Board Arrears When Board Members Fall Behind

One of the most difficult issues for board members and residents of co-ops, condominiums and HOAs is that of arrearages. The problem poses practical, procedural and ethical issues, and can ultimately lead to legal repercussions. There are plenty of reasons why residents may go into arrears on their monthly maintenance or common charges. The question is how to manage the problem effectively, efficiently and with the least overt embarrassment possible.

Responsibility

Perhaps the most obvious and consistent responsibility one has as a member of a common interest community is not to serve on the board or a committee, or to act as a watchdog for your neighbors, but rather to pay your fair share of the community expenses (known as ‘maintenance’ in a co-op and ‘common charges’ in a condominium or HOA). This obligation is contractual, and as a cooperator or member of an association, you enter into it when you buy your unit. It is of vital importance, as the operation of the community depends on your timely payments to make their payments – everything from buying cleaning supplies to making underlying mortgage or debt payments on other community financing. Regardless of the type of ownership, the structure is non-profit, and every penny collected is accounted for and used to maintain the community’s financial health.

Frank Flynn, Managing Partner/Owner of the Flynn Law Group, a firm located in Boston, says, “It comes down to fiduciary duties. Board members or trustees are also required to abide by their fiduciary duties; things like self-dealing, engaging in fair practices and maintaining an ethical obligation to the condominium trust. Board members must uphold the trust amendments and condominium documents. They must abide by those documents they are supposed to uphold.  Timely payment of obligations falls under their fiduciary duties. If they are in violation, they can be removed. They must be in compliance of all trust provisions. It’s a real conflict if they are delinquent. In Massachusetts, after 60 days we would have to bring notices and start a foreclosure proceeding.”

The extent to which non-payment might affect the ability of the entire community to meet its obligations differs with the size of the association or corporation. Clearly, a $1,000 monthly obligation is more critical in a 20-unit property than in a 250- or 2,000-unit property, but nevertheless, arrearages have a negative effect and can pile up. Ultimately, they can have a cooling effect on resale prices if there are too many that have gone on for too long, as buyers often look to that information as an indication of what their potential investment’s financial health looks like.

Reasons for Delinquency

No one buys into co-op, condo or HOA with the intent of defaulting. The purchase decision is saturated with tests on all sides to insure financial success. The buyer wants to feel comfortable knowing they can afford the monthly obligation. The board of the co-op or condo wants to feel secure knowing they have a dependable member and the lender providing the financing for the acquisition of the unit wants to avoid foreclosure, a costly and painful experience for everyone involved. The assumption of monthly financial obligation in the form of maintenance or common area charges is made carefully by all parties and with the best of intentions.

Life doesn’t always turn out the way we plan, however. Cooperators or condominium owners may fall into arrears for any number of reasons. Generally, these reasons fall into two categories;  we can call these two categories ‘with-intent’ and ‘without-intent.’

Most cases fall into the category of without-intent. For example, people lose their jobs. While many corporations and associations require members to have a financial cushion in place when purchasing their unit, unemployment can continue for long periods of time, as was evident throughout the last years-long recession. A resident’s ‘cushion’ can be depleted long before new employment is found. A neighbor who has been a member in good standing and paid consistently for many, many years can now become a drag on the entire building.

Also, people get sick.  Again, a sizeable nest egg can be consumed in a short period of time when serious illness occurs.  Medical insurance doesn’t always cover everything and a resident may be faced with the choice of paying for life-saving treatment or paying the maintenance. And while these crises are going on, life continues to happen. College tuitions still have to be paid, outside help may be necessary on a round-the-clock basis, and we still have to eat.

Arrearages occurring with intent are less common, but they do happen. Usually, they revolve around issues that may come up between the individual resident and the co-op or association board. Say, for instance, that a resident has an ongoing problem with a neighbor involving noise. The co-op or condo board may find it impossible to resolve the issue with the resident causing the problem. The affected resident may choose to pressure the board to resolve the problem by withholding monthly charges and placing them in escrow – a bank account held to the benefit of the corporation or association – until the dispute is resolved. However, though the money is being held for the benefit of the association or corporation, it isn’t being paid into the common accounts and therefore can’t be used to pay the bills – so it’s still an arrearage.  In general, the law prohibits a cooperator from withholding payment in this manner, though many do it all too frequently.

