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Court Rules That Partial Assessment Payments Must Be Accepted

By Paul W. Windust, Esq.

The Appellate Division of the Orange County Superior Court recently overturned a decision of its trial court and held that homeowners associations must accept partial payments of past due maintenance assessments. While this decision is precedent only to Orange County trial courts, its straight forward analysis and application of Legislative intent to the rules that govern assessment foreclosures make it attractive to adopt state wide. Under the holding of this case, homeowner associations and their collection agents are required to accept partial payments of past due assessments, drastically changing a long held practice of rejecting tendered partial payments in the absence of an agreed upon payment plan.

In September 2003 an Association we represent was sued by an owner to halt the approaching foreclosure sale of her condominium unit. The Association was foreclosing its assessment lien because the owner had not paid the full amount demanded by the collection firm hired by the Association. What followed was ten years of litigation and over $250,000 in attorneys' fees incurred by the Association. Perhaps that litigation could have been avoided had the Association and the collection firm had the decision in Huntington Continental Town House Association, Inc. v. The JM Trust (2014) to direct how partial assessment payments should be handled.

The facts in Huntington are remarkably similar to the facts faced by our client over ten years ago. The defendant JM Trust owned residential property subject to assessments levied by a homeowners association. After paying regularly for six years, the defendant failed to pay a monthly assessment which started a long string of delinquencies. Eventually, the association recorded a lien against the property. Two weeks later, the association authorized the filing of a lawsuit to foreclose the assessment lien and asked its collection firm to send a letter announcing the association's intention to foreclose. The lawsuit was filed two months later. The defendants requested a payment plan to which the association agreed. However, after a few months the defendants failed to make the promised plan payment. Instead, the defendants tendered the regular monthly assessment amount (an amount lower than the plan amount) which the association returned as it was “unable to accept partial payments.”

Shortly thereafter, defendants tendered a cashier's check for $3,500 to the Association. The Association's collection firm returned the check again stating that it would not accept partial payments. The Association then sued the defendants and was awarded foreclosure and damages. The defendants appealed.

The Appellate Division of the Orange County Superior Court held that there was nothing in the Davis-Stirling Act that precluded acceptance of partial payments once litigation has commenced. The Court reasoned that (former) Civil Code section 1367.1 provides a comprehensive framework detailing how homeowner associations may secure delinquent assessments and related fees by way of lien against the owners' separate interest. In the Court's opinion, subdivision (b) allows for partial payments and delineate to what debts, and in which order, payments are to be applied. The court stated: “The plain language of subdivision (b) contemplates partial payments of amounts owed. There would be no need to explain how payments are to be applied to the various charges if the Legislature contemplated only full payments.”

The Court rejected the notion that subsection (b) applies only in the pre-lien context. Further, the Court noted that Civil Code section 1367.1 is subordinate to, and shall be interpreted in conformity with section 1367.4 which discusses foreclosure procedures and sets limits on when foreclosure is a permissible remedy. Finally, the Court concluded that “[a]llowing partial payments to pay down delinquent assessments after lien recordation would be consistent with the Legislature's desire to limit the remedy of foreclosure to those circumstances where it appears to be the only viable option for collecting delinquent assessments.”

Referring back to our case, the Association did not file suit for foreclosure at first but started down the path of non-judicial foreclosure. The analysis applied in the Huntington case would not seem to distinguish a judicial from non-judicial situation such that partial payments must be accepted regardless of which process is used. The Legislative intent relied upon by the Court is same in either a judicial or non-judicial foreclosure.

After three consecutive months of delinquency, the Association “accelerated” annual assessment and shipped the file off to its collection company. The collection company issued a pre-lien letter, adding a substantial amount in collection fees to the account. When the owner received the letter she objected but eventually tendered the principal amount of assessment payments due without collection fees, which amounted to approximately $800.00. Because the collection company had a “no partial payment” policy it returned the check to the owner and proceeded along to the foreclosure sale. Incensed, the owner filed suit to halt the foreclosure but raised additional claims against the association which has taken years to resolve through the courts. But the question remains, could the years of litigation been avoided had the collection company accepted the partial payment and recovered its collection fees in small claims court? We will never know. But we know now that partial payments must be accepted and applied as directed by Civil Code section 5655.

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