Short Sales

A short sale occurs when a home is sold for less than the amount of the outstanding mortgage on the home, with the explicit agreement of the bank.  In other words, the purchase price of the home is “short” of the remaining balance due on the existing mortgage.

Short sales are being used by owners in an effort to avoid foreclosure and possibly preserve the owners’ credit rating.  While the home that is being sold via a short sale is not bank owned, the bank must approve (and ultimately determine) the sale price of the home as they are agreeing to reduce the amount owed on the mortgage.  Banks generally prefer short sales over foreclosures because a short sale is accomplished in a much shorter period of time than a foreclosure and because the cost of a short sale is far less than that of a foreclosure.

Because community associations can possess a statutory lien on a particular property for past due assessments (which are usually present if the unit gets to the point of short sale), the association will be asked to approve the short sale.  As a general matter, when a short sale is proposed and the association is contacted about the outstanding account balance, the association is offered only a percentage of the total amount it is owed so that the short sale can be accomplished (sometimes, the association is offered the full amount owed, but this generally occurs only when the total amount owed is proportionately very small when compared to the short sale price, and even then, such an occurrence is a statistical rarity).  At this stage, the association must decide if it will accept less than the entire amount owed on the account or if it will “hold out” for the entire balance (it is noted that the amount the association ultimately accepts can and should be negotiated as the first offer provided is usually a “low ball” offer).

In making this determination, the association should consider the fact that after the short sale, a new owner will be present in the unit and will begin to pay assessments; therefore, the financial “bleeding” the association is facing will ultimately come to an end.  Should the association refuse to accept a compromised offer on the amount owed, the likely result is that the short sale will not be consummated and the unit will end up in foreclosure.  In a [Pennsylvania] foreclosure situation, the association is statutorily entitled to receive unpaid assessments, fees and costs that come due during the six (6) months immediately preceding the date of judicial sale of a unit.  All other amounts owed to the association are divested in the foreclosure.  Thus, community associations may actually end up in a more favorable financial position if a unit is sold in a short sale rather than in foreclosure.   Of course, because each situation is factually unique, outcomes will vary.  Associations should therefore seek the advice of a qualified property manager and/or counsel when they are faced with a short sale in the community.

Foreclosures

In general terms, a mortgage loan provides that the mortgagee (lender, usually a bank) possesses a security interest (lien) in a home purchased by the mortgagor (borrower).   The foreclosure process begins when the mortgagor defaults on the loan, and the mortgagee begins legal proceedings to repossess the property.

As it pertains to community associations, and as previously indicated, in a [Pennsylvania] foreclosure situation, the association is statutorily entitled to receive unpaid assessments, fees and costs that come due during the six (6) months immediately preceding the date of judicial sale of a unit.  All other amounts owed to the association are divested in the foreclosure.  Once an Association learns that the property has been listed for Sheriff’s Sale, the Association should contact the Sheriff’s office to advise of the (1) existence; (2) nature; and (3) amount of the Association’s statutory lien.  This being said, the association should always seek out the advice of counsel in order to determine a legally permissible course of action as Fair Debt Collection Practices Act (FDCPA) issues may arise in this setting.

Associations should also be aware that if the foreclosure process is completed and the foreclosing bank takes title (or if the bank takes a deed in lieu of foreclosure), the association should verify if a Sheriff’s deed has been issued to the bank and, if so, contact the bank and request payment of the prior assessments and other charges the association is entitled to receive.  The association should also ensure that the bank, as [new] titleholder of record, will be promptly paying assessments going forward, as required by the community’s controlling documents.  As a general matter, associations should stay on top of their collections efforts and apply them uniformly to all owners, including banks.

Associations should also be aware that recent changes and amendments to federal law and federal programs have provided borrowers with additional options to be utilized in response to foreclosure proceedings and/or in an attempt to avoid foreclosure altogether.  As a result of all of this, the foreclosure process is taking longer than ever before to get from start to finish, and Associations are waiting longer than ever before to see some sort of finality with respect same.

For example, the Home Affordable Modification Program (HAMP) provides borrowers with the possibility of lowering their monthly mortgage payments to make their homes more affordable.  Effective June 1, 2012, the population of homeowners that may be eligible for HAMP was expanded to include:

• Homeowners who are applying for a modification on a home that is not their primary residence, but the property is currently rented or the homeowner intends to rent it.
• Homeowners who previously did not qualify for HAMP because their debt-to-income ratio was 31% or lower.
• Homeowners who previously received a HAMP trial period plan, but defaulted in their trial payments.
• Homeowners who previously received a HAMP permanent modification, but defaulted in their payments, therefore losing good standing.

