Can You Use Small Claims Court to Collect Unpaid HOA Fees?
One California small claims judge's opinion has caused confusion over homeowners associations' ability to use small claims court to collect unpaid fees. Here, we explain the California brouhaha and offer insights about using small claims court in other states as well.
A Bad Judicial Call?
Under California law, an association can pursue delinquent assessments in small claims court, but it can't use the foreclosure process for amounts of $1,800 or less. The idea is that homeowners shouldn't lose their home when their delinquency is relatively small.
However, in a recent case, a small claims court judge interpreted California law to limit an association's recovery in small claims court to that $1,800 threshold required to initiate a foreclosure proceeding, despite the fact that the homeowner owed $6,000, and the state allows recoveries up to $5,000 in small claims court cases.
What's the deal?
"In my opinion, the small claims commissioner just blew it," says Robert M. DeNichilo, an attorney at DeNichilo & Lindsley LLP in Irvine, Calif., who specializes in representing community associations. "The statute says the maximum amount recoverable in small claims court should be the jurisdictional limit, which for corporations is $5,000. The next section of the statute talks about foreclosure, so if you have over $1,800 in delinquencies, you may use foreclosure to recover the money."
"She's just a small claims court commissioner, and I think she's wrong," agrees Sharon Glenn Pratt, a principal at Pratt & Associates in Campbell, Calif., who advises many homeowners associations.
So what's the bottom line in California? "Whether an association is owed over or under $1,800," says DeNichilo, "it can use small claims court to pursue that amount." The fees range from $40-$45, plus $25 service fee.
However, your association can't pursue a foreclosure action if you're owed less than $1,800. "I've told my clients that the $1,800 limit applies only if they're trying to put a lien on the property," says Pratt. "Associations can't start judicial or nonjudicial foreclosure unless homeowners are in excess of $1,800 in arrears and 12 months delinquent."
The Pros and Cons of Small Claims Court
Even if you can use small claims court to collect unpaid homeowners association fees, is it a good idea? Many attorneys recommend against it, but there are exceptions.
"In certain circumstances, small claims is a very viable option, such as when it's a small amount of money," says DeNichilo. "It can be very quick to get a judgment. In the one case we did in small claims court, we got a judgment in three months compared to the foreclosure process. You still have to collect that judgment, but your cost of getting a judgment is so much cheaper."
The drawbacks? "You can't use an attorney, and there's a limit of $5,000 that you can collect, and that includes attorneys' fees," says Pratt. "There also aren't strict rules of evidence, and small claims court is really unpredictable. So I think you're better off using superior court."
You also can't appeal California small claims court decisions. "I've had several clients go through small claims court, and I've heard of commissioners granting zero," says DeNichilo. "You can't appeal that; other owners hear about the decision, and then the rumor is that you can't collect your assessments. If you think you have a very strong possibility of collecting, you run the risk of getting a judge like [the one who likely misinterpreted California law]. You have that risk."
Small claims court is also available to homeowners associations in North Carolina. However, Michael S. Hunter, an attorney and partner at Horack Talley in Charlotte, N.C., who represents more than 500 community associations, doesn't have any clients who use it.
"It's an option, but not a very good one," explains Hunter. "In North Carolina, homeowners associations can't represent themselves in court; they're going to need an attorney. So they might save money on the filing fees, but they won't save the attorneys' fees."
There's another drawback. "Filing any type of lawsuit as opposed to a foreclosure action exposes the association to counterclaims," says Hunter. "And getting a judgment doesn't get you paid. It's just a piece of paper that says someone owes you money." On the plus side, you're entitled to an automatic appeal in North Carolina.
Marc Andrew Landis, a partner at Phillips Nizer LLP in New York City who advises associations and co-ops and is a member of the executive board of the Council of New York Cooperatives and Condominiums, also recommends against small claims court for the state's community associations. "In New York, especially in New York City, I wouldn't recommend that an association use small claims court as a mechanism for the collection of unpaid co-op maintenance or condo common charges," he says. "First of all, the small-claims part has a jurisdictional limit of $5,000, which is quickly exceeded in a typical non-payment dispute.
"Second, the co-op corporation or condo board is tying its hands since the relief in small claims court is limited to the collection of fees; if the effort to collect post-judgment is unsuccessful, it will have to head back to state supreme court to enforce the statutory lien against the premises," Landis continues. "Third, the small claims part is informal and inefficient, which probably works to the benefit of the debtor—the court tries to refer most cases to volunteer arbitrators, whose decision is binding even if it's wrong on the law. You face multiple appearances if you want your case to be heard by an actual judge. And if you agree to mediate or arbitrate, the decision can't be appealed."
Lower Court Costs are Still Appealing
If you're thinking that the lower filing fees for small claims court are too good to pass up, you may be right. However, you should do an actual comparison before you reach that conclusion.
Take New York, for example. "It is less expensive because the filing fees for small claims court are nominal—$15 to $20—and you're not required to have an attorney," says Landis. "But the filing fees for New York City civil court, which handles matters up to $25,000, are about $100, and the fees for going to the New York state supreme court, which handles matters of $25,000 or more, is in the mid-$300s. Relatively speaking, compared to the value of the asset at hand, going to the supreme court is a little more expensive, but not much. The real costs are that you're retaining counsel. But in many cases, you can add your legal fees onto your damages, and you get to recover those if you win as well."
DeNichilo also says that if you're heading to court, it's still smart to have your attorney prep your case and your witnesses so you lessen your chances of losing. "Your manager has to appear and will need to prepare," he says. "So there are a couple hundred dollars in costs there. My clients usually want me to prepare the manager, which also requires attorneys' fees. I've walked my clients through the process and prepared them well. And we've been fortunate that they've got the judgment for the small amount they were owed."