What Happens After the Bankruptcy Discharge: An Emerging (and Disturbing) Trend in Foreclosure, Bankruptcy and HOA Law

The prevalence of foreclosures in the real estate market has had several unexpected repercussions to distressed homeowners who have made the decision to walk-away from their home.  Banks appear to be unable, incapable, or unwilling to handle the volume of foreclosures, so a distressed homeowner may continue to own his or her home for months, and occasionally even years, after receiving a Notice of Trustee’s Sale (rather than the 90-days stated in the Notice).

Because you are legally responsible for payment of assessments until you are no longer the owner, it is important that you continue to pay your HOA assessments until you have received confirmation that there is a new owner (most commonly in the form of a Trustee’s Deed Upon Sale).  Many people who make the mistake of thinking that they can simply return the keys to the bank or that the Notice of Trustee’s Sale means they no longer own the property get a rude awakening after a few months: A hefty bill for unpaid assessments from the HOA that in all likelihood includes collection costs such as attorneys’ fees.  The HOA also may file a lawsuit to collect those assessments.  Because such collection actions almost always increase the amount you are obligated to pay, it is important to make sure that you continue to pay your assessments until the trustee’s sale is completed.

Many distressed homeowners are turning to bankruptcy as a solution, logically thinking that it simultaneously eliminates their personal obligation to pay HOA assessments and creates the vehicle for walking away from their home.  Ordinarily, the bank will seek, and obtain, permission from the bankruptcy court to conduct the trustee’s sale and notice the trustee’s sale.  Then, the homeowner is discharged from bankruptcy and is able to start fresh without being weighed down by the debts.  At least this is how it is supposed to happen.

But what happens if the bank postpones that trustee’s sale or, as we are commonly seeing, simply cancels it for whatever reason.  One possible reason for the bank to postpone or cancel the sale is that it has too many foreclosures and does not want to take on the added cost of HOA assessments, so it decides to hold off on the foreclosure, thus leaving you responsible for assessments.  The HOA does not care that the bank is dragging its feet, but you should—you remain obligated to the HOA until you are no longer the owner!  So while the discharge may have eliminated your personal liability for past assessments, the HOA can, and will, begin to charge you for assessments that accrue after you have been discharged from your bankruptcy.  So it is important for a distressed homeowner who has filed for bankruptcy to stay abreast of the trustee’s sale and not simply assume that the bank has followed through with its stated intention of foreclosing.

The distressed homeowner is not without possible remedies against the bank.  Call us to schedule a consultation with an attorney to discuss these possible remedies.

Homeowner and condominium associations are increasingly adopting policies for shutting off water or other utilities where an owner has fallen behind in his or her assessments, owes fines or penalties for violating the governing documents, or is supposedly refusing to follow rules.  Although people who own in a homeowner association generally are obligated to pay assessments, associations commonly use these water shut-off policies in order to force members to pay assessments, fines, penalties or other charges that they may not owe.  These owners often face an unfair choice: Pay what we tell you to pay or live without water. 

What many homeowners do not know is that such policies in many cases may be unenforceable. There is no reported case in Arizona that authorizes a homeowners association to shut off water or other utilities. The determination of whether the policy is enforceable depends on several factors, including (a) an association’s governing documents, (b) Arizona’s planned community and condominium laws, (c) the history of the policy and its enforcement, and (d) whether the association is seeking to collect assessments or fines and penalties.  In many cases, the water shut off policy is not enforceable and can be successfully challenged in court.

In most cases, we find that the application of these factors provides fertile ground for challenging a shut-off policy.  While this is especially true where the association does not pay for the utility that is the subject of the shut off policy, the association does not necessarily gain the right to shut off essential services even if it pays for the utilities.
Please understand that we are not advocating you to refuse to pay assessments.  Assessments have been called the “lifeblood” of a homeowners association and an association has every right to collect assessments…provided that the assessments are valid and it does so within the law.  If you believe that assessments are invalid, we strongly encourage you to seek legal representation to learn about your rights and obligations.  We recommend you seek legal counsel before taking any action.  Although many people believe that they can simply stop paying assessments, it is our experience that this is not the wisest course of action and many people who stop paying assessments quickly regret it.

Courts cannot, and should not, condone a homeowner who has refused to pay valid assessments.  But the courts also should not condone a homeowners association that has exceeded its lawful powers and seeks to use unlawful collection tactics.  And, in many cases, the association is using the threat of water shut off to force a homeowner to pay disputed fines or penalties. 

A. An Association’s Governing Documents Rarely Permit the Disconnection of Water of Other Utilities.

Although many associations will argue that their governing documents (CC&Rs and Bylaws) in general provide sufficient authority for shutting off utilities, this is rarely the case. Unless an association’s CC&Rs explicitly creates the right to shut off utilities as a collections tactic, then no such right exists.   Even if the CC&R’s provide such an explicit right, that provision may be found to be unlawful.

The CC&R’s constitute a contract between the Association and the homeowners. In most cases, the governing documents spell out the rights and remedies of the association.  Rarely do these enumerated rights include the ability to shut off water or other utilities for non-payment.  Rather, they generally permit an association to commence legal action for damages or foreclosure (if applicable) and on occasion may also allow the association to suspend certain rights and privileges, such as the right to vote.  If the right to shut off water is not expressly spelled out in the CC&Rs, then it is not part of your contract with the association.