Moreover, other federal agencies, such as the Consumer Financial Protection Bureau (CFPB) and the Department of Treasury’s Office of the Comptroller of the Currency (OCC), are involved in the residential mortgage market from a regulatory perspective and can get involved on behalf of a homeowner whose home is in foreclosure.  Accordingly, associations should be educated in and made aware of the various programs that exist and how each may impact the financial position of the association.

Finally, “other” issues occur during the foreclosure process that associations must handle in the best interest of the association.   For example, when a unit is in the foreclosure process and the owner abandons the unit (and the foreclosing bank has not yet taken title), the association must examine its controlling documents and/or other legal requirements to determine what duty the association has to ensure that the unit is kept in good repair.  It is noted that a foreclosing bank will often take similar action when a unit is abandoned by its borrower in an effort to protect its investment; however, the bank’s concern about preserving its collateral is different than the association’s potential responsibility in this regard because the association must examine its duty to keep the unit in good repair as it relates to the potential impact of the abandoned unit on all of the association’s owners/members and their units, not just the abandoned unit itself.

Because of all of the complicated financial and legal issues involved with short sales and foreclosures, and because each situation may be factually different than the those which have preceded it, associations dealing with these situations should seek the advice of both a qualified property manager and counsel to determine the best course of action for each specific situation.

This article was originally published in the July/August 2012 edition of Community Assets, a publication of Pennsylvania and Delaware Valley Chapter, Community Associations Institute.

A native of Allentown, Mr. Albanese is a member of the Seton Hall Journal of Sports and Entertainment Law. He also holds the position of Chief Student Representative for BARBRI. Mr. Albanese graduated, with distinction, from The Pennsylvania State University in May 2010 with a B.A. in Political Science. He is a member of the Phi Beta Kappa Society. Prior to working for FLB, Mr. Albanese served as Legal Intern to the Honorable William E. Ford of the Lehigh County Court of Common Pleas.

A native of Schnecksville, Ms. Sweeney is the Symposium Editor of the Seton Hall Circuit Review and a Student Bar Representative and Mentor, and was selected to participate in the 2012-2013 Civil Litigation Clinic. She also is the 2013 Judge Lawrence A. and Virginia Golden Whipple Memorial Scholar. Ms. Sweeney graduated magna cum laude from Bucknell University in 2007 with a B.A. in English and Theatre. Ms. Sweeney also published an honors thesis in Theatre and was selected for the Department’s highest honors. Prior to working for FLB, Ms. Sweeney served as Research and Litigation Assistant to Professors Rachel Godsil and Shavar Jeffries of the Seton Hall Center for Social Justice. Ms. Sweeney has also participated in Teach for America.

At FLB, Mr. Albanese and Ms. Sweeney are responsible for preparing and drafting legal documents, conducting research and drafting legal memoranda, and participating in client interviews and meetings.

Fitzpatrick Lentz & Bubba, P.C., is a full-service law firm providing quality legal services in real estate, land use, business, commercial litigation, health care, estate planning & taxation, employment, bankruptcy, family law and related areas. The law firm has been named “Who’s Who in Business Lehigh Valley” every year since 2008, and was named one of the Best Places to Work in PA for 2010 and 2011.

The Mechanics’ Lien Law, a powerful arrow in the quiver of an unpaid contractor, subcontractor or material supplier to a building project, is the legal procedure that allows claimants to place a lien on the real estate of the project for the value they have added to the property.

On January 6, 2012, the court overturned decades of precedent to hold that the Mechanics’ Lien Law should be construed liberally, not strictly, to affect its goals and to promote justice. In a case known as Bricklayers of Western Pennsylvania Combined Funds, Inc. v. Scott’s Development Co., the court used this new liberal interpretation to expand the number of entities permitted to file mechanics’ lien claims.

In the Bricklayer’s case, the trustees of employee benefit funds filed mechanics’ lien claims for unpaid contributions owed to union members as a result of collective bargaining agreements between a contractor and the unions. The unions themselves had no contract with the property owner, nor did they have a traditional subcontractor agreement with the general contractor. Rather, they had a collective bargaining agreement with the contractor specifying what work the union members would do, and what the contractor would pay, including contributions to the benefit funds. Despite this handicap, the court allowed the trustees to proceed with their mechanics’ lien claim.

