HOAleader.com - Tip of the Week - July 9, 2010
Published: Thu, 07/08/10
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When Selling Your HOA Debt Makes Financial Sense
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It's tempting. You've got thousands of unpaid assessments, and
collecting them seems hopeless. Then a white knight gallops in
and offers to pay you to purchase that debt. In this week's tip,
we discuss whether selling your association's bad debt is a
violation of your fiduciary duties.
"Though I haven't seen any associations sell their debt, I think
it's an interesting question," says Sharon Glenn Pratt, a
principal at Pratt & Associates in Campbell, Calif., who advises
many homeowners associations.
The answer may depend on what your association has done to
collect the debt and the solvency of the debtors.
"I can certainly envision in the environment we're in right now
with collections, the answer might come down to how collectible
that judgment is, and sometimes selling it for pennies on the
dollar might be within your fiduciary duty because it might be
the best you can do," says Pratt.
"But there are really good collection companies who can work with
you without your association selling the debt. They can pull
credit reports to find out whether the homeowners work and what
other property they own, and judgments are good for 10 years. So
you'd have to look at how collectable the debt is, take measures
to collect, and then evaluate whether the board is making a good
financial decision by selling the debt. If it's just for your own
convenience to sell it for pennies on the dollar, it could be a
violation of your fiduciary duty."
Whether the debt is uncollectible is critical, agrees Robert M.
DeNichilo, an attorney at DeNichilo & Lindsley LLP in Irvine,
Calif., who specializes in representing community associations. "
To determine whether the board breached its fiduciary duties, you'
d have to use the business judgment rule, which presumes a board'
s actions were taken in the interest of the corporate
shareholders. If the debt is uncollectible, I don't see how it
would be a breach because collecting something is better than
collecting nothing."
You must also weigh the idea of selling your debt against your
ability to collect if you place a lien and foreclose against
homeowners. For more information on that, see our new article:
http://www.hoaleader.com/members/453.cfm
Best regards,
Matt Humphrey
President
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