Another Interesting Court Decision about Condominium Collections
There was another interesting case in December last year about the rights of condominium corporations to collect common expenses.
In the case of Trez v. Wynford, a condominium corporation (MTCC 1037) had failed to register liens for collection of certain common expense arrears. The units in arrears were owned by a company that was controlled by two of the directors of the condominium. Those directors also controlled the condominium’s Board, and they apparently decided, on behalf of the condominium corporation, not to register liens against the units that were in arrears. The Board had also issued status certificates for a new mortgage against the units in arrears, indicating that there were no arrears. At that time, the arrears were over $800,000, and they later grew to about $1.3 million.
The particular directors were subsequently removed from the Board.
The new Board asserted that, in these special circumstances, the condominium corporation should be entitled to an equitable lien against the defaulting units in priority to the mortgage.
The Court disagreed, saying:
“The [Condominium Act] clearly sets out MTCC’s right to a lien for common expense arrears. As a result, it is not proper for the court to create an equitable lien in its place. The principle is analogous to case law under similar statutes, such as the Construction Lien Act, which have held the court cannot create an equitable lien where a statute has occupied the field by creating a lien for the same purpose.”
The Court also refused the corporation’s request to “revive” its lien rights.
This left the condominium corporation without lien rights, and therefore having only unsecured rights of collection. As a result, the condominium corporation might not be able to collect the arrears. For instance, if a defaulting owner was to go bankrupt, the condominium corporation would be left to share the equity, if any, of that bankrupt owner with all other unsecured creditors of that owner.
Of course, if the condominium corporation had fidelity bonding, that bonding might cover this sort of loss.
Depending upon the circumstances, there might also be basis for a claim against past directors, which may be covered by the corporation’s Directors and Officers (D&O) Liability Insurance. D&O insurance won’t respond to claims resulting from dishonesty or bad faith. But the D&O insurance might respond to a claim against the “innocent” Directors on the Board at the time. But for such a claim to succeed, the corporation would have to prove negligence on the part of those innocent Directors, which might not be the case, depending upon all of the circumstances.
In my view, there are two morals to this story:
- It’s important to register timely condominium liens.
- It’s always best to elect honest condominium Directors.