How a mechanics’ lien works

A mechanics’ lien aims to secure payment for labor and materials related to construction or improvement to buildings or real estate. Once filed, a mechanics’ lien immediately interferes with an owner’s ability to sell or pledge his or her property. This simple yet drastic legal remedy gives claimants powerful leverage to demand payment. It provides an unpaid claimant with an extra legal option in addition to a lawsuit for breach of contract or under the Contractors and Subcontractors Payment Act.

Generally, only a “contractor” or “subcontractor,” as defined by the Law, is permitted to file a lien claim for the payment of debts owed by the owner to the contractor or by the contractor to any of his or her subcontractors, and then only for the value of labor or materials furnished during the particular construction project. Importantly, even some subcontractors who never contracted with or even met the owner of the property can file mechanics’ liens against the owners’ property where the contractor does not pay them. In a situation where the owner has paid the general contractor, which then fails to pay its subcontractor, a mechanics’ lien can ultimately force the owner to pay twice for the same work.

Historically, courts have always required claimants to strictly follow the Mechanics’ Lien Law. The slightest deviation or minor error was sufficient to void a lien entirely. The Mechanics’ Lien Law was given a strict, narrow construction because it was a special legal remedy in favor of a unique class of creditors.

What this decision could mean for your business

The decision to interpret the Mechanics’ Lien Law liberally for purposes of deciding what entities are able to file lien claims is a sea change in legal practice. This upheaval in the legal terrain will affect many aspects of the construction business, impacting owners, lenders and others far beyond the specific interests of union benefit funds.

Everyone involved in a construction project could be affected. Owners of property will want to protect against suits from employee benefit funds and others by ensuring that all contributions are made by their contractors, withholding funds or requiring labor or material payment bonds. Any unpaid entity which might qualify as a “subcontractor” under the newly loosened legal standard might consider filing a lien to enforce its legal rights. Contractors who may have to indemnify owners will also want to closely monitor claims from putative subcontractors.

Mechanics’ liens provide an incentive for an owner-developer of a property to pay the contractor since a lien will hinder him/her from obtaining permanent financing, or a mortgage, for the property. While greater protections have been provided to contractors and suppliers, there is now a greater burden placed on owner-developers to protect themselves by requiring bonds or lien releases from all contractors, subcontractors and suppliers as they are paid upon completion of work.

“At ATI Physical Therapy we expect to put on a top notch program and Joe Bubba did not disappoint,” said Harry Harris of ATI Physical Therapy. “He spoke on a variety of timely healthcare topics and his presentation was well received and appreciated by all the orthopedic surgeons in attendance.”

Mr. Bubba is one of the Firm’s founding members. He serves as Managing Partner and Chair of the Healthcare Group. In his healthcare practice, Mr. Bubba concentrates on physician-hospital relationships and physician practices and medical staff matters. He represents hospitals, medical staffs, ambulatory surgical centers and other healthcare clients. Mr. Bubba acts as counsel for physicians and hospitals engaged in the fair hearing and internal review process. He has also served as a hearing officer throughout the region. Mr. Bubba is also a commercial/healthcare arbitrator for the American Arbitration Association (AAA) and the American Health Lawyers Association (AHLA).

Mr. Bubba also has an extensive corporate and business practice. He has focused his corporate work on significant land transactions, mergers & acquisitions and shareholder succession and disputes. He is a frequent speaker for the Pennsylvania Bar Institute and other organizations.
Fitzpatrick Lentz & Bubba, P.C., is a full-service law firm providing quality legal services in real estate, land use, business, commercial litigation, healthcare, estate planning & taxation, employment, bankruptcy, family law and related areas. The law firm has been named “Who’s Who in Business Lehigh Valley” every year since 2008, and was named one of the Best Places to Work in PA for 2010 and 2011.

The event is scheduled for Thursday, June 21, 2012, 4-6 p.m. at Delaware Valley College in Doylestown, PA. Tony Ceballos, Director, Philadelphia U.S. Export Assistance Center, U.S. Commercial Service, will speak to attendees.

The event is free for members, and non-members pay $15.00.

Timothy D. Charlesworth, a shareholder and attorney in the Commercial Business & Banking group of Fitzpatrick Lentz & Bubba, is an Advisory Board member of BCITC. Mr. Charlesworth’s practice includes international trade law, including distribution & agency relationships, technology licensing, and many other aspects of international business law. He is also president of the World Trade Club of the Lehigh Valley.

Click here to download the invitation. 

Fitzpatrick Lentz & Bubba, P.C., is a full-service law firm providing quality legal services in real estate, land use, business, commercial litigation, health care, estate planning & taxation, employment, bankruptcy, family law and related areas. The law firm has been named the law firm leader in “Who’s Who in Business Lehigh Valley” in each year since 2008, and was named one of the Best Places to Work in PA for 2010 and 2011.

