Hawaii Condo Law

A lot of the laws about community associations exist because of Fannie Mae & Freddie Mac. Fannie Mae and Freddie Mac are Government Sponsored Enterprises created by the U.S. Congress. Although they are government sponsored, they are privately-owned corporations without government guarantees or protections. They purchase mortgages on the secondary market, pool them, and sell them as mortgage-backed securities to investors on the open market.

Fannie Mae and Freddie Mac each have standards for the mortgages they are willing to purchase. These two sets of standards include requirements for community associations. For instance, Fannie Mae and Freddie Mac have insurance requirements for condominium associations. If your condominium association doesn’t meet their insurance requirements, standard mortgages are not available for the units in your condominium. Developers and owners want standard mortgages to be available for the units in a community association because it makes it easier to sell the units. All things being equal, a unit in a non-conforming project will be more difficult to sell and may affect the value of the units. As a result, it is common for statutory requirements and governing documents to comply with the Fannie Mae and Freddie Mac guidelines.

In addition, the free markets also tend to follow the guidelines. For instance, it is difficult to find association insurance policies in Hawaii that do not meet the Fannie Mae and Freddie Mac guidelines. The insurance companies want to have policies that will appeal to the biggest market. Creating insurance policies that are not in demand doesn’t make financial sense. Therefore, even if you wanted to purchase a non-conforming insurance policy for your association, you would have a hard time finding such a policy.

As most of you know, I have been involved with CAI’s National’s efforts to represent community associations in issues before the Federal Communications Commission (”FCC”). This summer, CAI submitted testimony on whether the FCC should consider prohibiting exclusive contracts for larger cable operators. CAI’s position was the same as it was 8 years ago when the FCC decided that it did not have the authority to prohibit exclusive contracts — that many community associations use exclusive contracts to negotiate better rates, special benefits (like rewiring of buildings) or prevent damage to the common areas. This summer the FCC reversed its prior decision and decided that it did have the authority to prohibit exclusive contracts.

Today, the FCC decided to adopt a rule prohibiting exclusive cable contracts for Multiple Dwelling Units (which would include condominiums, planned communities and residential cooperatives). Several people have asked why we haven’t written on this issue since it was a topic in recent newspaper articles. The difficulty is that although a rule has been adopted, the actual rule and FCC order is not yet generally available. The news paper accounts appear to be based on the FCC press release and the written statements of FCC Commissioners Martin, Copps, Adelstein, Tate and McDowell. A draft rule and order was also not available prior to the FCC Meeting.

It is clear from the press release and written statements that exclusive contract provisions in existing cable contracts with large cable companies are now void. However, other details will have to wait until the formal rule and order is issued. For instance, we do not know how bulk cable agreements will be affected by the FCC Rule and Order. It seems unlikely that bulk cable agreements would be prohibited, but it’s hard to comment without the actual rule and order. It is clear, however, that agreements with larger cable operators that prohibit other providers from the project would be illegal. The larger cable companies have indicated that they may challenge the FCC Rule and Order.

In addition to prohibiting exclusive cable contracts, the FCC also adopted a Further Notice of the Proposed Rulemaking that seeks comment on whether the FCC address exclusivity clauses entered into by Direct Broadcast Satellite providers (satellite television), private cable operators (smaller cable operators), and other multichannel video programming distributors.

I will update this article after the FCC’s Rule and Order is available.

In the year 2000, we were successful in getting condominium associations a limited priority lien for delinquent assessments. The limited priority lien is for up to 6 months of delinquent assessments or $1,800.00, whichever was smaller. This means that a portion of the condominium association’s lien will be paid before the mortgage on the unit. The limited priority lien statute is contained in HRS §514B-146(g) & (h).

As part of a compromise with the mortgage bankers, the law included a couple of provision, including that the limited priority lien would automatically end in December, 2003. In 2003, that sunset date was extended to December 31, 2007.

On April 17, 2007, Governor Lingle signed into law SB923 which repealed the sunset date. This means that the limited priority lien is now a permanent part of the condominium law.

Most people are aware that when someone files for bankruptcy, creditors are to cease collection efforts until a court order is issued lifting the automatic stay. A decision this week from the Hawaii Bankruptcy Court involving the automatic stay illustrates the risks of not complying with the automatic stay. The debtor filed an adversarial proceeding against the creditor seeking damages for violating the automatic stay. The creditor is alleged to have sent statements with the amounts owed “for informational purposes”. The court ruled that the complaint stated a valid claim if proven and allowed the claim to go to hearing.

