Dues Collection Small Claims Lawsuits

2009 April 06
Last edit: 2009 May 04. Click History for a list of changes and updates.

__The continuation of this post discusses implications of the decisions and actions of MOA’s board of directors to pursue collection of unpaid dues and special assessments as personal debts of the owner. I believe the Board has the obligation to determine the validity of the collection as personal debt under the law and governing documents before proceeding. Part of this obligation is to examine the likely arguments against validity and to determine that the likely arguments are not valid. This post discusses (at least some of) those likely arguments.

__Under the Declaration of Covenants, Conditions and Restrictions, DMCCR (sometimes called deed restrictions), liens can be filed against the property unit (lot) for unpaid or delinquent dues and assessments. There are no provisions in the DMCCR making the unpaid dues and assessments a personal debt of the owner.

__Owners were certainly informed in a number of ways that ownership includes an obligation to timely pay dues and special assessments. They were also advised that the means for MOA to collect unpaid dues and assessments is to file a lien and then foreclose that lien.

__Since the DMCCR does not state that unpaid dues and assessments are personal debt of the owner, action by the board of directors to file a lawsuit in small claims court is likely invalid under the law and governing documents. Before proceeding, the MOA Board should have determined such lawsuits in small claims court are unquestionably valid under the law and governing documents.

__(edited 2009 May 04) If the money is owed, it should be paid and/or collected. None of the angst related to liens and potential lawsuits would occur if the owners just made timely payment of dues and assessments. But MOA's collection means should be limited to those authorized under the law and the governing documents. An unauthorized collection action is a violation of the rights of the owners/members — a rights issue. While we may not have sympathy for those who have not made timely payments of dues and assessments, they are entitled to the same protections under the law and governing documents as any other owner/member. The classic rights issue in USA is ACLU’s defense of the right of a Nazi group to march in Skokie, Illinois. (end edit)

__Other information may be available on the internet with the following Google searches:

• Michaywe OR Michaywé dues OR assessments "owners association" "personal debt"
• debt "small claims" site:http://www.hoatalk.com/
• Michaywe OR Michaywé "owners association" dues OR assessments "personal debt"

Copy the text in the bullets into the Google search window. Obviously, the search terms in the third bullet focus on Michaywé.

__Correctness and good explanation are a high priority in this post. If there are questions concerning the correctness and explanations, please call to discuss. Thanks.

Don Nordeen
(989) 939-8240
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Please be advised that the writer is not an attorney, and this is not legal advice. The information is based on research on information available in the public domain.
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• Key Words:_ Attorney Issues; Governance; Governing Documents; Members' Rights; dues, assessments, unpaid, delinquent, late fee
  

Click Continue for Post Continuation plus Comments. Or Click Show All for Above plus Post Continuation and Comments.

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Dues Collection Small Claims Lawsuits (continued)

Introduction
__The Michaywé Owners Association (“MOA”) has filed a number of lawsuits in Otsego County Small Claims Court (some that are over the dollar limit for small claims may be filed in District Court) seeking a judgment from the court against the owner of the property in Michaywé with unpaid or delinquent dues. Any lawsuit should be taken very seriously, and not be ignored. Without a reply to the court and an appearance, a default would likely be entered for the amount claimed.
__My view is that each owner of property in Michaywé is obligated under the Declaration of Covenants, Conditions and Restrictions (“DMCCR”), Article V, for the provisions concerning annual dues and any special assessments, which also authorizes liens for unpaid dues and assessments, and foreclosure of those liens. Both the annual dues cap and special assessments must be approved by the owners of property in Michaywé who are mandatory members of the Michaywé Owners Association. Prompt payment by each owner in the obligation of each owner.
__More vigorous collection should bring in more funds to MOA. Side effects should also be anticipated. Some owners of vacant lots no longer have interest in Michaywé and are seeking to sell the lots. For a number of reasons, buyers are few. The annual cost for taxes, dues and assessments may not justify continued ownership. Absent buyers, the owners may simply choose to abandon the property by not paying the taxes. In time, the vacant lot will be forfeited and foreclosed to the state of Michigan, which is not obligated to pay the dues and assessments. The previous owner will likely not have any obligation for dues and assessments after forfeiture and foreclosure.

