The Michigan Court of Appeals, in a 12 page opinion that was just released, has ruled that an assessment levied by a condominium association was invalid because the board of directors failed to follow the requirements of the condominium bylaws.
In that case, the board levied an assessment to raise funds to pay for legal fees for a lawsuit against the condominium developer. However, the board chose to disregard the bylaw provisions which required it to hold a meeting of the Association members and take a vote on whether to file the litigation and whether to approve a proposed litigation special assessment. The board decided to levy the assessment without the required vote. Members of the Association who objected to the failure to take a vote and who declined to pay the special assessment had liens recorded against their units. The Association then promptly filed actions to foreclose the liens.
While the trial court ruled in favor of the condominium association and upheld the assessment, the Court of Appeals reversed. The appellate court held that the board was not authorized to levy the assessment in its sole discretion, but instead was required to follow the processes contained in the bylaws. The court reasoned that the bylaws were in the nature of a binding contract between the association and its members. The appellate court rejected the condominium association's arguments that the bylaw requirements were too onerous or that they purportedly conflicted with the Michigan Nonprofit Corporation Act. The court also determined that, even if a particular procedural requirement of the bylaws was unreasonable, the trial court could have severed that provision and still give effect to the remaining provisions.
Additionally, the appellate court also reversed the trial court's award of attorneys fees to the Association. The Association incurred approximately $15,000 in legal fees in attempting to collect the $3,000 assessment. The Court of Appeals found that since the assessment was invalid, attorney fees and costs were not authorized.
This case underscores the importance of a board of directors knowing what provisions are in the condominium documents and obtaining sound advice and direction from its association counsel. Our law firm represented the co-owner in this case because we believed that the board should not have wholly disregarded the requirements in the bylaws.
Nottingham Village Condominium Association v. Pensom, Docket No. 319552
The size of a community association’s budget will vary depending upon the number of elements of the development that it may have the responsibility to maintain, such as landscaping, sprinkler systems, roadways, roofs, windows, balconies, etc. If an association has a management company, the budget must account for that, too. No matter the size of the budget, associations rely on the payment of assessments from their members to raise the money necessary to pay their contractors and service providers. Since association members have their own household budgets, they tend to keep a keen eye on association spending and typically want the Board of Directors to operate as lean as possible and keep the assessments down and in check. “Where is all the money going?” is often a frequent refrain at annual meetings and in chats between neighbors. All of this may lead condominium or homeowners associations to adopt budgets that do not have much, if any, room for cost-overruns and unanticipated expenses, and which depend on virtual 100% compliance by association members in the payment of assessments. In tough economic times, if several members begin to fall several months behind in paying the assessments, the association may suddenly find itself struggling to pay its bills. Therefore, it is vital for a community association to ensure that it has a collection policy and procedures in place, and that it follows them.
For instance, the policy and procedures can and should provide for the following:
· Payment due date and grace period;
· When a “reminder” or demand letter will be sent to a member who has fallen behind;
· When the matter will be turned over to provide that when a members falls two months behind, the matter is turned over to the community association’s legal counsel;
· When a lien will be recorded;
· Whether the Association will pursue collection from a tenant in the condominium unit (as provided in the Michigan Condominium Act);
· How payments will be applied (i.e., first to legal fees and costs incurred, then to late charges/interest, and then to assessments in order of greatest delinquency).
The collection policy and procedures should be systematically followed, and the members should be aware of them. The further a member falls behind, the bigger the debt becomes, and the more difficult it will be to collect what is due and bring that account current. Thus, minimizing delinquencies and promptly taking action in accordance with a collection policy is critical because the association’s cash flow will be significantly impacted if there are too many members who are substantially behind. Remember, a community association is technically a non-profit corporation and although the members may be your next-door- neighbors, sound business practices should be followed in running the association’s financial affairs. An experienced community association attorney should be able to assist the association in drafting and adopting a good collection policy.
In a Michigan Court of Appeals decision released on March 18, 2014, the court ruled that a mortgage foreclosure purchaser's obligation for unpaid condominium assessments begins when they acquire the Sheriff's Deed to the condominium unit.
The case involved a dispute between Wells Fargo Bank and a condominium association as to when the bank, which was the purchaser of a condominium unit at its own mortgage foreclosure sale, began to be responsible for the payment of condominium assessments. The bank took the position that it's responsibility began at the close of the redemption period (typically six months later), and not before. The Michigan Court of Appeals rejected that position, however, and there is now a published court decision in the State of Michigan which supports the long-espoused view of many Michigan condominium association lawyers that the purchaser at a mortgage foreclosure sale must begin paying condominium assessments from the date of the sale forward.