SHORT SALES TOOLS FOR SURVIVAL

Prepared by:
Timothy J. Zimmerman



HOAs are no strangers to foreclosures. The loss of HOA assessment income due to foreclosures is substantial. More and more owners are “underwater” in their lot or condominium unit: the amount they owe far exceeds the value. Lenders are taking longer to foreclose and HOAs are experiencing increased losses as a result. One tool to reduce foreclosures is the short sale. Simply put, a short sale is a sale of the property for less than what is owed.

So, you have an owner who is past due on his assessments. His property has been on the
market for months, and he finally found a buyer, but at a price substantially below what he was
asking. In the midst of trying to close on the sale, he has learned that the proceeds are not
sufficient to payoff all of the liens: the first mortgage, the second mortgage, and the assessments.
So, he comes to you and says he wants the HOA to approve a short sale.

A short sale is a way for an owner to avoid a foreclosure, for lenders to recover more
from the sale of the property than if a foreclosure took place, and for the HOA to get a new
owner who will pay assessments in the future. This kind of situation is facing hundreds of HOAs
nationwide. If you or your HOA have not been involved in a short sale yet, chances are you will
be within the next year or so and you should have an idea of how to deal with it.

As an example, assume the owner has a potential buyer who is willing to pay $150,000,
but when the owner bought the unit two years earlier, he paid $180,000 . When he (or she)
bought the property, he got a first mortgage, the balance of which is now $135,000. In addition
to the first mortgage, the owner has a second mortgage of $15,000, and owes the HOA $4,000
for assessments. If the property is sold for $150,000, there is not enough money to pay all of the
secured parties. In addition to that, there are closing costs and real estate broker fees. So, the
owner cannot sell the property for $150,000 unless somebody agrees to take less than he is
owed.. The owner now comes to you as a representative of the HOA. What should you do?

Well, if he already has a title or escrow company involved with the sale, the first thing
you want to see is a preliminary settlement statement. That is a statement prepared by the escrow or title company listing the income and expenses of the sale. It will list the sales price, closing costs, real estate broker commission, and payoff balances to all lien holders. This is important for the HOA. You want to confirm the sales price (yes, I have had owners misrepresent the sales price, although it really is rare). You want to know the payoff amounts to each of the lenders and the real estate commission to the realtor. Lastly, you want to know how short is the owner; that is, how much are the proceeds short from paying everyone in full.

Naturally, owners and real estate agents come first to the HOA, thinking since the HOA is
last in line, it should reduce its lien so that the deal can get done. What they usually do not
realize is that the HOA’s lien is usually senior to the second mortgage. So, the HOA’s response
to the owner or his agent is that the owner needs to be talking to the second mortgage holder, not to the HOA. The HOA certainly is not going to reduce its balance so the second mortgage can
get paid; there is little reason to do so.

Let’s assume for a moment that there is no second mortgage, but the proceeds are not
sufficient to pay the first mortgage, the expenses of the sale, and the HOA. Look to see how
much the real estate agent is being paid. Often, yes often, there will be enough to pay the HOA
but for the real estate commission. It is time to tell the real estate agent to take the hit, at least a
substantial part, along with the HOA. The HOA is not in the business of subsidizing home
sales. If the HOA does not approve the sale, the real estate agent will not get a commission. So,
try to strike a balance so the agent gets a reasonable amount and the HOA gets as much as it can.

What else can you do as an HOA? Remember, if the deal closes, you get a new owner
who presumably will start paying the new assessments, so closing the deal helps cut off an
ongoing problem and continual shortage in assessment payments. You really do want a new
owner in there. Consider allowing the owner to close by paying the HOA less than the amount
owed from the sale, but have the owner sign a promissory note for the difference and let him
make payments. Make sure the note has a provision for attorney fees. If he balks at that, remind
him that if the first mortgage is foreclosed and the property sold, he will still be liable for the full
amount of assessments and attorney fees, and repayment terms will not be as attractive. Taking a promissory note for the difference is not fool-proof, however, since the note is unsecured. The
owner could always file bankruptcy later, resulting in little on no payment on the note.

Negotiating a short sale is not easy. Often the owner does not approach the HOA until
late in the sales process or with a foreclosure sale set to take place soon, creating time pressure.
Sometimes the HOA will need to play chicken and be willing to risk a failed sale to get what it
wants. A short sale may fall through because the HOA and the owner (or the agent) cannot come
to terms, but do not let that discourage you. Remember, if the first mortgage holder forecloses,
the owner will still usually be personally liable for the unpaid assessments as well as any second
mortgage. Thus, the owner will want to do his best to get the short sale done if it likely will
bring more money than a foreclosure. The HOA will need to decide when to hold tough to make
sure it gets its fair share, but it will need to be reasonable to get a deal done.

A short sale can be a useful tool for HOAs to recover assessments which may otherwise
be lost. You may win some, you may lose some. But, in our current economic environment,
boards should be willing to consider short sales as an opportunity to reduce losses and improve
future cash flow.

Board Member Fiduciary Duties

June 4, 2009

Written by: Peter Harrison


One of the biggest concerns that we see with our clients is the fulfillment of fiduciary duties. What are they? Are they being met? What liability is associated with them?

In order to fully understand these “duties,” it is important to know what a fiduciary is. Encyclopedia Britannica states that a fiduciary is: “a person who occupies a position of such power and confidence with regard to the property of another that the law requires him to act solely in the interest of the person whom he represents. Examples of fiduciaries are agents, executors and administrators, trustees, guardians, and officers of corporations. They may be contrasted with persons in an ordinary business relationship, in which each party is free to seek purely personal benefits from his transactions with the other.”

