NEW LAW MEANS NEW PROCEDURES FOR COLLECTING DELINQUENT ASSESSMENTS Effective January 1, 2006, SB 137 will become law. This bill will revise and modify procedures for collecting delinquent assessments. This article will provide an overview and highlights of the bill. For the actual text of the bill consult a website such as lexis.com or http://www.leginfor.ca.gov/calaw.html. This bill is known as Senate Bill No. 137 (SB 137) or the Ducheny bill. A "2006 Overview of Collection Laws" follows this article and is a short summary of the new laws. A sample Notice Regarding Assessments and Foreclosure which can be used also follows this article. The difficulty with trying to summarize these new laws is that they are very complex. It is important that each step in the collection process is followed, otherwise, it is very likely that a lawsuit will develop which will be very costly and time- consuming. This is counterproductive to the real goal of timely, efficient assessment collection. Don't think you are saving time or money by skipping steps; in the end it could just cost you more. That said, here is a checklist of what you need to do to implement these new laws: 1. Adopt a collection policy that is in full compliance with all laws. 2. Adopt a dispute resolution procedure (sometimes called a "meet and confer"). A. Designate a board member to represent the board in dispute resolution. B. Develop a written policy for the designated board member to follow. The board should establish guidelines and parameters to follow. C. Explain the appeals procedure to members. 3. Develop payment plan standards. It is better to accept a payment plan that is workable for the homeowner than to forego any money or to proceed unnecessarily when the delinquency can be resolved. 4. Distribute the Notice of Assessments and Foreclosure (see II below). 5. Distribute the Summary of Civil Code section 1369.520 (the ADR Summary). I. The $1800 or 12 Month Delinquency Limit: A. Homeowner Associations (associations) that seek to collect delinquent regular or special assessments less than $1800, not including accelerated assessments, late charges, fees and costs of collection, attorney fees, or interest, may not collect the debt through foreclosure, judicial or non-judicial. They may collect the debt through a civil action, small claims court, or record a lien. Prior to recording the lien, the association shall offer the owner and, if requested by the owner, participate in, dispute resolution (sometimes called "meet and confer") programs; therefore, associations must have a Dispute Resolution Procedure in place. (1) Once the assessment exceeds $1800 or is more than 12 months delinquent, the lien can be foreclosed on. B. Associations that seek to collect delinquent regular or special assessments of an amount more than $1800, not including any accelerated assessments, late charges, fees and costs of collection, attorney's fees or interest, or any assessments that are more than 12 months delinquent, may use foreclosure, judicial or nonjudicial, subject to the following conditions: (1) Prior to initiating foreclosure, the association shall offer the owner and, if so requested by the owner, participate in dispute resolution (or "meet and confer") or alternative dispute resolution (ADR). The decision to pursue dispute resolution or ADR shall be the choice of the owner, except binding arbitration shall not be available if the association intends to initiate judicial foreclosure. (2) The decision to initiate foreclosure of a lien for delinquent assessments shall be made only by the board of directors. The board shall approve the decision by a majority vote of the board members in an executive session. The board shall record the vote in the minutes of the next meeting of the board open to all members. The board shall maintain the confidentiality of the owner(s) by identifying the matter in the minutes by the parcel number of the property, rather than by the name of the owner(s). A board vote to approve foreclosure of a lien shall take place at least 30 days prior to any public sale. (3) The board shall provide notice by personal service (hand delivery) to the owner who occupies the property, if the board votes to foreclose upon the property. If an owner does not occupy the property, the board shall provide written notice by first-class mail, postage prepaid, to the most current address shown on the books of the association. In the absence of written notification by the owner to the association, the address of the owner's property may be treated as the owner's mailing address. (4) A nonjudicial foreclosure by an association to collect upon a debt for delinquent assessments shall be subject to a right of redemption, after the foreclosure sale, for 90 days after the sale. (5) The limitations on foreclosure of assessments, do not apply to timeshares nor to assessments owned by developers. II. New Notice of Assessments and Foreclosure: The language and requirements of the new process of delinquent assessment collection must be stated in a new form. A sample form is at the end of this article. Highlights of what must be included are: A. Assessments become delinquent 15 days after they are due, unless the governing documents provide a longer time. B. Failure to pay association assessments may result in the loss of an owner's property through foreclosure. C. Foreclosure may occur either as a result of court action, judicial foreclosure or without court action, nonjudicial foreclosure. D. For delinquent assessments less than $1800 or less than 12 months delinquent, foreclosure may not be used. E. For delinquent assessments $1800 and over or more than 12 months delinquent, foreclosure may be used, provided the following occurs: (1) Prior to initiating a foreclosure, theassociation shall offer the owner and, if requested by