According to Mr. Hoffman, “given the state of the economy, delinquencies are causing severe budgetary shortfalls and other problems for associations.”  Mr. Hoffman will speak on “Delinquencies from Start to Finish,” and will provide managers with an overview of community association delinquencies and how to best handle them. 

Fitzpatrick Lentz & Bubba, P.C., is a full-service law firm providing quality legal services in real estate, land use, business, commercial litigation, health care, estate planning & taxation, employment, bankruptcy, family law and related areas. The law firm has been named “Who’s Who in Business Lehigh Valley” each year since 2008, was voted “Best of the Valley” by Lehigh Valley Magazine readers in 2010 and 2011, and was ranked as one of the 100 Best Places to Work in PA in 2010 and 2011.

The suitability of the approved design must be carefully studied. Even a minor modification to a design can trigger requirements for additional governmental proceedings or the need to file a new application. While some municipalities allow minor modifications of plans to be reviewed and approved administratively or through an amended plan submission, not all municipalities provide these simplified procedures.

The composition of political bodies changes and that turnover brings new personalities (and new individual agendas).  As mentioned, modifications may provide opportunity for further municipal review. A plan that had been favorably received by a prior board may be met with opposition by its successor. For example, we encountered an instance where a former objector was elected to the governing body during the course of the approval process. Even changes in municipal staff can impact the project, as modifications bring an opportunity for staff to look to apply new, more onerous zoning ordinances or preferences.

The conditions of a prior approval must also be reviewed. If an approval remains subject to conditions, the conditions can range from significant fees to obligations to construct costly public improvements. Conditions can also create ongoing obligations and restrictions. For example, while your predecessor may have been agreeable to conditioning an approval on limiting hours of operation, the impact can be devastating to your intended operation.

The enforceability of conditions is not always straightforward. We have encountered conditions which cross-reference ordinances that are no longer in effect. Also, the conditions imposed to mitigate the effect of a zoning approval may become an issue when ordinance amendments take effect that conflict with the conditions (or even eliminate the right to make an approval subject to the conditions).  Notice of these conditions, often, will not show up in a title search. The obligations can be included in plan notes, within the text of decisions and within what are referred to as “developer” agreements.

Finally, due diligence must closely consider how long the permits are valid and when changes in the zoning ordinance can be applied. Municipalities can require that if construction is not commenced within a defined period (typically one year) the approvals will be deemed void. Further, under Pennsylvania law, if the public improvements for a project are not “substantially complete” within five years, changes in the zoning ordinance (including those relating to use, project layout and density) can be applied even absent a modification. This five-year period does not run from the date that the plan is recorded but rather from the date of preliminary approval.

The Pennsylvania Permit Extension Act provided relief regarding the duration of permits. By law, it provides that the periods imposed by ordinances and certain other laws will be “tolled” through July 2, 2013. However, the law includes exceptions and its application in certain instances remains unclear or the subject of controversy. For example, the Pennsylvania Department of Environmental Protection issued guidance stating that the Permit Extension Act is inapplicable to NPDES permits.

There are significant opportunities in acquiring a “pre-approved” project. However, extensive due diligence by the developer, its legal counsel and engineers is a must to ensure that the approvals are viable, suitable and appropriate for the intended development.

The Firm’s employees nominated and selected a hands-on project, helping Camelot for Children get ready for its Spring Open House and annual summer camp programs. Attorneys, paralegals, and administrative staff volunteered at Camelot’s Emmaus Avenue facility in April, pulling weeds, spreading mulch, digging a sand pit, and providing handyman services. Employees also donated supplies needed for the project, and items the organization needed for summer camp.

Voting was conducted online and continued during the Volunteer Center’s celebration event on May 24, 2012. At the event, FLB’s project was announced as the winner among companies with fewer than 250 employees.

“FLB sends a big thank you to all of its clients and friends who voted in support of its project,” said Jane P. Long, shareholder and chairperson of the Firm’s Corporate, Business & Banking group.

The Challenge raised $32,000 to support Volunteer Center programs including Holiday Hope Chests for Lehigh Valley at-risk youth; leadership training for youth and boardsmanship for minorities and community volunteers; and volunteer service days. 

The mission of Camelot for Children, Inc., a non-profit organization, is to be a gathering place for seriously, chronically, and terminally ill, handicapped or disabled children; to foster an environment of emotional support among these special children and their families; to provide opportunities for these special children to interact with each other in a family/home setting; and to help to develop their physical and mental abilities.

