HOA Private Government

California attorney Tyler Berding writes in the April 2010 Executive Council
of Homeowners’ (see note 1) ECHO Journal, “Bankruptcy Won’t Work,” about
“the practical and legal reasons why associations almost never go into
bankruptcy.” Essentially, Berding informs his readers that the HOA is
communal, like a partnership, where all “partner-members” are responsible
for the debts of the HOA “partnership”. Didn’t anybody tell you that before
you bought your home? Or that your home is collateral for the survival of
the HOA?

He correctly maintains that because the HOA has “deep pockets”, the pockets
of its individual members, jointly and severally, the pursuit of a
bankruptcy is not rationale. The judge will assess the remaining solvent
homeowners to ante-up to pay all the debts of the HOA. One could say it’s
one of those undisclosed pitfalls of HOA ownership. Pursuing individual
homeowners who haven’t the means to bail the HOA out of its financial crises
is just a fruitless undertaking by the members, who still do not want to
accept the failure of the HOA legal structure to protect their individual
assists. They have been blinded by the false propaganda of “the voice of the
community” thinking that “community” means their own individual interests,
and do not see the communal nature of their HOA membership.

Berding does not mention that the failure to budget for bad debts, a
standard accounting practice, reflects poor management by the HOA board, and
its advisors (although he admits to understanding the meaning of
“assessments for bad debts” below). Failure by incompetent boards and its
advisors to act in a prudent manner, as required under law, is another
inherent fault, another deficiency, within the structure of the HOA concept.
You can’t be successful in mass merchandising HOAs and getting all those
people to buy if you bring up these serious financial negatives. Or to get
the legislatures and planning boards and local governments to
enthusiastically support and encourage HOAs if you bring up any negatives,
can you?

Here are some of Berding’s messages from the ECHO Journal:

“Ironically, it is not unusual to find that an association’s largest
“creditor” is itself. The failure, year after year, to make reserve
transfers creates unfunded liability and makes it impossible for the
association to effect repairs when the time comes. . . . . The fact that
some owners don’t pay their share of what their association owes to a
creditor is not enough. That seeming shortfall becomes an internal debt to
the association, which is in turn simply spread again across all owners in
the form of assessment increases or emergency special assessments, until the
creditor is paid in full. The ability of an association to pay its
obligations is as deep as the combined equity of all property in the
community and the assets of all of its members. This makes bankruptcy not a
feasible option for associations.
. . . .
“For all of these reasons, a bankruptcy filing will not normally be
considered a remedy available to a community association. There would have
to be no equity available in property in the community, and each individual
owner would have to file his or her own bankruptcy petition for that to be
effective as against the association’s creditors. That’s simply not going to
happen or ever be a permanent situation. As owners walk away from property
and mortgage holders take it back, the banks become responsible for the next
round of assessment shares to pay the creditor. Lender foreclosures wipe out
mortgages and create new market equity in property. Owner bankruptcies, even
if pre-petition assessment debt is discharged, won’t address post-petition
rounds of assessments for bad debt as they’re spread across all owners.
Shares may slowly contract and debts can be negotiated, but the principle
that the obligation is shared by all remains.”

Notes (emphasis added)

1. The Executive Council of Homeowners (ECHO) is a nonprofit membership
corporation dedicated to assisting California homeowners associations. “The
mission of ECHO is to advance the concept, interests and needs of homeowner
associations through education and related services to board members,
homeowner members, government officials and the professionals in the
industry.”

Please pay attention to the contradiction in the mission statement of ECHO
above. Do they speak for the homeowner members or for the HOA boards? Anyone
with anyone knowledge of the legal structure of corporations understands the
“class” distinctions between management and owners. With respect to HOAs,
the attorneys are careful to state that the HOA attorney’s client is the
HOA, as represented by the board through its president, and not the class of
individuals who are owner-members. To state that the HOA board represents
the interests of any individual homeowner, or even the entire class of
owners is a false and misleading statement. The statutes and CC&Rs do not
grant the HOA board the authority to represent the interests of the
membership before public entities.

Its name is misleading and should read: The Executive Council of Homeowners
Associations, ECHOA!