Friday, January 30, 2009

Comply with the FDCPA when you collect!!!

Several years ago, the collection of unpaid condominium association assessments was relatively simple. The procedure to collect remained the same, but with values rising by 2% per month or more, condominium associations who had to go through the foreclosure process, which occurred about 40 times (!) less often than they do now, were paid in full even at the sale, due to the rising price environment.

It has come to my attention that in this declining price environment, some management companies are adding certain fees to offset their internal costs of bookkeeping. I understand the problem that Community Association Managers face. In these unprecedented times, the cost of additional bookkeeping puts a strain on their budget, and the company has somewhat of a “no-win” choice: either find a way to isolate the costs of the extra bookkeeping, such as adding an “actual cost” into the 45-day initial demand letter in the homeowner association setting, (as allowed by law, at least for the time being) or force a rise in the basic management fee, thereby punishing the people who pay for the costs incurred by the people who don’t pay.

The problem arises when those management companies, or the attorneys who represent the associations, attempt to collect an additional fee or cost from the delinquent owner through the demand process. In my opinion, that is a violation of the Fair Debt Collections Practices Act (the “Act”). The Act provides that a debtor is only obligated to pay for debts that he/she legally contracts to pay. In the case of a Condominium Association, the legal contract and agreement thereto is the Declaration of Condominium and the Condominium Documents. Additionally, state law may allow imposition of other costs (the “actual costs” for HOAs, as referred to above).

In the condominium setting, however, there is no authority either under state law, the Act, or the documents to segregate a separate cost and impose that cost against debtors. Make no mistake; the issue is not whether the associations and their managers have the legal right to agree, by contract, for the association to pay the management company additional fees to pay for the costs of keeping track of delinquent owners. That is a matter of contract between the association and the management company. It is perfectly legal to charge an association, say $25 per delinquent owner. That is is a cost of the contract shared by all owners. The problem arises because neither the association, nor the management company, nor counsel for the association, can legally require that a unit owner debtor pay those fees.

I have always counseled my clients and their management companies not to ask for those fees when collecting, either in the initial demand sent by the management company or through legal counsel. While this may not create liability for the Associations, I believe it creates extensive potential liability for the lawyers and management companies who do so.

What’s the bottom line? Management companies and lawyers who demand that condominium unit owners pay additional fees and costs other than those allowed by law are exposing themselves to liability, with the result of possibly hundreds or thousands of individual lawsuits being brought against them for an alleged violation of the Act. While there have been some notable class action lawsuits involving the law firm of Katzman and Korr and my former law firm, Becker & Poliakoff, if I was a plaintiff’s lawyer, I would run an ad seeking out people who may have been charged those extra fees and proceed to bring a thousand actions, each on behalf of an individual owner, against entities who violate the law. While I don’t advocate this, and I certainly don’t wish it on any management company or any lawyer, I feel strongly that my clients and their managers should strictly follow legal guidelines for collections. Being aggressive and taking prompt action is one thing; violating federal and state laws is another.

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