s say an owner owes $2,000 in fees. Your HOA’s negotiating a payment plan that requires the owner to pay an extra $100 per month to eliminate the debt over time. In the settlement agreement, you can ask the owner to agree to a personal judgment being entered against him if he breaches the settlement agreement.
“We say, ‘As a collection tool, we’re pursuing you to get a settlement. If you want to sign a confession of judgment, that’s OK,'” says Polomis. “Owners are signing that confession of judgment so they can avoid further collection actions. We like that because it saves us the time and effort of having to jump through the hoops of getting a judgment. We simply file the confession, say the owner signed it, and under the terms of this settlement agreement, we’re entitled to a judgment for X. That’s an effective tool because it’s completely within the home owner’s control whether that judgment is entered.
“But you can’t impose a judgment on an owner unilaterally,” adds Polomis. “The owner has to agree.”