Background
__The remedy in the DMCCR for failure to make prompt payment of annual dues and special assessments is that the Association is authorized to file a lien against the property, and then to foreclose that lien if not paid. See DMCCR, Article V, Section 5.
__In 2008, MOA established a Dues Collection Policy to seek collection of unpaid dues and special assessments by claiming the unpaid dues and assessments are personal debts and can therefore be collected as debts though the courts. Under the Revised Judicature Act, a personal debt claim must be filed in the court in the county of the defendant (claimed debtor). In 2008, an amendment to the DMCCR, claimed by the board to have been approved, specifies the venue for all litigation to be Otsego County. For many reasons, I recommended Vote "NO" on Proposed Amendment to Michaywé Deed Restrictions Regarding Venue. That post provides an overall perspective, including that the proposed amendment fails to satisfies a basic "smell test" of being fair.
__I believe both the proposed amendment to the DMCCR and the decision of the board to claim that unpaid dues and assessments are a personal debt are likely not valid under the law and governing documents. While paying members may choose to look the other way on an invalid method of collection of dues, the next abuse of power may have other effects that the individual members may consider abuse of power. The principle is no abuse of power. The ends do not justify the means. Two wrongs don’t make a right.
__I filed a Formal Protest — Proposed Amendment to DMCCR Concerning Venue with the Association. This Formal Protest post is an update of the one I filed with MOA at the time of the vote, as indicated by the revisions with dates. Part of the formal protest is the question, Are delinquent dues & assessments a personal debt?. The DMCCR do not state that unpaid dues and assessments are a personal debt. Rather, the DMCCR states that the DMCCR “runs with the land”.
__The Declarations for some common interest developments clearly state that unpaid dues and assessments are personal debts of the owner(s). For example, see

• Hawaiian Paradise Park Owners Association — Go to Article IX, Section 5, or search for "personal debt".
  
• Twin Brook Owners Association — Go to Article IV, Section 1.
  
• Pine Forest Owners Association — Go to Article VII, Section d(ii).
  

Additional examples are available in the Google searches in the Post Introduction for search words and terms. The DMCCR for Michaywé makes no such statement that unpaid dues and assessments are personal debt of the owner.
__The clearest indicator that the Board of Directors is uncertain about the legal basis is the board’s refusal to make the correspondence to and from the Association’s attorney (paid for by members’ dues) available for inspection.

Potential Abuse of Authority
__Overall, the actions by the board reflect an apparent policy by the board that the ends (collecting unpaid dues the board believes are owned) justify the means (using a small claims lawsuit that the board has not shown to be valid under the law and governing documents, and in fact may not be valid) and that protection of the rights of owners/members is not a factor in the board’s considerations. I believe that the fiduciary duty of each board member requires each board member to ensure that each proposed action conforms to the law and governing documents, and not to proceed if there is doubt. To prevent abuse, doubt should be resolved in favor of individual owners, not in the interests of the board. Individual MOA members should certainly not be expected to determine whether or not a board-proposed action conforms to the law and the governing documents. The board appears to have adopted a "catch us if you can" approach that is detrimental to members and the Association.
__The action to use the small claims court, or the District Court for larger amounts, takes advantage (possibly unfair advantage) of the property owners who may not respond properly to the lawsuit. It also places a burden on those owners to determine whether or not MOA has acted within its scope of authority under the law and the governing document. It is potentially bullying by use of the court. The board has the resources paid by the members of MOA to get it right, to resolve doubt in favor of members, and not to proceed unless the action is clearly valid under the law and governing documents. The MOA board has not released such information to members to so demonstrate.

