Sometimes an association is owed an amount of money, that is significant to the association. However, despite the amount, a board may decide the collection actions may generate amounts in attorneys’ fees that are greater than the underlying arrearage. That board then votes to ignore the balance and take action.
A delinquent owner may owe an association $5,000. The association decides to retain an attorney to recover the amount. After legal action begins, and attorneys’ fees are incurred, the debtor pays that $5,000 only, without reimbursing the association for the attorneys’ fees incurred to get that $5,000.
“This leaves the association in the difficult position of having not recovered the attorneys’ fees incurred to get the debtor to pay the assessments,” said David Byrne, an attorney with Ansell, Grimm & Aaron, PC in Princeton, New Jersey, Chairperson of the firm’s Community Association Law Group.
We spoke with Byrne to better understand situations like this, and to know how an association can respond.
If a debtor does not owe an association a huge amount of money, an association may choose to settle with the debtor — even if it is a poor settlement — or let go of the balance out of fear that the attorneys’ fees expended will not be awarded.
Additionally, if the association decides to pursue legal action and the case goes to court, an association may fear that the judge may make a poor decision. According to Byrne, “if the judge makes a poor decision, an association may not be able to recover the legal fees.”
Despite these risks, Byrne said he believes associations should, generally speaking, take legal action against debtors. In the case where legal fees may be higher than the amount owed, Byrne said that associations should fight to recover legal fees.
“Associations do not have to be completely frightened of being aggressive with unpaid assessments that are only about $5,000 to 10,000 dollars,” he said. “Even with a smaller balance, an association can still feel confident enough to take action.”
In fact, associations in Pennsylvania, New York and New Jersey are typically awarded legal fees in the pursuit of a collection action, according to Byrne. In many cases, the court will award attorneys’ fees that were significantly higher than the debt being sought after in the lawsuit.
However, in rare cases, Byrne acknowledged, it may be smarter to settle. So how should a board decide whether to settle or sue? When an association must decide whether or not it should settle, Byrne said an association should first do its research. It is important to know the judge, and how he or she has been known to respond to similar cases in the past.
An association should also consider whether or not the debtor will appear sympathetic. Will the association look as though it had a chance to resolve the dispute prior to having incurred significant attorneys’ fees, but chose to proceed aggressively?
Finally, an association must consider whether or not it has made mistakes. Could the association have avoided certain legal fees if it had done things differently? If the association incurred legal fees when unnecessary, a judge may be on the side of the debtor when considering an application for attorney fees.
“Associations should try to avoid a situation where the legal fees are larger than the underlying assessment debt, but sometimes it is tough to avoid,” said Byrne.
From time to time, a difficult situation may be inevitable. Byrne though said it is essential that associations understand how often judges choose to side with the association. “Associations must realize that even if a debtor does not owe that much money, the association can likely still recover the legal fees that it paid,” he said.