Receivership versus Chapter 11 Bankruptcy for Condominium and Homeowner Associations
Condominium and homeowner associations are constantly confronted with financial issues which are left up to a board of directors consisting of unit owners and a management company to resolve. Sometimes these financial issues are inherited from one board of directors to another and from one management company to another. Over time, these financial issues take on a life of their own as the problems snowball and the issues get bigger and bigger.
I came across an article published in the Miami Herald on March 21, 2016 relating to the Tropical Point Condominium in Miami. The article is titled Condo Owners Face Financial Losses Under Receivers. The article discusses the issues arising from the retention of a receiver in state court to resolve the Tropical Point condominium’s financial issues and the resulting problems with the receivership.
Many condominium and homeowner associations look to retaining receivers for resolving debt and management problems but receivership may not be the best tool in these circumstances. Bankruptcy law is specifically designed to deal with management and debt issues under a well-defined federal bankruptcy system. An association is a corporation, and as such, qualifies for the protection of the federal bankruptcy law under Chapter 11. Unlike receiverships, a Chapter 11 bankruptcy allows for the reorganization of debt. This means debt can be reduced, completely eliminated and/or restructured to make it manageable for the association. Oversight is another benefit of a Chapter 11 bankruptcy filing. There is direct oversight by the bankruptcy court judge and the U.S. Trustee’s office to maintain the integrity of the federal bankruptcy system and to ensure the proper implementation of the federal bankruptcy law. The federal bankruptcy law requires that the retention of any professionals such as attorneys, accountants, realtors, etc. be approved by the Court. Federal bankruptcy law also requires that fees charged by these professionals be reasonable and fee applications must be approved by the Court by which any party can object including the debtor association itself, the U.S. Trustee’s office, creditors and the unit and homeowners. In the Chapter 11 bankruptcy, the association remains in possession of the operations and is referred to as a Debtor in Possession. This allows the association’s attorneys, board of directors, management company and accountants to work together to fix the financial issues affecting the association without the interference of third parties. One of the most important tools for associations for dealing with financial crisis is the bankruptcy automatic stay. The automatic stay under 11 U.S.C. § 362 of the U.S. Bankruptcy Code gives debtor associations breathing room so they can reorganize their affairs. The automatic stay acts as an injunction to stop lawsuits, collection activity and adverse action against the debtor association. The prevention of these actions through the automatic stay ensures that the debtor association is permitted to reorganize its affairs without interference. Federal bankruptcy law also provides a mechanism to recoup transfers and assets through adversary proceedings. Debtor associations can further use federal bankruptcy law to reject certain contracts and agreements. In certain circumstances, federal bankruptcy may permit a surcharge to creditors when they have benefited from the Chapter 11 bankruptcy filing at the debtor association’s expense. As can be seen here, federal bankruptcy law offers many benefits over a state court receivership and eliminates many of the resulting problems with receiverships.
In 2014, as a leading Miami bankruptcy law firm, we represented the Bella Luna Condominium Association which resulted in the confirmation of a Chapter 11 bankruptcy plan. Through the condominium association’s bankruptcy filing, the association was able to stop its water from being turned off, it was able to eliminate lawsuits, reorganize its debt and develop a management plan for its future operations. The federal bankruptcy law was extremely useful for this association to get back on its feet. This association is one of many organizations and companies which our Miami bankruptcy lawyers have assisted.
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By Richard R. Robles, Esquire
Law Offices of Richard R. Robles, P.A.
905 Brickell Bay Drive, Suite 228
Miami, Florida 33131