the owner, participate in dispute resolution or "meet and confer" or ADR; binding arbitration may not be used if the association intends to initiate judicial foreclosure; (2) The decision to initiate foreclosure of a lien that has been recorded shall be made only by the board of directors; it may not be delegated. The board shall approve the decision by a majority vote of the board members in an executive session. The board shall record the vote in the minutes of the next board meeting open to all members. The confidentiality of the owner(s) shall be maintained by identifying the property by parcel number, rather than by name. A board vote to approve foreclosure of a lien shall take place at least 30 days prior to any public sale. (3) The foreclosure notice shall be personally served on the owner(s) who occupies the property, or notice may be by first-class mail, postage prepaid, at the current address shown on the books of the association. In the absence of written notification by the owner to the association, the address of the owner's property may be treated as the owner's address. (4) A nonjudicial foreclosure for delinquent assessments shall be subject to the right of redemption for 90 days. F. After a lien is recorded, the owner's property may be sold to satisfy the lien. G. In a foreclosure, the association may recover assessments, reasonable costs of collection, reasonable attorney fees, late charges, and interest. The association may not use nonjudicial foreclosure to collect fines or penalties, except for costs to repair common areas damaged by a member or a member's guests, if the governing documents provide for this. H. If the association is to record a lien on the owner's property, the association must comply with the requirements of Civil Code section 1367.1 when collecting delinquent assessments (the requirements of 1367.1 are stated in V, below). If an association fails to follow these requirements, it may not record a lien. I. At least 30 days prior to recording a lien, the association must provide the owner with certain documents by certified mail, including a description of its collection and lien enforcement procedures, the method of calculation the amount, and an itemized statement of the charges owed. J. An owner has a right to review the association's records to verify the debt. K. If a lien is recorded in error, the lien must be released within 21 days. L. Collection practices may be governed by state and federal laws regarding fair debt collection. Penalties can be imposed for debt collection practices that violate these laws. M. When an owner makes a payment, he or she may request a receipt. The receipt must indicate the date of payment and the person who received it. N. The association must inform owners of a mailing address for overnight payments. O. An owner may dispute an assessment debt by written request for dispute resolution. P. An association may not initiate foreclosure without participating in ADR with a neutral third party, if requested by the owner. Binding arbitration shall not be available if the association intends to initiate judicial foreclosure. Q. If it is established that the assessment was paid on time, the owner is not liable for any charges, interest and costs of collection. R. An owner (not a timeshare owner) may request a payment plan. The association must inform the owner of the standards for payment plans, if any exist. S. If an owner makes a written request for a meeting to discuss a payment plan, the board must meet with the owner(s). Payment plans must conform with the payment plan standards of the association, if any exist. T. A member may provide written notice to the association of a secondary address. If a secondary address is provided, the association shall send all correspondence and legal notices to both the primary and secondary addresses. IV. Civil Code section 1366.3 is repealed: This law dealt with paying (delinquent assessments) in full under protest. V. Civil Code section 1367.1 is amended: Highlights of this section follow: A. A regular or special assessment and any late charges, reasonable attorney's fees and interest shall be a debt of an owner at the time they are levied. At least 30 days prior to recording a lien, the association shall notify the owner in writing by certified mail of the following: (1) A description of the collection and lien enforcement procedures of the association, the method of calculation of that amount, a statement that the owner has a right to inspect the association records, and the following statement in 14-point boldface type or in capital letters, if typed: "IMPORTANT NOTICE: IF YOUR SEPARATE INTEREST IS PLACED IN FORECLOSURE BECAUSE YOU ARE BEHIND IN YOUR ASSESSMENTS, IT MAY BE SOLD WITHOUT COURT ACTION." (2) An itemized statement of the charges owed, including any delinquent assessments, the fees and reasonable costs of collection, reasonable attorney's fees, late charges and interest. (3) A statement that the owner shall not be liable to pay the charges, interest and costs of collection, if the assessment was paid on time. (4) The right to request a meeting with the board of directors to discuss a payment plan. (5) The right to dispute the assessment debt by submitting a written request for dispute resolution. (6) The right to request ADR with a neutral third party before the association initiates foreclosure, except that binding arbitration is not available if the association intends to initiate judicial foreclosure. B. Any payments made by the owner shall be first applied to the assessments owed, then to fees and costs of collection, attorney's fees, late charges or interest. When a payment is made, a receipt shall indicate the date of payment and the person who received it. The association shall provide a mailing address for overnight payment. C. Prior to