When Arrearages Involve a Board Member

The legal, procedural and ethical considerations involved in arrearages become even more sensitive when it involves a member of a co-op or condo board. But is there any specific legal treatment or procedure for board member arrearages? The answer is a simple no, unless stipulated otherwise by the bylaws of the corporation or association.

Deborah B. Koplovitz, a shareholder with Anderson Kill, a law firm in New York City, says, “Legally, people have an obligation to pay their monthly charges under the co-op or condo’s governing documents. Procedurally, most co-ops have a policy in place that after a month [of nonpayment] the managing agent sends a warning letter. If there’s no response, then it goes to legal counsel or formal action.” She explains that there’s no special policy in most cases for board members. “All boards should treat everyone the same. Ethically, people do get into trouble. It happens, and it makes sense for boards to consider that when people go into arrears. Maybe there is a way to work things out.”

Mark Hakim, Senior Counsel and Director of the Cooperative and Condominium Department at the law firm of Chaves & Perlowitz, based in lower Manhattan, says, “You have to look at the bylaws to determine what if any right the corporation or association might have with respect to dealing with these issues. In older buildings, absolutely not, there is no language dealing specifically with board member arrearages. It wasn’t considered at the time those offering plans were put together. Today, with new plans when we write them, we take these issues into account.”

Christopher Florio, an attorney with Stark & Stark in Lawrenceville, says, “There’s nothing in the law that automatically says a board member in arrears cannot serve or gets suspended.  However, there are documents that we have with clients and have seen in the past that indicate that if a member is not current, the member is off the board. The mechanism to address this in the bylaws.”

What’s a Board to Do?

“Unless your documents are very specific,” says Florio, “it is very difficult to remove or stop someone from serving on the board. The object should be to get this person on a payment plan,” like anyone else in the association. Florio suggests another consideration. “If the board member is an effective why would you want to remove them from the board?” People can run into difficulties.

Hakim says that he always recommends to his clients, “that the board have a specific policy dealing with arrears as it relates to board members, including that no other board member should be addressing it directly with the board member in arrears. It is best to have any such issue addressed through management and counsel.”

Short of removing the board member, another option open to boards is removing the board member from a specific voting role, such as president or treasurer, to prevent the board member in arrears from taking part in critical decision making; boards might also opt to set up subcommittees to vote on certain issues and not permit that member to serve on said committee.

Another question is whether a board can prevent a current board member in arrears from running for re-election, or a resident in arrears from running for the board in the first place. There are ethical questions as to whether a board can ‘out’ a candidate for non-payment during the election process, or even whether the law permits that information, which is generally treated as confidential and fiduciary to the board, from being released. Flynn says he would recommend the following to a board seeking to update their documents: The bylaws should include language that “trustees must abide by their fiduciary duties,” which would include keeping current on common charges, and, “that a member should be in good standing to run for the board.” 

In New Jersey, Florio points out that a recent court decision and resulting legislation known as Radburn provides that if a member is in arrears but on a payment plan, they are in good standing and can run for the board. He also suggests that ‘outing’ someone in arrears is a bad idea, and he recommends against it. It amounts to public shaming, and is not an effective way to collect money. 

Perhaps the most important thing to keep in mind in dealing with these very thorny issues is that as Koplovitz says, “A cooperative is just that; a place where people cooperate with each other.” Arrearage situations can be difficult for everyone – board members and regular members alike. Imagine how uncomfortable that elevator ride can become. While the financial health of the community must be paramount, keep in mind, whoever it is, didn’t go into arrears lightly.  

A.J. Sidransky is a writer/reporter for The New Jersey Cooperator, and the author of several published novels. 

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Comments

  • If a Board member is in arrears for a period in excess of the Co-op rules but is allowed to extra time to catch up before "catastrophic" action is taken, then the time limits go out the window. Any shareholder must now be given the same extension, lest a court challenge to eventual seizure find that the Board member received that special treatment. Discrimination, self-dealing, fiduciary failure could all be claimed. Of course, any shareholder being given extra time without a payment plan in place would also lead to claims of discrimination, but a Board member would surely ruin the arrears management system.