Beaumont Tashjian Law Blog

Friday, July 1, 2016

The Real Cost of “No Cost Collection”

By Calvin S. Rose, Esq. and Tracy R. Neal Esq.

Published in the CAI-Greater Inland Empire Chapter's
Connect 2016 2nd Quarter Magazine 

The “no cost collection” model has come under attack in recent years, culminating most recently in the collection case, Hanson v. JQD, LLC d/b/a Pro Solutions, (N.D. Cal., 2014) (“Hanson v. Pro Solutions”). California community associations and the common interest development industry at large have watched this case unfold, beginning with a homeowner filing a lawsuit against a assessment collection services provider, and culminating in takeaways that will undoubtedly resonate throughout California.

Assessments have been termed the “lifeblood” of an association. Assessments are the sole source of income for associations, from which association expenses are paid, including daily operating expenses to common area maintenance and repairs. Boards have a fiduciary duty to levy and collect assessments. Like most businesses, community associations and the boards that run the day-to-day business of an association, seek out services at the best price, which in some cases may mean the lowest price.  As a result, delinquent assessment collection services at no cost have appealed to community associations as they are non-profit corporations operating on a zero budget. Hanson v. Pro Solutions, however, has shown the potential real cost of “no cost collection”.

In Hanson v. Pro Solutions, a Northern California association hired Pro Solutions, an assessment collection company, to assist with collecting delinquent assessments under a “no cost collection” model. Under a “no cost collection” model, a collection company assists an association with collecting delinquent assessments, while the collection costs and fees charged by the collection company are billed directly to the delinquent owner.

Collection fees and costs are incurred at varying stages throughout the collection process.   California Civil Code Section 5650 allows an association to recover reasonable collection costs including attorney’s fees incurred in collecting delinquent assessments. If and when the owner pays the delinquent assessments, he/she also pays the collection company’s fees and costs. The collection process is essentially at “no cost” to the association. There may be instances, where, if the collection company does not collect, then the association may not be responsible for paying any collection costs and fees. Homeowner Hanson sued Pro Solutions alleging, among other things, that she was charged collection fees and costs for which the association did not incur, nor pay, pursuant to the “no cost collection” model. 

Critical in the Hanson v. Pro Solutions case was what collection costs, if any, were incurred by the association. Under a literal interpretation of the “no cost collection” model, if no collection fees and costs are incurred by the association, then it would follow that there would be no collection fees and costs for which a delinquent owner would be billed. The Hanson court stated: “the HOA incurs no costs by hiring Pro Solutions to collect from delinquent homeowners like Hanson”. 

The court also stressed: “Pro Solutions offers its collection services free of charge”. Again, it would follow that free to associations must mean free to delinquent homeowners. If this is true, can “no cost collection” be expected to continue?

Hanson v. Pro Solutions has since been settled, which means there was no court decision on the “no cost collection” model.  However, the Hanson court did caution: “California courts would likely find such charges to be unlawful, meaning Pro Solutions had no right to attempt to collect these fees . . ..” If and when subjected to another challenge, the “no cost collection” model may likely be found to violate provisions of the California Civil Code, and applicable federal and state fair debt laws.  Where does this leave the “no cost collection” model?  After analyzing the Hanson case, it would be hard to imagine an association actively seeking out delinquent assessment collection services on a “no cost collection” basis. Sure, the association was not named as a defendant in Hanson v. Pro Solutions, but in a subsequent lawsuit, an association may be sued thereby exposing the association to liability. 

Boards must come to understand, whether the association hires a collection company, an attorney, or contracts for its management company to perform delinquent assessment collection services, there will be collection fees and costs associated with collecting delinquent assessments.

With this said, there are alternatives to the “no cost collection” model, such as:

  • “Pay-as-you-go,” whereby collection fees and costs are paid by an association as they are incurred. The contract between an association and the delinquent assessment collection services provider should clearly indicate that fees and costs are incurred and due and payable when billed; or

  • No upfront collection fees and costs, in which collection fees and costs are advanced on the association’s behalf by the delinquent assessment collection services provider, and paid at the conclusion of the collection process. The services provider may first look to the delinquent owner for payment of the collection fees and costs (as allowed by statute), but if not paid by the delinquent owner, then the collection fees and costs are paid by the association.

In either case, the association is ultimately responsible to pay fees and costs that have been incurred. This means that even if the association does not recover any of the delinquent assessments from the delinquent owner, the association must pay for collection fees and costs that have been incurred on behalf of the association. Under the alternative pricing models, the association does have the ability to seek reimbursement from delinquent owners after the association has paid collection fees and costs to the services provider, whether billing the collection fees and costs back to an owner’s assessment account or suing the owner.

There are unfortunately very few things in life that are free, and “no cost collection” is not one of them.

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