recording a lien for delinquent assessments: (1) The association shall offer the owner and, if requested by the owner, participate in dispute resolution (the "meet and confer" program) or ADR with a neutral third party. (2) The decision to record a lien only for delinquent assessments shall be made only by the board of directors. The board shall approve the decision by a majority vote in an open meeting. The board shall record the vote in the minutes. (3) An owner may submit a written request to meet with the board to discuss a payment plan. The association shall provide the owner the standards for payment plans, if any exist. The board shall meet with the owner in executive session within 45 days of the postmark of the request, if the request is mailed within 15 days of the date of the postmark of the notice. If there is no regularly scheduled board meeting within that period, the board may designate a committee of one or more members to meet with the owner. Payment plans shall not impede an association's ability to record a lien. Late fees shall not accrue during the payment plan period. D. When a notice of delinquent assessment is recorded, the amount of the assessment, any costs of collection, late charges and reasonable attorney fees shall be stated, as well as a legal description of the property and the name of the record owner(s). (1) In order for the lien to be enforced by nonjudicial foreclosure, the notice of delinquent assessment shall state the name and address of the trustee authorized by the association to enforce the lien by sale. The notice of delinquent assessment shall be signed by the person designated in the declaration or by the association for that purpose, or if no one is designated, by the president of the association. (2) A copy of the recorded notice shall be mailed by certified mail to every person who is an owner of record, within 10 days after the recording. (3)Upon payment in full, within 21 days, the association shall record a release and provide a copy to the record owner. (4) A monetary charge imposed by the association as reimbursement for costs incurred in the repair of damage to common areas and facilities for which the member or the members' guests or tenants were responsible may become a lien and is enforceable by sale, provided the authority to impose a lien is set forth in the governing documents. E. A monetary penalty imposed by the association as a disciplinary measure for failure of a member to comply with the governing instruments may not be characterized as an assessment that may become a lien enforceable by sale. F. An association may not voluntarily assign or pledge the association's right to collect payments or assessments or to enforce or foreclose a lien to a third party. After 30 days following the recordation of the lien, the lien may be enforced in any manner permitted by law. Sales must be conducted according to current law. G. If a lien was recorded in error, a release must be recorded within 21 days. A declaration must be provided to the record owner that the lien was recorded in error and a copy of the release or notice of rescission must be provided to the owner. H. An owner may request that collection notices be sent to a secondary address. The association shall notify owners of their right to submit secondary addresses to the association at the time the association issues its pro forma budget. I. An association must comply with the above procedures or the process must be started over, at no cost to the owner. VI. Civil Code section 1367.4 is added to Davis-Stirling: A. This law goes into effect January 1, 2006 and applies despite what your governing documents say. B. For delinquent regular or special assessments less than $1800, not including any accelerated assessments, late charges, fees and costs of collection, attorney fees or interest, you may not collect the debt through judicial or nonjudicial foreclosure; but may collect or secure the debt: (1) by a small claims action; (2) by recording a lien, but you may not foreclose on the lien until the debt exceeds $1800 or the assessments are more than 12 months delinquent and prior to recording the lien, the association shall offer the owner dispute resolution, and any other manner provided by law, except for judicial or nonjudicial foreclosure. C. For delinquent assessments more that $1800 or more than 12 months delinquent, judicial or nonjudicial foreclosure may be used, if the following conditions are meet: (1) Prior to initiating foreclosure, the association shall offer the owner and, if requested by the owner, participate in dispute resolution (or "meet and confer") or ADR. The decision to pursue either dispute resolution or ADR shall be with the owner, except that binding arbitration shall not be available if the association intends to initiate judicial foreclosure. (2) The decision to initiate foreclosure of a lien shall be made only by the board of directors and may not be delegated. The board shall approve the decision in executive session. The vote shall be recorded in the minutes of the next meeting of the board open to all members. The board shall maintain the confidentiality of the owner(s) by identifying the matter in the minutes by the parcel number of the property. The board shall approve the foreclosure at least 30 days prior to any public sale. (3) If the board votes to foreclose, the board shall provide notice by personal service, if the owner occupies the property. If the owner(s) does not occupy the property, the board shall provide written notice by first-class mail, postage prepaid. (4) A nonjudicial foreclosure for delinquent assessments shall be subject to a right of redemption 90 days after the sale. VII. Civil Code section 1367.5 is added to Davis-Stirling: Its highlights are: A. If it is determined through dispute resolution or ADR