Notice and Opportunity to Cure Arrearages in Condominium Collection Matters

Notice and Opportunity to Cure Arrearages in Condominium Collection Matters

The December, 2019 South Carolina Supreme Court decision in Winrose Homeowners Association v. Hale invalidated a lien foreclosure sale by an HOA for outstanding dues in the amount of $250.00 “as shocking the conscience of the Court”. This decision has been the subject of heated conversation in condominium blogs. The headlines zeroed in on the amount of the unpaid fees, but as always, there is more behind the matter than just the sound bite.

As a condominium attorney with over twenty years of experience and about a thousand mortgage, timeshare and condominium lien foreclosures under my belt, I cringe over cases like this. The facts presented a perfect storm for a bad outcome all around.

The Hales failed to pay $250.00 in HOA fees and the HOA commenced a legal action for collection. The Hales were notified of the proceedings, but instead of filing an answer, they “put the papers in a drawer and forgot about them.” They paid a subsequent invoice of $250.00, and the HOA attorney mistakenly advised that the lien had been satisfied. However, the initial legal proceeding was never withdrawn and the HOA filed a default and obtained judgment to foreclose in the total amount of $2,898.67 ($250.00 of which was for HOA fees, the remainder for late fees, interest and legal fees and costs). Under South Carolina law, the foreclosing party need only provide notice of the sale to participating parties in the underlying lien action, and since the Hales failed to answer the initial complaint, they received no notice of the sale, and were unaware it had taken place until the new owner commenced an eviction action. The Hales filed an action to overturn the foreclosure sale, but did not raise any irregularities with the foreclosure sale process itself, arguing only that the sale should be set aside as the sale of their $128,000.00 property for the amount of $3,036.00 “shocked the conscience.” The lower court upheld the foreclosure sale.

Before the South Carolina Appeals Court, the Hales argued the Court should employ the Equity Method in which the successful bid is compared to the amount of equity in the property. Subtracting the mortgage amount of $66,004.00 from the property value of $128,000.00, leaving $61,996.00 in equity. Under this method, the sales price was 4.89% of the equity. However, the Appeals Court chose to follow the Debt Method advocated by the HOA and the buyers, finding that the sale was not so shocking as the successful buyer bought the property subject to the first mortgage in the amount of $66,004.00, so that in essence, the buyer bought in the amount of $69,040.00, which constituted 54% of fair market value.

On further appeal, the South Carolina Supreme Court noted that: “A judicial sale will not be set aside due to an inadequate sale price unless: (1) the price was so grossly inadequate as to shock the conscience of the court; or (2) an inadequate – but not grossly inadequate – price at the sale is accompanied by other circumstances from which the court may infer fraud has been committed”. The Court specifically did not rule on whether one method is preferable over the other, but chose the Equity Method after reviewing the totality of the circumstances. The buyer at the sale was an entity that frequently bought properties at foreclosure and would either sell the properties back to the former owners for inflated amounts, or would fail to pay the senior outstanding liens, rent out the properties and wait for the banks to foreclose. The HOA sale was in 2014 and the Hales continued to pay the mortgage as the buyer showed no inclination to pay off the mortgage balance on its own. Further, the Court was disgusted by the HOA attorney’s cavalier attitude towards foreclosure. It was clear the Court wanted to overturn the foreclosure sale and chose to employ the Equity Method, even stating that if the buyer had not tried to resell the property to the Hales and had taken steps to pay off the mortgage, then the case could have turned out quite differently.

As a condominium attorney with over twenty years of experience and about a thousand mortgage, timeshare and condominium lien foreclosures under my belt, I cringe over cases like this. The facts presented a perfect storm for a bad outcome all around. Granted the owners failed to address the initial notice, but once a subsequent payment was received, bells should have gone off and someone should have contacted the owners regarding the balance, especially after advising the owners that the lien had been satisfied. The overall arrearages amounts did not justify the means. Foreclosing on an owner just because you can, with insufficient notice is bad optics for the industry as a whole.

In Massachusetts we are extremely fortunate to have one of the strongest condominium lien statutes in the country, where the mortgage holder will pay the priority lien the majority of the times, in order to maintain their priority status. Consequently, in the majority of circumstances, there is no reason to rush or abuse the process, especially if the proper steps have been taken. The major lesson from the South Carolina case is providing proper notice and opportunity to cure the arrearages. One of the most common complaints I hear from owners after a lien enforcement action is commenced, is that they received no prior notice from the condo trust of the arrearages, and that if so notified that the matter would be sent to counsel, they would have paid. Granted, a condominium trust should not have to constantly remind or explain payment obligations to owners, but providing such written notice, greatly assists condominium trust’s counsel when later defending a lien action in court as it negates the owner’s argument of lack of notice.

Massachusetts Courts are consumer oriented, and judges consistently inquire as to notices provided to owners. It is recommended that a condo trust send the owner a written notice of the need to cure arrearages at 45-60 days, and advise again at 75 days that should the arrearages not be cured the account will be sent to the condo trust’s counsel for legal action, and then once the account is 90 days past due, send the account to counsel. This provides the owner with sufficient time to cure by making partial payments over a period of time, negotiating a short term payment arrangement or meeting with the condo board to discuss any particular issues with the arrearages. It also means that condo counsel has sufficient time to send the initial notice of lien delinquency letter and wait 30 days for a response from the owner before proceeding. Waiting until an owner is 5 or more months in arrears before sending to legal counsel forces counsel to have to undertake all preliminary enforcement steps at once, leaving the owner with a larger legal fee obligation they are now responsible for in addition to the condo arrearages. Again, many owners can cure if given enough time and the suggested time frame provides several months for the owner to cure on their own. While Massachusetts law provides a condo trust with the tools to enforce a lien, the purpose of a lien enforcement action is to have owners make the payments and retain their units. Foreclosure is the option of last resort.

Laura Brandow Condo Law Blog

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Laura Brandow