For a community association, this means that statements of accounts should not be sent to a delinquent owner once they have filed for bankruptcy. The only exception would be statements that showed only the amounts that were incurred after the bankruptcy petition has been filed. Since community associations are permitted to seek recovery of post-petition indebtedness, sending a statement for only those amounts is permitted. Failure to follow these procedures could result in the association being sued for damages for violating the automatic stay.

Related issues: FAQ on Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

A non-Judicial Foreclosure is a procedure for selling real property that is subject to a lien, mortgage or other security interest. The purpose of a non-judicial foreclosure is the same as a judicial foreclosure. The difference is that a judge is not involved in the procedure. The foreclosing party must either be a condominium association, timeshare association or a mortgagee with a power of sale provision in the mortgage. The mortgagee or the association handles the duties of the commission including publishing notices of the auction, taking bids, and payment of the proceeds. As in a judicial foreclosure, the proceeds of the sale are used to pay the cost of the public sale, real property taxes, the money owed on the property and any liens and security interests. If there are any funds left, it is paid to the former owner of the property. Since there is no judge, a deficiency judgment is not available in a non-judicial foreclosure.

A judicial foreclosure is sometimes referred to as a standard foreclosure. In a judicial foreclosure, a lawsuit is filed and a judge orders the appointment of a commissioner and the sale of the property at a public auction. The commissioner handles the details of the public auction. Bidders are normally required to put a deposit down unless the bidder is one of the mortgagees or lienholders. The sale and the proposed purchase price must be approved by the judge to make sure it is adequate. The proceeds are used to pay the commissioner’s fees and cost, real property taxes, the money owed on the property and any liens and security interests. If there are any funds left, it is paid to the former owner of the property. If there is insufficient funds to pay everyone, the judge can enter a deficency judgment for the difference.

One alternative to a judicial foreclosure is a non-judicial foreclosure.

On May 9, 2005, I provided a FAQ on the Act as it relates to community associations. Since then, the answer to the last question has been updated (although the date of the article has not been changed) to reflect that one technical amendment has already been made to the Act. The Emergency Supplemental Appropriations Act for Defense, the Global War on Terror, and Tsunami Relief, 2005 includes in on page 67, technical amendments for bankruptcy fees. Effective on October 17, 2005, the following bankruptcy fees will change:

• The Chapter 7 filing fee will be increased to $220. With the trustee fee of $15 and the $39 administrative fee, the total Chapter 7 filing fee will be $274.
• The Chapter 13 filing fee will be reduced from $155 to $150. Thus, the total filing fee for Chapter 13 will go from the current $194 to $189.

Congress apparently decided not to increase the fees retroactively. Other bills to amend the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 have been introduced.

Ed Foster of InfoWorld has a blog on gripes about computers and computer vendors. Today, he wrote about an issue that commonly arises for community associations — Evergreen clauses. You’re probably familiar with them. They’re automatic renewal clauses that extends the contract for a year or more unless one party cancels. With the change over of board members, site managers and managing agents, it is often difficult for community associations to remember to cancel the agreement. As Ed Foster points out, even normal businesses can fall prey to these types of clauses. The best thing to do is to write them out of all your contracts. The last thing you need is suddenly finding out that your landscaping contract has been automatically extended for another 3 years. If your vendor refuses, consider getting another vender. Do you really want a vendor that has to rely on tricks to make sure you remain their customer?

If you have existing contracts with Evergreen clauses or you can’t get the vendor to eliminate them and you feel the vendor is still the best choice, see if you can immediately exercise your right to cancel. If the contract does not require that the notice of cancellation for the additional term be made within so many days before the end of the existing term, you can give notice of cancellation of the additional term immediately upon signing the contract. For example, an Evergreen clause might read, “This contract is automatically extended for an additional three year term unless either party gives notification of cancellation at least 60 days before the end of the initial or renewal term.” Since the clause permits you to cancel 60 days or more before the end of the term, you can cancel the day you sign the contract. On the other hand, if you have to give notice, say within 60 days of the end of the existing term, you’re going to need to implement a calendaring or tickling system for your contracts so that you don’t miss the cancellation period by accident.

Finally, community associations should also consider reviewing their contracts to determine if they have Evergreen clauses.

