Condo Bankruptcies Begin

Daily Business Review – In a move an increasing number of condo associations are expected to follow, the Maison Grande in Miami Beach has filed for bankruptcy
 
Facing almost $1 million in claims by unsecured creditors, a troublesome recreational lease, and at least 100 unit owners delinquent on payments of their fees, the association filed a Chapter 11 petition last month in U.S. Bankruptcy Court in Miami.
 
As one of the first condo association bankruptcies of the current economic crisis, “it’s definitely cutting edge,” said attorney Mark Schorr, a solo practitioner in Fort Lauderdale who represents the Maison Grande association.
 
With residential foreclosures and personal bankruptcies soaring in South Florida, Maison Grande’s decision is expected to become more commonplace, said attorney Aleida Martinez Molina of Becker & Poliakoff in Coral Gables. She is not involved in the Maison Grande case.
 
The significant drop in property values is a key factor pushing associations toward bankruptcy filings, said attorney Robert Kaye of Kaye & Bender in Fort Lauderdale. He represents associations in Broward and Palm Beach counties that are considering bankruptcy. He declined to identify them.
 
“In prior times, there was enough equity in all the properties [in an association] so that assets would likely exceed liabilities,” he said. “Now, since a large percentage of associations are upside down, that’s changing their view about bankruptcy. Their debts have overtaken their assets.”
 
So many of Becker & Poliakoff’s association clients have inquired about filing for bankruptcy, that Martinez Molina has begun studying how a bankruptcy filing would impact associations.
 
“It’s not the answer for everyone,” she said. “It’s not a place to dump a situation to avoid other courts. But if there are special code sections or provisions that can help an association reorganize … it could be a very good forum.”
 
But associations shouldn’t go into bankruptcy without an exit strategy, she said. “They can’t hide under a rock. They have to have a game plan — what provision will you avail yourself of to weather the storm?” Martinez Molina said.
 
Typically, Chapter 11 petitioners are for-profit companies seeking financing as debtors-in-possession to bail themselves out of tough financial straits.
 
But associations are nonprofit organizations with limited budgets and funding. The severity of the recession means credit will remain tough to obtain for some time.
 
“The problem for everyone is the credit markets,” she said. “They are non-existent. But for that, there would be more bankruptcies.”
 
Unit owners’ maintenance fees are the only significant source of revenue for associations, but many owners are themselves filing for bankruptcy, she said.
 
In Maison Grande’s case, the board of directors is confident it can obtain financing to get out from under a burdensome recreational lease, Schorr said.
 
According to court documents, Maison Grande has to pay developer Dorten Inc. more than $112,000 a month for a 99-year lease of the pool and some parking spaces. The lease expires in 2074.
 
Miami-based Dorten, whose principals have included former executives of developer Avatar Holdings, sued the association in April for nonpayment of the lease. In May, Dorten sought to have a receiver appointed to collect the payments from the association. Shortly before a hearing on the receivership, Maison Grande filed for bankruptcy.
 
“If that pushed them into bankruptcy, so be it,” said Dorten attorney Norm Segall of Ruden McCloskey in Miami.
 
The association paid $15,000 in January and $75,000 before filing for bankruptcy but still owes Dorten almost $700,000, he said. 

The lawsuit is on hold while the bankruptcy action proceeds. The association plans to reject the lease and seek a cap on any damages that could result, according to the bankruptcy filing. If an agreement with Dorten can’t be reached to reduce the lease payment or buy the pool and parking spaces, Maison Grande will seek a loan, according to the bankruptcy filing.
 
Keeping the existing pool, even if the lease is rejected, is out of the question, said attorney Tom Messana of Messana & Stern in Fort Lauderdale, who represents Maison Grande in the bankruptcy.
 
A hearing is scheduled in bankruptcy court for July 15, but the parties have agreed to mediate.
 
Association president Ariel Melchor did not return phone calls.
 
Kaye represents a Tamarac condo association that is considering bankruptcy. With half of its 280 unit owners delinquent on their maintenance fees, the association is in the red to the tune of $50,000 per month, he said.
 
Kaye also represents a Palm Beach County condo association that is likely to file for bankruptcy after losing a court case against a roofing contractor.
 
A judgment of $130,000 could grow to more than $300,000 after attorney fees and court costs are added, he said.
 
“They can’t afford that, and 20 percent [of 120 unit owners] already are delinquent in paying fees,” Kaye said.
 
These associations, which he declined to name — and many more — are likely to file for bankruptcy protection as they run out of funding options, he said.
 
The state Legislature’s failure to amend the condo law this year to require lenders to pay a larger portion of past-due fees on foreclosed condos could force more associations into bankruptcy court, Kaye said.
 
State condo law currently caps lenders’ liability at the lesser of six months of unpaid fees or 1 percent of the original mortgage. But lenders don’t pay any association fees until a foreclosure is complete and they take title to a unit.
 
As foreclosure filings have soared in the wake of the housing and financial market bust, they can take almost two years to complete.
 
That means condo associations still must maintain the foreclosed units, and the remaining condo owners must pick up the tab of their non-paying neighbors.
 
“As long as lenders are extending foreclosures into 18 months and two years, the associations are pretty well stuck because there is no cash flow and they can’t raise funds necessary to operate,” Kaye said.
 
NO PAYMENT INCENTIVE
 
Meanwhile, unit owners in foreclosure have no incentive to pay their association fees, said Miami attorney Douglas Snyder, a solo practitioner who represents the 220-unit Greenwich condo in North Miami in its Chapter 11 bankruptcy filed in March.
 
Snyder said the association had been sued by service providers for non-payment of about $750,000. The court ordered the association to begin making payments “and it was bleeding them dry,” he said. “This way, they can handle everyone at the same time.”
 
About 20 percent of the unit owners are in foreclosure. Association president Lidia da Cunha did not reply to an e-mail seeking comment.
 
The financial crisis that is pushing condo associations toward bankruptcy is only going to worsen, said Martinez Molina.
 
“Bankruptcies are not the leading indicator of the economy, they are lagging indicators,” she said. “So people who were hurt with layoffs and cutbacks, those people won’t file for bankruptcy for some time. We haven’t even seen that wave of filings yet. And individual bankruptcy filings affect condo associations.”