Q&A: The time to protect your real property assets is before any HOA litigation
Question: Not long after we moved into our townhouse, we came to loggerheads with the board. Try as we might to resolve our differences, nothing worked. My wife and I found ourselves in a lawsuit with the association that started shortly after we moved here. Yesterday our attorney explained the gravity of the loss he expects we will suffer within a few months.
We now want to cut our losses by getting the money out of our mortgage-free home and moving away. But our attorney said we cannot sell our home or even our vehicles in order to avoid the judgment because of something called the “Uniform Fraudulent Transfer Act.” Is this true?
Answer: This is a lesson for all potential homeowner litigants: Assets must be protected prior to being sued and prior to you suing the homeowners association or board directors. Here’s why.
Each titleholder’s real property in a common-interest development may be pledged as collateral for any association loans, which may be obtained without approval from owners. That leaves titleholders to pay the mortgage bill through special assessments or homeowner dues. These assessments are in essence a lien, levied against each property until the association’s loan is paid off. When owners sell their property, the buyer either accepts the lien with the sale or the seller has to pay the lien off before the sale. That’s just one complication.
If a titleholder is engaged in litigation, the Uniform Voidable Transactions Act (formerly known as the Uniform Fraudulent Transfer Act) comes in play. The act, California Civil Code Sections 3439 to 3439.14, specifies that any real or personal property, bank account funds, safety deposit box valuables, annuities, stocks and bonds are no longer yours to transfer.
If you were planning to safeguard these assets by transferring them to a child or another person, you are out of luck if litigation has started or if a judgment has been entered against you. Late “transfers” can be voided by the court. If you were to die during this time, your estate can be attached, preventing any of your property from passing to your heirs until the outstanding claims are paid.
Though this may sound odd, one way that titleholders can protect their assets against unexpected litigation is to make certain that they have a mortgage, and the larger the better. A mortgage can act as a buffer between an owner’s assets and anyone seeking to take the property.
A mortgage, even multiple mortgages, makes the foreclosure process more complicated, prolonging the proceedings and giving the owner more time to move and/or make other arrangements.
A mortgage also brings the bank into the process if an association starts a judicial foreclosure, meaning that it proceeds through the court. The bank will vigorously defend its interests, which can sometimes align more closely with the titleholder than the initiator of the foreclosure process.
If the association or judgment creditor seeks to foreclose on your mortgaged property outside the court – a so-called non-judicial foreclosure – the bank as a priority lien holder must be notified of the intent to foreclose. If the association or judgment creditor did not serve you with notice of that proceeding, which is not unheard of, the bank will have a separate duty to notify you of it, which ensures that you have an opportunity to defend your asset.
A mortgage also means that less of an owner’s money is tied up in an illiquid asset in the event that assets need to be transferred quickly.
Contrast that scenario with a “free and clear” property without a mortgage, which essentially serves as a neon sign announcing that there are no encumbrances to prevent a “taking” of that property. In other words, should the right situation present itself, it’s a methodical but relatively easy land grab.
Whether or not a property is mortgaged, titleholders need to include “loss assessment” coverage and a large “umbrella” policy as part of their personal homeowners insurance package.
In the event of litigation or should the association specially assess the owner during a time of hardship, loss-assessment would typically pay the owner’s share up to the limits of the policy and after accounting for the deductible.
An “umbrella” policy provides an extra level of protection to all existing insurance policies and is only triggered for very large claims or judgments. Depending on the type of policy you may have in place, an umbrella may also provide defense attorneys to represent you and the insurer’s interests. But don’t forget, just like asset transfers, loss-assessment coverage and umbrella policies must be in place prior to any litigation. No insurer will take you after the fact.
Your home is a valuable asset, but when you buy into a common-interest development with a deed-restricted title, you make that asset more susceptible to liability. It is your responsibility to use the tools available to bolster your protection and to plan carefully, because there are far fewer tools available to you once litigation has started.
Zachary Levine, a partner at Wolk & Levine, a business and intellectual property law firm, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian, JD, P.O. Box 10490, Marina del Rey, CA 90295 or firstname.lastname@example.org.
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