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Partial Payments of Community Association Delinquent Assessments: To Accept or Not to Accept...

By Andrea L. O'Toole, Esq. and Emily K. Clark, Esq.

The issue of whether to accept a delinquent owner's offer of partial payment of their debt comes up often and is usually not taken lightly by homeowner association boards. The offer, by definition, is less than the owner owes to the association. As such, the board's dilemma is whether to accept less than is owed to the association and to forego further collection efforts on the remainder, or to reject the offer and attempt to collect more or all of the amounts owed, usually in an effort to get the association as close to “whole” as possible. Each collection is unique and, as can be imagined, there are numerous factors to consider at each stage of the collection process. A recent assessment collection case in which the court held that an association must accept a partial payment is garnering a lot of attention and has been the subject of internal discussion at B&W as our attorneys advise our clients on how to address this new case.

In Huntington Continental Townhouse Association, Inc., v. The JM Trust,1 the Appellate Division of the Orange County Superior Court held that the Davis-Stirling Common Interest Development Act (the “Act”) compels homeowners associations to accept and apply partial payments, even where that payment reduces delinquent assessments owed but not any other amounts due (such as late fees, interest, collection agency fees, attorneys' fees and costs of collection). While managers and directors may now be wondering how this case will affect an association's ability to collect the “other” fees and collection costs to which it is entitled as explained below, we conclude that the case is not binding on California homeowner associations and until a definitive applicable ruling is made, there is no prohibition on accepting partial payments.

The Huntington Continental Case

A homeowners association filed suit to foreclose on an assessment lien. Thereafter the owner and association entered into a payment plan; the owner made two payments under the plan and then failed to make the next two scheduled payments; the owner later tendered the regular monthly assessments for two months and after that tendered a check of $3,500 to the association (which, according to the Appellate Division, would have brought the owner's past due account current not including collection fees and costs). Although the association's president informed the owner that the association's counsel would apply the $3,500 payment to the owner's delinquent account, counsel returned all checks, asserting that it was unable to accept partial payments. The association was awarded foreclosure and damages and the owner appealed. The Appellate Division reversed the court's award and held that the partial payment had to be accepted.

In its decision, the Appellate Division noted that there is nothing in the Act that precludes the acceptance of partial payments of delinquent assessments once collection efforts have been commenced. However, the court found that obligating associations to accept partial payments is consistent with the Legislature's intent to limit the remedy of foreclosure to only those instances where it is the only viable option for collecting delinquent assessments. The opinion does not address how the late fees, interest and costs of collection are dealt with once the assessment principal is paid. As experienced managers know, the law (Civil Code section 5720) prohibits associations from foreclosing until the assessment principal exceeds $1,800 or is more than 12 months delinquent. Thus, the effect of accepting a partial payment that cures the delinquent assessment principal but nothing else means the association could no longer utilize its foreclosure rights. Instead, it would need to file suit to collect the remaining amounts or passively leave its lien in place until a transaction on the property (e.g. sale or refinance) might yield a recovery. All this adds uncertainty and delay in the collection process and could have the effect of requiring the community at large to absorb collection costs and fees.

Huntington Continental is not Binding Except in Orange County

Perhaps the most interesting and significant feature of Huntington Continental is that it was decided by an “Appellate Division” of the Superior Court. An Appellate Division of a Superior Court only hears appeals of Superior Court matters in which the amount in dispute is less than $25,000 as was the case in Huntington Continental. The Appellate Division's opinion is “certified for publication,” meaning it may be cited or relied on by courts and parties as precedent.2 However, while it may be binding on other Superior Courts subject to that Appellate Division, it is not binding in other counties.

Other courts could use Huntington Continental as persuasive precedent; however, its holding is not binding and associations are not required to accept a partial payment merely because it reduces the delinquent assessments owed. As such, whether to accept the offer of a partial payment is still a decision in which boards must carefully consider weighing all the relevant factors.

1  2014 WL 173800 (Appellate Division, Superior Court, Orange County) (Jan. 13, 2014).
2  Cal. Rules of Court, Rule 8.1115.
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