that a lien for delinquent assessments was recorded in error, all charges shall be reversed and the lien released. The association shall also pay all costs related to dispute resolution or ADR. VIII. Code of Civil Procedure section 116.540 is amended: Its highlights are: A. In a small claims action, a corporation may appear through a regular employee or a duly appointed or elected officer or director, who is employed, appointed or elected for purposes other than solely representing the corporation in small claims court. An association may appear through an agent, a management company or bookkeeper. B. If a defendant is a nonresident owner of property, he or she may defend against a claim without personally appearing by: (1) submitting written declarations; or (2) allowing another individual to appear, if that person does not get paid and has not appeared more than 4 times during the calendar year. C. A party who is the owner of rental property may appear in a small claims action through a property agent who is under contract to manage the property. D. At a small claims action, the court shall require any individual who is appearing as a representative of a party to file a declaration stating that the individual is authorized to appear for the party and the basis for that authorization. The declaration shall also state, if necessary, that the individual is not employed solely to represent the party in small claims court. E. A husband and wife may appear for his/her spouse. CONCLUSION These new laws are traps for the unwary. Realize that you must pay attention to your delinquent assessment collection policy, which must conform to these new laws, and be particularly cautious when foreclosing. Send delinquent accounts to collection within a reasonable time (after 3 complete billing cycles, approximately 75 days). Waiting too long only makes it more difficult for owners to "catch up". Have an outside entity administer the collection process (such as an attorney or a collection company). Be consistent in the application of all procedures. Be fair to everyone. Good luck! 2006 OVERVIEW OF COLLECTION LAWS 1. Revised Civil Code §1365.1 requires notice regarding assessments and foreclosure, annual disclosure. 2. Association must comply with requirements of Civil Code §1367.1, a lien cannot be recorded until the requirements are satisfied. 3. Before an account can be turned over for collection and ultimately for foreclosure, the board shall approve the decision by a majority vote in an open meeting and record the vote and approval in the minutes of the meeting. 4. Prior to recording a lien the association shall offer the owner and, if so requested by the owner, participate in dispute resolution pursuant to the association's "meet and confer" or ADR program. 5. Board of directors must meet with an owner who requests a meeting to discuss a payment plan within 45 days of the written request. Payment plans shall not impede the association's ability to record a lien and cannot include late fees if owner complies with the plan. If a default occurs, collection activities can resume from the time prior to entering into the payment plan. 6. Payment plans must conform to the association's payment plan standards, if they exist. 7. Foreclosure of assessment liens are prohibited until the amount equals or exceeds $1800 or assessments are more than 12 months delinquent; this does not include accelerated assessments, late charges, fees and costs of collection, attorney's fees, or interest. 8. Prior to initiating a foreclosure the association shall offer the owner and, if so requested by the owner, participate in dispute resolution pursuant to the association's "meet and confer" or ADR program. 9. Dispute resolution, meet and confer and ADR replace Civil Code §1366.3 resolution of assessment dispute by alternative dispute resolution "pay under protest", which will be repealed effective January 1, 2006. It is important to note that the board must designate a member of the board to meet and confer with the disputing owner. As it is written, this means that the owner will meet with the designated member first, then meet with the entire board if the owner appeals the decision. 10. If it is determined through dispute resolution that a lien was recorded in error, the association would be required to reverse specified charges and take other corrective actions. 11. Notice of a decision to foreclose shall be provided by personal service if the owner occupies the property or by written notice, by first-class mail, postage pre-paid, to the most current address shown on the books of the Association to an owner that does not occupy the property. 12. Notice of default shall be sent by certified mail and shall be served in accordance with the manner of service of summons i.e. personal service as provided by a process server. 13. 30 days prior to any public sale, the Board is required to meet in executive session, by majority vote, and record the results of the vote identifying the property by the parcel number in the minutes of the next meeting of the board open to all members. 14. There is a 90 day redemption period after a foreclosure sale by the association. 15. Requires the association to notify the owner through the annual budget disclosures of his or her right to submit a secondary address. 16. Requires the Association to send any and all correspondence and specified legal notices to both a primary and secondary address, if the owner provides written notice of a secondary address. 17. A management company representative or a bookkeeper can appear and participate in a small claims hearing on behalf of the association. 