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (”the Act”), community associations can expect to be able to obtain judgments for more delinquent common assessments than they did under the old law. In large part, this is because the Act makes it more difficult for anyone to eliminate their personal obligation to pay debts through bankruptcy (”discharge”).

The Act also includes a specific provision for the protection of community associations. Bankruptcy courts across the country have had different rules for delinquent assessments after an owner files bankruptcy. Some courts have said that the right to assessments arise at the creation of the community and when the bankruptcy filing occurs, assessments after the bankruptcy filing can be discharged. A few courts said that assessments after the bankruptcy cannot be discharged. A 1994 law made assessments after the bankruptcy filing non-dischargeable in a residential condominium or cooperative if the owner resided in or rented out the unit. However, the different rules continued to exist for many planned community associations and commercial condominiums or cooperatives. The 1994 law also meant that if the owner moved out or stopped renting the unit, the post-petition delinquencies could be discharged. The Act makes all post-petition common assessments non-dischargeable.

What is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005?

This law has been considered by Congress for 8 years. The Act includes some of these key provisions:

• Adopts a means test for bankruptcy
• Mandates financial counseling before filing
• Mandates financial management course after filing as a condition to obtaining a discharge
• Increases the time periods that debtors must wait between bankruptcies if they obtain a discharge
• Increases the amounts paid in Chapter 13 cases
• Automatically terminates the automatic stay in some refiled cases
• Increases the amounts to be repaid to creditors
• Toughens homestead exemptions
• Grants additional rights to secured creditors
• Grants post-petition relief to community associations
• Grants higher priority to child and spousal support obligations
• Requires the debtor to provide tax returns or tax transcripts to any requesting party
• Permits relief from the automatic stay in favor of a real property secured creditor when the bankruptcy petition is part of a scheme to delay, hinder and defraud creditors involving either (i) a transfer of the real property without the secured creditor’s or court’s consent, or (ii) multiple bankruptcy filings affecting the real property

Most of the Act will be effective on October 17, 2005. The effective date for most provisions of the Act is 180 days after April 20, 2005, the day the President signed the bill. Except for a few provisions, the new Act will not apply to any bankruptcy cases that were filed before October 17, 2005. Many people expect there to be a spike of bankruptcy filings before October 17, 2005 to take advantage of the more lenient old law.

Is financial counseling required before an individual can file for bankruptcy?

Yes, once sufficient non-profit credit counseling agencies have been approved, the Act will require that before anyone files for bankruptcy, they must be certified by an approved non-profit credit counseling agency to have been briefed on opportunities for available credit counseling and to have received assistance in preparing an individual budget analysis. The U.S. Bankruptcy Trustee’s Office is charged with approving non-profit credit counseling agencies. This requirement can be waived if the debtor submits a certification describing exigent circumstances and stating that he or she requested credit counseling services but was unable to receive it within 5-days from the request. However, even if waived, the debtor must undergo counseling within 30 days of filing the petition unless the court grants a 15 day extension.

Is a financial management course required after filing for bankruptcy?

Yes, once sufficient financial management course providers have been approved, debtors must complete the course prior to any discharge under either Chapter 7 or 13. The U.S. Bankruptcy Trustee’s Office is charged with approving financial management course providers based on criteria contained in the Act.

When does a debtor’s income and expenses have to qualify under the means test?

If a debtor’s average gross family income 6 months before the bankruptcy filing exceeds the median for families in the debtor’s state, the debtor’s income and expenses must meet the means test. If the income and expenses do not meet the means test, the debtor must file a Chapter 13 bankruptcy rather than a Chapter 7 bankruptcy. The Bureau of the Census publishes charts with the median family income by state and American Bankruptcy Institute has more specific information on how median income is determined.

What is a Chapter 7 bankruptcy filing?

Chapter 7 is a liquidation proceeding. Under Chapter 7, the debtor turns over all non-exempt assets to the Bankruptcy Trustee. The Trustee liquidates the assets and pays the creditors. All unpaid debts are discharged other than those few that are exempt from the bankruptcy laws.

What is a Chapter 13 bankruptcy filing?

Chapter 13 is a reorganization proceeding. Under Chapter 13, the debtor pays some or all of the debts over a period of 3 to 5 years to the Chapter 13 Trustee who distributes the funds according to a plan approved by the Bankruptcy Court. The amount of the debts paid under the plan will vary but only needs to be more than what unsecured creditors would have received under a Chapter 7 filing. During the repayment period, creditors are prevented from requiring payment directly from the debtor for debts incurred before the bankruptcy filing (”pre-petition debt”).