Fitzpatrick Lentz & Bubba, P.C., is a full-service law firm providing quality legal services in real estate, land use, business, commercial litigation, health care, estate planning & taxation, employment, bankruptcy, family law and related areas. The firm has been named “Who’s Who in Business Lehigh Valley” every year since 2008, and was named one of the Best Places to Work in PA for 2010 and 2011.

The seminar, “The Good, The Bad, and The Ugly: Promoting Harmony, Handling Critics and Keeping the Peace,” will be held at Sycamore Grille, 92 Main Street, Delaware Water Gap, PA.

This program will explore ways of creating homeowner involvement, building social relationships among neighbors, handling complaints, dealing with difficult situations and how to turn a community critic into a fan.

The event is sponsored by the Pennsylvania/Delaware Valley Chapter of Community Associations Institute. Managers receive one hour of continuing education credit for attending this program.

Click here for more information, or to register.

Steven T. Boell is an attorney in the Firm’s Real Estate, Zoning & Development and Healthcare groups. Mr. Boell represents condominiums and planned communities in issues relating to their formation, management, governance and operation.

Sometimes this mentality – cutting back, reducing expenses, saving money, – spills over into other areas in our lives, like the cable bill or dining out. But car insurance shouldn’t be one of them. “Skimping” here could leave you with regrets. Far reaching ones.

In Pennsylvania, drivers have to choose “full tort” or “limited tort” when they buy their auto insurance. Often times, people select “limited tort” coverage in exchange for payment of a lower premium. The problem is that sometimes drivers don’t realize the impact of that election until it’s too late – after an accident occurs. It’s not until then that a driver asks “what did I give up?” The answer: Possibly a lot.

Limited tort purchasers give up their right to make claims for “non-economic” loss, generally referred to as “pain and suffering.” The one way the law allows you to get around this is if you sustain a “serious injury” or a “serious impairment of bodily function”. Say what? Who determines that? And how?

The law provides that it might ultimately be a jury’s job to decide those questions. There’s no doubt that death is a serious injury, but the rest is potentially left for someone else’s interpretation.

With “full tort” electors, there’s no question that they have full rights. No exclusions. No exceptions. No wiggling. Now, this doesn’t mean that full tort electors don’t go to trial. Limited tort electors, however, leave open for argument whether your injury was or was not serious or whether you were or were not seriously impaired. Sounds like a lawsuit? Like a trial? It can be.

In the end, the premium savings limited tort electors gain in the short run may very well backfire in the long run if an accident occurs. The costs incurred in trying to prove that their injuries are serious or that they are seriously impaired quickly “eat up” all those premium reductions obtained in prior years. And then, what if the jury disagrees with you? Although injured, you may not recover compensation for your injuries.

Other areas of coverage that people often don’t pay enough attention to are “uninsured” and “underinsured” coverage. These two coverages are “optional” – perhaps a clear invitation to forego them to save some premium charges. Kind of like when you’re offered an extended service plan. You think – “nah, I won’t need that” or “I’ve already paid enough for what I’m buying – why do I need to pay more?” As with the washer or dryer that breaks down right after the warranty expires, this insurance decision can backfire, too.

A rough example: Let’s say you’re involved in an accident and you’re injured pretty badly. The other driver has either no insurance or the state minimum coverage of $15,000. This sets up a possible uninsured claim or an underinsured claim. If you purchased uninsured and underinsured coverage, you’ll be able to make a claim against your own policy for the value of your injuries which either weren’t covered at all or only partially covered by the state minimum. But, what if you didn’t buy those coverages (because, remember, you didn’t have to)? You could end up with zero or the $15,000 discussed above, clearly (and literally) adding “insult to injury.”

So, what’s the lesson here? Dig into that drawer at home and check your insurance policy. And you should do that right now. What did you elect to buy? And, more importantly, what did you decline in order to try to save money? Call your agent. Ask questions. Double check everything. Find out now what rights you have (or don’t) and be informed before an accident occurs. Confirm that you’ll have plenty of coverage if and when you’re involved in an accident with an issue you do not have control over – a driver who chose to not get insurance at all or only purchased the minimum.

When you meet with your attorney and he or she asks – “did you have full tort or limited tort” – you’ll know that he’s not asking about a dessert. And when your attorney says “can I see your list of coverages,” you’ll know that you have “good coverage” because you took the time (again, before the accident) to review what you have (and what you don’t). As with any choice, an informed one is always the best one.

This article was published in the June 2012 issue of Lehigh Valley Marketplace.