18. On-line education course for boards of directors is to be developed by the Department of Consumer Affairs and the Department of Real Estate, if funds are available. Notice Regarding Assessments And Foreclosure Civil Code § 1365.1 - Effective January 1, 2006 NOTICE ASSESSMENTS AND FORECLOSURE This notice outlines some of the rights and responsibilities of owners of property in common interest developments and the associations that manage them. Please refer to the sections of the Civil Code indicated for further information. A portion of the information in this notice applies only to liens recorded on or after January 1, 2003. You may wish to consult a lawyer if you dispute an assessment. ASSESSMENTS AND FORECLOSURE Assessments become delinquent 15 days after they are due, unless the governing documents provide for a longer time. The failure to pay association assessments may result in the loss of an owner's property through foreclosure. Foreclosure may occur either as a result of a court action, known as judicial foreclosure or without court action, often referred to as nonjudicial foreclosure. For liens recorded on and after January 1, 2006, an association may not use judicial or nonjudicial foreclosure to enforce that lien if the amount of the delinquent assessments or dues, exclusive of any accelerated assessments, late charges, fees, attorney's fees, interest, and costs of collection, is less than one thousand eight hundred dollars ($1,800). For delinquent assessments or dues in excess of one thousand eight hundred dollars ($1,800) or more than 12 months delinquent, an association may use judicial or nonjudicial foreclosure subject to the conditions set forth in Section 1367.4 of the Civil Code. When using judicial or nonjudicial foreclosure, the association records a lien on the owner's property. The owner's property may be sold to satisfy the lien if the amounts secured by the lien are not paid. (Sections 1366, 1367.1, and 1367.4 of the Civil Code) In a judicial or nonjudicial foreclosure, the association may recover assessments, reasonable costs of collection, reasonable attorney's fees, late charges, and interest. The association may not use nonjudicial foreclosure to collect fines or penalties, except for costs to repair common areas damaged by a member or a member's guests, if the governing documents provide for this. (Sections 1366 and 1367.1 of the Civil Code) The association must comply with the requirements of Section 1367.1 of the Civil Code when collecting delinquent assessments. If the association fails to follow these requirements, it may not record a lien on the owner's property until it has satisfied those requirements. Any additional costs that result from satisfying the requirements are the responsibility of the association. (Section 1367.1 of the Civil Code) At least 30 days prior to recording a lien on an owner's separate interest, the association must provide the owner of record with certain documents by certified mail, including a description of its collection and lien enforcement procedures and the method of calculating the amount. It must also provide an itemized statement of the charges owed by the owner. An owner has a right to review the association's records to verify the debt. (Section 1367.1 of the Civil Code) If a lien is recorded against an owner's property in error, the person who recorded the lien is required to record a lien release within 21 days, and to provide an owner certain documents in this regard. (Section 1367.1 of the Civil Code) The collection practices of the association may be governed by state and federal laws regarding fair debt collection. Penalties can be imposed for debt collection practices that violate these laws. PAYMENTS When an owner makes a payment, he or she may request a receipt, and the association is required to provide it. On the receipt, the association must indicate the date of payment and the person who received it. The association must inform owners of a mailing address for overnight payments. (Section 1367.1 of the Civil Code) An owner may dispute an assessment debt by submitting a written request for dispute resolution to the association as set forth in Article 5 (commencing with Section 1368.810) of Chapter 4 of Title 6 of Division 2 of the Civil Code. In addition, an association may not initiate a foreclosure without participating in alternative dispute resolution with a neutral third party as set forth in Article 2 (commencing with Section 1369.510) of Chapter 7 of Title 6 of Division 2 of the Civil Code, if so requested by the owner. Binding arbitration shall not be available if the association intends to initiate a judicial foreclosure. An owner is not liable for charges, interest, and costs of collection, if it is established that the assessment was paid properly on time. (Section 1367.1 of the Civil Code) MEETINGS AND PAYMENT PLANS An owner of a separate interest that is not a timeshare may request the association to consider a payment plan to satisfy a delinquent assessment. The association must inform owners of the standards for payment plans, if any exist. (Section 1367.1 of the Civil Code) The board of directors must meet with an owner who makes a proper written request for a meeting to discuss a payment plan when the owner has received a notice of a delinquent assessment. These payment plans must conform with the payment plan standards of the association, if they exist. (Section 1367.1 of the Civil Code) Tom Fier is an attorney in San Mateo, California. For the past 28 years, he has been a specialist in homeowner association law. He is a past Chairman and current member of the ECHO Legal Resource Panel and a frequent contributor to the ECHO Journal. He is a noted speaker in all aspects of association law, appearing regularly at ECHO seminars. Beverlee Gordon is the owner of A.S.A.P. Collection Services, a San Jose based collection company that specializes in the collection of delinquent homeowner assessments.
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