What is the Means Test for filing a Chapter 7 bankruptcy?

The difference between the debtor’s monthly qualified expenses (less secured payments) and income is multiplied by 60. If that amount is less than $6,000.00, the debtor may file a Chapter 7 bankruptcy. If that amount is greater than $10,000.00, the debtor is prohibited from filing a Chapter 7 bankruptcy. If that amount falls between $6,000.00 and $10,000.00, the debtor may file a Chapter 7 only if that amount is less than 25% of the non-priority unsecured claims. There are provisions to allow additional expenses or adjustments to the income in special circumstances. In most instances, however, if the debtor’s gross family income exceeds the median for families in the debtor’s state, the debtor will probably need to file under Chapter 13 rather than under Chapter 7. The U.S. trustee, bankruptcy administrator or judge can challenge a debtor’s bankruptcy filing in any case where the totality of the debtor’s financial circumstances indicates abuse of the bankruptcy system.

How were pre-petition common assessments handled before the Act?

The unsecured debts are handled differently under Chapter 7 and Chapter 13. In a Chapter 7 case, the mortgages, taxes, pre-petition delinquent common assessments and other secured debts would be paid from the sale of the real property in order of the priorities established by state law. Any secured pre-petition debts not paid through the liquidation of the property would become unsecured debts. The unsecured debts are handled differently under Chapter 7 and Chapter 13. Under Chapter 7, if there are assets remaining in the bankruptcy estate, they are liquidated and used to pay the unsecured debts. If not all the unsecured debts can be paid, the remaining unsecured debts would be discharged unless the debt is exempt from the bankruptcy laws. Under a Chapter 13 filing, all or part of the unsecured debts would be paid over 3 to 5 years. The amount of the unsecured debt to be paid is determined by the bankruptcy court.

How will pre-petition common assessments be handled under the Act?

The new means test will mean that more debtors will file Chapter 13 bankruptcies rather than Chapter 7 bankruptcies. That means that fewer debts will be discharged. In addition, the Act increases the amounts debtors pay in Chapter 13 filings, so associations will receive more of their pre-petition common assessments than they do under current law. However, there is no provisions in the Act which specifically addresses pre-petition common assessment debts. The changes, while significant, are due to the provisions of the Act favoring creditors generally.

How were post-petition delinquent common assessments handled before the Act?

Delinquent common assessments incurred after the bankruptcy filing are treated differently depending on the type of community association and the location of the bankruptcy. This is because courts in various locations have treated delinquent common assessments differently. For many associations, the post-petition delinquent common assessments are discharged unless the debtor is residing in the unit or renting the unit.

How will post-petition delinquent common assessments be handled under the Act?

Regardless of the type or location of the community association, post-petition delinquent common assessments will not be discharged as long as the debtor or the trustee has a legal, equitable, or possessory ownership interest in the unit.

Will there be any other changes to the Act?

Congress has already adopted and the President signed an amendment that will change the bankruptcy filing fees effective October 17, 2005. A number of bills amending the Act have been introduced. Other technical corrections remain possible. It is even possible that Congress will make substantive changes to the Act.

For more information, you may wish to review articles by Eugene R. Wedoff, United States Bankruptcy Court, Northern District of Illinois, Thomas J. Yerbich, Esq. or Doney & Associates.

Joe West in his Community Associations Network recently wrote about the stupid legislative amendment of the year. The proposed amendment would require associations in Arizona to have a website with current rules and schedule of fees and fines. Failure to do so would require the Association to pay $1,000 per violation (plus $100 per day) to each member. Of course, the Association’s funds come from the owners. So, the association would assess each owner for the fine that they would pay to the owner. Although this is a more extreme example of misunderstanding the source of an association’s funds, we see variations of this all the time. In one case, some homeowners demanded that they should be reimbursed for their hotel expenses when the project was undergoing necessary repairs. Even if the association were obligated to reimburse those expenses, it would mean that all the other owners could have made the same demand. The result would be the same — the association assessing all owners the hotel expenses to pay the expenses.

Going back to legislation, bills often propose expanding the obligations of associations without regard to the fact that these new obligations cost money. Often these bills claim to help homeowners but they do not always consider the association’s cost is paid by those same homeowners. The fact that an association is made up of the homeowners is hidden by the fact that the association is an entity.