Once the meaning of fiduciary is understood, it is important for board members to understand where that fiduciary duty comes from. Board members have broad statutory authority to fulfill their fiduciary duties. UCA § 57-8-3(20) states that the board shall be charged with and having the responsibility and authority to make and to enforce all of the reasonable rules covering the operation and maintenance of the property. UCA § 57-8a-102(3) states that the board has the primary authority to manage the affairs of the association. The Utah Revised Non-Profit Corporation Act also delegates fiduciary duties to board members in UCA §16-6a-801 through 817.

A board member of an HOA has multiple fiduciary duties that need to be met. The first of these duties is the Duty of Care. Fulfilling the Duty of Care means to act with the care of a reasonable prudent person. It also means that a board member needs to act in the best interest of the HOA, and to do so in good faith. A board member who meets this duty will regularly attend board meetings. In considering options that are presented to the board they will exercise independent judgment. In exercising independent judgment they will ensure that they are informed, and relying on expert advice in making decisions concerning the HOA.

The next duty is the Duty of Undivided Loyalty. This duty highlights the fact that board members need to avoid conflicts of interest. If the board is presented with a matter that presents a conflict of interest to an individual board member, that board member should be recused from voting on the issue. A classic example of a conflict of interest is when a board member is presented with an opportunity to enter a self-serving transaction. A self-serving or self-dealing transaction consists of a fiduciary taking advantage of his or her position in a transaction and acting for his or her own interests rather than for the interests of the homeowners. When a fiduciary engages in self-dealing, she breaches the Duty of Undivided Loyalty by acting in her own interests instead of the interests of the represented party.

Finally, board members are faced with the Duty to Act Within the Scope of Authority. Essentially, what this means is that board members have an obligation to know and understand their duties as outlined in the declaration, bylaws, and Utah (or any state) code. Additionally, board members who exceed their authority and cause damage, may be personally liable for their unauthorized actions. This duty also contains a requirement of confidentiality.

The business judgment rule protects from liability board members who act in good faith, without fraud, self-dealing, or unconscionability, provided their actions are authorized by law. A board member who decides to disclose confidential information contrary to the determination of the majority of the board generally cannot claim the protection of the business judgment rule because such board member’s action is not authorized by law. A single board member has no authority to act on behalf of the HOA and cannot lawfully take action contrary to the decision of the majority.

A board member has a fiduciary duty to the HOA to maintain confidentiality of materials determined by the board as a whole to be confidential. A single board member has no right to unilaterally reject that determination.

By utilizing standard business management practices, board members can substantially reduce the risk of litigation for breach of fiduciary duties. Forward thinking, team work, and solid leadership are the correct elements for a successful HOA. Board members need to ensure that applicable law and governing documents are properly followed. Professional advisors, including attorneys, accountants, reserve study consultants, engineers, architects, insurance brokers and community association management consultants are among the paid advisors who may be engaged to either advise on a narrow issue or more broadly help board members understand and comply with their legal standard of care. For more information on fiduciary duties or other HOA concerns, please contact Peter at phh@vf-law.com.

Satellite Restrictions

May 26, 2009

Written by: Peter H. Harrison

Lawyers are often asked about an HOA’s ability to restrict or prevent the installation of satellite dishes. An HOA generally has the authority to restrict or prohibit all sorts of things; shouldn’t a satellite dish be included? Given that some believe a satellite dish to be a cumbersome eyesore, it would only seem logical that the HOA could preserve the look and feel of the neighborhood by having such a restriction. However, federal law has a different interpretation.

In October 1996, the Federal Communications Commission (FCC) adopted the Over-the-Air Reception Devices Rule (OTARD rule or rule) concerning governmental and non-governmental restrictions on viewers' ability to receive video programming signals from direct broadcast satellites ("DBS"), multi-channel multi-point distribution (wireless cable) providers ("MMDS"), and television broadcast stations ("TVBS").

The OTARD rule prohibits entities, such as community associations, from creating restrictions that impair the installation, maintenance or use of antennas used to receive video programming. The OTARD rule prohibits restrictions that: (1) unreasonably delay or prevent installation, maintenance or use; (2) unreasonably increase the cost of installation, maintenance or use; or (3) preclude reception of an acceptable quality signal. The rule does not prohibit restrictions that merely affect a viewer's ability to receive signals as long as the restrictions do not impair. Therefore, architectural restrictions that affect but do not impair a viewer's ability to receive signals are permissible.

Despite this, there are some allowable restrictions against satellite dishes and antennas. If there are legitimate safety concerns, restrictions will be permitted, even if they impair reception, or delay/increase the cost of installation, maintenance, or use of the antenna. An HOA can enforce a safety restriction while the FCC reviews the validity of the restriction. Valid safety restrictions include preventing people from installing antennas on fire escapes, requiring that a person not place an antenna within a certain distance from a power line, following electrical code requirements to properly ground the antenna, prohibiting installation at a location that will obstruct a driver's view of an intersection or street, and creating installation specifications and requirements that describe proper methods to secure an antenna.

The safety reason for the restriction must be written in a document that is readily available to antenna users prior to installation, so that a person wanting to install an antenna knows what restrictions may apply. The restriction cannot impose a more burdensome requirement than is needed to ensure safety. In addition, the restriction must explain the reason for the safety concern. A safety restriction will not be valid without a specific explanation of its necessity.

HOAs need to be careful when dealing with the use of satellite dishes and should consult with counsel prior to prohibiting or restricting the use of a satellite dish. For more information on this and other HOA information, please email phh@vf-law.com.