Chapter 11 Reorganization for Community Associations

This post was written by Gian Ratnapala, Esq., Associate Attorney for PeytonBolin.

 Gian Ratnapala, Associate Attorney, PeytonBolin

In the past few years almost 100 condominium associations nationwide have filed for chapter 11 reorganization under the bankruptcy code.  A majority of these associations are Florida condominium associations.  Bankruptcy is a great tool for relief from insurmountable debts for the condominium associations in distress.  A reorganization under bankruptcy helps a condominium association to pay off its past due obligations through a reorganization plan and obtain a fresh start for the community.

Why Seek for Bankruptcy Protection?

For most associations, bankruptcy would be a viable solution when it lacks sufficient income to meet its financial obligations as they become due (cash flow insolvency).  In the recent Florida bankruptcy cases for condominium associations, the association was unable to meet its obligation to one or two large creditors, who had provided goods or services in the reconstruction of condominium associations after natural disasters.  The associations were unable to meet these major expenses in the face of the declining real estate market and the increasing level of unpaid assessments by unit owners.

Another major factor for an association is the rising level of bankruptcies within their membership.   A great number of unit owners who are insolvent are seeking protection under chapter 7, 11, or 13 of the Bankruptcy Code.  Many of these cases result in reduced liability of the unit owner to the association.  Community associations are least protected within any chapter of the bankruptcy code when unit owners file for protection in bankruptcy.  Florida Bankruptcy Courts have consistently held that a condominium association's lien for unpaid assessments are unsecured after valuation of the property against the first mortgage, and in all cases where the unit owner seeks to “strip off” the association's lien, such relief is granted.  An association in distress is further driven into insolvency by such protection awarded the unit owners.

In considering all circumstances surrounding distressed associations, it is hard to find reasons why an association itself should not seek the protection of the Bankruptcy Code.

What does Reorganization Mean to a Community Association?

A community association is a not-for-profit corporation organized under the laws of the state in which it resides.  Despite the fact that a community association is run by volunteer members, it is still a business operation that needs planning, management, and adherence to the corporate laws.  If an association is unable to make its day to day obligations, and is in the verge of insolvency due to increasing liabilities and insufficiency of the assessments actually collected, an association may consider seeking relief in bankruptcy.

There are several advantages in filing for bankruptcy protection:

• The association can take advantage of the automatic stay that will be imposed upon filing a bankruptcy petition, which will stop all collections or proceedings against the association.
• Within a chapter 11, the debtor usually retains management rights of the day to day operation of the association.
• Subject to court approval, the association can assume or reject any existing contracts for management or provision of services to the community (such as landscaping contracts, bulk cable TV agreements, etc.)
• The greatest advantage in a chapter 11 reorganization for the association is the ability to compromise any pre confirmation claims and pay less than what was originally owed on those accounts.

In the United States, many large corporations and organizations declare bankruptcy as business tool for the proper and effective governance of the business.  Just the same, an association's board of directors should not be hesitant to make an educated business decision to seek that same protection when the conditions are proper.

A plan for reorganization provides for the payment and settlement of the liabilities that are due on the day of confirmation of a plan for reorganization.  The Plan then becomes the binding agreement between all creditors who had claims against the association prior to confirmation.  As such, the plan could modify an association's obligations to a manageable payment plan which would relieve the association from any insurmountable liability.  Moreover, such reorganization would assist those unit owners who are current in their payment of assessments from the possibility of undue increases in their regular assessments.  The Board of Directors would still be able to continue the business of the association and provide effective services to the membership, without the interference of a trustee or even a receivership.

If you have a question about whether or not Chapter 11 reorganization is right for your Community Association, contact us at PeytonBolin.  PeytonBolin PL
Office: (954) 316-1339
Toll Free: (877) PEYTONB