How condo owners are affected when an association files for bankruptcy

Miami Herald

10 hours ago

Bankruptcies have traditionally been rare for community associations, but two recent filings by condominium associations in Miami-Dade and Palm Beach counties just a week apart could represent the start of a troubling trend.
The first was in late April, when the Green Terrace Condominium Association filed for Chapter 11 bankruptcy, which is designed to allow filers to reorganize their finances under court supervision while remaining operational. Chapter 11 bankruptcy, which is also commonly referred to as reorganization bankruptcy, is the most common type used by associations.
The community's residents were alerted about the filing via letters posted on their doors stating:
'The association has faced significant challenges over the past decade, including various criminal and civil litigation and substantial mismanagement by previous board members. The current board is actively working to address these issues and is optimistic the Chapter 11 filing will lead to a favorable outcome for all involved.'
The filing came after the city of West Palm Beach notified the community that it planned to shut off its water service due to its outstanding balance of more than $1.4 million. The city is also owed $2.5 million in code enforcement liens, and it is just one of dozens of creditors listed in the filing.
The cutoff of water service to the community was suspended by the bankruptcy filing, which has provided residents with more time to find and move to new homes. The reports indicate 20 people have applied with the city for up to $7,000 in emergency rental assistance for new apartments, and 16 have met the eligibility requirements.
The circumstances behind the bankruptcy filing for the Ocean 5 Condominium Association on May 2 are different. The five-story building at 458 Ocean Dr. in Miami Beach has only 13 units and was completed in 2006, and it apparently resorted to a Chapter 11 bankruptcy filing as a result of a $583,000 civil judgment awarded to one of its unit owners.
According to a report by the South Florida Business Journal, the association originally sued the owner in 2019 for allegedly conducting unauthorized short-term rentals and causing a disturbance involving one of its renters that drew media attention, which harmed the property's reputation. The owner filed a counterclaim against the association alleging it used the lawsuit to retaliate for the negative publicity, and it deactivated the owner's key to access the building without cause.
The unit owner ultimately prevailed and was awarded the damages for lost rental income and emotional distress. The bankruptcy filing, which lists the owner as the association's sole creditor and claims assets valued at less than $130,000, states that the Miami-Dade Circuit Court jury's ruling is currently under appeal.
While the conditions at these two associations that led to their bankruptcy filings are different, they both share a common factor. Involvement in civil litigation took a toll on the financial well being for both, and for Ocean 5 the judgment in favor of the owner's countersuit appears to have been the sole cause of its insurmountable debt.
Indeed, litigation is among the most common drivers for association bankruptcies. It can present unexpected costs that create insoluble financial shortfalls, so associations should turn to it only when all other reasonable options have been exhausted.
In addition to such legal setbacks, associations can also be forced into bankruptcy by significant financial mismanagement or theft, uncovered property damage, high rates of owner delinquencies, and the costs associated with inspections and repairs.
Chapter 7 bankruptcies, which are also available to associations, are designed to liquidate assets in order to pay off debts, so they are generally an unrealistic option. Associations' assets are all jointly owned by their unit-owner members.
Instead, most association bankruptcies take the form of Chapter 11 filings, which enable them to restructure their debts with the benefit of an 'automatic stay' to halt creditor collection proceedings unless they are otherwise allowed by the court. They provide opportunities to negotiate with creditors, cancel or renegotiate contracts and avoid the seizure of assets and garnishing of bank accounts.
Just as with litigation and foreclosures, associations should consider bankruptcy only as a last resort. They will need to pay both attorneys' fees and court costs, plus fees for a trustee if one is appointed, and they typically will not be allowed to completely wipe away debts and judgments. Their actions and reorganization plans will be highly scrutinized by their creditors and bankruptcy judge, who may even dismiss the case if it is deemed that the community has not presented a viable restructuring strategy.
Those that are experiencing mounting and highly significant financial strains should seek the help of qualified attorneys and other experts to make changes to their budgets and collections that could address and resolve their growing financial woes. If all reasonable options and actions prove to be of no avail, they should give bankruptcy circumspect consideration with the help of highly experienced bankruptcy counsel.
Michael L. Hyman with the South Florida law firm of Siegfried Rivera has focused on community association law since 1970 and is based at the firm's Coral Gables office. He is the author of the two-volume 'Florida Condominium Law and Practice' and is board certified as an expert in community association law by The Florida Bar. Michael is a regular contributor to the firm's Newsroom blog at www.SiegfriedRivera.com/blog. The firm also maintains offices in Broward and Palm Beach counties, and its 49 attorneys focus on real estate, community association, construction and insurance law. www.SiegfriedRivera.com, [e-mail], 305-442-3334.