Question: Even with an annual income of more than $2 million, our association is in a big mess. There's a several-million-dollar loan inclusive of our reserve account the association is paying off that has a variable interest rate currently at 6.85%. The association can't touch the reserves because the bank says it's garnisheed as collateral for the loan.
The board says we have to pay this money back because the bank is holding our reserve account hostage. If it is borrowed and we can't touch this high-interest money, can the association just give it back?
Some owners want to pay their lump sum prorated share directly to the bank. The board is demanding that the money be sent to the management company.
Owners have no guarantee that their funds will be forwarded to the bank and that funds would not be co-mingled with our operating account. We fear directors have no intention of paying off this loan and will misappropriate funds and assess again as they have before.
Can boards borrow money without informing titleholders, then pass that debt onto owners via a special assessment vote? Can our association file for bankruptcy and wipe this debt out?
Answer: Stating that the bank has "garnisheed" the association's funds as collateral for the loan may not be accurate.
Garnishment is a legal strategy that a creditor uses to collect on a judgment. The bank likely has collateral for its loan, not garnisheed association funds.
The association must have the authority to borrow, usually found in the bylaws or covenants, conditions and restrictions, and most lenders won't lend without that. Any board decision to borrow must be present in the minutes, giving the titleholders notice of the intentions. Typically, a homeowner vote may not be required.
Your association is obligated by law to levy and collect assessments, but there is a limit to both. Pursuant to Civil Code section 1366.1, an "association shall not impose or collect an assessment or fee that exceeds the amount necessary to defray the costs for which it is levied." If levied to repay the loan, the funds must be used for that purpose.
Repayment should come directly from the association, not through a middleman such as a management company. Most management companies refuse to post bonds, so if they abscond with or misappropriate the money, the association has no recourse and must still pay the bank.
Individual titleholders cannot pay off their prorated share because they are not individually liable to the bank.
An outstanding loan to the association does not prevent the owner from selling his unit. Any lien the bank may have on property to secure the loan is placed on the common property, not the individual units.
California homeowner associations cannot declare Chapter 7 bankruptcy and wipe out their debt. California appellate courts have ruled that because the association has an unending source of money — the titleholders — with which to pay its obligations, at most it can file for Chapter 11 reorganization. The court can order an association to make an emergency assessment against all the titleholders to pay off its obligation.
The late Stephen Glassman, an attorney specializing in corporate and business law, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to P.O. Box 10490, Marina del Rey, CA 90295 or email@example.com.