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November 24, 2006
Rebuilding After Lawsuit - What if There Is Not Enough Money?
Have you heard of this scenario? I have, too many times [from a reader]:
"A few years ago, the HOA won a lawsuit against the original builder for defects. The net proceeds were about $____ million. Due to many factors, the association out of money long before all of the defects were repaired. Now, the Board wants each owner to pay a $10,000 special assessment to finish the work that needs to be done. Is this right?"
Right? Maybe not. Fair? Maybe not. Realistic? Yes, unfortunately.
Lawsuits are not the answer to everything in a defect situation. In fact, there are times when an association is better off to simply take the money it would spend on a lawsuit and what it has in reserves to make the necessary repairs! Of course, this is to be determined for each case by many factors, such as:
(1) What is the extent of the damages?
(2) What is the financial capability or repair capability of the contractor(s) responsible for the defects?
(3) What is the urgency in getting the defects repaired?
(4) What will it cost to fix the damages vs. what will it cost to pursue the contractor or developer in court (both in terms of dollars and in terms of time)?
The laws have changed in recent years to require certain procedures before lawsuits against developers and builders can be filed, in an attempt to force a process whereby the developer or builder has an opportunity to come in and do testing themselves, whereby owners are involved in the disclosures and decisions, and whereby the parties are encouraged to seek a solution outside of court rather than in litigation.
But the fact remains, sometimes litigation turns out to be the best (or at least most productive) option. Even when it is, and the HOA receives a fair judgment, it is often not enough to make all repairs that have been discovered. And so, in that case, HOAs have to disclose what proceeds were received, how they will be spent, and what will not be fixed that was included in the demand for damages.
After the lawyer takes their cut, which sometimes was based as an hourly rate for time spent, and sometimes is based on a contingency, the Board has to manage the remaining funds and expenditures wisely to get the most "bang for the buck." Unforetunately, in many cases Boards do not do a very good job of allocating resources and before everyone knows it, there is a serious shortfall considering all of the work that has been identified as needing to be done.
Then, its a matter of removing projects from the priority list, or going to the members for the funds needed to fix everything that has been identified as a problem. If Owners will not approve the special assessment needed, then they are stuck with required disclosures about the problems that have been identified.
Sometimes in a lawsuit a party "overblows" the impact of the thing sued upon hoping that by exaggerating the impact, the party will recover enough to do adequate repairs, even after paying the attorney. But more often, there is just a considerable shortfall.
It is difficult to move through the litigation process without a special assessment, either for legal costs and the attorney, or for replenishing reserves from which money was taken to fund the lawsuit, or to make up the shortfall.
Is it fair? Maybe not. But life is not always fair ... is it!
Posted by Beth Grimm at November 24, 2006 9:28 AM