Nor can the right be inferred or implied from a general right to collect assessments or charge fines. One court addressing this question has decried this “extra-legal means of enforcement,” holding that the association in that case lacked the legal right to shut off a homeowner’s water.  See Western v. Chardonnay Village Condominium Ass’n, 519 So.2d 243 (1988).  In general, the absence of express language authorizing utility shut off, and the inclusion of specific language spelling out the methods for collection of unpaid assessments, as if often the case, defeats any argument that such an implied right exists.

The association’s CC&R’s generally do not give it the right to employ collection tactics such as shutting off water, disconnecting utilities, or prohibiting parking any more than the association could threaten to change the locks on your house or condominium.  And an association does not have the right to change the locks on your house or condominium.

B. Arizona Law Does Not Permit the Disconnection of Utilities.

Arizona law also does not authorize the disconnection of water or other utilities.  Arizona’s statutes governing condominiums and planned communities generally restrict exclusive an association’s remedy for non-payment of assessments to commencement of a civil action for damages and/or foreclosure of its lien (where applicable).  Nothing in Arizona’s Planned Communities Act or Condominium Act allows an association to disconnect these essential services any more than it could change the locks on your home.  Simply put, an association does not have the authority under Arizona law to deny water or other utilities as a means of collecting for past due assessments or penalties.

Arizona courts have analogized homeowners associations to landlords in many respects.  See Martinez v. Woodmar IV Condominiums Homeowners Ass’n, Inc., 189 Ariz. 206, 941 P.2d 218 (1997).  A homeowners association has no greater right to shut off water or other utilities than a landlord.  And a landlord generally cannot shut off essential utilities in Arizona—even where the landlord pays for those utilities—as a means of compelling payment of rent.  See A.R.S. § 33-1364.  Thus, the fact that the homeowners association might pay the utility bill as a common expense does not necessarily create the right to shut off that utility to a non-paying homeowner.

The disconnection of essential services also arguably raises serious due process concerns.  The Condominium Act and Planned Community Act both require commencement of legal process in order to collect past due assessments or fines.  Where an association has received a specific grant of power under statute, a collection policy that circumvents the legal process provided, and avoids the judicial oversight inherent in the legal means set forth in the statute, offends basic concepts of due process.

C. The History and Application of the Policy Is a Crucial Question.

Even if state laws and an association’s governing documents permit shutting off utilities, one should examine the history of the policy and how it is being enforced.  Consider the following questions:  Was the policy adopted in a properly noticed, open meeting? Was the policy communicated to the homeowners?  Is the policy uniformly enforced? Unless you can answer, “yes,” to each of these questions, the homeowner may have valid grounds for challenging the policy.

Policies that are discussed and adopted in closed, private meetings by a select handful of homeowners subvert Arizona’s open meeting statutes (A.R.S. §§ 33-1248 and 33-1804), and are invalid and unenforceable. Although the open meeting statutes do not explicitly spell out the remedies for their violation, the statutes would be meaningless if actions taken during a closed or secret meeting are valid. Even if the policy was adopted in a properly noticed, open meeting, the failure of the association to disseminate the policy to homeowners could render the policy otherwise unenforceable.

Such policies, however, are almost never enforced uniformly or objectively.  The policy is often enforced only against those designated as troublemakers or outsiders; or delinquent board members may exempt themselves or their friends from the harsh application of the policy; or the policy may be enforced arbitrarily or capriciously.  Any evidence that the policy is not enforced on a uniform and non-preferential basis renders the policy enforceable.  It also violates an association’s duty to treat all homeowners equally and fairly.

D. Is the Association Shutting Off Water as a Fine or Penalty?

The non-payment of assessments, as discussed above, should not be condoned and Arizona law provides remedies for the non-payment of those assessments.  In many cases, an association has threatened to shut off water or other utilities as a means of forcing a homeowner to pay disputed fines, penalties, or fees.  The nature of the monetary amount that is the subject of the collection effort is a crucial factor that must be considered in challenging the water shut off policy.

Although it is our position that water shut-off policies are almost always unenforceable, the challenge to the policy is strengthened where the alleged delinquent balance includes disputed fines, penalties, and charges other than just assessments. The rationale common employed by an association defending a water shut-off policy is that assessments are used to pay the utilities.  This rationale is absent where the balance consists, in part or whole, of fines or penalties for alleged (and unproven) CC&R violations.

Arizona law distinguishes between assessments and fines.  For example, a homeowners association has the statutory right to foreclose where the unpaid assessments exceed $1,200.00 or have not been paid for more than one year, the association generally does not have the right to foreclose for violation fines or penalties.  If an association cannot foreclose if you paint your house the wrong color or leave your trashcan out overnight, why should they be allowed to shut off your water in order to force you to pay fines and penalties that you dispute and may not even be valid!

E. Conclusion.

In many cases, a policy that allows the association to deny essential utilities or access to your unit is subject to challenge.  Because every case is unique, you should not rely on this article as legal advice specific to your situation.  But if you are faced with threats of having your water shut off, you should immediately consult a lawyer.