Enforcing a Judgment Against an HOA

In the event you prevail in a case against your Texas HOA and obtain a judgment for damages, the question of how you can collect those damages will unquestionably arise. What if your HOA is low on funds? What if they don’t have any assets? Are your fellow homeowners responsible for paying your judgment? Can the HOA use their assessments to pay off the judgment?

One potential, although nowhere near certain, method of collecting your judgment is through your association’s special assessments. While the case law on this issue is rather conflicted, there may be a path forward for creditors (e.g., plaintiffs who have obtained a judgment) to force special assessments from a debtor or bankrupt HOA to discharge their judgment debt. Whether or not the courts determine this to be possible tends to depend on two factors: (1) how the courts view the Association/Homeowner relationship and (2) what authority is granted to the Association in their governing documents to collect  

On one hand, courts have held the Association/Unit Owner relationship is akin to a corporation/shareholder relationship. 

In Sweet v. Moon, the court held that “without an applicable provision of the Declaration, the homeowners are not liable for the POA’s debts under ordinary corporate law. ‘[I]t is a universally accepted basic axiom of corporate law that a corporation’s shareholders [the Crown Pointe property owners] are not personally liable for’ the debts of the corporation [CPOA].” 24-1001, 2024 Bankr. LEXIS 1176, at *9 (Bankr. S.D. Ala. 2024). The court further held that the Association, like a corporation’s relationship to their shareholders, is a separate legal entity from its unit owners, and that these individuals are shielded from liability when they do business in corporate form. Id. 

Further, in Westwood Cmty. Two Assoc. v. Barbee, the court held that the Declaration did not allow the Association to collect special assessments from individual homeowners to satisfy judgments, and that because the Declaration in that case only allowed for special assessments for the “operation, maintenance, and repair of” common areas, the Trustee was not permitted to collect special assessments from the homeowners in order to satisfy a judgment in bankruptcy. Westwood Cmty. Two Assoc. v. Barbee, 116 Fed. Appx. 247, [slip op.] at *5 (11th Cir. 2004).

On the other hand, there is case law to support the argument that generally, assessments (whether regular or special) are considered property of the debtor’s bankruptcy estate and can therefore be used to repay creditors of the Association. 

The court in In re Stone Creek Vill. Prop. Owners Ass’n determined that pursuant to Texas case law and the Declaration of the Association, the right to demand and receive assessments is a right owned by the homeowners, not the Association. No. 10-54343-C, 2011 Bankr. LEXIS 2944 (Bankr. W.D. Tex. 2011). However, those rights are enforceable by the Association (the debtor), which demands and receives the assessments for the benefit of the homeowners. The court went on to state that whether assessments received by the Association constitute property of the Association’s bankruptcy estate is determined by how much control the Association has over those funds. See In re Cowles, 143 B.R. 5, 7 (Bankr. D. Mass. 1992) (stating “several courts have found that ‘where the debtor, ‘in one capacity or another’ dominates all aspects of the trust [in the case of owners associations, accounts holding assessment funds] to the extent that he exercises absolute dominion and control over the assets, his interest in the trust … constitutes property of the estate.”) (see also In re Steffan, 97 B.R. 741, 745 (Bankr. N.D.N.Y. 1989)). The court in Stone Creek placed significance on the fact that the Association controlled the assessment funds through a bank account in the Association’s name. Different to Ms. Graham’s case, however, is the fact that the CC&Rs in Stone Creek provided the capital fund of the Association to “meet unforeseen expenditures.”

Thus, because the court determined that the Association’s formation and existence lies solely in serving the interest of the homeowners, and does not place any real restrictions on how the Association may use the assessments it receives, the debtor may use the assessments to pay expenses incurred on behalf of the entire community of homeowners. Therefore, the court concluded that the Association does not merely hold homeowner funds in trust, but has broad authority to use such funds to pay the Association’s creditors as necessary for the upkeep, etc. of the property, and as such, are considered property of the debtor’s bankruptcy estate.

Conclusion

What can we learn from these prior decisions? Chiefly, if it is not permitted by the governing documents of the Homeowners Association, a court will likely not allow a collection of special assessments to satisfy a judgment. However, there may be a path forward pursuant to the Stone Creek case to collect through the reserve funds of the Homeowners Association (depending on what the governing documents state).