Owners/Members are placed in a difficult position?
__Owners who are sued in Small Claims or District Court are between a rock and a hard place. Even though MOA’s claim of personal debt may not be valid, the unpaid dues and special assessments are likely valid against the property as evidenced by a valid recorded lien. Some of the unpaid dues and assessments may not be valid in small claims court, namely: unpaid amounts beyond the six-year time limit for contracts; and assessments of late fees that are likely invalid under the law and governing documents.
__Challenges to MOA claims of personal debt in Small Claims or District Court might be successful, or successful in part. The challenges might prevail on the basis of principle. However, the liens would likely still be valid. Challenges concerning no longer being the owner due to foreclosure, conveyance, and/or error might (or perhaps should) result in dismissal of the claim.
__Information for people sued in small claims court is available from the Michigan Courts on Small Claims - Self Help. Failure to respond or appear may result in the court entering a default. If a default has already been entered, a petition to the court for reconsideration might be the course of action available.

Basis for Challenges that MOA should have investigated
__One of the established ways of ensure that a proposed action is valid under the law and governing documents is to ask what can go wrong if the proposed action is implemented. Before proceeding and to avoid legal bullying, the MOA board should have answered the what-can-go-wrong questions concerning possible challenges to the collection actions in small claims court, which include the following:

• The action should be challenged on the basis that MOA has failed to state a valid claim under the law and governing documents. That challenge would claim that MOA did not provide the documentation of a valid claim based on a valid contract interpreted according to the principles in law. MOA should be required to provide evidence concerning the valid owner of the property.
  
• MOA should be challenged to provide the legal analysis and argument that supports MOA’s claim that the unpaid dues and assessments are a personal debt, and that the amounts are correct and within all provisions of the law and governing documents. See Are delinquent dues & assessments a personal debt?.
• The late fees could also be challenged since they may be invalid under the law and governing documents. See $25.00 Late Fee Likely Inconsistent with Master Declaration.
• There may be a time limit on debt that can be claimed in Small Claims Court, even though the time limit may not apply to liens against the property. The time limit for contracts is usually six years.
• For defendants who are not residents of Otsego County, two additional potential challenges exist:
• Otsego County may not be the proper venue. The proper venue may be the court in the county of residence of the defendant. See Venue and Michigan Case on Amendment of CC&Rs. The claim that Otsego County is not the proper venue is based on the amendment to the DMCCR not being valid. See also Formal Protest — Proposed Amendment to DMCCR Concerning Venue.
• Even if the proposed amendment is valid, it is prospective and is not retrospective. “Additionally, "[c]ovenants are to be construed with reference to the present and prospective use of property as well as to the specific language employed and upon the reading as a whole rather than from isolated words."” Borowski v Welch, 117 Mich App 712, 716; 324 NW2d 144 (1982) at 717 quoted in Mable Trust at pdf p12 ¶2. Consequently, the 2008 amendment of the DMCCR likely does not apply to unpaid dues and assessments owing at the time the amendment was declared approved by the board.
• If the named defendant is no longer owner of the property due to conveyance, foreclosure or forfeiture, the lien transfers to the new owner unless extinguished by the conveyance, foreclosure or forfeiture. See Do liens just disappear in foreclosure? For additional information. Also see What To Do With Uncollectible Debt.
  

__As previously stated, I believe it is incumbent upon the board to ensure that it is unlikely that there are any valid challenges (what can go wrong?) that might be raised by members before taking action. Any doubts about the validity under the law and governing documents should be resolved in favor of owners/members.

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Please be advised that the writer is not an attorney, and this is not legal advice. The information is based on research on information available in the public domain.
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• History:_
• 2009 May 04 — edited paragraph in post introduction
  
• 2009 Apr 06 — Initial Post, work in progress.
  
• Links:_ Dues Collection Small Claims Lawsuits at [http://swagmanmwpoa.blogspot.com/2009/04/dues-collection-small-claims-lawsuits_06.html]

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