The time to protect your real property assets is before any HOA litigation
Los Angeles Times
By: Donie Vanitzian
26 November 2016
Not long after we moved into our townhouse, we came to loggerheads with
the board. Try as we might to resolve our differences, nothing worked.
My wife and I found ourselves in a lawsuit with the association that
started shortly after we moved here. Yesterday our attorney explained
the gravity of the loss he expects we will suffer within a few months.
We now want to cut our losses by getting the money out of our
mortgage-free home and moving away. But our attorney said we cannot
sell our home or even our vehicles in order to avoid the judgment
because of something called the “Uniform Fraudulent Transfer Act.” Is
This is a lesson for all potential homeowner litigants: Assets must be
protected prior to being sued and prior to you suing the homeowners
association or board directors. Here’s why.
Each titleholder’s real property in a common-interest development may
be pledged as collateral for any association loans, which may be
obtained without approval from owners. That leaves titleholders to pay
the mortgage bill through special assessments or homeowner dues. These
assessments are in essence a lien, levied against each property until
the association’s loan is paid off. When owners sell their
property, the buyer either accepts the lien with the sale or the seller
has to pay the lien off before the sale. That’s just one complication.
If a titleholder is engaged in litigation, the Uniform Voidable
Transactions Act (formerly known as the Uniform Fraudulent Transfer
Act) comes in play. The act, California Civil Code Sections 3439 to
3439.14, specifies that any real or personal property, bank account
funds, safety deposit box valuables, annuities, stocks and bonds are no
longer yours to transfer.
If you were planning to safeguard these assets by transferring them to
a child or another person, you are out of luck if litigation has
started or if a judgment has been entered against you. Late “transfers”
can be voided by the court. If you were to die during this time, your
estate can be attached, preventing any of your property from passing to
your heirs until the outstanding claims are paid.
Though this may sound odd, one way that titleholders can protect their
assets against unexpected litigation is to make certain that they have
a mortgage, and the larger the better. A mortgage can act as a buffer
between an owner’s assets and anyone seeking to take the property.
A mortgage, even multiple mortgages, makes the foreclosure process more
complicated, prolonging the proceedings and giving the owner more time
to move and/or make other arrangements.
A mortgage also brings the bank into the process if an association
starts a judicial foreclosure, meaning that it proceeds through the
court. The bank will vigorously defend its interests, which can
sometimes align more closely with the titleholder than the initiator of
the foreclosure process.
If the association or judgment creditor seeks to foreclose on your
mortgaged property outside the court – a so-called non-judicial
foreclosure – the bank as a priority lien holder must be notified of
the intent to foreclose. If the association or judgment creditor did
not serve you with notice of that proceeding, which is not unheard of,
the bank will have a separate duty to notify you of it, which ensures
that you have an opportunity to defend your asset.
A mortgage also means that less of an owner’s money is tied up in an
illiquid asset in the event that assets need to be transferred quickly.
Contrast that scenario with a “free and clear” property without a
mortgage, which essentially serves as a neon sign announcing that there
are no encumbrances to prevent a “taking” of that property. In
other words, should the right situation present itself, it’s a
methodical but relatively easy land grab.
Whether or not a property is mortgaged, titleholders need to include
“loss assessment” coverage and a large “umbrella” policy as part of
their personal homeowners insurance package.
In the event of litigation or should the association specially assess
the owner during a time of hardship, loss-assessment would typically
pay the owner’s share up to the limits of the policy and after
accounting for the deductible.
An “umbrella” policy provides an extra level of protection to all
existing insurance policies and is only triggered for very large claims
or judgments. Depending on the type of policy you may have in
place, an umbrella may also provide defense attorneys to represent you
and the insurer’s interests. But don’t forget, just like asset
transfers, loss-assessment coverage and umbrella policies must be in
place prior to any litigation. No insurer will take you after the fact.
Your home is a valuable asset, but when you buy into a common-interest
development with a deed-restricted title, you make that asset more
susceptible to liability. It is your responsibility to use the tools
available to bolster your protection and to plan carefully, because
there are far fewer tools available to you once litigation has started.
An Ontario example
There was a condo director in north Etobicoke that had no fear of civil
court; none what-so-ever. Why? Because he was judgment-proof.
He was elderly and his only declared income was a pension cheque. All
his assets were in his son's and other relatives' names. Legally, he
had absolutely no assets at all.
Therefore, he had complete freedom to be as outrageous as he pleased. His
numerous "public" e-mails were defamatory. He lost a civil defamation action,
after defending himself, but the applicant's $40,000 award was
He was an unsuccessful co-applicant in a court application against the
condo corporation and his co-applicant was forced to pay the full $30,000 costs
award when the condo corporation put a lien on his unit.
Only a person in his position has little to fear from the civil courts.
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