One of the most difficult issues for board members and residents of co-ops, condominiums and HOAs is that of arrearages. The problem poses practical, procedural and ethical issues and can ultimately lead to legal repercussions. Sadly, and for many reasons, residents may go into arrears on monthly maintenance or common charges. The question is how to manage the problem effectively, efficiently, and with the least overt embarrassment possible.
Perhaps the most obvious and consistent responsibility one has as a member of a common interest community is not to serve on the board or a committee, or to act as a watchdog for your neighbors, but rather to pay your fair share of the community expenses (known as ‘maintenance’ in a co-op and ‘common charges’ in a condominium or HOA). This obligation is contractual, and as a cooperator or member of an association, you enter into it when you buy your unit. It is of vital importance, as the operation of the community depends on your timely payments to make their payments – everything from buying cleaning supplies to making underlying mortgage or debt payments on other community financing. Regardless of the type of ownership, the structure is non-profit, and every penny collected is accounted for and used to maintain the community’s financial health.
According to William Chatt, a partner with Chicago law firm Cervantes, Chatt & Prince, “It doesn’t look good when the very person or persons who are responsible for overseeing the finances of the association don’t have their own personal finances in order. It’s a matter of credibility. From a legal point of view, a board member must be treated the same as any other owner. They are subject to all the same sanctions. In Illinois, where we have a very powerful condo statute, the board member faces the same consequences: collection suit, order of possession, eviction, lien, whatever the remedies are. To be fair, they must be treated exactly the same as any other unit owner.”
The extent to which non-payment might affect the ability of the entire community to meet its obligations differs with the size of the association or corporation. Clearly, a $1,000 monthly obligation is more critical in a 20-unit property than in a 250- or 2,000-unit property, but nevertheless, arrearages have a negative effect and can pile up. Ultimately, they can have a cooling effect on resale prices if there are too many that have gone on for too long, as buyers often look to that information as an indication of what their potential investment’s financial health looks like.
Reasons for Delinquency
No one buys into co-op, condo or HOA with the intent of defaulting. The purchase decision is saturated with tests on all sides to insure financial success. Buyers want to feel comfortable knowing they can afford the monthly obligation. The board of the co-op or condo wants to feel secure knowing they have a dependable member and the lender providing the financing for the acquisition of the unit wants to avoid foreclosure, a costly and painful experience for everyone involved. The assumption of monthly financial obligation in the form of maintenance or common area charges is made carefully by all parties and with the best of intentions.
Life doesn’t always turn out the way we plan, however. Cooperators or condominium owners may fall into arrears for any number of reasons. Generally, these reasons fall into two categories; we can call these two categories ‘with-intent’ and ‘without-intent.’
Most cases fall into the category of without-intent. For instance people lose their jobs. While many corporations and associations require members to have a financial cushion in place when purchasing their unit, unemployment can continue for long periods of time, as was evident throughout the last years-long recession. A resident’s ‘cushion’ can be depleted long before new employment is found. A neighbor who has been a member in good standing and paid consistently for many, many years can now become a drag on the entire building.
Or how about when people get sick? Again, a sizable nest egg can be consumed in a shockingly short period of time when serious illness occurs. Medical insurance doesn’t always cover everything, and a resident may be faced with the choice of paying for life-saving treatment or paying their maintenance fee. And while these crises are going on, life continues to happen. College tuition still has to be paid, outside help may be necessary on a round-the-clock basis, and, of course, residents still have to eat.
Arrearages occurring with intent are less common, but they do happen. Usually, they revolve around issues that may come up between the individual resident and the association board. Say, for instance, that a resident has an ongoing problem with a neighbor involving noise. The co-op or condo board may find it impossible to resolve the issue with the resident causing the problem. The affected resident may choose to pressure the board to resolve the problem by withholding monthly charges and placing them in escrow – a bank account held to the benefit of the corporation or association – until the dispute is resolved. However, although the money is being held for the benefit of the association or corporation, it isn’t being paid into the common accounts and therefore can’t be used to pay the bills – so it’s still an arrearage.
When Arrearages Involve a Board Member
The legal, procedural and ethical considerations involved in arrearages becomes even more sensitive when it involves a member of a co-op or condo board. But is there any specific legal treatment or procedure for board member arrearages? The answer is a simple no, unless stipulated otherwise by the bylaws of the corporation or association.
Deborah B. Koplovitz, a community law attorney with Anderson Kill, a law firm in New York City, says, “Legally, people have an obligation to pay their monthly charges under the co-op or condo’s governing documents. Procedurally, most co-ops have a policy in place that after a month [of nonpayment] the managing agent sends a warning letter. If there’s no response, then it goes to legal counsel or formal action.” She explains that there’s no special policy in most cases for board members. “All boards should treat everyone the same. Ethically, people do get into trouble. It happens, and it makes sense for boards to consider that when people go into arrears. Maybe there is a way to work things out.”
Mark Hakim,senior counsel for the law firm of Chaves & Perlowitz, also based in New York, says, “You have to look at the bylaws to determine what if any right the corporation or association might have with respect to dealing with these issues. In older building absolutely not – there is no language dealing specifically with board member arrearages. It wasn’t considered at the time those offering plans were put together. Today, with new plans, when we write them, we take these issues into account.”
What’s a Board to Do?
Stephen Boonshoft, an attorney with Robinson Brog Leinwand Greene Genovese & Gluck in New York City, specializes in co-op and condominium law and says, “If a shareholder is a board member and is in arrears, and the bylaws don’t give the board any power to deal with the situation, the board can ask the member to recuse themselves. If the board member refuses, the board has no recourse. The board member can only be removed by the other shareholders.”
Hakim says he always advises his clients “that the board have a specific policy dealing with arrears primarily as it relates to board members, such that no other board member should be addressing it. It should always be addressed through management and counsel.”
“If there is something in the bylaws,” says Chatt, “their duties can be suspended. From a practical standpoint however, I haven’t seen this. Many boards have standing collection practices where a member who is in arrears for more than 30 days is turned over to the association attorney. If there are any decisions to be made, the board member who is in arrears should recuse him/herself [from voting on them]. The member should not be voting and deciding on something that would give them favor.”
Short of removing the board member, another option open to boards is removing the board member from a specific voting role, such as president or treasurer, to prevent the board member in arrears from taking part in critical decision making; boards might also opt to set up subcommittees to vote on certain issues and not permit that member to serve on said committee.
Campaign Dirty Tricks
Another question is whether a board can prevent a current board member in arrears from running for re-election, or prevent a resident in arrears from running for the board. There are ethical questions as to whether a board can ‘out’ a candidate for non-payment during the election process, or even whether the law permits that information, which is generally treated as confidential and fiduciary to the board, from being released.
“There is nothing in the statute,” points out Chatt, “that says someone in arrears cannot run. However, if it’s stated in the association’s rules that someone has to be in good standing, they can be prevented from running. As far as ‘outing’ someone that’s in arrears to the rest of the membership, that’s never a good idea.” If such claims are made in error and then broadcast to the general public, you go down a slippery slope of things like defamation, slander and libel, he continues. “Secondly, board members shouldn’t reveal things that are essentially credit information.”
Perhaps the most important thing to keep in mind in dealing with these very thorny issues is that as Koplovitz says, “A cooperative is just that; a place where people cooperate with each other.” Arrearage situations can be difficult for everyone – board members and regular members alike. Imagine how uncomfortable that elevator ride can become. While the financial health of the community must be paramount, keep in mind: whoever it is didn’t do into arrears lightly.
A J Sidransky is a writer/reporter for The Chicagoland Cooperator, and the author of several published novels.