Filing for Chapter 11 bankruptcy reorganization: viable
option for condo associations, HOA’s
By JEFFREY S. BERLOWITZ
Special to the Miami Herald
22 March 2015
While the housing market in South Florida is continuing its recovery,
many of the community associations in the region are still struggling
with delinquencies by unit owners in the payment of their association
dues. The shortfalls in the associations’ collections, which in some
cases have also been exacerbated by gross mismanagement or even theft
by members of association boards, are causing scores of South Florida
condominium and homeowners associations to experience significant
difficulties in satisfying their operational expenses.
For associations that are incapable of meeting all of their financial
obligations, seeking relief through a Chapter 11 bankruptcy
reorganization plan has now become a viable option in order to avoid
forcing some unit owners to pay more than their proportionate share of
the assessments.
While many typically think of financial reorganization under Chapter 11
as being reserved exclusively for large corporations, condominium and
homeowners associations are also entitled by law to file for this form
of bankruptcy relief. In fact, over the last few years, a couple of
South Florida associations have already emerged through a successful
Chapter 11 reorganization and regained their financial footing.
Chapter 11 is a designed financial reorganization program that is
operated under bankruptcy court supervision, and it enables an
association to restructure its debt with the protection of an
“automatic stay,” which halts creditor collection proceedings during
the pendency of the bankruptcy case unless they are otherwise allowed
by the court. An association in Chapter 11 has the opportunity to
negotiate with its creditors, cancel or renegotiate onerous contracts
and leases, and avoid the seizure of assets and garnishing of bank
accounts by creditors holding judgments.
In South Florida, two recent cases of association bankruptcies
highlight the potential benefits for financially strapped condominiums
and HOAs. The first was The Spa at Sunset Isles, which is a 232-unit
condominium in Palm Beach County that filed for Chapter 11 bankruptcy
in 2010. Because the community’s financial strains were being caused by
many units under foreclosure, the bankruptcy court issued an order
requiring the lenders that were languishing in their foreclosure
actions to begin paying monthly assessments to the association before
taking title to the units and, at the same time, ordered them to
complete their foreclosure actions. Given that certain of The Spa’s
units were in foreclosure proceedings for more than three years, the
bankruptcy court’s order provided immediate and substantial relief.
Ultimately, the community confirmed its reorganization plan with
substantial funds in its operating account resulting from the payments
it received from the foreclosing lenders.
Another recent South Florida association bankruptcy was filed last
November by the Bella Luna Condominium Association, which was facing
court battles with creditors, a 25 percent delinquency rate among its
residents, and a threat from the City of Hialeah to cut off its water
due to significant arrears in the payment of its water and sewer bills.
With the help of the bankruptcy court, the condominium was able to
slash its unsecured debt by approximately 85 percent and restructure
its remaining debt, paving the way for this community to regain its
financial well-being.
With the modest pace of the recovery in the housing market, many
community associations are still facing significant financial distress,
and Chapter 11 bankruptcy reorganization represents perhaps their best
possible opportunity for a positive financial future. In fact, for
associations that continue to face an exorbitant percentage of units in
prolonged foreclosures, the ruling in the Palm Beach County case could
set the tone for similar cases in the future. It has the potential to
open the door for other associations to seek similar relief whereby
lenders behind with their foreclosure actions are forced to begin
paying assessments before they take title to the units, which will
undoubtedly compel them to expedite their foreclosures.
In light of the two successful Chapter 11 bankruptcy reorganizations by
South Florida community associations, the associations that currently
find themselves in unsustainable financial straits may consider a
bankruptcy reorganization filing as a viable option for a potentially
solid financial future.
Jeffrey S. Berlowitz is a partner with the Coral Gables-based law firm
of Siegfried,
Rivera, Hyman, Lerner, De La Torre, Mars & Sobel, P.A. He has
focused on bankruptcy law since 1993, and the law firm focuses on
community association law and represents more than 800 Florida
associations.
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